Is rental property right for you?
Most people float the idea of investment property around at some point, and the growing popularity of real estate buy-and-flip shows only makes the prospect more enticing. But before you take out multiple mortgages or meet with private lenders, it's worth understanding what you're really getting into.
Interest rates were reaching historic lows in 2022, and most millennials chose to rent versus buy — so the timing looked good. But rental properties don't immediately equate to passive income. You have to maintain properties, find and retain tenants, and constantly update things to protect your investment.
The trade-off for that extra work is a monthly stream of revenue and the potential to sell a property eventually for profit. Real estate investment is considered one of the safest forms of investment since tangible property generally holds its value — if you work with knowledgeable mortgage brokers and choose the right areas to invest in.
If you're ready to invest in rental real estate, here are a few things you should know. The following tips aim to ensure your investment is sound and will continue to add value to your portfolio over the next few years.
Choose the right location
Being a landlord doesn't always follow the same rules as being a homeowner. Areas with high appreciation often result in low cash flow for rentals because you usually can't have it both ways. Investors who anticipate a high appreciation value are willing to give up some cash flow by securing a higher mortgage. At the same time, the best deals on rental properties lay in areas with low appreciation rates, which means there's a higher potential for monthly cash flow.
You have to determine your investment strategy upfront and get comfortable with one or the other.
Decide how you'll pay for it
Before you start looking at a location, you need to decide if you'll purchase your rentals outright or finance your purchase. Contemporary wisdom suggests that buying a house is the smarter decision because then the cash flow is entirely yours. However, when you break down the cash return on owning a home versus investment, sometimes leveraging a property by financing results in a higher cash return.
It's best to talk to a trained mortgage broker about your options and do the math before making a final decision. How comfortable you are with debt will also heavily influence your ultimate decision.
Get comfortable with long-term investment
Most people obtain a mortgage when they first become a landlord, and you won't see positive cash flow during the first few years of real estate investment because of the high costs of upkeep and mortgage interest. The longer you own a property, the higher your appreciation rate and cash flow.
You have to be comfortable with long-term investment. If you aren't, property investment might not be the right tool for you.
Figure out if you're landlord-ready
You also need to evaluate if you're ready to be a landlord. Landlords must be available 24/7 since emergencies can happen at any time, screen tenants, schedule repairs, and handle disputes among tenants. Not everyone is comfortable with that level of interaction or responsibility.
Alternatively, you can hire a management service to take care of these tasks, but they'll take 6–10% of your rental income.
Create an emergency budget
While rental income can be intoxicating, it's essential to keep 20–30% of your rental income aside for emergencies and maintenance. As a landlord, you can't wait to make repairs, and you're legally compelled to care for your properties, so you need to be prepared for all scenarios.
What to do next
If you're serious about rental property, talk to a mortgage broker who understands investment strategy — not just products. We can help you run the numbers, figure out what makes sense for your goals, and avoid the mistakes that turn a promising investment into a money pit. Reach out at [sayhello@hellomortgage.ca](mailto:sayhello@hellomortgage.ca).
