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Before you buy a rental properties in Ottawa, consider three things: the expected amount of rental income, the annual expenses you will incur, and the risks that may come along.
With any real estate investment decision, the first thing you will want to look at is the numbers.
1. Expected Amount Of Rental Property Income
Before you buy a rental property, find out how much rent is reasonable to expect given the location and quality of the property. Also, it is important to determine the demand for rentals in a certain area. (according to CMHC, in Ottawa, we are currently at a vacancy rate of 3.2% as of spring 2014).
Example:
- Let’s say you buy a house for $300,000.
- Through research you learn the average rent for that type of property in that location is $1500 per month.
- You can then calculate that you will receive $18,000 a year($1500 x 12 = $18,000), or a 6% gross return.
Next, you must consider the expenses you will incur as a property owner.
2. Annual Expenses Of Owning Rental Property
Fixed Expenses:
You will have reoccurring expenses such as annual property taxes, insurance, routine maintenance and repair items, and the cost of any property management services.
Variable Expenses:
Don’t forget to set aside funds for major expenses such as replacing the water heater, air conditioner or heater, roof, fencing, flooring or plumbing.
Continuing the example above, assume you calculate that property taxes, insurance and routine maintenance will cost about $1,000 per year. You also plan to set aside an additional $1,000 a year into an account that will pay for any major repairs.
Your actual return (net return) on your rental property is now $4,000 per year ($6,000 in annual rent minus $2,000 in annual expenses), or 4%. That calculation assumes your property stays rented on a continuous basis. You must factor in risks like not being able to find a quality renter.
3. Risks Of Buying Rental Property
- Your property could sit empty between renters, lowering your overall return.
- You could incur legal expenses should you need to evict a bad tenant.
- You could incur excess repair costs should a bad tenant cause damage to the property.
A qualified property management company will help reduce risks, as they have the experience necessary to screen tenants to ensure they aren’t going to create problems down the road. Property management firms typically charge 7-8% of the rent received.
For a detailed analysis of the return you might expect from buying a rental property, contact me and I will put together an investment outline for various property options in Ottawa.
Rental real estate can provide a stable source of income, but like any investment, you need to understand what you are getting into before you buy.
Contact me at https://chrissteeves.ca/contact-us/ for detailed information on income properties in Ottawa.
