10 Investment property basics

About the business

Although there are many ways to generate income from residential real estate, the most accessible and by far the most common, is to rent out the property. There are several different segments to the rental market in Alberta. The Primary rental market consists of purpose built rental buildings. There are short term or vacation rentals ( Airbnb, VRBO ) which revolve around short hotel-like experiences.  Then there is the secondary rental market which is made up of housing not originally designed as a rental in which landlords typically lease the home to tenants for longer periods of time. The latter is a income property concept that people are most familiar with and is the most relatable to people in the Calgary and Okotoks area.

I am willing to be that almost everyone has been themselves, or has a friend, a coworker, a family member that owns a rental property.  There are two main types of investors who own property in the secondary rental market

1. Active real estate investors : Some buyers are always on the lookout for their next income property. They will seek out properties that meet their investment criteria to add to their portfolio. Often times this is the evolutionary end of our second type of investor. As time, experience and equity increase often the accidental investor becomes the active investor.
2. Accidental / passive real estate investors: This investors’ story often begins with living in the home that becomes their income property. Albertans live in a prosperous part of the country. A lot of us have the luxury of consistently increasing  wages and equity to travel the typical path through the homeownership cycle. We start out renting, working  toward owning an apartment, to an entry level home, only to outgrow that home, move up again and so forth. Often at some point along the home ownership path, with the related sales and purchases, an opportunity to rent presents itself.

The 10 income property basics.

1. Know yourself and your resources

Before you do anything – do an assessment and take inventory of your skills, resources and sources of support. A change to one or a few of the following can dramatically change your ability to grow or maintain your rental portfolio:

• Your income and job stability – contract work or in an industry prone to layoffs? Spouse looking to retire or maybe re-enter the workforce?
• Are you looking for a short term or long term investment? Most of the benefits of owning a rental property are realized over decades, not months.
• Understand the impact of interest rates – like really.. work the numbers and ask some advisors. What will the impact of changes mean for you and how would you manage it? Keep in mind you will have a tenant and obligations to them based on your lease type and details.
• Do you have access to funds for repairs and capital improvements?
• How does this impact your taxes? It’s not that complicated but a rental property will add a few things to consider and some extra work come tax time

2. Hire a property manager or self manage your income property?

Basically it’s not rocket-science but most things in life aren’t. You just need to decide if you have the time and are comfortable doing the work or if it’s better to leave the management of your rental property to a professional.

Most property managers will do all or some of the following:

• Assess the rental value of the property and help you set a rental price
• Market for tenants, do showings and select a tenant
• Negotiate and sign a lease on your behalf
• Collect rent
• Coordinate repairs to the property
• Handle tenant questions and concerns
• Provide you with some type of monthly reporting and disbursement

There is a cost to this service and although there are varying business and pricing models out there, you pretty much get what you pay for. You can expect fees in the Calgary area for a licensed property manager to run between 8-12% of gross rent.  Most have an upfront onboarding cost and take the percentage of rent fee on monthly basis.

The self-manager needs to consider:

• Are you going to be living close enough to deal with things in person – often on short notice
• Do you have the time to find tenants and deal with issues
• Do you understand what is and is not allowed under the Alberta Residential Tenancies act?
• Are you handy? Do you know someone who is? Most issues are small – but left unchecked will snowball into unhappy tenants and bigger problems later

3. Understand your product

How did you use your home? How do you see other people using your home? If you were a family of four and fell in love with the house because you were close to the school and the dog park, you can pretty much bet the same will be true about your tenant applicants. Knowing this you can understand what is reasonable to expect, what to allow and where to advertise. For example in this case you wouldn’t advertise your family home on the university bulletin board.. you also should expect children… and potentially pets to be in the equation.

4. Know the market

This is pretty easy these days with most internet listing services (ILS). You can scope out the competition based on house type, location, finishes etc. Understanding the rental market in Calgary can also be further aided by looking for news articles and statistics published by trusted sources. This will give you the understanding of where comparable prices are now and just as importantly, which way they are headed.

5. Have realistic expectations

• What are your financial returns going to be on your income property? Have you factored in all costs and are pricing based on the market and not what you “need” to get
• Tenants are people too. Quite often it’s hard to see things from an opposing viewpoint and that gets harder when emotions are involved.  Keep in mind what you would want if the roles were reversed
• Repairs happen. Yes, things break down or need repair. Sometimes the first day a tenant moves in, sometimes not for years then all at once. Don’t let it throw you.
• Things that happen, happen on a Sunday… at 10pm…. when it’s raining….. and you are on your way to the airport. Have a backup person to call or be ready to handle things at inconvenient times yourself.

6. Choose carefully – it makes everything else easier

This applies to many things and seems simple but I cannot stress enough how important this is in managing your rental property.

• If you are not doing things yourself choose the right manager – make sure they are licensed by RECA and ask questions!  Ask a Realtor you trust, ask a friend..
• Attract and choose the right tenant. This is the single most important step – no question. Don’t overprice,  don’t rush, do your research, use tenant screening tools, ask for and check references !
• Something needs repair or replacement? Keep in mind that this is your investment – do the right things now even though you don’t live there!

7. Do your walk-through(s)

At the beginning and end of your tenancy please… I mean please make sure you do a thorough walk through of the property with the tenant. This does not take long – even a well documented report of a large home will take 45min – max. Even if you are your new tenants are getting along great and neither has concerns, I tell you again… do a detailed walkthrough. Do it for your sake, do it for your tenants sake, do it for the next tenant, do it for your security deposit. Just do your walkthrough. If you want a template just ask me and I will email to to you.

8. Get a proper, binding lease

This sounds obvious, but I am willing to bet that 25% of people who self-manage their property either do not have a lease or it is unenforceable in some way. Don’t let this happen to you. Make sure you have one at the start and keep it current. It will also help to understand the two main types of residential lease:

• Fixed term – this lease has a specific end date. Could any length of time form the start, or commencement, of the lease.  An important thing about this type of lease is that it is assumed that the lease ends on the date specified. That means no notice is required by either party to end the lease on that day.
• Periodic – this is a lease that is assumed to renew upon at the end of the specified period. That could be weekly, monthly or yearly. Notice required to end these lease will vary with the length of period and you should check the Alberta Government website

9. Know the laws

This is not nearly as hard as it sounds. There is a lot of hearsay and misunderstanding when it comes to landlord and tenant rights. For example, a lot of people I speak with think that interest is always payable a security deposit. When in fact that is not the case, it varies from year to year and has been 0% in Alberta for over a decade. This and many other things are well laid out on the Service Alberta website. Check it out – and download the handbook.

10. Have a plan

Have a plan! Yes ! Have goals and understand what will and will not help you get there. Don’t look for a two year lease when you want to sell in 6 months. Don’t plan on holding a property for 30 years and neglect maintenance. Make sure that your actions will be congruent with your goals.

In the end

This is brief overview of some factors that I believe will help empower you as a landlord based on my experience. I personally believe that having an income property can be a financially rewarding experience and if managed correctly it can grow into a solid side gig or something even more substantial. Once you have an understanding of the income property basics you can confidently start your journey as a landlord. If you need help buying the right rental property check out some more information on my site , take a look at my rental property calculator or give me a shout.