Start Rental Property Business: Is Being A Landlord Profitable?

Would you like to make a move with rental properties? There were 14.5 million households and 44 million people living in rented single-family homes in the United States in 2019, and Urban.org projects a 21% increase in new rented households between 2020 and 2040.

Rental properties can be a great way to invest your money and get an advantage from the large sums that investors are putting into the market. However, achieving this with rental properties can take time and effort. It takes time, knowledge, and strategies to start.

In this guide, we explain everything you need to know about renting property, from how to get started to where to begin, the pros and cons, and some things to keep in mind before moving in.

Let’s get started!

Advantages Of Rental Real Estate

There are many advantages to owning rental real estate. Here are some of the top reasons why you should consider investing in rental properties:

Steady Income

You’ll receive a steady income stream when you own a rental property. This income can be used to pay off your mortgage or be saved for later use.

Appreciation

If the rental market in your area is strong and demand remains high, you can sell your property at a profit. However, this is only sometimes the case, and it’s important to understand potential risks before investing in real estate.

Having Control

You have complete control over your property and can choose how much time and effort you want to put into managing it. You also have the option of selling or renting it out if needed.

Tax Exemption

You may also qualify for tax deductions if you own a rental property. These deductions will help reduce your tax liability and increase your overall financial picture by lowering your taxable income yearly.

For instance, suppose you have a mortgage on your property and other expenses such as maintenance costs, repairs, etc. In that case, these expenses can be deducted from your gross earnings before calculating how much tax you owe at the end of the year.

The leverage effect

You can control a much larger asset with a smaller cash investment by taking out a mortgage to purchase a rental property.

Diversification

Ownership of rental real estate can help diversify an investor’s portfolio from single-unit homes to multi-family homes, from duplexes to condos, reducing the portfolio’s overall risk.

Disadvantages Of Rental Real Estate

Renting out your property is a great way to earn extra income, but it has challenges. From finding the right tenant to dealing with maintenance issues, here are some of the disadvantages of owning rental real estate:

Responsibility

As a landlord, you are responsible for the maintenance and repair of the property, as well as for ensuring that the property is safe and habitable for tenants. This can be time-consuming and costly.

Vacancy

If your property is not occupied, you will not receive any rental income. This can be a financial strain if you rely on the property’s income to cover expenses.

Risk of Default

Tenants may only sometimes pay their rent on time or stop paying altogether because they don’t feel like paying rent anymore. When this happens too often, it could stress your finances.

It could also mean that you have to take legal action against tenants who don’t pay their rent on time or who don’t pay at all.

Legal issues

Various laws and regulations apply to rental properties, and landlords must ensure that they comply with these laws. Failure to do so can result in fines and legal issues.

Management

Managing a rental property can be time-consuming and requires a certain level of expertise. If you need more time or expertise to manage the property effectively, you may need to hire a property management company, which can be an additional expense.

Liability

When you own a home, it’s possible that someone could get hurt or damage your property while they are living in it. In case someone is injured on your property, or if they damage something while living in your home, you may be held legally liable for the damages they caused.

Pricing Your Rental Properties

Renting a home or apartment is a popular option for young people and families just starting. Rental rates vary from city to city and even from neighbourhood to neighbourhood. Aside from this, rental rates also vary according to the property type, location, and amenities.

The Canada Mortgage and Housing Corporation report that the average monthly rent for a two-bedroom apartment in major Canadian cities is $1,167 for a conventional rental and $1,771 for a condo.

The following table provides the vacancy rate and average rent for a two-bedroom apartment in Canada based on the latest data from the Canadian Mortgage and Housing Corporation (CMHC).

City Purpose-built Rental Market Condominium Market
Vacancy Rate Avg. 2 Bedroom Rent Vacancy Rate Avg. 2 Bedroom Rent
Vancouver 1.2 % $1824 0.8% $2498
Edmonton 7.3% $1270 5.3% $1412
Calgary 5.1% $1355 4.2% $1524
Saskatoon 4.8% $1183 3% $1208
Regina 7.1% $1156 4.8% $1278
Winnipeg 5% $1317 2.1% $1406
Hamilton 2.8% $1362 0.4% $1996
Kitchener 2% $1356 0.8% $1950
Toronto 4.4% $1666 1.6% $2355
Ottawa 3.4% $1550 0.8 $1818
Quebec 2.5% $945 3% $1135
Montreal 3% $932 1.4% $1420
Halifax 1% $1335 0% $1530
Gatineau 1.1% $1035 1.3% $1260

Is Being A Landlord Profitable?

Being a landlord can be profitable but involves significant work and risk. Landlords can profit from their rental properties because they can charge rent for using the land and building.

The rent charged for the use of the land and building is based on what it costs to maintain and operate those things and what the market can bear.

This means that landlords have a lot of flexibility in how much they can charge for rent, which allows them to charge more than they would if they were renting out just one unit at a time.

In addition, if landlords rent out just one unit at a time, they also make money off of their properties by charging fees for things like property management services, preparing leases and collecting rents.

These fees are charged on top of the amount tenants pay each month as part of their rent payment plan.

The fact that landlords make money off their rental properties does not mean that it will always be financially beneficial for them to become landlords; there are also risks associated with rental real estate.

However, the profitability of being a landlord depends on some factors, including

  • Properties in high-demand areas, such as major cities, tend to be more profitable than those in less desirable areas.
  • Properties that are well-maintained and updated are more likely to attract and retain tenants, which can help increase profitability.
  • The rent charged should be sufficient to cover the expenses of owning and managing the property, including mortgage payments, property taxes, insurance, maintenance, and other fees.
  • A high vacancy rate can impact profitability, as the property generates income only when rented.
  • Owning and managing a rental property can involve some expenses, such as legal fees, advertising costs, and repairs.

Being a landlord can be profitable but requires a strong strategy, direction, and a readiness to take risks. It is important to assess all aspects influencing profitability before becoming an owner.

Understanding How Landlords Make Money

Rental real estate is a great way for investors to make money. But how do landlords make money? The answer is that landlords make money in the following ways:

Rental/ passive income.

The most obvious way landlords make money is through rental income. This is the amount of money you receive from tenants every month. It’s important to remember that this figure is different from your profit.

Your profit is what you receive after paying expenses, such as

maintenance and repairs,

Tax Benefits

Landlords enjoy several tax benefits that help offset some of the costs of owning rental property. For instance, they can depreciate the property over time using accelerated depreciation schedules that allow them to write off a portion of their real estate investment each year.

This means landlords will pay less in taxes even if they don’t spend more on repairs or maintenance during those years.

Appreciation

Appreciation is one of the most significant ways landlords make money from rental real estate. Appreciation is the gain in the value of a property over time. Property value can increase between 1% and 5% yearly in a good area.

For example, if you bought a house for $250,000 and sold it for $300,000 after 10 years, you would have enjoyed an appreciation rate of approximately 8%. The average appreciation rate was around 5% during this decade, and many factors contributed to this.

However, it’s important to understand how appreciation works, as well as some of the factors that contribute to appreciation rates.

Location: Where your property is located will make a big difference in its value. Properties located near schools, major roads, parks and other amenities are often more valuable than those not in areas with access to these resources.

Development: The city’s development contributes to an increase in the value of a home by increasing both the number of people living there and the number of job opportunities available.

Size: The size of your property also affects its value. Smaller properties are more affordable than larger ones, but they may also appreciate at a slower rate.

Large homes require more upkeep, which can reduce their appeal over time if not maintained properly.

Owner equity: Owners increase equity by paying down their mortgages, which decreases the asset’s value. Thus, by combining appreciation rates in an area with principal payments, equity in the home can be calculated.

Amortization

Landlords often take out mortgages on their property to purchase it. The loan amount is then divided into monthly payments that the landlord pays back over time with interest.

The longer the loan length and the higher the interest rate, the more money landlords make on amortization.

Factors To Consider When Buying Rental Properties

Buying a rental property can be a great way to build wealth and passive income. But it’s more complex than finding a place you like and renting it out.

There are many factors to consider before you buy a rental property, including your financial situation, the type of tenants you want and the property’s location.

Determine Your Financial Situation

Before buying a rental property, you need to determine whether or not it’s in your best interest financially. You may be able to afford one or two properties, but if you want to own more, you need to make sure that the investment makes sense for your overall financial picture.

Location

You need to consider the property’s location because it will determine how much rent can be earned. If it is located in a good area, you will earn more rent than in a bad area.

You must ensure that all your tenants have easy access to transportation and other amenities, such as grocery stores, pharmacies, etc., since this will make their lives easier.

Diversification of Properties

The vital consideration is diversifying the types of properties you buy into. Diversifying property types means investing in properties like apartments, duplexes and single-family homes.

This gives you more options when finding tenants who will pay their rent on time and keep your property in good condition. If one type of property begins to struggle, others may be doing well enough to compensate for it.

Suppose you have a diverse portfolio of rental properties. When one type of property starts to struggle, like apartments, during a recession, another may be doing well enough to make up for it, like single-family homes.

Keeping Finance Secure

Quick profits and short-term returns tempt many people who invest in real estate. However, this can lead them into trouble if they aren’t careful.

You should only use some of your savings or retirement money on an investment property because if something goes wrong with your purchase, you could lose everything you’ve worked so hard for over the years.

How To Start A Rental Property Business?

Renting out a property is one of the easiest ways to make money. You don’t have to be a real estate agent, you don’t have to be an expert in the construction, and you don’t even need to be good with numbers! However, learning how to start a rental property business would be best.

Evaluate Your Finances

Before renting out properties, looking at your finances and seeing if this will work for your needs is important. Investing in rental properties might not be a good idea if you’re looking for extra cash.

If you want to invest in real estate and are looking for long-term returns on your investments, renting out, properties might be right up your alley. Before starting a rental property business, important questions should be answered:

  1. How much money do you have?
  2. How much debt do you have?
  3. Do you have any experience in real estate or managing properties?

Research the Market

The first step to starting any business is doing research. Before spending money on it, you need to know if there is a market for what you want. The same goes for rental properties.

To get started, you need to research the local real estate market. Here are some questions you should be able to answer before starting your first rental property business.

  1. How many homes are available?
  2. What are their prices?
  3. How much rent can you expect to get from each unit?
  4. Is there enough demand for this type of property in your area?
  5. Is the crime rate on the rise, and what trends have been seen over the past year?

Choose the Right Property

The next step in starting a rental property business is choosing the right property. You should buy a property that meets your needs and has the potential for appreciation.

Your goal should be to find an investment property that will provide you with positive cash flow while increasing in value over time.

To find the best rental property and real estate markets, you should consider the following factors:

  • Job opportunities,
  • Rent and vacancy rates
  • Amenities
  • Tax rates associated with the property.

Hire a Property Manager

A property manager is an essential component of the rental business. They will be responsible for finding tenants and maintaining the property.

This will include managing any maintenance issues, collecting rent and paying bills on time, performing inspections, and ensuring that all lease terms are followed.

If you need more time or desire to manage your properties yourself, it’s important to find a good property manager who knows what they’re doing. A good property manager should have experience in this field and be able to provide references from previous clients.

Property managers typically charge a percentage of your monthly rent as their fee. The percentage varies depending on how much work they do for you but usually ranges from 2-5%. 

You will have to pay them on time every month regardless of whether or not you have received any money from your tenants yet.

Where To Buy Rental Properties In Canada?

Canada is one of the most popular countries for real estate investing, with a wide variety of cities to choose from. The following are some of the best places to invest in rental properties in Canada.

The first place to look for rental properties is in Vancouver. This city has a lot of amenities that are attractive to renters, including beaches and mountains. There is also a large population of young people, which means more tenants looking for places to live.

Vancouver has very strict regulations regarding renting out properties, so it may not be the best option if you have never owned a rental before or don’t know much about the regulations that apply here.

The next option is Toronto, the city of Toronto is one of the largest and most diverse cities in Canada, and it’s also home to many students and young professionals who are looking for apartments to rent.

This makes it an ideal place for investors to buy rental properties. It’s also a good place to find affordable condos, which can be rented at higher prices than other housing types.

Another good place to look for rentals is in Edmonton, Alberta because it has some of the lowest vacancy rates in Canada, so many people will be looking for places to rent here!

Check out 5 Steps to Buy Your First Rental Property in Canada. Millionaire Strategy:

 

FAQs

How Much Money Do Landlords Make?

Landlords make a profit by collecting rent from their tenants. The amount of money a landlord makes depends on several factors, including the quality of the property and location and how much they charge in rent. 

A landlord can also make money from repairs or improvements to the rental property, but this is only sometimes an option for landlords who don’t want to take on the responsibility themselves.

Can I Buy Property In Canada?

Yes, you can buy property in Canada. Canadians are one of the largest investors in residential real estate in the United States.

If you are a Canadian citizen or a permanent resident of Canada, then purchasing property is easy. It will be more difficult to purchase the property if you are not a Canadian citizen or permanent resident.

You will need to apply for a work permit or study permit and have a good reason for wanting to buy the home.

What Are The Costs Of Owning A Rental Property?

Renting out a property requires some initial investments; owning a property varies by property type, location, and other factors. You can expect to pay between 35% and 80% of your gross operating income in expenses. 

This is an important consideration if you are interested in buying a rental property and want to live in it with your family.

For example, if your rental property brings in $1,000 per month in rent, you should expect to pay between $350 and $800 per month in expenses.

Final Thoughts

Many people are interested in property management, and it’s a good field to get into if you want to start your own business. It can be lucrative and exciting, but it’s also a lot of work you need to figure out how much time and money you want to put into it before you begin.

We know that buying investment properties can initially seem daunting, but it’s easier than it might seem. With the right strategy, you can make the most of your money and enjoy the benefits of rental property ownership.

It is our hope that this guide has been helpful to you if you are interested in renting properties. If you have any questions or need help, feel free to reach out!

Sabine Ghali

Sabine Ghali

Helping real estate investors build wealth over time

Sabine Ghali, Managing Director at Buttonwood Property Management, Award Winning Real Estate Broker and an Entrepreneur at heart. Sabine is on a mission to help investors create real estate wealth over time in the Greater Toronto Area. Sabine is published in a number of media outlets, including Toronto Star, The Globe and Mail, Toronto Sun, Entrepreneur, Forbes, and Gulf News, among many others.