Are you thinking of buying an investment property? Are you looking for tips on what type of property you should be buying? Should you buy something where you can rent it out on AirBnB or focus on properties aimed at long term rentals?
In this article we will answer all of the key questions you have. We have purchased and managed our own investment property for over five years, and want to share everything we’ve learned with you!
Should You Buy an Investment Property?
An investment property is a great way to build wealth. Not only are you able to get someone else to pay for your mortgage by renting your property out, but you are also be able to claim some tax deductions.
If you have enough disposable cash on hand for the downpayment on an investment property, then you should seriously consider purchasing an one and renting it out.
You should plan on keeping your investment property for a minimum of five years, and have the financial flexibility to hold it for ten years just in case the real estate market turns south when you want to sell.
Tips for Buying an Investment Property
We have three key tips to share from our experience with purchasing and running an investment property.
First, for first-time investment property buyers we recommend buying a condo. Why? The reason is that you will have much less headaches when compared with a property such as a house or townhouse.
With a condo, your building will take care of the repairs to the building so all you have to worry about are issues in your own unit. Contrast this with a house where you would have to worry about things like the furnace, AC, landscaping, shoveling the snow, and roof leaks.
Second, make sure your property is in a desirable location – even if it means paying a bit more. The reason is that this offers you tremendous flexibility. If you’re in the hustle and bustle of downtown, then you can easily rent our your property on AirBnB or executive short term rentals if you can’t find a long term tenant. You should look for areas that are close to the entertainment district, universities, and large hospitals. Don’t be lured in by ultra-affordable property values on the outskirts as you will have to work much hard to rent them out.
With our property, we had an AirBnB occupancy rate of over 85% when we did short term rentals. Once we switched to long term rentals, it never took us more than seven days to find a new tenant.
Third, do your research on what your costs for owning the property are and what kind of rent you can expect from the property you want to purchase.
The costs you have to consider are the mortgage (principle plus interest), property taxes, condo fees, insurance, and utilities (if you’re covering that for the tenant).
In terms of the rent you can expect, just check your local Kijiji rentals or other rental websites to see what the market rates are. You can also do a quick search on AirBnB to see the market rates on properties in the area you’re considering buying.
Ideally, you want to be “cash flow positive”. This means that the money entering your bank account from the rent is more than the money leaving your account to pay for the property.
At a minimum, your rent should at least cover the interest portion of your mortgage + property taxes + insurance + condo fees. The reason we are only considering the mortgage interest in this case is that the portion of your mortgage that is going towards paying your principal is not technically a cost since it goes towards the equity of your property.
Should You go With AirBnB or Long Term Tenants?
So you have a fantastic investment property in a great location, and now you need to rent it out. Should you do short term rentals through a platform like AirBnB?
The answer will depend on your personal situation.
We tried both AirBnB and long term rentals for our property, and liked the AirBnB approach better.
If you have a few hours to spend each week on managing your AirBnB property, and are able to clean the property yourself then you will make more money on AirBnB. Additionally, running your property as a short term rental may allow for more tax deductions.
If you would like to be a more hands-off landlord, then renting your property on a long term (12+ months) lease is the way to go. You’ll probably make 10-20% less than you would on AirBnB, but it is much less work. The only times you have to deal with your tenants are if appliances break, or if there’s some sort of emergency such as a burst pipe.
The one thing that surprised us with long term tenants is how much work it took to find a good one. We had to run credit checks, call references, and spent at least 15 hours showing our property to prospective tenants before renting it out.
Risks with Owning an Investment Property
As with any investment, there are risks that you will need to understand before diving in. Some risks can be mitigated with the proper insurance, while other risks are completely out of your control. In no particular order, here are the biggest risks associated with owning an investment property.
1. The market could turn sour at any time. Imagine if you were trying to cash out on your investment property in 2008, or if you were running an AirBnB during the COVID-19 crisis. The market throws us curveballs, and you could be stuck with holding onto your investment property longer than you want to. Even worse, you might lose money on it. Unfortunately, there’s not much we can do to insulate ourselves against market forces.
As with any investment, make sure the money you are putting towards your investment property is not money that you will need until you retire. This will allow you to ride out temporary swings in market conditions.
2. Your property could be damaged by your tenants. Whether you’re doing a long term rental or AirBnB, there is a risk of your tenants damaging your property. The damage can range from cosmetic annoyances to serious issues that will take several weeks to fix.
There are insurance policies that will protect you against tenant vandalism, but these policies are often double the price of an insurance policy that doesn’t cover tenant vandalism. You’ll have to make a judgement call, and decide whether the peace-of-mind is worth the money.
If you’re renting it out on a platform such as AirBnB, you should still get robust insurance coverage. The claims process through the AirBnB host guarantee can take a long time, and they can essentially do whatever they want as their terms and conditions give them unilateral decision-making powers.
If you’re renting your property out on a long term lease, then the tenant’s security deposit (usually equal to a month’s rent) can provide some protection.
3. Having to Deal With Emergencies. Life happens, and sometimes there will be inconvenient issues that pop up at inopportune times. For example, there might be a flood in you area, or maybe the condo unit above you broke their toilet and flooded your investment property. Being a landlord means you will have to deal with these issues when they arise.
We hope that this article has given you some insight into whether an investment property is right for you. If you have any additional questions don’t hesitate to e-mail us or leave a comment!