Are you considering investing in a rental property this year? Jumping into the real estate market with the intention of becoming a landlord can be an extremely profitable idea but you will need to keep these 5 factors top of mind…
20% Down Payment Required
If you are buying an investment property you will need a down payment of 20% (if you are buying a property as a principal residence you may only require a 5% down payment). Given the price increases seen in Kelowna this will be a significant amount so be prepared for this requirement.
Qualifying for a Mortgage
Effective January 1, 2018 new rules were implemented requiring borrowers who have a down payment of 20% or more to pass a ‘stress test’. What this means is that you will be required to qualify for your mortgage at an interest rate that is higher than what you will actually be paying. This can have the effect of reducing the amount you will receive under your mortgage and therefore may restrict the type or value of properties you can consider.
New Tenancy Rules
Effective December 11, 2017 new tenancy rules were implemented that limit the circumstances under which a landlord can remove a tenant from a property. If you plan on having a long term tenant this may have less of an impact on you, but if you planned on renting to university students from September to May and then renting to tourists on a weekly basis over the summer you will not be able to require the university student to vacate unless he or she agrees.
If you are buying a property that already has a tenant in it, you need to be aware of the rent that tenant is paying because you will be bound to it. You will only be able to increase rent by a prescribed amount each year.
Future Changes to Airbnb
Kelowna is host to hundreds of Airbnbs, most of which are illegal. In order to address this boom the City is considering how to manage Airbnb through different regulatory tools. Other municipalities only permit an owner to Airbnb their principal residence and not a rental property. The City of Kelowna was collecting information via an online survey which closed December 3, 2017; while we don’t yet know which direction it will take, it is important to know that there will very likely be changes.
Property Type & Taxes
Ok, we sort of fit two in here at the end, but both are important for you to consider. You need to conduct due diligence before purchasing an investment property to ensure you will be able to use it for your intended purpose. For example, a strata property may have rental restrictions.
Tax is always an important consideration so discuss with an accountant how to manage any income/debt associated with the property, and plan to budget for taxes you will have to pay when you sell the property.
Ready to start understanding the finer details of investing in rental estate? Reach out to our Real Estate and Transactions Team today to ensure all your legal bases are covered.
This content has been prepared to provide general information and is not to be relied on as legal advice or a legal opinion. If you have any questions, or are considering purchasing an investment property contact Alison McLeod: [email protected]. 250.979.2561