Are you trying to buy a Toronto condo that already has a tenant? Or are you thinking about investing in a rental property? It may seem a profitable investment to buy a rental property in the hot Toronto real estate market, but you should also know about all the risks and responsibilities. Keep reading to get familiar with all the important tips about Toronto home buyers’ rights, responsibilities and obligations when buying a home with tenants in Toronto.
On one hand, owning a rental property in Toronto means within five years you will benefit from a rent increase of 13.39% and a 6% annual ROI. On the other hand, you as a homeowner are still responsible for all the mortgage, taxes and other expenses. Besides, according to the Rental Market Survey of the Canada Mortgage and Housing Corporation, Canada’s overall vacancy rate increased from 2.0% in 2019 to 3.2% in 2020. So, before stepping into this path and buying a home with tenants in Toronto, you take the professional advice of a top Toronto realtor to walk you in the right direction.
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Let’s first review the advantages and disadvantages of buying a home with tenants in Toronto. Then I will tell you all the important tips to remember when buying a rental property.
Advantages of buying a home with tenants
- You will have a regular monthly income. This will be a stable immediate cash flow created by collecting rent, minus your expenses.
- When there are currently tenants in the property, you don’t need to spend so much time and money to find tenants for a vacant house. First-time landlords usually have no experience in drafting a legal-tenant agreement. Also, going through the process of interviewing potential tenants could be time-consuming and often exhausting.
- Although no one can guarantee the increase in the price of your property, it has been proven that real estate appreciates over time.
- Several related expenses can be deducted from your gross rental income, including the mortgage interest, property taxes, insurance, maintenance costs and property management fees. At the end of the year, if the total expenses were higher than rental income, you can pay it from any other source of income.
- There is a high demand for rental properties in the Toronto real estate market.
Disadvantages of buying a home with tenants
- As a landlord, you will have different responsibilities. You should manage all the maintenance and sometimes emergency repairs. Besides, collecting rent can be complicated for disturbed tenants. Certainly, you have the option of hiring a property manager, but it is usually not so cheap.
- Although there is a high demand for rental properties, sometimes it can be tricky to sell. So, you must apply the best strategy and consider the market conditions and all the costs of a real estate agent commission, legal fees and real estate lawyer.
- Being a landlord in Toronto can be expensive. You should pay for downpayment and mortgage, as well as repairs and upgrades which could be 2% of the purchase price.
- When you buy a house with tenants, there is already a rent agreement. If the tenant has been there for a long time, the rent could be far below the present asking rent. As a new owner, you cannot renegotiate the rental fee. There is a chance to increase the rent once a year which is only 1-2% in the province of Ontario.
- You should know that your rental income is taxable. And also, this extra taxable income may result in a higher marginal tax rate. It means that you might have to pay more tax for every additional dollar you earn.
- When you buy a house that currently has a tenant, you have no idea of the quality of the tenant. Since you have not interviewed your tenant, as a professional landlord you better know how to deal with nuisance tenants.
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Important tips to consider when buying a home with tenants in Toronto
No matter if you are a first-time homebuyer or seasoned investor, when you decide to invest in a property that has a tenant, you will need a proper strategy and enough information about the real estate market. For better results, you can use the following important tips first.
- If the current tenant has a lease agreement, it means you cannot ask them to leave before the lease expires. The lease agreements generally expire after one year and automatically come under a month-to-month agreement. As a new buyer, you have the right to check the lease agreement to see the terms and how long the tenants have lived or will be there. So, educate yourself about all the landlord-tenant laws.
- Honestly, it is hard to find a good tenant. Now that you already have a tenant, arrange a meeting for a coffee, try to know them and other details. During such introduction meetings, both parties can make their decision to continue the tenant-landlord relationship or not.
- Do your own research about the average rate of rents in your intended neighbourhood. Search about the current rents range and occupancy rates in that area. The best decision is to buy a house in an area with good job opportunities and population growth.
Real Estate, Mortgage and Financial Tips
- Use the professional advice of your investment advisor and lawyer to find the right mortgage which fits your financial needs.
- Buying a rental doesn’t mean you can skip the insurance step. Because it is a huge investment and valuable asset. Use the advice of your insurance agent to properly protect your asset from any unforeseen financial impacts.
- Read all about the tax implications of all the property types in Toronto. Understand what you are subjected to as a resident or landlord.
- Manage your finances. According to Canada’s mortgage rules, if you occupy part of the property, a minimum downpayment of 20% for a small rental property cannot be applied to you. So, you must first determine what you can afford to buy. You should evaluate your budget and keep track of closing costs.
- There’s no difference between buying a vacant condo or a rental property. You will need a team of professionals anyway. You should include an investment advisor, real estate agent, lawyer, appraiser, home inspector and insurance agent in your team to make sure of your every step.
Before buying a home with tenants in Toronto, check the Landlord and Tenant Act to make sure you follow the process correctly. After you are assured about all the responsibilities and regulations, it is time to start. Good luck!