John Pasalis in Real Estate Trends
CEP News interviewed me several weeks ago for a story about a home buyer who decided to purchase a house with a rental unit as a way to spend a little more for his home than he qualified for without the rental income.
Income is one of the most important factors banks look at when qualifying you for a mortgage. If you decide to purchase a home with a legal rental unit, lenders will typically take that rental income into account when qualifying you for a mortgage. The additional income usually means that you can spend more on your home.
Even if you’re not looking to spend more on your home, buying a house with a rental unit is a great way to pay down your mortgage faster. The additional income can cut the life of your mortgage in half.
If you are thinking of buying a house with a rental unit, here are a few things you should consider:
Fire Retrofit
You may come across a lot of listings that have the following in their description:
Agent and seller do not warrant the retrofit status of the rental unit
This means that the rental unit probably doesn’t comply with the current fire code, a common problem among homes with rental units. The most common problem with units that don’t comply is that they do not have two exits. If the rental unit you are looking at does not have two exits keep an eye out for places where you might be able to add a second exit. A large window may make for a good second exit for the unit.
Legality
Most houses with rental units in the city of Toronto are not legal. By legal I mean to say that the house is registered as a single family dwelling not a multi-family dwelling. This would happen if the renovations to convert the single family house into a two or three unit house were never approved by the city. As far as the city is concerned the home should not be used as a multi unit dwelling. If the rental unit is not legal your lender may not take the rental income into account when qualifying you for a mortgage.
Research your competition
Invest some time to research comparable rentals in the area. First see what other homeowners in the area are charging for their rental units. You can do this by looking up rentals on Craigslist, myhood.ca or viewit.ca. You also want to see what larger apartment buildings are charging in your area. Do their apartments include heat and hydro? Do they include parking? In what condition are the units in? Are there a lot of vacant units in the area? All of these questions will help you come up with a good estimate for the rental income you might receive should you decide to buy the house.
Be Prepared For a Little Noise
No matter how much soundproofing you put between the units, you’ll never be able to eliminate all of the noise between them. The noise might make you feel like a renter in your own home but the additional income will leave you far better off in the long term.
Update the Unit
You’ll be able to find a better tenant faster if the unit looks clean and well kept. Updates don’t always have to be expensive. You may want to rip out the old carpet and replace it with laminate flooring. Instead of replacing the kitchen you can easily paint the cabinets and replace the hardware to give it a great new look.
Wait for the Right Tenant
Don’t rush to rent your apartment. Once your tenant is living there it can be hard to evict them out should you have problems with them. You can weed out most nightmare tenants with a thorough application process. If you have a good feeling about the applicant and they pass your application process then you’ve probably found the right person.
Be Thorough When Reviewing Applications
All potential tenants should fill out an application. Make sure to follow up with their references which includes their previous landlords. Check their ID and ask them for a current pay stub, not an employment letter. Pay stubs are a little harder to forge. You are checking to see if this potential tenant can actually afford to pay the rent each month. Here are a few red flags to watch out for when reviewing their application:
- A tenant who has a history of staying at apartments for under a year is not a good sign.
- If the applicant is a student ensure their parent cosigns the lease and have the parent fill out the same application. Go through the same steps with the parent as you would with any otehr applicant. You want to make sure that the parent’s income can support the rent should their child fall short several months.
- When you call their current landlord ask them if they have had any issues regarding noise or non-payment of rent. Also ask them if the tenant has caused any damage to the unit or to the building.
- Tenants who have caused problems at their current apartment may not be willing to give their current landlord as a reference. I had one such applicant fraudulently give me their friend’s name and phone number under the contact information for their current landlord. The fact that the friend didn’t know the first thing about real estate or property management made it pretty clear to me that the person on the phone was not their current landlord. If you have doubts as to whether or not the person you are talking to is actually the applicant’s current landlord ask them several specific questions to see how they react. Do they own the building or do they work for a property management company? What’s their company name? How long have they worked at or owned the building? How many units are in the building? The average friend may not be ready to answer these kinds of questions.
- Do they have a steady job? Do they switch jobs every few months?
You can use Rent Check to check your applicant's credit history.
Here's a copy of a sample residential rental application.
Sign a Lease
Make sure you sign a lease with your tenant. Your lease will clearly outline what your tenant is obligated to pay for the unit and what’s included in the price. Is heat, hydro, cable, internet, parking included? You want to make sure all the details are clear. You can pick up a standard lease from Dye & Durham.
Know the law
Bookmark the Landlord and Tenant Board's website. It has a lot of useful information including answers to many common questions that are of concern to landlords. If you are having problems with your tenant document everything and take action immediately. Don’t let problems drag on for months.
Be a good landlord
Take your tenants concerns seriously and address their work requests in a timely fashion. Work hard to keep your tenants happy. It will pay off in the long run.
John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John
October 1, 2008
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