Most people have thought about it at one time or another, rental properties are a good way to bring in some extra income. There are a few things you should know.
Identify your price range, you should then aim for 10 - 20% of your top end for a down payment.
A big factor in being able to get and hold tenants is the location. You should identify where you want your home and who you want to target as tenants. Is it close to amenities? In a quiet neighbourhood? Close to UWO or Fanshawe College? What about bus routes? Is it close to the Hospital? Does the neighbourhood have good value appreciation? Does each tenant pay for their own utilities?
Another thing to consider is if you are going to live there yourself. If you are it may be easier to get a mortgage than if you weren't.
Think about whether you want a Single Family Residence, Duplex, Triplex, etc.. Single Family Residence homes can be rented to a maximum of 5 tenants as long as there are 5 legal bedrooms, while a duplex ( a home with 2 entrances, kitchens and is separated) can have more.
Once you have found the home you want and you have bought it, closing the deal and getting everything finalized can take 1 - 2 months depending on complications and conditions in the agreement.
Click here to get an idea of what you can afford and what mortgage payments would be
You're going to need to get the licenses together to rent the home. If you're renting a duplex, you will need two Residential Rental Unit Licenses (one license for each residence). Information on licenses in London, Ontario can be found here.
You will also need a fire inspection completed, which will include things like smoke alarms and egresses. An Egress is a basement window that can be used as an escape in the event of a fire. A couple specifications for it include things like the window cannot be higher than 1 meter above the floor and must be able to be opened without the use of tools.
Information on Egresses can be found here.
Calculating your Income
When calculating your income you need to estimate how much your property will yeild yearly (subract 5 - 10% from this to allow for vacancy and bad debt), estimate your yearly expenses necessary to maintain the flow of rental income and subtract these two numbers and you will get your net operating income (NOI). Don't include mortgage payments in your expenses because NOI is only used to gauge the property income generation - mortgage payments will skew the results and the capitalization (cap) rate.
Deduct the mortgage payments from NOI to get your annual cash flow and then divide that number by the amount you have invested (down payment + incidentals) then multiply the result by 100 to convert it to a % value. This % value will be your return on investment
Take your net income and divide it by the cost of the property to get your capitalization rate and then multiply it by 100 to convert it int a % value. Capitalization rate will basically tell you how long it will take for the property to pay itself off (100% / 8% = 12.5 years).
Cap rate and Return on Investment are very crucial in determining potential in the property and should not be overlooked.