October 12th, 2018

9 tips to avoid losing money on rental properties

Investing in a rental property can be a great way to earn an excellent financial return. But if you aren’t smart about it, you can lose money just as quickly as you make it.

While learning how to make money is step one, identifying and avoiding money-losing pitfalls is equally important. Here, we break down 10 ways to make sure you’re rental property is as profitable as it should be.

1. Pick a good location

While a rundown property can be renovated, a location is fixed. Location also plays a big role in determining how much the property will cost, and how much you can charge tenants. Make sure you do adequate research into the market - supply, demand, neighbourhood, etc. Don’t just buy a place you fall in love with.

2. Be sure to screen your tenants

Bad tenants can be costly, so make sure you have a good one. Ideally you want someone who will look after and respect the property, as well as pay their rent on time. While there is no guaranteed way to find a good tenant, there are a few precautions you can take, including checking their credit score, asking for employment information, speaking to references and meeting with them in person. While the process may be tedious, it makes it less likely that you will lose money down the road.

3. Don’t set the price too low

It can be tempting to beat the competition by offering a better price than your neighbour. While this approach helps you avoid vacancies, it can be costly long term. Offering a rate below market value means you’re getting less than the place is worth.  

4. Don’t make your rent too high, either

We get it, you want to make as much money as possible. But if you set a lofty price that is not reflective of the market, renters will compare your place to similar properties and note the difference in price. Even if you get an extra $100 a month, you may end up losing far more by having a unit it empty for months on end. If you’re not sure where to set rent, get a rental property assessment.

5. Make sure you have adequate insurance

Insurance is two-sided when it comes to a rental property, and you need to make sure both sides are working together to keep the property safe. While landlord insurance will work to protect the structural aspect of the property, tenant insurance will look after the personal possessions within.

The insurance coverage you require as a landlord is a form of homeowners insurance that has premiums and deductibles, and covers damage to the structure of the building. It also has special additions that a regular home insurance policy does not have; for example, a landlord policy will cover the loss of rent income if a unit becomes uninhabitable due to an accident. It will also cover liability against any accidents in common areas of your property.

However, it does not include any form of intensive contents protection, which is why it is a good idea to talk to your tenant about the importance of taking out their own insurance policy.

Though insurance is a monthly expense, it can save you a massive sum, if a lawsuit or structural damage occurs.

6. Keep things strictly business

Of course, you want to be on good terms with your tenants and be able to have an open, honest discourse with them. But, as a landlord, it’s important to remember this is a business relationship. Make sure you always collect rent on time and your tenant always follows the guidelines laid out in your rental agreement.

7. Keep up to date with rental increases

In Ontario, a landlord is legally permitted to raise rent once every 12 months. Each year the amount by which you can increase rent will vary. If you’re not following along with these increases, you’re losing money. There may be a reason you don’t increase rent, but if the market dictates you can, it’s important to keep on top of when you’re eligible.

8. Get your rent as soon as its due

Make sure your tenants are paying their rent on the day its due. This can be challenging, especially if you have multiple properties. A good way to ensure you’re getting rent money as soon as possible is to have a property management company collect it for you.

9. Make sure you understand property laws

Making sure you are up to scratch on your national, provincial and local housing laws is the best way to protect yourself against lawsuits that can really take a chunk out of your bank account. While there are laws in place to protect you and your property, there are also plenty of laws in place to keep your tenant safe - and one wrong move could see you faced with some hefty legal proceedings. Protect yourself and your tenant by staying up to date on the do’s and don’ts of rental laws.