What to know if you're buying a home for property investment

By Your Mortgage

Purchasing a home for property investment can be like starting a garden

Purchasing a home as an investment property can feel like an entirely different universe from buying an owner-occupied space, but there are still things to keep in mind regarding tenants, taxes, and repairs. If you're in the market to buy a home to rent out, it's a good idea to keep these things in mind.

What is the ideal location?

One of the most important things to keep in mind when you're purchasing a home to use as a rental property is the location. Would you want to live in your rental property? If you're hoping to attract students, you will almost certainly want to purchase a home with good access to a university. Conversely, if you're looking to rent your property to families or professionals, being located next to a college may be the worst thing for your property.

Beyond location, it may be worthwhile to think about the layout of the property itself as it relates to your tenants. If you're aiming to rent to young families, a yard or similar outdoor space will be a great attraction. If your goal is the senior market, the ideal space may be a single-floor home, as stairs can be something that elderly folks simply do not want to deal with.

How much should you charge for rent?

Ideally, this is something you should have investigated prior to buying the investment property – you want to make sure you understand a realistic amount to charge tenants living in the space.

If the price is too high, you may find that you're putting a cap on the potential tenants in the area, and arguably just as importantly, increasing the potential amount of time the property remains empty, which will not generate any income for you. At the same time, if the rent is priced too low, you are unnecessarily limiting the earning potential of the property.

To that end, real estate listings and websites can give you a solid estimate of how much rent other property owners are charging in the same neighbourhood, which will help you evaluate an estimate for how much you should aim to receive in monthly payments.

If you have already bought the property and hired a property manager, they should be able to provide you with details regarding the appropriate rent.

What to do about tenants?

Your tenants are going to be the primary focus of any investment property you decide to purchase. Without them, your second property will sit unused as a costly piece of land that is not generating you any income. But how do you find the best tenants, and what are some of the things that you need to know about dealing with them?

How to attract good tenants

Step one: Write an honest listing. While you want to cater to your ideal tenant, you don't want to oversell the positive qualities of your property. Dishonesty could make tenants think twice about renting, or at least cause them to ignore the positive aspects of the space.

Step two: Make the property presentable. The interior should be as spotless as can be, including the bathroom and the kitchen. Remember, you want to make the property look like a place you would want to rent.

Step three: Price the rent fairly. As we noted above, you'll want to make sure that your rental prices are in-line with the area to give yourself the best chance of landing an ideal tenant. If you're asking for $2-300 more per month to comparable properties in the same area, odds are you're going to find yourself being approached by people who have been turned down by the less-expensive options available. In other words, they may not be the most ideal candidates.

What should the tenant screening process entail?

Once you have started taking applications for potential tenants, being able to easily discern whether they are suitable for your property is of the highest priority.

To that end, you'll want to check their current employment status, and whether or not they have regular, continuous employment. If they haven't, it's possible that it may be difficult for them to pay the rent on time in an orderly, regular fashion.

Other things that could be included on the application: the presence of pets, whether or not the applicant is a smoker, and whether they regularly have visitors or guests that will be on the property – or whether they have a situation that may see them leaving the premises for substantial stretches at a time.

Also, be sure to ask for contact information and references from previous landlords. You can also include prior rent amounts to see if there is a serious discrepancy or gap between the amount being paid currently and the amount you are planning to charge.

What if a tenant is late with the rent?

No one wants to think about it, but it's important to have some idea about what to do if your tenant is late with the rent – or worse, doesn't pay it at all.

Of course, the sooner you know about this sort of situation, the sooner you can move to fix it. Not just so you can mitigate the financial hit, but also to see if the issue behind it is something that is within your control to fix.

This is also the reason why many landlords employ a property manager to oversee their properties.

If a tenant falls behind on their rent, or falls into arrears, you should first send them a notice for non-payment of rent. In a perfect world, your tenant reads the notice, promptly sends you the rent, and everything returns to running smoothly.

If your tenant still doesn’t pay, a second notice should be sent, this time terminating the lease and requesting that they vacate the property.

It's important to be familiar with the tenancy laws in your particular state or territory, because the time between presenting the notice and requesting vacation – as well as the number of days in rental arrears before a termination notice can be sent – vary around the country. As a result, you always want to make sure you issue the tenant with the correct notices within the specified timeframes.

Investigate landlord insurance.

As we've alluded to above, there will always be risks associated with owning a rental property, and even the best tenant can accidently damage something or wind up being unable to pay rent. Specialised landlord insurance is essential and can provide coverage for landlords should an unforeseen insurable event occur.

Landlord insurance policies can provide cover for malicious and accidental damage, loss of rental income and the landlord’s legal liability.