4 Key Differences Between Homeowners And Real Estate Investors
So you want to be a landlord? Even if you already own your own home, there’s a big difference between living in your own place and renting a home out to someone else. In fact, homeowners and investors differ in a number of ways when it comes to owning real estate. Not living in the property you buy makes a big difference in how both you – and the authorities – view your property. More than one-third of all of Edmonton’s homes are rentals. That’s a lot of real estate owned by investors, which points to the potential profit in owning rental properties. But if you want to be part of this elite group, there are some things to consider. Here we look at some of the key differences between homeowners and real estate investors.
Flexibility
[pullquote_right]More than one-third of all of Edmonton’s homes are rentals[/pullquote_right]
Real estate investors are always looking for the right property to rent out. If they feel a property they own doesn’t meet their needs or they’re interested in climbing the property ladder, they’ll simply sell what they have and buy something more suitable. Being flexible is an advantage to investing that homeowners don’t usually have. Homeowners get attached, settle in and generally plan to stay for a while. Property investors, on the other hand, can jump in and out of the real estate market much more easily than a homeowner can. Because landlords don’t live in their rental properties, they have a lot more flexibility in terms of buying and selling. One caveat with regards to selling a property in Alberta is that any tenants must be given 90 days of notice before having to vacate the property. This requires a little planning on the part of the landlord, but still allows the investor to leave the market relatively quickly. And when it comes to entering a market, all an investor needs is the necessary funds. This presents an advantage over a homeowner, who may have to sell a primary residence and coordinate a move. However, while getting into the market is relatively simple, things get more complicated for landlords here on in.
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Financing
[pullquote_left]Investors are required to put in more money because investors are more likely to default[/pullquote_left]
As a real estate investor, you’ll need to put more money down on a house when you buy, and will have to pay tax on any capital gains when you sell (unless you are reinvesting your profit into another property). The required down payment on a revenue property is usually 25 percent of the selling price of the home, whereas a homeowner can put down a much lower percentage – even zero percent in some cases – and still be allowed to own a property. This rule is in place because real estate investment is seen as being much riskier than home ownership. Investors are required to put in more money because investors are more likely to default. The bigger down payment provides the banks with some security on the loan if that happens. The bottom line is that if you lose your house, you’re homeless, but if you default on your revenue property, you’ve lost someone else’s home. It’s an obvious choice for an investor who is in a tough financial position.
Risk
You can’t control what someone else does; therefore, relying on someone else to make your mortgage payment, cover the cost of your taxes, utilities and repair costs can be pretty tricky. If you’re a landlord, it’s ideal if the rent and utility payments cover all of these items. That said, you shouldn’t be cutting it so close that you’ll have to turn off the heat if your tenant doesn’t pay the rent. Unfortunately, not getting the rent in time is not the only thing that can go wrong – tenants may cause damage to your property or even damage your reputation with neighbours or condo boards. A real estate investor’s goal is to minimize risk, while maximizing profit. With all the variables in play, it’s not an easy task. (To learn more about minimizing risk, see
How To Find A Quality Tenant)
Responsibility
[pullquote_right]Landlords need to follow the rules – all of them[/pullquote_right]
As I said before, a landlord is running a business. This means he or she needs to follow the rules – all of them. If anything happens that jeopardizes your tenant’s well-being, you could be in trouble with the law. Things to consider here are permits, fire safety, mold, asbestos, carbon monoxide and electrical codes. It’s not advisable to overlook these items when it comes to your home and family, but when it’s someone else’s home and family, the consequences may be even more severe. Regular inspections and liability insurance are a must when it comes to rental properties, as is making sure all codes and regulations are met. You do not want to end up being the responsible party in a lawsuit or investigation. A simple slip and fall on a set of steps without railings could add up to legal fees that erase many months of rent for a landlord, so be sure to keep everything safe and sound. You’ll be doing yourself a favour, and your tenants will appreciate it too.
Owning a rental property must be worth the trouble, considering how many homes in Edmonton are rentals. Investing in property is a great business, but it is a business; it’s not a game and it’s not like running your own home. If you treat a property investment as a business, focus on keeping your customers safe, follow the rules and minimize your risk, you’ll be on the right track to success in real estate investing.
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