5 Steps to Ensure your Rental Property makes MONEY!
With the recent upswing in interest rates, many Canadians have put on hold their plans to purchase more rental property real estate.
Unfortunately, the mortgage rates that we have enjoyed over the past 10-15 years may never come back.
The Canadian federal government and Bank of Canada kept these rates artificially low through various market manipulations.
Historical mortgage rates in Canada sit in the 5-6% range rather than the 2% we’ve seen more recently.
With that in mind, let’s get into some examples and best practices that will ensure your rental property is, and stays, cashflow positive.
#1 Consideration BEFORE YOU BUY YOUR NEXT RENTAL PROPERTY
Make the decision upfront in your mind that you are NOT purchasing this property for potential price appreciation.
Canadians love to say that real estate values always go up and this has been true over the long term. However, this is not a criteria on which to purchase or not purchase a piece of rental real estate.
If you purchase a property and it happens to go up in price, this is an awesome bonus.
So…how should I determine whether to purchase rental real estate?
Answer: CASHFLOW
Once you’ve accounted for all of your rental property’s expenses, you should show positive cashflow, or at minimum, break even.
The last thing you want is to have to cover cashflow deficits waiting for property price appreciation that may not come or may not come for awhile.
Breaking even and ensuring positive cashflow allows the property to “pay for itself” from rental income without straining your out of pocket finances. This is not a Huber Mortgage metric. This is backed by the Real Estate Investment Network and Robert Kiyosaki of “Rich Dad Poor Dad” fame.
This is a Long Term Investment.
It makes sense. Rents pay for your rental properties fully while any price appreciation is a bonus!
Then…think about how nice life will be once your property (or properties) are paid in full.
You will still have maintenance, insurance and property tax costs but that money that used to go to the bank each month for your mortgage payment will now land in your bank account to fund retirement, new properties, college education, travel…you name it!
HOW TO DETERMINE CASHFLOW on BC RENTAL REAL ESTATE
An example will help clarify this concept.
I am using a single family home example with a separate basement suite – purchase price $800,000, mortgage $680,000 at 5%.
Though these single family homes with basement suite cost more upfront, the cashflow tends to be stronger long term.
Personal rental property experience taught me that having 2 properties (1 fully rented up and down and 1 rented downstairs, I was living upstairs) would pay for almost all of my living costs. Further, well managed properties increase monthly positive cashflow after all expenses.
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Rent upstairs – $3500/month
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Rent downstairs – $1500/month
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Mortgage (principal + interest) – $3752
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Property Tax – $416
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Maintenace (5%) – $250
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Insurance (5%) – $250
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Vacancy (5%) – $250
Total Rent ($5,000) – Total Expenses ($4,918) = $82 positive monthly cashflow.
It may not seem like much but now it’s your job to maximize this positive monthly cashflow by following these next suggestions.
5 Rental Real Estate Best Practices
Have competitive realistic rent prices:
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Research the rental market in your area upfront.
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Consult with a few property managers and real estate agents dealing with investment properties to understand the rental market price ranges
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Set a rent price that is competitive but still covers your expenses – mortgage payments, property taxes, insurance, vacancy and maintenance costs.
Minimize vacancy periods:
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Keep your property well-maintained and advertise it in places where potential tenants are likely to see it
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Respond promptly to inquiries and schedule showings quickly to minimize vacancy periods
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The lower your vacancy time periods, the higher your income will be. In the example above, we allotted 5% of your rental income to cover inevitable vacancies. Being prompt and advertising to find solid replacement tenants will lower this 5%, putting more cash in your pocket
Screen potential tenants thoroughly:
In the last section I noted that when you have a vacancy, you need to find a SOLID tenant. This is crucial. Having best practices on evaluating tenants will ensure you get the best tenants and avoid big headaches. 95% of tenants are amazing. When you slip up, the 5% can be a pain. However, you will also get better at screening tenants over time so be patient 🙂
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Understand the rental tenancy laws in your district or province. If you can, sit down with or communicate with one of BC’s rental tenancy agents (1-800-665-8779 / HSRTO@gov.bc.ca). They will tell you the do’s and don’ts and will appreciate you being proactive. Guess what? Most landlords are NOT proactive.
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Conduct background checks and credit checks on potential tenants
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Ensure that they have a good rental history and can afford the rent
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Your gut is your friend…listen to it
Plan for unexpected expenses:
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Set aside some money each month for unexpected expenses
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In our rental cashflow example above we were setting aside 5% of rental income for repairs or maintenance or $250/month
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Keep this money in a separate bank account and let it accumulate so when a repair or appliance malfunction arises, you have the cash ready to keep your property in tip top shape
Regular accounting:
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Review your expenses regularly
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Look for ways to cut costs without sacrificing the quality of your property or the happiness of your tenants
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This action will help you maximize your monthly profits, see where unnecessary costs are arising and be more content with your overall experience because your rental property is NOT costing you cash out of pocket.
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The greatest beauty of this game is paying off your rental property asset through rents alone, without spending a dime of your out of pocket cash!
In closing, reach out and discuss your rental real estate plans. There are details to understand, best practices to adhere to and support available to get started and keep you moving forward in a positive direction.
We love crunching the numbers and getting you the financing you need to succeed in your rental real estate business.
WORRIED ABOUT INTEREST RATES?? – Click HERE to learn 5 Reasons NOT to Freak Out Over Mortgage Interest Rates
Sincerely,
Michael
PS – One of my hobbies is blogging about mortgages, debt and government policy. During the day I’m a MORTGAGE BROKER in Kelowna, BC!
Check out the Huber Mortgage Home Buyers Guide HERE
