Buying a Rental Property: By the Numbers
If you’re buying a new property, you must consider the following hidden costs in addition to the price of the property itself
When it comes to owning a rental property, there are as many benefits as there are questions.
But, like most things, it all comes down to the numbers. Let’s break them down.
First, why should you consider owning a rental property? There are some great perks.
• You will receive a tax benefit by becoming a landlord.
• You will gain wealth over the long term both in equity and monthly rental revenue that your investment property produces.
• You will have an investment that provides dividend wealth well into your retirement years and a legacy to your children.
Are you considering using your current home as a rental property and buying a new home for yourself? Or are you thinking about buying a new rental property? Through each step of the process, there are some costs you need to think about.
1. SELLING YOUR CURRENT PROPERTY
The options when selling your home can be overwhelming. Should you list privately, with a licensed agent, or with a discount brand? Whichever you choose, do your homework first. Ask for references from prospective agent and talk to your mortgage broker for advice.
Or perhaps you’ve already hired a realtor and now anxiety has set in as you begin to have second thoughts about them. Is it too late to find another one? (The answer is usually no!)
Some people will tell you to upgrade your home to sell it faster, while others will tell you that you simply need to stage or vacate your home while it’s on the market. Anytime you’re investing resources into your home to sell, always ask, “What is my return on this investment and is it worth it?”
Here are some costs to keep in mind when you are putting your home on the market, based on $1,000,000 selling price:
5% Realtor Fee $50,000
(2.5% to Buyer agent, 2.5% to Selling agent):
13% HST $6,500
Upgrades (variable) $5,000
Storage Costs (variable) $1,000
Real Estate Lawyer (variable) $1,500
Approximate Selling Cost $64,000
ADDITIONAL COSTS?
And it might not even end here. If you still have a mortgage on your property, there is likely a cost to break your mortgage, as well. So factor in approximately the same as your selling cost: an additional $64,000.
ADDITIONAL SAVINGS?
There is some relief though. If you sell your current property and buy your next one with the same realtor, they could provide you a discount on their commission. A 1% discount: $10,000
Many homeowners decide to refinance their existing property and use the equity within their home as the down payment of a new rental property.
2. BUYING YOUR NEW PROPERTY
If you’re buying a new property, you must consider the following hidden costs in addition to the price of the property itself: land transfer costs; real estate lawyer costs; appraisal; inspection costs; possible upgrades; and moving costs.
Based on a $1,000,000 Toronto property, the numbers would look something like this:
Land Transfer Tax $32,950
Real Estate Lawyer (variable) $2,000
Appraisal $400
Inspection $550
Upgrades (variable) $5,000
Moving Costs $1,500
Approximate Buying Cost $42,400
So, with both buying and selling costs combined, if you’re selling and buying a $1,000,000 property in Toronto, you can expect to pay approximately $106,400. No small sum.
IS THERE ANOTHER OPTION?
Yes! Many homeowners decide to refinance their existing property and use the equity within their home as the down payment of a new rental property. It saves you on many of the costs of selling a property listed above.
More questions about buying and selling property?
We understand that becoming a landlord is not for everyone and has its challenges, but it has a significant upside if you seek advice from those who’ve done it before. And always consult with a mortgage broker you trust to review the numbers.
At Separation Mortgages, we’re here to help. Call or text us at 416-570-5646 or fill out our contact form here: