Buying a Rental Property in Canada
Ready to become a landlord? From the types of rental properties available to the best places to buy them, check out this step-by-step guide to purchasing a rental property.
By Emily Southey | 12 minute read
Are you looking to buy your first-ever rental property? There are a few things you need to know.
Investment Property Types
Before we explain the process of buying a rental property, we’re going to lay out your options. When purchasing an investment property for the purposes of renting it out and generating income, investors have two main options: residential properties and commercial properties. We explain each option below.
Residential Rental Properties
Residential rental properties are those that renters live in, either for a short or long period of time. They can be any type of property, from a condo to a home to a cottage. Some of the most common types of residential rental properties are as follows:
- Long-term rental property: At its most basic, a long-term rental property is a property you purchase to rent out to tenants. It can be anything from a single-family home to a condo unit. Investors make money from long-term rental properties by collecting rent from tenants, as well as through appreciated property value if and when you decide to sell the property in the future. If you choose to invest in a long-term rental property, you may have the option of living on- or off-site.
- Short-term vacation rental property: Owning a vacation rental property is fairly similar to owning a long-term rental property, except for the fact that your tenants will be short-term. When purchasing a short-term vacation rental property, you will need to make sure it is located in an area popular with tourists. In addition, you will need to budget for the additional upkeep required, as short-term means greater turnover, which means even more maintenance.
- Accessory dwelling unit (ADU): Accessory dwelling unit or ADU, is a term used for when a homeowner rents out extra living space on their property. Most commonly, this ADU is rented out to a family member, though it can be rented to anyone. An example of an ADU is a basement or shed that is converted into a suite or small home. Managing an ADU is typically cheaper than buying an entirely separate property, making it a good option for beginner investors or those interested in a more passive form of real estate investing.
Commercial Rental Properties
Commercial rental properties are non-residential properties. Some of the most common examples of commercial real estate are hotels, office buildings, warehouses, and retail stores. Managing a commercial property shares some similarities with managing a rental property. Namely, the investor is responsible for owning and renting out the space to a tenant. However, in this case, the tenant will use the space for business purposes rather than residential purposes. As with residential real estate, the tenant of the commercial space will pay rent to the investor, resulting in monthly cash flow. Therefore, the commercial real estate investor will earn money by collecting rent, as well as when they eventually sell the property, if its value has appreciated.
“When purchasing an investment property for the purposes of renting it out and generating income, investors have two main options: residential properties and commercial properties.”
Why Buy an Investment Property
Looking for a reason to buy an investment property? We’ll give you several. We outline the pros and cons of purchasing an investment property below.
- Potential for appreciation: One of the main advantages of purchasing any piece of real estate is the potential for appreciation. To earn as much profit as possible, aim to buy low and sell high.
- Rental income: Another major perk of owning a rental property is having a steady flow of cash. Whether you rent out a condo or a retail space, you get to charge your tenants rent, which results in more money in your pocket every month.
- Tax deductions: Buying rental property means gaining access to tax benefits you wouldn’t otherwise have. For example, in Canada, real estate investors can deduct certain rental property expenses from their income, such as insurance, utility bills, property taxes, and mortgage interest. In turn, this reduces how much tax they owe.
- Landlord role: One drawback to buying a rental property is that you become the landlord. This role comes with several obligations and responsibilities, many of which can be time-consuming. For example, you might have to deal with unpleasant tenants or handle emergency repairs. Of course, you will also need to take care of property maintenance and the process of finding and vetting prospective tenants. That said, if it’s feasible, you can hire a property management company to tackle these responsibilities on your behalf.
- Upfront costs: Buying a rental property is expensive — often far more expensive than purchasing a stock or bond. This makes real estate investing a little more difficult than other types of investing. If you don’t have the capital to buy a property on your own, you will need to apply for financing.
- Difficulty obtaining financing: As mentioned above, buying a rental property doesn’t come cheap, which means many investors will need to rely on financing. Unfortunately, it can be difficult to obtain financing for a rental property, especially since the down payments are high (typically no less than 20%).
- No guarantee of property appreciation: All investments come with risk, and that includes rental properties. Any time you buy a piece of real estate, there is no guarantee that it will appreciate in value. Depending on the market, it could actually do the opposite. That’s why understanding the risks before investing in real estate is so important.
- Lack of liquidity: Let’s face it — real estate is not a liquid asset. Even in a hot real estate market, it can still take several months to sell a home. Investors need to come to terms with their money being tied up for years when they invest in real estate.
- Changes to the tax code: One last con of owning a rental property is that the tax code could change in a way that is unfavourable to real estate investors. For example, right now, owners of rental properties can deduct all kinds of expenses from their taxes, lowering how much they pay each year. But if the tax code were to change, some or all of these benefits could be eliminated, which could significantly increase the cost of owning a rental property.
How to Buy Your First Rental Property: A Step-by-Step Guide
Now that you understand the types of rental properties available to you and the pros and cons of buying a rental property, let’s dive into how to buy one. Follow the step-by-step guide below to learn all about purchasing a rental property in Canada.
1. Clear outstanding debt
The first step to buying a rental property is to clear any outstanding debt. Buying a piece of real estate isn’t cheap. Don’t overstretch yourself by attempting to buy a second property without paying off your debts. Instead, clear your debts first and boost your credit rating. This will make it easier to not only buy a rental property but obtain financing for that property.
2. Start saving
Step 2 is to start saving. As soon as you have cleared your debt, start putting money aside for the down payment on your rental property. Keep in mind that down payments for rental properties in Canada, assuming the property is your second home purchase, are high (usually no less than 20%).
3. Do extensive research
Start researching as early as you can. The purpose of the research phase is to learn as much as you can about real estate, such as market trends, up-and-coming neighbourhoods, and the smartest types of investments near you. The more you know about rental properties, the greater your odds of success. During this phase, we recommend consulting books and articles, as well as networking with real estate professionals in your area, whether they be other investors, realtors, or real estate attorneys. Many cities offer seminars and courses on real estate investing for you to take advantage of. You might also be able to find an online community or forum dedicated to rental property investments in your city.
4. Settle on a location and type of rental property
Step 4 is to settle on a location and property type for your future rental property. Location is everything, so take your time to carefully consider not only which city but which neighbourhood is right for you. Consider housing prices, average rent, market trends, demographics, unemployment rates, cultural attractions, nearby schools, and local facilities like parks, recreation centres, and libraries.
5. Find a realtor you can trust
Once you know what city and type of rental property you want to buy, it’s time to contact a realtor. Take your time finding a realtor who’s right for you. Interview several to get a feel for each and ask them questions about their experience representing other real estate investors. Specifically, ask about their knowledge of the local housing market and their experience buying investment properties.
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6. Assess potential rental properties
Working alongside a reputable realtor, assess each potential rental property before buying. We recommend assessing the following factors: income potential, location, potential property expenses, management fees, and repairs needed (both major and minor). Only after scrutinizing each property should you work with your realtor to narrow down your options.
7. Make it official and sign on the dotted line
If you find a property you like at a price point and location that aligns with your investing goals, ask your realtor to draft an offer that includes your offer price and conditions. The best-case scenario? The seller accepts the offer right away. However, they may submit a counteroffer to kick off negotiations. While there’s a chance the deal falls through, if it doesn’t and you’re happy with the final terms of the offer, you can make it official by signing on the dotted line and closing the deal.
8. Save again
So you bought your first rental property…. Now what? If you plan to make a career out of being a real estate investor, then the next step is to start saving up for your next property. Since the property you just bought will soon be rented, you will start earning some extra income, which should be enough to cover the mortgage payments. This might leave you with enough wiggle room to start planning for your next purchase. You could consider buying another rental property or even getting into house flipping and buying a fixer-upper.
9. Pay off your mortgage
Ultimately, the goal for all real estate investors should be to pay down their mortgages as quickly as possible. The sooner you pay off your mortgage, the faster you can grow your real estate portfolio. Plus, paying down your rental properties quickly means that the rent you collect goes straight into your pocket (or can be put toward your next rental property!)
Best Place to Buy Rental Property Canada
If you’re interested in buying an investment property, Canada is an excellent choice. Home to one of the world’s strongest housing markets, buying a property in many Canadian provinces can result in serious gains. But before you go out and purchase a home in any old part of Canada, we’ve put together a list of the best places to buy a rental property in the country. The following cities and regions are still affordable yet housing prices are predicted to rise in the near future, making them the ideal locales to purchase a rental property right now. Without further ado, our top five places to buy rental properties in Canada are Saint John, N.B., Thunder Bay, Ont., Saguenay, Que., Regina, Sask., and Saskatoon, Sask.
Frequently Asked Questions
Is buying a rental property worth it?
Yes, for many investors, buying a rental property is worth it. There are so many benefits that come with buying a rental property -— namely, the extra income. If you buy a residential or commercial property and rent it to tenants, you will collect a monthly rent cheque. This new income stream often makes rental properties worthwhile for investors. Plus, if their property appreciates in value, they earn an additional profit when they eventually sell it.
How much are taxes on rental income?
Rental income in Canada is taxed at 38% on the federal level. However, each province has its own tax rate on top of this. For example, in Ontario, the provincial tax rate for rental income for corporations is 11.5%.
What are the pros and cons of buying rental property in Canada?
The pros of buying a rental property in Canada include the high potential for appreciation, the low bar of entry, steady cash flow, tax advantages, portfolio diversification, and the control you have over your investments. Meanwhile, the cons of buying rental property in Canada are the responsibilities of being a landlord (which may include dealing with unpleasant tenants and property maintenance), lack of liquidity, significant upfront costs, and the risk of the property depreciating in value.
What is the difference between commercial versus residential real estate investing?
The main difference between commercial and residential real estate is the type of property being invested in. Residential rental properties are those that tenants live in. Commercial properties are used for business purposes (that is, any property that is not used as a residence, such as an office building, warehouse, hotel, or retail space).
Can I buy an investment property with no money?
You can attempt to buy an investment property with no money of your own. However, you will need to acquire a loan, such as a hard money loan, to fund your purchase. Alternatively, you will need to ask a friend or family member for help so that you have enough for the down payment and subsequent loan payments.
On the other hand, real estate crowdfunding is not without risk. The most obvious risk is that you could lose some or all of your money if the property does not perform well. The reason for this could be the market taking a turn and the property depreciating in value, or high vacancy rates making it difficult to find tenants. There is also a risk that the property you invest in could get foreclosed by the banks due to an unpaid mortgage. In this case, it would likely be sold at or below market value, which could translate to major losses for investors. Further, real estate crowdfunding platforms are not regulated by the government, which makes them a bit less safe or secure than other kinds of investments. In addition, since crowdfunding is a newer trend, many platforms haven’t been around that long and do not have proven track records. Finally, as with any real estate investment, these investments are not liquid and may take some time until you earn a profit.
What should I know before buying a rental property?
Investors must know the risks and challenges that come with buying a rental property before they buy one. For example, real estate investments are far less liquid than other kinds of investments, like stocks or bonds. So while the potential return on investment (ROI) is significant, most investors won’t reap the benefits of their investment until years later when the property is sold. Understanding that real estate investments are not very liquid and that your money will be tied up for a long period of time is crucial. Further, real estate investors must have the necessary capital to purchase a rental property. Buying property doesn’t come cheap, whether you’re purchasing a residential home or a commercial building. Knowing the costs and budgeting for them is vital if you are going to see success as a real estate investor.
How do you buy a rental property?
Buying a rental property is a similar process to buying a primary residence. You will need to start saving, ideally clear your debt, do some research into the housing market, consult with a realtor, find a property to buy, make an offer, and close the deal. From there, pay off your mortgages and start saving for your next rental property!