Renting your home to others can be a great way to build equity while someone else pays your mortgage. As a new homeowner-landlord, you want to make the experience as pleasant and profitable as possible. The best way to proceed is to properly prepare your home for renters, whether short-term or long-term.
But before you start cleaning and locking away your valuables, look up the local rental laws in your community, as well as the tax consequences of turning your home into income.
You should start by carefully familiarizing yourself with the Ontario Standard Lease Agreement so that you know what’s permitted and not permitted in a rental agreement. This new standard lease requires landlords to use 15 standard clauses and limits their ability to amend, disregard and add new clauses to the contract. Any clauses that are added outside of this agreement, are not enforceable, for example a no pet clause, or a damage deposit.
Two of the most frequently asked questions when it comes to rental properties are:
In terms of raising rents, not all properties are equal. New buildings, additions to existing buildings and most new basement apartments that are occupied for the first time for residential purposes after November 15, 2018 are exempt from any rent control. This means that there is no maximum amount that you can increase the rent of these properties. Having said that, you can’t force a tenant out by raising the rent to an unreasonable level, and must be able to justify the rental rate.
For properties first occupied before November 15th 2018 you are only allowed to raise your rent by the government allowable limit which is set each year.
For all rent increases a landlord must give 90 days notice and can only raise the rent once per year and/or when the initial negotiated rental term has ended.
Understanding your options for ending tenancies is also critically important. No one wants to be stuck with a bad tenant, or even a good tenant in some situations.
The most common reason for wanting a tenant to end a tenancy is when you are looking to sell your property. In this situation, a tenant has no obligation to leave the property. Most landlords either incentivize the tenant to leave by offering to remunerate them, or simply sell the property with the tenants as is.
Another reason that landlords want a tenant to end their tenancy is so that they themselves can move back into the property or so that they can renovate. A landlord may apply to terminate a tenancy on the basis the rental unit is needed for use by the landlord, the landlord’s spouse, a child or parent of the landlord or the landlord’s spouse or a person who provides or will provide care services to the landlord or landlord’s family. Additionally a landlord may also apply to terminate a tenancy on the basis that the landlord: (1) will demolish the rental unit; (2) needs vacant possession to do extensive repairs or renovations; or (3) intends to convert the rental unit to non-residential use. There is a formal process to retaking possession of a property and it requires the landlord give the tenant 60 days written notice.
What’s important to note is that once the initial term of a lease agreement ends, all tenants have the right to continue on a month to month basis as long as they would like, unless the landlord has a legal right to end the tenancy (see above).
Now that the technical details are out of the way, let’s look at how to maximize the return on your rental property.
Wilmingtonforrent.com defines properties that are rented for 90 days or less as short-term and those rented for six months or longer as long-term
Vacation, seasonal and special event pricing. Cottage summer rentals or ski mountain winter rentals are in high demand with limited supply which allows you to command premium rent during peak seasons. Conversely, long-term rentals are negotiated at a lower rate for year-round occupation.
Have your property and rent it, too. As the owner, you can use your property anytime you wish by blocking your rental calendar for yourself. This option offers the best of both worlds, where you can still enjoy access to the property while helping offset the cost by renting it when you want.
Tenant Screening. The vetting process is more difficult with short term rentals. Credit and job reports aren’t available and if a tenant lacks a history of reviews on the platform, it can potentially lead to negative experiences.
Restrictions. In many areas, including Toronto, short-term hosts are required to register and/or obtain a license or permit before renting their property. There are also restrictions on which properties can be rented and for how long on a short term basis. In Toronto short term rentals can only be offered from a principal residence (a room, basement or the entire house).
Last but not least, many condominium corporations prohibit short term rentals. Even in buildings that currently allow short term rentals, there is always a risk that the condominium corporation changes their policy to restrict them.
Fewer managing duties and maintenance costs. Low tenant turnover requires less attention to the property, lower management costs, and lower advertising costs.
Consistent income more likely. Longer lease terms reduce the likelihood that your property will be vacant during seasonal slowdowns or softer market conditions.
Tenant Screening. Vetting tenants is much easier with long term rentals. Landlords will have access to credit reports, job verification, references from previous landlords and more. The helps ensure that you get a great tenant that takes care of the property and pays on time.
Tenants. Even with extensive vetting, there is still a possibility of getting a bad tenant. Bad tenants can be a nuisance, not pay on time or worse. While there are remedies to get rid of bad tenants, the process is long, slow and something to be avoided at all costs.
Just like when you sell a property, properly preparing your property could result in significant increases in your return. The more fastidious and attractive your home is, the more rent you can charge and the more likely it is that you will attract respectful renters who will care for your property.
Below is a basic checklist of things to consider that will help you maximize your rental return.
For short-term holiday or vacation rentals there are some unique items that will add the guest experience.
Protect yourself financially. Trusted Choice suggests that you set aside at least three months of your home’s expenses in savings, including your mortgage payment, bills, insurance, taxes, and some for maintenance, to cover unexpected expenses and vacancies.
Hire a professional Realtor. If you want to keep your distance from renters and let someone else evaluate their credit and rental history and field any issues they have with the property, a great Realtor is a massive asset. In addition to renal screening and management, a Realtor will list your property on MLS and find tenants through their own databases and marketing channels.
Vet your tenants. For long-term rentals, get rental histories, references, background checks, credit checks and employment verification.
For short-term rentals on sites like AirB&B, VRBO, etc, landlord reviews are your biggest ally. These platforms have matured significantly over the past decade and many users have used the platforms for many short term stays. Just like the reviews that can be found for each property, each renter also receives a review from the landlord.
In the end, renting a property has risks, but it’s one of the most stable and predictable ways to generate long term income by having someone else pay off your mortgage for you.
Toronto Luxury Realty Group
Jay Egan & Olga Lapshina