Being a landlord can be a lucrative opportunity to earn rental income from your property. But note that the title of landlord comes with several responsibilities that are not highlighted. There are different provincial rules and tax laws related to rental income. The financial transactions, legal paperwork, tenant screening, and requirements before starting and ending a lease make rental income a type of small business. If you are a homeowner renting your apartment for extra income, here are a few things to consider to prepare yourself for the new role of a landlord.
Key Considerations for Homeowners Before Renting an Apartment
You have to keep track of some broad considerations for the smooth running of your rental income and for preserving your real estate, starting with drafting a rental agreement. A detailed, legally compliant rental agreement serves as a guide for both you and your tenant regarding the terms of tenancy and rent payment, and protects either party in the event of a potential disagreement.
General Considerations
Some points to remember while drawing up the agreement are:
- Check if your homeowner’s insurance covers rental use (standard ones do not)
- Double-check your province’s rental laws, as they differ from province to province.
- Check your tenant’s credentials through a thorough screening process before renting.
- Take pictures of every part of your apartment before handing the keys over to the tenant (these can be used as evidence in case of damage to property)
- Set aside 1–2 months’ rent each year to cover maintenance costs.
Financial Considerations
Not all properties are profitable rent-wise. Some may command a lower rent but demand high maintenance. Finding a tenant might be difficult for some properties, and some might see tenants competing because of their location or size. Before listing your property and bearing the commission and marketing expenses, it is important to do the math.
List down the various property-related fixed overheads you pay as a homeowner. Among them are mortgage payments, insurance, property tax, utilities, maintenance, and property management fee (if applicable). Now compare the cost with the rental income you can get for your place. For instance, your expenses come to $2,000 per month, and your rent is $3,000 per month. Your actual profit is just $1,000. Is this amount worth all the effort?
If you depend on rental income to meet recurring expenses, ensure you have a few months of rent in reserve to cover a vacancy. If your property doesn’t get a tenant for a few months, the vacancy reserve will cover you. An accountant can crunch the numbers and tell you if renting the apartment makes sense.
Rent Amount Considerations
The basis for setting rental income is the average rent currently applicable in your neighbourhood, which you can find in online rental listings, at an open house, or from a property management company.
Once you have the basic rent, you can adjust it based on what your property offers. A newly renovated, centrally located property gets a premium. Some other add-ons on the base rent include extra parking, a pet-friendly policy, and utility bills included in the rent. The rent amount set for the first year is subject to an annual increase at a fixed rate.
Charging too low a rent can break the price, and charging too high a rent can leave your property vacant for a long time. A vacant property will only add to the expense, as you will have to pay for utilities and maintenance from your pocket. You could consider setting a lower rent initially to attract a tenant, but ensure the rent is not too low.
Think of it this way, you have been trying to rent the apartment for the market price of $1,900 for two months. Instead, if you rent it for $1,800, you lose $1,200 in a year, but avoid $3,600 of loss from two months of vacant property. Choose your rent amount wisely.
Insurance Considerations
A standard homeowners’ insurance policy usually does not cover rental use, but you can switch to a landlord policy for an extra 15-20% premium. It will better safeguard your interests as the landlord. Make sure you have liability coverage of at least $1 million and loss of rental income coverage if your property becomes unlivable due to damage.
Provincial Rules Considerations
Rental laws differ across Canadian provinces, with slight variations in lease requirements, security deposit limits, rent increase rules, notice period for entries, and eviction procedures. Not adhering to these rental laws can lead to heavy penalties and make it difficult for you to evict your tenants, if needed.
Tenant Screening Considerations
Many homeowners avoid renting their property out of fear that tenants will ruin it or refuse to leave. While there is no foolproof plan to avoid problematic tenants, thorough screening can reduce the likelihood of finding them. The first step is to conduct a cursory phone check of the potential tenant’s details before showing the property. This enables you to meet and assess them in person. If you have a good feeling about them, ask them to complete a detailed rental application with vital information, such as employment, references, income verification, and consent for a credit/background check.
Keep a lookout for red flags, such as a cash-only offer, no references from previous landlords (if they claim not to be first-time tenants), refusal to answer all screening questions, frequent changes in address or employment, or any other suspicious information on the application. Make sure any doubt that comes to your mind, no matter how insignificant it may seem, is answered satisfactorily before going forward.
Tax Considerations
You must report your rental income in your tax filings by filing Form T776 with details like the rent amount received, security deposit taken, mortgage, and other expenses incurred.
Expenses such as property tax, maintenance and repairs, travel expenses incurred to manage the property, and other direct expenses incurred to earn rental income are tax-deductible. However, you must keep receipts and invoices for all transactions for at least 6 years to claim deductions.
You can also claim depreciation on capital expenses incurred to improve the life or value of the apartment, such as major renovations, roof replacement, heating and cooling system upgrades. Again, keep the invoices and receipts.
There are special considerations for non-resident landlords. Firstly, non-residents need a Canadian to act on their behalf to withhold 25% of the tax, file, and pay it. If your tax liability on rental income after expense deduction is not 25%, you can file Form NR6 and pay tax on net rental income or file a Section 216 tax return and claim a tax refund.
Taxation can get complicated. A professional accountant can help you calculate and pay your tax liability, file tax returns on time, and avoid costly mistakes.
End of Tenancy Considerations
There are several considerations when a tenant leaves. Either party must give a notice period as required by provincial law, expressing their intent to vacate the apartment. As a landlord, you will have to inspect the property for any damages, unpaid bills, late or non-payment of rent, and deduct that amount from the security deposit.
A landlord has to maintain a detailed accounting of the security deposit, unpaid rent, and expenses, and that is where an accountant can help.
Contact MW&CO in Woodstock to Help You with Accounting for Rental Income
Talk to our team to help you understand the accounting, financial, and tax considerations before renting your property, and help you stay compliant with the tax laws. At MW&CO, our accountants and bookkeepers can provide services such as filing returns and preparing financial statements. To learn more about how MW&CO can provide you with the best accounting and bookkeeping services, contact us online or by telephone at 519-539-6109 or toll-free at 1-877-539-6109.