Income Property in Calgary: What You Need to Know – Part 3
(Estimated reading time: ~6 minutes)
In our last blog post, we discussed 4 key considerations for income property investments in the Calgary real estate market. This blog post expands on one of those 4 key considerations – the ongoing costs that you need to consider before deciding to take the plunge and purchase a rental income property.
With Reward Comes Responsibility
While property ownership has many advantages, it also has its fair share of responsibilities. Not only are you responsible for the obvious things like property taxes and maintenance/repairs, you’re also obliged to ensure that this income property is clean, safe, and ready for human residents!
You're also required to both have a working knowledge of and act within the parameters of Alberta's Residential Tenancies Act (or whatever your local provincial or state equivalent is). While this document may seem a bit long, technical, tedious, or even downright daunting, it's your best resource when it comes to understanding yours and your tenants' rights, roles, and responsibilities. It is also your best line of defense should you and your tenants ever have to enter into litigation.
Knowledge is Power
Now, it’s important to point out that there’s a very distinct difference between understanding the on-going costs of owning an income property and actually being prepared for these costs… At the risk of repeating ourselves, this is just one more reason you want to reach out and get a knowledgeable, experienced realtor on your side – like any of the fine folks here at Elite Home Real Estate.
A good realtor knows the true on-going costs of owning an income property and has the network of contacts and resources to help you be fully prepared to shoulder and/or offset these expenses.
Top 9 On-Going Costs
What follows is a “Top 9 List” of on-going income property ownership costs that anyone looking to make such an investment must consider. Some of these expenses are no-brainers, but some may take you by surprise – read on to learn more.
1. Maintenance and Repairs
Maintaining and repairing a property is a given. However, the costs of maintenance & repairs depend on several factors, including:
• The age of the property
• Current condition of the property
• The tenants who occupy the property (including if they have pets or children)
• Good ol’ Mother Nature.
There are a variety of ways you can prepare yourself for these costs. Some sources suggest setting aside an average of 15% of your rental income to go into maintenance and repairs. Others recommend creating a high interest savings account and keeping a set amount in it to accommodate for these costs. Again, talking with an experienced realtor will help you choose an option that best fits you.
2. Updates and Renovations
Despite what realty TV suggests, income property isn’t always a “fixer upper” or a property that needs to be flipped – in fact, it rarely ever is. But if you want to get the right tenants for the right price, you’ll want to make sure your property is updated appropriately!
For example, if the location of your rental property is more upscale, then you’ll want to ensure that the property’s appliances, fixtures, carpeting, etc. are updated and modernized to attract your target tenant market.
Likewise, if your property has more of a “heritage” feel and is located in an older, established neighbourhood (like Calgary’s Inglewood or Crescent Heights neighbourhoods), then you’ll most likely want to make sure the interior mouldings, ceilings, and hardwood floors are all nicely refinished. You’ll also have to ensure that your property’s plumbing, electrical wiring, windows, roof, and appliances are all updated and fully functioning.
3. Property Taxes
In case you weren’t already aware, property taxes vary based on the area of the city that your property is located. You can go here for Calgary property tax rates. It’s important to fully consider the tax rates for rental properties before deciding to buy or invest as it can have a significant impact on your cash flow. Some neighbourhoods are also more prone than others to larger hikes in property taxes, so be sure you get a full understanding of the specific tax situation of whatever property you are considering.
4. Home Insurance
Home insurance varies based on the area the property is located, the size and age of your property, and even the various fixtures and appliances you have in it. Insurance is always a wise thing to have (and most property owners see it as a necessity), but is an absolute requirement if you get a loan on or for your rental property.
Even if you don’t take a loan, it really is a necessity to have insurance on all of your properties – as one of the largest assets you may ever own, it’s crucial to keep it insured… Because sometimes when it metaphorically rains, it literally pours.
5. Home Owners Association (HOA) fees
While it’s true that not all neighborhoods have HOAs, the ones that do are typically more desirable areas to live in – especially for families. HOA fees typically go to community events, maintenance of any community hall, local playgrounds, and any other community-focused activity or resource. Yet though HOA fees may seem an unnecessary extra expense to some, the benefits of living in a neighbourhood with an HOA are hard to ignore. For tenants with young families, a neighbourhood playground, community pool, or sports rink has way more appeal than a community without these amenities.
HOA fees can vary, but it is typically a cost that the property owner covers – not the tenants.
This is probably a no-brainer, but vacant rental properties cause negative cash flow. That said, it’s not the same negative cash flow as repairs or other updates, because at least those contribute to your ROI over time by keeping your tenants happy and your property maintained.
However, vacant properties don’t have any positive impact on your cash flow. In fact, it’s very much like taking a step back. This is because your property’s ROI and leverage is immediately affected due to the fact that a vacant property is, well, vacant. In other words, there is no money coming in to offset any of the property’s on-going operational and/or maintenance costs.
However, there’s no need to immediately fret if your property becomes vacant! It’s fairly uncommon for any given property to stay occupied year-round. Any time a tenant moves out, there will almost always be a period of vacancy time where the property needs to be cleaned, repaired, and/or updated to prepare for the next tenant (whenever it is that they move in).
Whether or not you are able to find a new tenant immediately, it’s a good rule of thumb to save up for 10% of your rental income for those metaphorical rainy days (in this case, vacancies).
7. Bad Tenants
Let’s face it: Bad tenants happen. All income property investors dream of renting to a perfect newlywed couple getting ready to start a family and who will stick around for a while… However, you could easily end up with tenants who never bother to clean or maintain their residence. Or tenants who put holes in the wall when carelessly moving furniture. Or even tenants who decide to start breeding bull mastiffs in the basement. (While this last example may seem extreme, we assure you that it has happened!)
Bad tenants cost money for many reasons, such as:
• Unkempt degradation of the property
• Not taking responsibility for DIY maintenance or simple tasks (cleaning the fridge after something spills, changing a light bulb, etc.)
• Taking responsibility for DIY repairs and doing them poorly
• Appliances not being used correctly
• A pet that ruins the carpet and chews up the door frame
• Smoking indoors
• Pretty much anything else you can imagine
In reality, you’re likely to get a combination of tenants from both sides of the spectrum. The good news is that you can choose to interview all tenants and have requirements for renting out your property, but that isn’t always a fool-proof solution either.
Even good tenants can leave nail holes in the wall, dirty washing machines, slow drains, etc. The trick is understanding that this is an unavoidable part of owning a rental property and being prepared for such eventualities.
This is also why updates are almost always necessary after a tenant moves out.
Not everyone will choose to promote their rental properties. However, depending on your needs, budget, and/or goals for renting it out, you may want to consider some cost-effective ways to advertise.
Social media can be a great way to reach more potential tenants for little-to-no money. Alternately, local classified listing sites like Kijiji or Craigslist are also strong resources to use for listing your rental property. Or even specialty rental listings sites such as RentFaster are great choices for getting your vacant property out there. Most of these resources have free listing options, but they’ll also offer paid listings that typically reach a greater audience.
Based on your budget, you could also consider additional options for getting your vacant rental property leased as quickly as possible. These options include flyers, online advertisements, and even listing them in the local newspaper.
9. Property Management
Property management is vital for all investors who care about their properties. You don’t want to be an absentee landlord who never keeps an eye on the place, never ensures its upkeep, or never completes necessary maintenance & repairs in a timely manner.
The logic for this is pretty obvious, but simply put: Unhappy tenants don’t stay long, and having a high tenancy turn-over rate is a great way to lose money. Being a present and attentive landlord will help you maintain your investment and keep your tenants happy, all of which benefits everyone.
If you have multiple properties and need help managing them all effectively or don’t have time to manage them at all, you may want to consider hiring a property manager.
Chat With Knowledgeable Experts
Admittedly, we are no doubt starting to sound like a broken record, but we really need to emphasize the importance of talking to someone who has established knowledge and proven success with investing in income properties. The team here at Elite Home Real Estate have decades of combined experience in the Calgary investment property scene and can provide the guidance and insight you’ll need to make the right decisions.
Ask about the risks and challenges that they have faced. Pick their brain so you can gain a better understanding of what you need to do in order to become a successful real estate investor or landlord. Contact us today to get the ball rolling and start learning all you need to successfully invest in Calgary income properties.