Episodes 10/11: Rental Properties
Updated: Jan 15, 2020
Over 2 episodes, we went over everything you need to know about rentals - from having a rental suite in your home, whether that be a completely self-enclosed secondary suite, or just a room in your house, owning separate investment properties, long-term rental leases and short-term AirBNB-style rentals.
We talked taxes, insurance, best practices, and how to protect your assets, so these videos should be really useful for those of you who currently have rental properties or suites or are thinking about investing in one or creating one in their home.
ZONING & PERMITS:
In Edmonton, construction of a secondary suite requires both a development permit and a building permit. If you would like to build a secondary suite in your home or a rental property that you own, there are a few steps you must follow to ensure you acquire the right permits and follow the City's bylaws. If you’re buying a home with an existing secondary suite, it’s a good idea to check and make sure that suite has the permits and is registered as a legal suite. This is going to save you a whole lot of headache if anything goes wrong with the tenant, a fire or any other legal issues.
As of August 2018, secondary suites are now allowed in single detached, semi-detached, duplex and row housing. To see if your property is zoned for a secondary suite, check your property’s zoning designation online.
Once you’ve determined that your property is zoned properly, you can apply for your permits online.
If you are using contractors to build your suite, they are likely going to help you with the building permits part of it, but you should get a head-start on the development permit as this can take 6-8 weeks to process.
If you are not an Edmonton resident, be sure to google “your city + secondary suite permits” in order to ensure compliance with your city's by-laws.
Additionally, if you are wanting to do a short-term rental like AirBNB, you will need to apply for a Home-Based Business permit after your development permit is approved.
Be sure to keep receipts for any permits you require as it will be deductible against your rental income for the year.
Something of note: The City of Edmonton has a grant for people building affordable secondary suites – the grant will cover up to half of your building costs if you rent to somebody under a specified income threshold.
You should start thinking about insurance before you even start construction or buy your rental property. Major renovations to the home or changes in use are considered material changes to your insurance agreement, and not letting your insurer know can result in denial of claims.
Another important reason to start a conversation is to get guidelines on their requirements for an in-home suite or rental property. Here are some questions you should be asking:
How long of a lease is required? (i.e. Allstate requires a year-long lease, so if you're looking to run a short-term rental, try a brokerage like Drayden Insurance instead)
Is the tenant required to have their own insurance? (This should be your requirement even if the insurer doesn't require it - when the tenant's liability is covered, your risk for financial loss is much lower)
Please note: AirBNB’s “damage protection” or other company’s similar ones should not be considered insurance. In fact, AirBNB’s “host guarantee” stipulates that you must make an insurance claim BEFORE you make a claim on your host guarantee, and any money that you receive from either that claim or the security deposit would be reduced from the host guarantee pay-out. Make sure you’re covered by an actual insurance policy.
Are there any restrictions for pets (particularly if there are certain breeds of dogs that aren’t allowable)?
Is there limit to the number of tenants you can have in one suite?
What will my premium increase be? - this is important information to have when you are planning for profit!
How often are you (or a property manager) required to inspect the property, outside or inside?
For rentals that you don't live in, what are the requirements for age and upgrades of the home?
It’s also important to note that most insurance companies will not cover any form of tenant theft or vandalism, so it’s very important for you to get an appropriate damage deposit to protect your assets.
PROFITABILITY & BEST PRACTICES
Now that you know your insurer’s requirements and you're compliant with the city's by-laws, you can start planning out your lease agreement and how much you’re going to charge for rent. Here are some things to consider:
· The ideal number of tenants you want, whether or not you’ll allow children and pets
· The rules that you’ll have in your lease. This may include where the tenant may smoke on the property, when/how guests are permittable, parking, late rent penalties, noise allowances, etc. I have a sample fixed-term lease to work off of – but also make sure that your rules are in compliance with the Residential Tenancies Act – for example, typically a landlord must give 14 days notice to evict for unpaid rent.
· If you’re doing a short-term rental, you obviously won’t be signing leases with your tenants, they’re agreeing with AirBNB’s terms or whatever service you’re using, so make sure you’re reading those terms and understanding them fully. The other thing you need to heavily consider when doing a short-term rental is your neighbors, particularly if you are in attached housing or a condo, there may be by-laws in place to prevent you from doing this, so make sure you’re checking on that as well. Hopefully, this would have come up when you were doing your City applications, but you never know!
· The amount of rent you will charge. Particularly in you are planning on investing into this venture, either by purchasing a new house or building a new suite, you don’t want to be losing money on this, obviously, but you also don’t want to be charging more than what the rent is worth in your area – a great resource for this is https://www.rentometer.com/ which you can plug in the number of bedrooms and address and it will tell you the average rent near you – you can also check places like Kijiji and Rentfaster. Here's a good litmus test to tell you if this is a good investment:
1. Estimate a year's worth of home expenses (mortgage, insurance, property taxes, condo fees, repairs & maintenance, utilities)
2. If you are sharing accommodations, divide by the portion of the home the tenant will be using (i.e. 50% if you are renting out the entire basement)
3. Add 20% (this is your profit!)
4. Divide by 12 if you want to charge monthly, or 365 if you want to charge nightly - is this number reasonable for your area? If so, this is likely a good investment! If not, keep looking, or use that money to invest in something a little safer and less hassle (RRSP's, mutual funds, stock market, etc.)
· In Alberta, you may not charge more than 1 month’s rent for a security deposit, so this something else to consider when deciding how much rent to charge. With short-term rentals, there’s usually not a damage deposit, it’s more of a cleaning fee, so there you want to think about how much time it takes you to turn over the suite for a new guest.
· If you feel like you need more information, the City of Edmonton also offers a Landlord course which covers the Act, your obligations and rights, the tenant’s rights, how to end the tenancy, landlord/tenant disputes, etc. They also offer forms you can purchase, such as notices to enter, eviction notices, rental increase, etc. Keep your receipts for taxes!
One of a landlord's most important jobs is screening tenants. In real estate investing, evicting a tenant is super time-consuming and expensive, so avoiding that at all costs should be a very important part of your business plan. Of course, there’s no real way to completely avoid a bad tenant situation, but there are many tools that can help mitigate it. So, I have some tips:
· Include your deal-breakers or your requirements in your ad. For example, if you’re not going to allow pets, or you require that the tenant have a certain level of income or have rental history, put that in your ad – this is going to save you time and your applicants time. BE CAREFUL with your requirements - there are very specific laws against tenant discrimination.
· When interviewing tenants, it might be best to talk on the phone or do a little interview in person when they are viewing the property – you can get a lot of information about somebody between the lines. Also note, are they on time for their viewing, what condition is their car in, how do they present themselves, these kinds of things can give you some insight on how they may treat your property.
· The next step would be references, so prior landlords and employer if possible. Google them! I know it might seem intrusive, but these references are going to be gold for you – even if a person seems amazing in every way, if you call their prior landlord and they do not recommend renting to that tenant, it’s probably something you should take on board. If somebody has no prior renting history, for example, a student, consider getting a co-signer like a parent or somebody who you can call on if rent’s not being paid or there are major damages.
· Once you’ve done all of the free work – so reference checking, interview, etc is consider pulling a credit report. This can tell you if an applicant has a lot of debt or has been defaulting on loans, which can usually give you a pretty good indication of what you can expect. Now, if you’ve talked to a previous landlord, maybe you know they do make rent payments a priority and that won’t be a problem, but these are all pieces of the puzzle that help to minimize your risk. The reason I say this should be the last step is because it can cost money, so if there’s something that you’ve done prior in the application process that has made you wary, you wouldn’t even have to spend this money to know it’s not a good fit.
· There is a service that does all of these checks for landlords – its called Naborly and they are teamed up with Equifax – they do a whole tenant screening process from basic credit reports to criminal reports – they take care of the application process (because you have to have certain disclaimers and wordings on your application to allow you to legally pull reports on the tenants), and some of the reports are free – from what I can see in my research, they make their money by offering the applicant tenant’s insurance, so it’s a bit of a win-win!
There are 2 types of taxable income that can arise when you own a rental property.
Regardless of whether you choose a fully-enclosed suite or just a bedroom in your house, a completely separate rental dwelling, a fixed term rental or a short-term rental, you need to report the income on your tax return, AND you need to know that when your house becomes even partially a rental, it has a different tax status than a principal residence does.
The year that your house becomes a partial rental, CRA deems that you “sold” that portion of your house to yourself as a rental property, and that information needs to be reported on your tax return. There will be no tax implication for this, because selling a principal residence is exempt from tax, but we do this to record the value of that portion of the house as your Adjusted Cost Base, which tells us the amount you “bought the rental for”.
When/if the house is sold OR you convert it back to just a principal residence and it’s no longer a rental, another sale occurs, and this time, any increased change in value on that portion of the house would result in a capital gain. If the value has gone down, it would be a capital loss, or if it’s remained the same, there’s no loss or gain, but it still needs to be reported.
This same principal is true for a rental home you don't live in, or have never lived in. The year you purchase the home, it is important to keep all purchase documents as these will be used when you sell the home in the future.
This handy checklist will help you to know what items to keep and track, but as a quick breakdown, you need to keep the following information for each tax year:
1. All rental income received – this will be easy if you have a lease with your tenant, should be the same amount every month. If you’re going with a short-term rental, I believe most of the services have some kind of income tracker for you, but just make sure you’re tracking it accurately in some way, either through the service or on a spreadsheet. (And side note: CRA has been known to get reports from AirBNB and others to see if there’s unreported income by tax payers, so something to be aware of).
· Important to note: Rental Income doesn’t include your damage deposit, this isn’t considered income unless you actually use it to off-set repairs or maintenance costs, or loss of rental income. If/when you use the damage deposit, be sure to record that and show what it was used for, but in the year you just receive it and not use it, it doesn’t need to be reported.
· If you make an insurance claim on the portion of your home that is a rental property and get a pay-out, that is considered income for the rental business, so whether it’s a whole-house payout and we pro-rate it, or it’s specific to the suite, we need to report that.
2. Expenses: See the checklist for a list of common expenses, but as I always say, if you’re not sure if it’s deductible, just keep the receipt – I’d rather you keep too much than not enough. It’s a great practice to have a folder or some sort of catch-all that you can keep your rental income ledger (which can just be a piece of paper, or a copy of receipts if you give receipts) and all of your bills and receipts in that pertain to the rental.
There are special rules when it comes to travel (if you own a rental that you don't live in)- see episode 3 for more information.
The other major expenses that you will probably incur especially in the first year or two would be the actual renovations and then any furnishing or appliances. Now, these are not expendable all in one year, we amortize them, meaning we expense them over a period of several years, or we use them to increase your Adjusted Cost Base that we talked about before, in order to reduce your capital gains when the property is sold or converted. Keep those receipts!
I hope these videos have been helpful for you and I wish you luck on your landlord endeavors!