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Any property you own is a great investment over the long-term. However, when people refer to real estate investing, they are typically referring to owning a property that makes them income beyond just building equity over time.
In general, there are 3 types of investment properties (or income properties):
- Short-term Rentals
- Monthly or Seasonal Rentals
- Long-term rental properties
In this post, I will be sharing the differences between each one by focusing on the pros and cons, to help you figure out what the right choice is for you. When looking at buying property to generate income, it is important to make sure you do your research and have a solid plan ahead of time. The goal is to make a good profit from your investment, and simple mistakes can have a big impact on how much money you make.
Short-Term Accommodations (AirBNB) in the local market
In Toronto, Short-term Accommodations are defined as all or part of a dwelling unit rented out for less than 28 consecutive days, in exchange for payment. These include both Airbnb’s and Bed and Breakfasts (hotels and motels are not included).
In the last decade Airbnb’s have grown in popularity, allowing travelers more options and flexibility when it comes to where they stay. It has also given property owners new opportunities to generate income. Guests are often looking for places to stay that are near amenities and attractions, and that also offers a unique experience.
As guests are renting your property for less than 28 days, there is more turnover than other investment properties, but also the opportunity to charge a premium for creating a high-quality travel experience.
Ideal city locations: There will be more demand for properties where downtown tourist areas can be accessed easily by transit or vehicle.
Maintenance & Upkeep: You will need to arrange for cleaning to be done on demand between reservations. As well, you may want to lean toward properties with smaller outdoor spaces to look after (snow clearing and grass cutting will be an added responsibility or cost for you).
Revenue Potential: This is highly variable, and ultimately depends on the type of property you own. At a quick glance, the average 2-bedroom unit in the downtown area could rent for approximately $350/night (if booked every night, gross monthly income would be $10,500). With the high turnover, you have the opportunity to adjust your nightly rates seasonally or with events happening across the city. However, there is equally the possibility that your unit will sit unoccupied for long-periods too, which means carrying costs with no income.
Toronto Bylaws: All short-term rental owners are required to obtain a license to operate in the City of Toronto, and if you are caught operating without registering with the city you will be fined. Two points to consider:
- You are required to collect and pay a 4% Municipal Accommodation Tax on all rentals;
- You can only rent your entire residence for up to 180 days per year
For more information about the City of Toronto bylaws click here.
Property Types Best Suited: All sorts of properties work for short-rentals, however, there are 2 important things to be aware of before buying a property to become a short term rental. Firstly, for your property to be approved by the city as a short term accommodation, it must be registered as your primary residence. If your home has a basement apartment, it could easily be used as an Airbnb, but having a second home that is solely for short-term rental, wouldn’t work. The second consideration is that some condo buildings do not allow short-term rentals. Be sure to look into the specific condominiums regulations ahead of time.
Monthly or Seasonal Rentals in the local market
Toronto is home to a number of different thriving industries. Large companies, educational institutions, and the film industry often have employees, contractors and consultants stay in Toronto for a few months at a time to complete specific projects. These individuals need places to stay and tend to be looking for home-like accommodations while they are working in the city, which offers them amenities and privacy. Fully furnished properties are typically desired.
Ideal city locations: Properties near or with easy access to the financial district (Bay St.), the film or arts districts (Eastern Ave. across to King St.), or near educational institutions (University of Toronto, Metropolitan University, York University, etc.) are likely to be in higher demand.
Maintenance & Upkeep: Furnishing will be an initial cost to consider, especially for luxury homes. If it is a family home, there may be outdoor landscaping, yard maintenance and snow removal to look after on a weekly to biweekly basis.
Revenue Potential: There is an opportunity for fairly healthy income when your property is rented. However, because it is difficult to anticipate when the right tenant will need a property like yours, there may be months without rental income to factor into your plan. Often a lump sum fee is paid at the outset of the period, which will require you to budget for the duration of the lease term. For perspective, a 2-bedroom home in the downtown area could ask as much as $6,000/month.
Toronto Bylaws: The City of Toronto has a Property Standards By-Law which applies to all properties in in the city, including all rental properties, and is worth a read if you are considering owning a home. For more information on the city’s Rental Property Standards you can read more here.
Property Types Best Suited: Both condos and homes will work, but in the downtown, private homes in established, family friendly neighbourhoods are in higher demand. If you own a home in the city, but also like to travel, this could be a great option for creating income while you are away.
Long-term Rentals in the local market
Long-term rentals are generally properties that are rented for a year or more. Many individuals living in Toronto are not financially prepared to enter the housing market, therefore, they have to rent. Renters will be using your property as if it was their own, until the time comes for them to move on. Renters are highly varied, which means there is a need for a wide variety of rental options in terms of residential real estate. However, in my experience, smaller condo units (1-2 bedrooms) in apartment buildings tend to be in higher demand and make for a good rental property
Ideal city locations: City-wide!
Maintenance & Upkeep: You have the option of including utilities, hydro, cable/internet, etc. with your monthly rental fees, or ask the tenants to pay for their use separately. That decision is often based on if they are renting a full property or if it is a unit within a home. Including these in the overall rental fee can be appealing to renters as it offers financial predictability. As the landlord, you will be responsible for addressing any repairs for structural and appliance issues. However, as tenants are living and caring for the unit as if it were their own, they often take responsibility for yard maintenance and snow removal attached to their unit.
Revenue Potential: You will want to keep your monthly rent competitive and comparable to other properties in your area. For perspective, a 2-bedroom home in the downtown area could ask up to $3,000/month or more. Because these are long-term leases, your rental income is predictable over the year which is great peace of mind. The downside is that if you get a tenant that stays for a number of years, you may find that even with the government-prescribed rental increase allowance, you fall behind market prices. As well, a tenant’s standards for cleanliness and upkeep may not be your own, be prepared to invest in a fresh coat of paint or new carpets between tenants.
Toronto Bylaws: The City of Toronto has a Property Standards By-Law which applies to all properties in the city, including all rental properties, and is worth a read if you are considering owning a home. For more information on the city’s Rental Property Standards you can read more here.
Property Types Best Suited: There is demand for all property types, be it a studio condo or 4 bedroom home. The most important feature, I find, in any rental is the ability for the tenant to see themselves in the space so keep the decor as neutral as possible. Cleanliness is king, fix all those little bugs you’ve gotten used, and leave them to enjoy their space.
What type of investment property is a good investment?
It all comes down to two questions:
- How much money do you want to spend as an initial investment?
- How much time do you want to spend managing your property?
It is a personal decision how invested you want your time and/or your money in an income property. However, no matter what, having an investment property is a great way to create more passive income while also building more equity.
For more information about owning an income property, investment advice or investment opportunities, check out my next blog post – How to Update and Decorate Your Property to Maximize Income Potential! For more information about ways to make extra income from real estate investments, or how to find the best real estate to invest your money in the city, be sure to reach out by phone or email.