*This post was created in collaboration with Alpine Credits
Owning a rental property can be a great way to boost cash flow and build wealth. However, it’s not the most passive way to earn income. There is plenty of work involved in being a landlord, not to mention the potential aggravations that often come with this type of undertaking. Before becoming a landlord, there are a few important things you should know.
Key Points
- Being a landlord can be very profitable, as long as you choose the right property and vet your tenants.
- Make sure you understand all your responsibilities as a landlord, including the amount of time, effort, and money required.
- Be sure to understand the laws surrounding tenancies in your province so you remain in compliance at all times.
- Do the math to make sure your rental property will be a profitable one.
Things You Should Know As A Landlord: First Time Landlord Checklist In Canada
As a landlord, there are certain things you should know to ensure your rental property is a profitable venture.
- Understand The Landlord And Tenant Laws In Your Province
- Have A Screening Process
- Buy The Right Insurance
- Treat Your Rental Property Like A Business
- Have A Comprehensive Lease
1. Understand The Landlord And Tenant Laws In Your Province
It’s imperative that you understand what you can and can’t do as a landlord. More specifically, you should find out what your rights and responsibilities are as a landlord in your province, as well as those of tenants.
Each province has legislation that governs tenancies. For example, in Ontario, the Residential Tenancies Act oversees things like protecting tenants from unlawful rent increases and evictions, rent regulations, and dispute resolutions. It’s in your best interests to find out what these are before becoming a landlord.
Tenant rights and responsibilities across Canada
2. Have A Screening Process
To avoid dealing with a bad tenant over the long term, it’s crucial to thoroughly screen prospective tenants before signing a lease. There are a few ways to screen prospective tenants to ensure your rental property has tenants of good character and strong credit. Here are a few things to check when assessing a future tenant:
- Credit report to assess a tenant’s ability to repay debt
- References from past roommates and landlords to assess a tenant’s behaviour in rental units
- Proof of income to see if a tenant is able to afford their monthly rent payments
- Employment status to ensure the tenant’s job is stable and reliable
- Tenant Insurance to cover any third-party liability claims when someone is injured on the property
| Note While you want to be comprehensive with your screening, make sure you follow the law when doing so. It is illegal to refuse a tenant based on their age, race, gender, colour, disability, language, religion and other discriminatory reasons. |
Pro Tip: Use The Landlord Credit Bureau
The landlord credit bureau allows landlords, property managers, and tenants to record rent payments. These records are shared with Equifax, which is one of Canada’s credit bureaus, and contribute to the improvement of tenants’ credit. For some, this is a great way to build credit. For others, if they don’t pay their rent, it could be damaging to their credit score.
For landlords, this bureau is particularly helpful because, with permission, landlords can pull up a credit history from prospective tenants. This will give landlords an idea of how disciplined tenants are in paying their rent on time.
3. Buy The Right Insurance
Landlord Insurance isn’t the same as regular homeowners’ insurance. There are many opportunities for coverage, including covering a tenant refusing to pay rent, damages from floods, liability coverage, and more.
Depending on the kind of property, location, and occupants, you will have specific needs for landlord insurance.
4. Treat Your Rental Property Like A Business
Rental income must be reported to the Canada Revenue Agency (CRA). However, not all of it will be taxable. Landlords can deduct many expenses, including expenses for repairs, insurance, garbage removal fees, mortgage interest, and more.
As a landlord, you should also remember that selling an investment property has different tax rules than selling a primary residence. You’ll need to pay capital gains tax on the profit made when selling a rental property. This is a tax that you would be exempt from paying if you sold your primary home.
5. Have A Comprehensive Lease
Your lease is crucial in terms of ensuring that every party is protected. Make sure that you create a lease and have all parties sign and date it before the lease term begins. A lease includes important information, including the following:
- Landlord’s name
- Names of all occupants
- Current tenant address
- Total rent
- Date rent is due
- Form of rent payment (ie. cheque, e-Transfer, etc)
- Tenancy term
- Parking rules
- Utilities
- Rules about the rental unit
Many other clauses can be included at your discretion.
To make it easier for you to ensure your lease is detailed, you can use a standardized lease. Otherwise, you can enlist the help of a real estate agent or lawyer to help you draft up an air-tight lease.
How To Determine Your Rental Property Rent Price?
You may have an idea in your mind about how much you’d like to charge in rent. But you need to make sure that the rent you intend to charge is realistic.
You can start by checking out online resources, like Zumper.com or Rent.ca. These sources will tell you the average rent prices in cities across Canada. However, you should also check the going rent prices in your neighbourhood for properties similar to the ones you own.
Knowing how much you can rent your property for will give you a better idea of whether your gross earnings will cover your expenses, and how much of a profit you can realistically expect.
Will Your Rental Property Be Profitable?
To calculate whether your rental property will be profitable, you’ll need to calculate your expected expenses and revenue.
- Debt Service Coverage Ratio – The simplest way to quickly gauge the potential profitability of a property is by subtracting the annual expenses from the annual rent you can collect. Expenses can include things like mortgage payments, utilities, property taxes, insurance, maintenance and repairs.
- Cap Rate – The cap rate — or capitalization rate — on an investment property refers to the estimated rate of return. You can find the cap rate by dividing the net operating income (the difference between the rental income and operating expenses) by the purchase price of the property. The lower the cap rate, the lower the risk, and vice versa. Generally speaking, a good cap rate is somewhere between 5% to 10% rate.
| Note Make sure you’re financially prepared for a few months of no rent payments. Ideally, your rental unit will be occupied 100% of the time. But realistically, you’ll more likely experience a vacancy from time to time. Make sure your finances are adequate enough to cover your expenses during these periods. |
Be Prepared To Be More Than A Landlord
“Landlord” is an all-encompassing title. You are not simply a rent collector when you become a landlord. There are many roles you will need to take on to be a successful landlord, including:
Debt Collector
Landlords hope to have tenants that pay their rent with no issues, religiously on the first day of the month. However, this is not always the case. Life happens, and people struggle to pay their debts sometimes, including tenants.
Ideally, a tenant will communicate with their landlord to figure out a payment plan. In other cases, tenants may cut communication with their landlord and simply refuse to pay rent, for whatever reason. In these instances, landlords need to act as debt collectors, by trying to initiate communication with their tenants, asking for rent, and exploring legal channels if their own collection efforts prove to be futile.
Negotiator
When looking for prospective tenants, you may find some of them will try to negotiate the rent amount. This is not uncommon.
Make sure you conduct enough market research to justify your rent. And, use other aspects of the property to negotiate. For example, your tenant might argue the rent amount, but they might be content if you include internet in the rent.
Repairman
While it’s simple enough to look online for a repairman’s services in the event of a faulty pipe, clogged toilet, or insulation issue, paying for such services can be costly. Depending on the complexity of the issue, you may choose to tackle it yourself. Otherwise, you’ll need to have access to a network of professionals to help you make necessary repairs when issues with your rental property pop up.
If you don’t want to spend so much time and effort wearing all these hats, you may consider hiring a property manager to take care of all these tasks. Just make sure you understand how their fees may impact your investment, as these companies tend to charge anywhere from 7% to 10% of your rent for their services.
Supervisor/Watchdog
Landlords need to stay on their toes and always be observant of their rental property. While they are often not there 24/7, especially if the property is not owner-occupied, landlords should observe their surroundings when they are on the property.
For instance, are there any signs of illegal activity on the property? Has the garbage been collected in the alley, or is it being put on the curb each week? Are there any mould issues that could result in health issues for tenants? These are just a few of the many things landlords should keep tabs on, which takes time and effort.
Final Thoughts
Being a landlord is not as simple as collecting extra monthly income. You’ll need to wear many hats and tackle frequent issues on your own while managing different personalities, landlord-tenant laws, repairs, and more. Make sure you’re prepared for the time and financial commitment of being a landlord before taking the plunge.
Landlord FAQs
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How much can I increase rent by in Ontario?
What is the average rent price in Toronto?
Can I evict a tenant for having a pet in my rental property in Ontario?
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