THINKING ABOUT BECOMING A LANDLORD?
THINGS THAT HELPMONEY. Being a landlord is not exactly "Passive Income". You'll be shouldering the costs of:
SKILLS. How HANDY are you? If the answer is NOT AT ALL, refer back to the last heading 'MONEY.' Minor plumbing, electrical, yard maintenance etc is a certainty so if you're able to fix things or know someone willing to fix things for low cost, that will help. Also using a reputable home inspector helps you dodge homes that are littered with future issues. Don't skimp on that. TIME. There's the house-hunting itself. The meetings with lawyers, bankers and insurance brokers. The initial furnishing/renovating if needed. Posting and interviewing tenants and/or property managers. The checking in on the property and stick-handling of tenant wants/needs. Oh and there's that other house you live at.  Did you plan to keep up on that one too? Figure out what you want your lifestyle to look like and how much time you'll really have to dedicate to this venture. It can be a challenging part-time gig. AN INSURANCE PERSPECTIVEWhen insurance companies consider 'Rental Properties' they often label these types of risks as "RESIDENTIAL REALTY". Realty is a big part of Atlantic Canada's economy but from a profitability perspective, it's not been a great performing category of insurance. Increased claim costs from things like water damage, and slip and falls have insurers shying away from these types of risks, and wanting A LOT more premium for the ones that they have. MINIMIZING RISK & COSTSConsider starting small Companies are more likely to take you on if you can attach your new rental property to your Homeowner's Insurance policy. If you only have one you're more likely to pay closer attention to it, and it's still a PERSONAL INSURANCE risk. This will give you a feel for life as a Landlord as well and help you figure out true costs and lifestyle trade offs. If you like it, then maybe start that corporation/holding company. Live close by Some insurers have rules around how far you can live from a secondary property for them to take it on. That may be a distance of 50-100kms, while others may charge more as the distance increases or not take it at all. Clients who own rentals in other provinces are some of the more challenging ones to place since so much of the investment rides on the tenant or a designated Property Management Company. Coverage offered can be quite limited, so don't assume anything on these...have a broker review the wording. Require tenant insurance If the building and my stuff is covered under my own policy, why should I care about their coverage? Answer: It provides you and often your insurance company the ability to collect from someone. There's plenty of reasons to require this, but I'll give you two that I think are most important with today's state of insurance. 1) The tenant policy may pay costs that the tenant is liable for, that ARE NOT covered under your building policy. Example: You have a $10,000 water damage deductible and a tenant overflowed a sink causing $8,000 in damages. Your building policy will not respond to the incident since the loss is UNDER YOUR DEDUCTIBLE...thus YOUR problem, not theirs. Good luck getting a tenant to pay out of pocket for that...BUT since you did your homework and CONFIRMED they had insurance (which should be on file with your broker) you may have access to some help! 2.) It keeps your account looking good...specifically having "professional operations" and "reasonable loss ratio". Professional Operations In today's market insurers need convincing your rental properties are a good idea to cover at all. Having tenants who actually have in-force insurance means you're doing a good job of rental management which reflects positively on your risk profile. Loss Ratio Is the difference between the premiums you pay and what an insurer pays out in claims. Example: You pay $5,000 in premiums in a year, and the insurer paid $20,000 in claims. Your LOSS RATIO (400%) is awful and at renewal you'll be either a big increase in premiums or a cancellation. Having a loss that YOUR INSURER can "subrogate" or "collect" from the TENANT'S INSURER helps reduce that ratio. This is especially helpful on large losses. BE ACTIVE IN MANAGEMENTIf you're renting multiple properties you should be in the game of transferring risk and a good broker can help you with this. We can proactively identify areas of potential friction BEFORE they happen like improving lease agreements...providing snow/ice removal best practices etc. Owners need to understand the value in this activity and take an active role in risk prevention to get the benefits. Seldom is anyone interested in Risk Management until AFTER they have a problem and in this business that is often too late. MD
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