Rental Property Tips

A rental property that is actually cash positive is a hard thing to find. Usually, the rent you collect is less than that of the total payments you have to make on the property (unless you already own the property completely).

When you first buy your property, you probably owe mortgage payments (principal, interest, property tax), maintenance fees (in the case of a condo), and income tax. If you collect enough rent to cover all of that and then some, you have a cash positive rental property; congratulations. Breaking even is also an accomplishment, and this is what you should be aiming for. Keep in mind that even if you do have to contribute some of your own money to the monthly payments, you are contributing only to the principal part of the mortgage, and so you're simply paying yourself. Don't be discouraged unless the amount you are contributing is more than the principal part of the mortgage payment.

There are many different things to consider when choosing the right rental property:

Finding an optimized Price/Rent ratio is the most important step in ensuring you have a cash positive, or at least a cash neutral rental property.

An obvious example is if you were to buy a $300K condo that rents for $1250/month, or if you were to buy a $200K condo that also rents for $1250/month. Clearly, the price/rent ratio is in favour of the $200K condo. A very central downtown condo can generate a large amount of rent, that is certain; but is that extra rent for the downtown condo worth the extra price you pay to own it? Downtown condos can easily cost $100K more than their semi-suburbanite counterparts. You may find condos on the outskirts of the a city for a great deal less in price, but only sacrifice a small amount of rent in exchange. The key is to do some quick math to ensure you're making the educated decision.

These ratios will differ a great deal from location to location, which brings us to our next point.

As mentioned in the previous point, location can be very important in the search for the best price/rent ratio. Location also decides WHO will live in your property. Depending on where you live you may have several options available to you;

Suburbs: Families are the likely renters. Money potential is high because of the possibility of renting to two families at once (top and bottom level). Vacancy periods may be a problem since these aren't the most common situations

Downtown: Single professionals or childless couples make for great tenants in condos. The area is usually more expensive on average, but so is rent. Just be sure to find a good ratio. So what kind of properties can you find in these areas?

Outskirts: Usually professionals who don't work downtown and need a car. Parking downtown is usually unfordable, so you get a lot of people compromising by heading to the edge of town. They are usually wiling to pay rents that are similar to what they would pay downtown, because they are getting a parking spot included. The best part is that these properties are usually much less expensive than their downtown counterparts. They make for great cash positive properties.

There are upsides to each type of property, and each depends on your unique situation:

Condos are perfect for those people who don't want a fixer-upper, don't have time to do a lot of maintenance themselves, or are exceptionally un-handy. Condos attract good tenants, who are willing to pay for convenience and social status. Condos can be found in all downtown areas as well as on the outskirts, and there are many of them. Searching for the right condo is much easier than searching for the right triplex for example. One key point is that new condos tend to be built in developing areas of a city, and so the price increase potential is the greatest of all property types.

Duplex/Triplex/Multi family homes are great for a cash positive investment as long as you are capable of maintaining the property yourself. The upside to self maintaining is that there is no maintenance fee like with a condo. This means more profits, but those profits could possibly end up in a large maintenance project down the road. These properties can cost a lot, much more than condos, in a downtown area. They become more and more affordable obviously as you move away from the core. These properties also have a "live in" option for investors that want to live in one unit while renting out the other. This option is very popular. These properties are often found in older areas of town so price increases over time are hit and miss.

Single Family Homes are usually found in the suburbs (or downtown for a great deal more money). Properties with basements are often rented to students or young singles for low amounts of money. These may also be split between two families, or a family and a couple. The two rents combines often make for a cash positive investment. Depending on what part of town your property is located, price increases are definitely possible. New subdivisions increase in price as their surrounding area develops and grows. Older parts of town have less of an upside.

Who you rent to is very important. On the other hand, who you can rent to is often determined by the previous factors. Students can't afford downtown condos while single professionals tend to flock to the downtown core where houses are hard to come by. Students are usually a good option because their not spending their own money quite yet, so all the money you get from them is either from the government or parents which means it won't run out. They can also be trouble due to the fact that they are irresponsible and enjoy parties more than we would like. Professionals make for perfect tenants because they have lots of money in general; but they insist on living in very expensive condos which means you have to do a lot more work to find the right place. Families can make for perfect tenants who won't destroy the place and live courteously in your property, but the pool of possible renters becomes very small when focusing on them.

It is impossible to say for sure if there is any particular scenario that is best. The idea is to know the pros and cons of each, and consider them all when making your decision.