There are a lot of reasons why you may buy an income property. Maybe you want to grow an empire of income properties to build a reliable income stream. Maybe you simply want a basement apartment rented out of your house to help pay the mortgage. Whatever the reason, there are some things that you should understand in the current Toronto Market.

Toronto is not like other places. The way you buy income properties here may differ in some ways from other cities and towns. Here are my tips on what you should do when buying a real estate property in Toronto:

UNDERSTAND DEFERRED GRATIFICATION

It is very unlikely that you will make money right away. You won’t start in the black in Toronto when buying an income property in this day and age. When you factor in your TMI (tax, maintenance and insurance), and if you don’t have a huge down payment, you will be running a small deficit in monthly income. Maybe a small one, but a deficit. In other words, you will be paying out more for TMI and your mortgage than you will be taking in with rent – at first. Fact is: Toronto prices are high. Landing properties can be competitive. So, you won’t have a gift land in your lap. Over time though that deficit red will turn to profit black as tenants turn over and rents continue to rise. As an example, I bought a triplex in 2010. My main floor one bedroom at the time rented for $1025. I have made some improvements on the unit, like a new kitchen, and some new flooring. It now rents for $2200, just under 10 years later.

PLEXES GENERATE MORE MONTHLY INCOME THAN SINGLE FAMILY HOUSES

A triplex or a duplex makes more money than a single family house in rent. So, if you have a 5 bedroom home, you may be able to rent that out for $5000/ month, depending on the neighbourhood and the state of the property. If you have a basement apartment, a main floor one bedroom and a top floor two bedroom, then you could likely land $1000 for the basement, $2200 for the main, and around $3000 for the two bedroom. Of course, these are all illustrative estimates, but the three units do add up to more money in any neighbhourhood. So, in my example, you would make $5000/ month for a single family house at a price point that is tougher to rent, and $6200 in rent for the triplex.

One important thing to note: Any plexes tend to be valued around how much rent you collect when it comes time to sell. Single family homes do take in less rental income in, but they are likely to be easier and usually are higher in value for sales than plexes.

TARGET AN EMERGING NEIGHBOURHOOD

In Toronto, much of the success of investing in income properties has to do with the equity you build as well as the rents you collect. I believe you are going to make more money investing in an emerging neighbourood that is inexpensive now (by Toronto standards), but will be worth more in the future. Areas that will have future transit improvements, a walkable main street with new businesses coming in or area that has smart condo development are good areas to target So, neighbourhoods like Mount Dennis or Caledonia that are along the Eglinton Crosstown that will be open in a few years. Prices and rents will be lower here to start, but once the new transit is in and the nearby main streets improve with their businesses, both prices and rents will go up.

KNOW A FEW THINGS ABOUT THE CURRENT TENANTS

If you are buying a property with the current tenants in them, you should know a few things about them. First, you want to make sure they are paying their rent. If they have been there a long time, they may be perfectly good tenants, but they will be paying way below market rent. And you just can’t ask them to leave so you can put in new tenants who will pay more. The laws in Ontario are put in place to protect tenants, and that it does. You cannot remove anyone form their unit unless you or a family member are moving in and planning on staying there for a year. And if you do that, you owe the tenant a free month’s rent. You also will not be able to increase their rent to market levels if they stay. You are restricted to a certain nominal amount each year that you can raise rents.

TALK TO THE TENANTS

When walking through properties when you are seeing what’s on the market, talk to tenants, if they are around. They will often know a great deal about the property from living there and will often be truthful. Simply put, they have nothing to lose. They will tell you about the noisy dog next door or the leaky condo window or the poor elevator service. It’s worth the ask.

Income properties are not instant money. They are usually a slow growth thing, but over time you can really build your wealth with income properties. It’s been done many time over in this city. Still, there is a better way to buy income properties. You just have to come at it from the right angle.