Buying Your First Income Property
Purchasing your first income property much like making a purchase of any sizeable asset, such as your house or car, will at first glance possibly be unfamiliar and daunting. Like any purchase, however, diligence and research are key. Think back to when you purchased your first home – your knowledge of various conditions and requirements for a purchase, such as inspections, mortgages, the process of closing, was unformed. Now you’re a seasoned homeowner and you feel prepared if you ever had to do it again. Purchasing an income property is much the same: it requires research and study, as well as the advice of an informed and experienced Realtor, such as any member of The Doyle Team. Here we’ll be going over a brief look at some of the items you should keep in mind when looking for and purchasing your first income property.
Finding the Right Property
This section could easily fill several pages, so we’ll be doing our best to keep this brief. The ideal property will be characterized as follows:
- Affordable and within your budget – this is first and foremost the paramount factor
- The property has upside. This can be in the form of rents that are well below market value and can easily be increased through such methods as renovation or finding a new tenant
- Feeding into the previous point, tenants present at the property either have leases expiring in short order or have had their lease expire recently, leading to a month-to-month lease. This allows for the new property owner (yourself) to install your own tenants at your discretion. Inheritance of a previous owner’s tenants can often undesirable when compared to the ability to install your own tenants.
- Ensure the units are properly separated, both in physical terms, as well as for utilities. Income properties are typically demised separately to create their own means of entrance and egress, though they are not always separately metered, meaning utilities such as hydro have to be factored into each individual tenant’s rent. This can result in the tenant taking advantage of this arrangement and maximizing their hydro usage each month and creating the uncomfortable discussion of rent renegotiation. It’s just easier to ensure each tenant has the own hydro meter and therefore pay their own utilities.
Zoning and Legality
Possibly most importantly, make sure the units are legal. It may seem obvious, but if a triplex (even one that’s separately metered and has three upstanding tenants with market-equivalent rents) isn’t legal or legal non-conforming (more on that later), it could create serious financial issues for you down the line.
Take an example for instance: Jennifer decides to purchase a recently-converted triplex in downtown Hamilton. She uses a realtor from Toronto she’s used before, but this realtor has only ever bought or sold single-family homes. They close successfully on the property and put tenants on the second, first, and basement levels. One problem: the triplex doesn’t have ample parking for three tenants, each comprised of a couple with two cars. The tenants begin regularly parking on the street with their six cars, where there would have originally been one or two for the original single-family home. The neighbours predictably complain to a Hamilton municipal parking bylaw officer, whose office subsequently look into the property further and find that the original owner did not complete the proper applications. Had the original owner filled their application for conversion of the single-family home to a triplex (as well as its zoning) and submitted it to the City of Hamilton Building Department, it most likely would have been denied for not supporting ample parking for three tenants. At this time, it is therefore only operable as a single family home.
This is regardless of how well the property was converted and how attractive the finishes are. Jennifer is therefore welcome to appeal the decision, but it is unlikely it will be granted. She is therefore forced to evict the tenants and apply for a minor variance, an application to amend the City of Hamilton Zoning Bylaw to allow for the triplex. Had Jennifer worked with an experienced and educated realtor, they would have recommended she get a zoning verification from the City of Hamilton, which would have told that a triplex is not a permitted use at the property, saving her stress, time, and money.
Other Factors to Consider – Financing
Unlike residential properties, income properties require a considerably larger down payment in order to qualify for conventional financing, typically around 30 percent of the sale price of the property. These can therefore be well into the hundreds of thousands of dollars and will still lead to purchases requiring the buyer to provide all leases and any other supporting documentation to the financing institution in question. Such documentation can include a certified rent roll, which summarizes all rents and lease commencement and expiry dates, or as discussed earlier, a zoning verification, certifying that the property is operating in a legal and qualified manner. Acquiring such documentation is generally part of the contractual obligation between the buyer and the seller, but there are occasional times when the information provided does not line up with what was originally said about the property. This can lead to difficult and uncomfortable discussions between the buyer and seller and are generally best handled by their respective representatives. It is crucial that an experienced and insightful real estate representative be contracted to ensure your interests are being accurately conveyed and protected.
Whatever your needs, whether you’re buying or selling, residential or commercial, The Doyle Team will help you achieve your goals. We are Your Real Estate Professionals.