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mans hand holding keys in front of miniature house - So, you Want to Buy a Canadian Rental Property?

So, you Want to Buy a Canadian Rental Property?

So, you want to buy a Canadian rental property? Purchasing a rental property in Canada as an investment can be a smart financial move. At its best, real estate can provide a steady stream of income and potentially appreciate over time. However, it’s important to be aware of and carefully consider all the steps involved in the process to ensure that you are making a sound investment. Here is an overview of the 7-step process involved in buying a rental property in Canada:

  1. Determine your investment goals: Before you start looking for a rental property, you must clearly understand your investment goals. Consider factors such as your budget, the type of property you are interested in (e.g., single-family home, apartment building), and the location of the property, and whether you want to be a hands-on manager or outsource.
  2. Research the market: Once you have a general idea of what you are looking for, it’s essential to research the local real estate market to determine which areas are likely to provide the best return on your investment. This can involve looking at factors such as average rental rates, property values, and local economic conditions.
  3. Find a property: There are several ways to find a rental property, including working with a real estate agent, searching online listings, or looking for properties that are being sold by owner. Be certain you have thoroughly researched any property that you are considering, and had it inspected by a professional to identify any potential issues. Remember to let the numbers determine your decision; leave emotions at home.
  1. Negotiate the purchase: Once you have found a property you are interested in, you will need to negotiate the terms of the purchase with the seller. This can involve discussing the price, any contingencies (such as a financing contingency), and the closing date.
  2. Obtain financing: If you are planning to finance the purchase of the property, you will need to apply for a mortgage. This will typically involve applying to a lender and supplying documentation such as proof of income and a credit report. If you’re buying directly from a property owner, be sure to have a contract in place reviewed by your real estate lawyer.
  3. Close the deal: Once you have secured financing and agreed to the purchase terms, you will need to sign the necessary paperwork and pay any closing costs. Once this is done, the property will be transferred to your ownership.
  4. Manage the property: This is frequently the part of the process many property investors overlook. After you have purchased the rental property, you will need to manage it effectively to ensure it is a successful investment. Bad tenants, no tenants, or non-paying tenants destroy your peace of mind and investment. Property management involves tasks such as finding and screening tenants, collecting rent, and maintaining the property. It may also include working with a property management company to handle these tasks on your behalf. Regardless of your choice, since it’s your business, it’s necessary to educate yourself through courses/a mentor to gain a thorough understanding of the laws involved in a rental business.

1. Determine your investment goals – what’s your “why?”

young woman sitting at work desk in front of lap top thinking - Determine Your Investment Goals
Determine Your Investment Goals

Determining your “why” for buying a Canadian rental property can be a helpful exercise in clarifying your goals and motivations for making this investment. Here are some steps you can follow to determine your “why” for buying a rental property:

Identify your financial goals: What are you hoping to achieve financially by buying a Canadian rental property? Are you looking to generate passive income, build wealth, or both? Understanding your financial goals will help you determine what type of property and investment strategy will best meet your needs.

Consider your risk tolerance: Real estate investing carries some level of risk, consider your comfort level (and/or your spouse’s/partner’s) with risk before making a purchase. Are you comfortable/prepared with the potential for unexpected repairs, vacancies, or higher mortgage rates, or do you prefer a more stable investment?

Evaluate your time and resources: Owning a rental property requires time and effort to manage and maintain it. Do you plan on continuing to work full-time while owning rental properties? Do you have young children? These are critical considerations when deciding if you have the time and resources to handle the responsibility yourself, or whether hiring a property management company would work better.

Reflect on your long-term plans: Do you see yourself owning and managing Canadian rental properties for the long term, or do you have a specific time frame in mind for selling your properties? Do you want to expand your portfolio over the years? Do you want your properties to finance your retirement, or are you holding them as a legacy investment for your children? Understanding your long-term goals can help determine whether rental property investing is the right choice.

Ultimately, determining your “why” for buying a Canadian rental property is a personal decision that will depend on your individual goals, risk tolerance, and resources. By taking the time to consider these factors, you can make a more informed decision about whether rental property investing is the right choice for you.

2. Research the types of properties & pros/cons

people doing research - Research the Market
Research the Market

There are several types of residential real estate investments, each with its own pros and cons. Here are some common types of residential real estate investments, along with some potential pros and cons of each:

Single-family homes:

  • Pros: Single-family homes may provide more stability and predictability than other rental properties. They may also offer more flexibility regarding the types of tenants you can attract.
  • Cons: Single-family homes may require more time and effort to manage, as you will be responsible for all maintenance and repairs. They may also be more expensive to purchase and insure.

Multi-family homes (e.g., duplexes, triplexes, etc.):

  • Pros: Multi-family homes may provide more income potential than single-family homes, as you can rent out multiple units. They may also be easier to manage, as you can spread the maintenance and repair responsibilities among multiple tenants.
  • Cons: Multi-family homes may be more expensive to purchase and insure, and you may face more challenges in finding and retaining tenants. Also, depending on the number of units, your investment may fall under a commercial mortgage which is an altogether different type of investment than residential.

Apartment buildings:

  • Pros: Apartment buildings can provide a significant amount of rental income, and you can hire a property management company to handle the day-to-day management responsibilities.
  • Find a property: There are a number of ways to find a rental property, including working with a real estate agent, searching online listings, or looking for properties that are being sold by owner.

Here is a video overview on investing in Canadian multi-family’s.

Vacation rentals:

  • Pros: Vacation rentals can be lucrative, particularly in popular tourist destinations. They may also offer more flexibility in terms of how you use the property.
  • Cons: Vacation rentals may require more time and effort to manage, as you will need to handle bookings, cleanings, and repairs to keep them at a 5-star rating.  They may also be more subject to seasonality and economic downturns.

Ultimately, the pros and cons of each type of residential real estate investment will depend on your individual goals, risk tolerance, and resources. By carefully considering these factors, you can determine which investment is the right choice.

Begin with the end in mind

While researching the type of investment property, consider your exit strategy.

An exit strategy is a plan for how to dispose of your investment in residential real estate when you are ready to sell. The steps you can follow to determine a residential real estate investment exit strategy are similar to buying an investment property:

  • Determine your goals: What are you hoping to achieve by selling your Canadian rental property? Are you looking to generate a certain level of profit, or do you have a specific time frame in mind for selling? Understanding your goals will help you determine the best exit strategy for your situation.
  • Consider the current market conditions: The real estate market can be volatile, which is why the current state of the market needs to be considered when determining your exit strategy. Are home prices trending upwards or downwards in your area? What are the rental market conditions? Understanding the market conditions can help you determine the best time to sell.
  • Decide on a sales method: There are several ways to sell your investment property, including listing it with a real estate agent, selling it yourself, or using a real estate investment trust (REIT). Each method has pros and cons, factor in your goals and resources when deciding which option is best for you.
  • Plan for taxes and other costs: Selling a residential real estate investment can have tax implications, be sure to plan for any taxes or additional costs that may be involved in the sale of your Canadian rental property. Consider consulting with a financial advisor or tax professional to help you understand the potential tax implications of your exit strategy.

Ultimately, the best exit strategy for your residential real estate investment will depend on your individual goals, market conditions, and resources. By carefully considering these factors, you can develop a plan that helps you achieve your objectives and maximize your profits.

3. Find a property

man holding magnifying glass - Find a Property
Find a Property

Before you start looking for a Canadian rental property, do you understand what you hope to achieve through this investment? Are you looking to generate passive income, build wealth, or both? It’s also important to consider your risk tolerance and financial situation. Investing in real estate can be risky, especially if you are self-managing. Building a solid financial foundation and developing a plan will mitigate potential risks.

Research the market and location:

Once you have a clear idea of your goals and risk tolerance, it’s time to start researching the market and location. Look for areas with strong rental demand, such as those near schools, public transportation, and employment centers, and consider the potential for appreciation and the local economic conditions.

Consider the type of property and financing options:

Each type of investment property has pros and cons. Carefully evaluate your options.
Consider the financing options available, such as a mortgage, a home equity loan, or a cash purchase.

Calculate the costs and potential return on investment:

Before you make an offer on a rental property, have you calculated the costs and potential return on investment? Consider the purchase price, closing costs, repair and renovation costs, property management fees (if you are not self-managing), and any ongoing expenses such as taxes, insurance, and maintenance. Also, factor in the potential rental income and any appreciation in the value of the property.

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Will the property cashflow?

To determine whether a Canadian rental property will cashflow, you will need to calculate the property’s net operating income (NOI). The NOI is the property’s annual rental income minus its annual operating expenses. If the NOI is positive, the property is cashflowing; if it is negative, the property is not cashflowing. Here is a link to a Canadian cashflow calculator.

To calculate the NOI for a rental property, gather the following information:

Rental income: This is the total amount of rent you expect to collect from the property each year. Be sure to include any additional income sources, such as parking fees or laundry facilities.

Operating expenses: These are the expenses that you will incur to operate the property, such as property taxes, insurance, utilities, maintenance, and repairs. In this calculation, include any management fees if you plan to hire a property management company.

Once you have this information, the NOI can be calculated by subtracting the operating expenses from the rental income. Here’s a simple formula:

  • NOI = Rental income – Operating expenses
  • If the NOI is positive, the property is cashflowing. If it is negative, the property is not cashflowing.

Do note that the NOI calculation only takes into account the property’s operating income and expenses. It does not include other costs associated with owning the property, such as mortgage payments, closing costs, or any money you may have invested in improvements.

Seek the help of professionals:

While it is possible to self-manage a rental property, it can be challenging, especially if you are a first-time investor. Consider your educational options, such as courses, workshops, conferences, and meetup groups, municipal landlord/tenant associations. Build your team of professionals, such as a real estate agent, a mortgage broker, a lawyer, trades services, and mentors. These experts can provide valuable guidance and support throughout the process.

Hire a home inspector to check for any potential issues and ask lots of questions to ensure that you fully understand the condition of the property and the potential costs and risks involved.

Buying a Canadian rental property is a big decision with legal and financial consequences; take the time to thoroughly evaluate the property, expenses, and whether it meets your investment and exit goals.

To get a more accurate picture of the property’s overall financial performance, consider using a more comprehensive analysis tool such as a discounted cash flow (DCF) analysis.

A discounted cash flow (DCF) analysis: is a method of evaluating the potential return on an investment by estimating the future cash flows that the investment is expected to generate and then discounting those cash flows back to their present value. This allows investors to compare the potential return on different investments, taking into account the time value of money (i.e., money is worth more today than it will be in the future).

DCF analysis is often used in real estate investing to evaluate the potential return on a rental property. It involves forecasting the future cash flows that the property is expected to generate (e.g., rental income, appreciation in value), as well as any costs associated with the property (e.g., maintenance, taxes). These cash flows are then discounted back to their present value using a discount rate, which reflects the investor’s required rate of return. The resulting current value is known as the net present value (NPV) of the investment, and it represents the expected return on the investment.

DCF analysis can be a useful tool for evaluating the potential return on a rental property, but it is important to note that it is based on a number of assumptions and estimates, and the actual return on the investment may differ from the predicted NPV. It is therefore important to carefully consider all of the assumptions and estimates used in the analysis and to perform additional due diligence to ensure that the investment is a sound one.

4. Negotiate the purchase

Man and woman sitting in front of a laptop negotiating - Negotiate the Purchase
Negotiate the Purchase

Negotiating the purchase price of a Canadian residential investment property can be a complex process, as it involves balancing your own financial goals with the seller’s objectives and the current market conditions. Here are some tips for negotiating the purchase price of a Canadian residential investment property:

Determine your budget: Before you start negotiating the purchase price, you must clearly understand your budget and how much you are willing to spend on the property. This will help you determine your bottom line and the price you are willing to walk away from the deal.

Research the market: Having a good understanding of the local real estate market helps to determine what similar properties in the area are selling for. This can help you to choose a fair price for the property you are interested in and to negotiate.

Make an offer: Once you have a clear idea of your budget and the market conditions, you can make an initial offer on the property. Keep in mind that your initial offer is likely to be just the starting point for negotiations and that you may need to adjust your offer based on the seller’s counteroffer and other factors.

Consider contingencies: Contingencies are conditions that must be met in order for the sale to go through. Common contingencies in real estate transactions include financing contingencies (which require the buyer to secure financing before the sale can be completed) and inspection contingencies (which allow the buyer to have the property inspected before the sale is finalized). Including contingencies in your offer can give you some flexibility and protection during the negotiation process.

Be prepared to negotiate: Negotiating the purchase price of a property can be a back-and-forth process, it helps to be prepared to make compromises (let go of your “nice to haves” and hold firm to your “must-haves”) and to negotiate in good faith. Be open to hearing the seller’s perspective and be willing to make counteroffers until you reach an agreement that works for both parties.

Get professional help: If you are unfamiliar with the real estate market or are not comfortable negotiating on your own, it can be helpful to work with a real estate agent, lawyer, or mentor who can provide guidance and assistance. They can help you to negotiate the best possible price for the property and to protect your interests throughout the process.

5. Obtain financing

loonies and toonies falling onto a surface - Obtain Financing
Obtain Financing

Obtaining financing for a Canadian residential rental property can be a multi-step process that involves working with a lender or a property owner to secure a mortgage. Here are some general steps to follow when seeking financing for a Canadian residential real estate investment property:

Determine your budget: The first step in obtaining financing for a residential real estate investment property is to determine how much you can afford to borrow. This will depend on factors such as your income, credit score, and the amount of money you have available for a down payment.

Shop around for lenders: There are many different lenders in Canada that offer mortgages for investment properties, including banks, credit unions, and mortgage brokers. Shop around to find the best mortgage rates and terms for your needs, or consider bringing in a joint-venture partner.

Gather necessary documentation: To apply for a mortgage, lenders typically require documentation such as proof of income, a credit report, and evidence of your down payment (e.g., bank statements). It will save you and the lender time if you gather all the necessary documentation before you start the application process. Lenders appreciated a prepared investor.

Submit a mortgage application: Once you have collected all the necessary documentation, you can submit a mortgage application to the lender of your choice. The lender will review your application and may ask for additional information or documentation as needed.

Review and compare offers: Once you have applied for a mortgage, you will receive offers from the lender(s). Carefully review and compare the terms of each offer to ensure that you are getting the best mortgage for your needs.

Secure financing: Once you have chosen the best mortgage offer, it’s time to sign the necessary paperwork and provide any required documentation to secure the financing. This will typically involve paying closing costs and other fees.

Specific requirements and processes for obtaining financing for a Canadian residential real estate investment property may vary depending on the lender and the property you are interested in. It can be helpful to work with a mortgage broker or real estate agent who can assist you with the process and help you to secure the best financing for your needs.

6. Close the deal

Business man and woman shaking hands over a desk - Close the Deal
Close the Deal

Closing a Canadian residential real estate investment property deal involves completing the final steps in the process of purchasing the property, Completing the final steps in purchasing the property, including;

  • Signing the necessary paperwork
  • Paying closing costs
  • Transferring ownership to the buyer

Here is an overview of the general process of closing a Canadian residential real estate investment property deal:

Review and sign the purchase agreement: Before the closing date, review and sign the purchase agreement, which outlines the terms of the sale, including the purchase price, any contingencies, and the closing date. Carefully review the purchase agreement and have it reviewed by a lawyer or other professional if necessary.

Obtain financing: If you are financing the purchase of the property with a mortgage, financing must be secured by the closing date. This typically involves signing a mortgage agreement and providing any required documentation to the lender.

Pay closing costs: Closing costs are fees that are associated with the purchase of a property, and they can include a variety of expenses such as legal fees, title insurance, and property taxes. Closing costs are paid at the closing, either in cash or by including them in your mortgage.

Sign the transfer documents: At the closing, the ownership is transferred from the seller to you by signing the transfer documents. These documents may include a deed and a bill of sale, and they will be registered with the appropriate government agency to complete the transfer of ownership.

Receive keys: Once the transfer documents have been signed and the closing costs have been paid, you will receive the keys to the property and take possession of it.

Specific processes for closing a Canadian residential real estate investment property deal may vary depending on the property and the terms of the sale. Real estate lawyers or agents can assist you with the closing process to ensure that everything goes smoothly.

7. Manage the property

couple and property manager discussing documents - Manage the Property
Manage the Property

Managing a Canadian rental property involves various tasks designed to ensure that the property is well-maintained, generates income, and is a successful investment. Some of the key responsibilities involved in managing a Canadian rental property include:

Finding and screening tenants: One of the most critical tasks involved in managing a rental property is finding and screening tenants. This involves advertising the property, pre-screening tenants, showing it to potential tenants, and conducting background checks and credit checks to ensure that the tenant is a good fit for the property. Every step is critical information you will need to decide whether the potential tenant is a good fit for your property. You don’t have to figure it out on your own, here is a link to an excellent tenant screening process.

Did you know human rights laws apply to housing in Canada? You don’t want to be sued even before you got out of the starting gate. Be careful your wording in your advertisement doesn’t violate any of the grounds for human rights under the Canadian Human Rights Act.

Collecting rent: As a rental property owner, you will be responsible for regularly collecting rent from your tenants. This can involve setting up a system for collecting rent, such as using an online payment platform or requiring tenants to pay by check or money order. Be sure to specify the rent on your lease, how, and when it is to be paid.

Maintaining the property: Managing a Canadian rental property also involves ensuring that the property is well-maintained, in good repair and that you are following the Residential Tenancies landlord/tenant laws. This can involve tasks such as performing routine maintenance, making repairs, conducting maintenance inspection reports, and ensuring that the property is clean and safe for tenants. Tenants come from various backgrounds, the best way to ensure they know your standards is to have the tenants sign and date a document outlining responsibilities.

Handling tenant issues: As a landlord, you may be responsible for handling issues that arise with your tenants, such as complaints about the property, disputes over rent payments, or with other tenants. The Residential Tenancies Act (RTA) provides a clear understanding of your rights and responsibilities as a landlord and the laws governing the landlord-tenant relationship in your area. You can find support from municipal landlord/tenant associations, provincial/state landlord/tenant sites such as Service Alberta , legal websites, and trustworthy Facebook groups such as Alberta Landlords Watch and Ontario Landlords Watch.

Managing finances: Managing a rental property involves keeping track of your financial obligations and income, such as paying property taxes, utilities, and insurance, and keeping accurate records of your rental income and expenses.

Managing a Canadian rental property can be time-consuming and require significant effort, particularly if you have multiple properties or are managing the property on your own. If you are planning to self-manage, expect a steep learning curve that can be shortened with education. Others have gone before you and done the work – invest in your education. It’s money well spent, and its tax deductible.

Documentation: Luckily, there are very affordable property management software programs catered to landlords with small portfolios that help create the habit of creating, storing, and documenting leases, financial transactions, contracts, addendums, receipts, pictures, and landlord/tenant communication If there’s a dispute, your documentation will be a reliable backup of evidence. You don’t have to re-create the wheel with documentation, there are a number of affordable document packages for landlords.

After you’ve self-managed the property, you may want to spend your time elsewhere or may find it more efficient to hire a property management company to handle some or all of these tasks on your behalf. Not all property managers are created equally. This is why it’s critical to understand the business of being a landlord to know if your property manager is following the landlord/tenant laws and working on keeping your property well-maintained and profitable.

While purchasing a rental property in Canada can be a complex process that involves many steps and responsibilities, it can also be a rewarding investment that provides a steady stream of income and the potential for appreciation in value over time. Successful rental investors enjoy:

Passive income: Rental properties can provide a source of passive income, as the property generates regular rental income without requiring the owner to be actively involved in the day-to-day management of the property.

Potential for appreciation: Real estate can appreciate over time, which means that the property’s value may increase as the market conditions change. This can provide a potential source of long-term wealth and financial security.

Tax benefits: Owning a rental property can provide tax benefits, as you can deduct certain expenses related to the property (such as mortgage interest and property taxes) from your taxable income.

Control over the property: As a rental property owner, you have control over the property and can make decisions about how it is managed and maintained (to a degree). This can be a rewarding experience for people who enjoy being involved in the management of their investments.

Overall, purchasing a rental property in Canada can be a smart financial move for people looking for a long-term investment that provides a steady stream of income and the potential for appreciation in value. Even if you’ve done your due diligence, like all investments, it involves responsibilities and risks to ensure that it is a financially viable and fits your circumstances.

What is an area about real estate investing you wish you knew before you invested?  I’d love to hear about it, email me [email protected]

To take advantage of helpful tips, tools, and educational resources for DIY landlords, sign up for a membership for Landlord Fundamentals 101. To save even more time and money, combine Landlord Fundamentals 101 with one-on-one coaching to qualify for the Canada Alberta Job Grant.

To have access to all the resources in one place – buy my book!  Canadian Landlords Handbook.

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