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Owning an investment property can be a lucrative endeavour and, once you’ve gotten the hang of it, purchasing an additional property can be tempting. However, owning two or more income properties can end up being a bit of a juggling act. Each type of investment—from duplexes and apartments to Airbnbs, rental homes, and pre-construction properties—has their share of challenges with much to consider before diving in head first.
The pros and cons
When done right, owning a rental property can be a great investment with the potential of producing an attractive revenue stream. Adding multiple properties ups the ante—and the responsibility.
Advantages of owning multiple investment properties
- Passive income—if your properties are performing well, hiring a property manager to take over your responsibilities as landlord means you continue to profit while working less.
- Business opportunity—diversifying your investment properties gives you access to both residential and commercial opportunities.
- Financing new properties—the more properties you own, the easier it is to acquire additional investments with each one funding the next.
- Long-term return on investment—owning multiple investment properties equates to higher profits from rental earnings as well as through real estate appreciation.
- Risk management—owning multiple types of properties in different markets with different sizes reduces the impact of negative real estate activity.
Things to consider when owning multiple investment properties
- Upfront costs—most investment properties require a minimum 20% down payment, meaning you need more initial capital. And unless it’s a turnkey purchase, renovation costs may be necessary, too
- Additional overhead—owning multiple income properties means paying more for recurring expenses like repairs, insurance, property taxes, mortgages, and utilities.
- More work—unless you hire a property manager, owning multiple properties requires more effort as a landlord, especially if your investments are in different communities or different cities.
- Lack of experience—while diversifying your portfolio is wise, it also requires a lot of knowledge around owning multiple properties, which can be overwhelming if you’re just starting out.
- Finding tenants—the more rental properties you own, the more tenants you need to find. If one or more of your properties sits empty for any period of time, you could be at greater financial risk.
When to purchase an additional investment property
Before you proceed with purchasing another property, do your due diligence and explore all your options. Seek out new opportunities where growth potential is easy to identify, even if it means buying a different type of property or entering a new market.
Next, look for the right property at the right price to maximize your rental yield. Remember, the right price isn’t always the lowest; a fixer-upper needing a lot of renovation will extend the timeline to achieving positive returns, so keep your financial growth goals in sight and reference them often during the process.
Here are a few other considerations to keep in mind:
- Budget—can you afford the increase in overhead costs including additional taxes and mortgage fees, and are you financially secure if a unit remains empty for an extended period of time?
- Market trends—is now the right time to invest in another property? Are mortgage rates favourable? What types of properties are showing the most potential?
- Resources—if the income homes are a side project, will they affect your professional career or personal life? Will you be able to maintain each property to the full extent of your responsibilities?
Knowing when to purchase a second, third, or fourth investment property requires plenty of research and planning ahead of time. Conduct a thorough real estate analysis, analyze the total costs including the down payment, insurance fees, and any necessary renovations.
Legal requirements of owning multiple properties
One of the most important elements of owning an investment property is having a bulletproof rental contract. The best way to do so is to work with a lawyer who specializes in real estate and is experienced with the ins and outs of owning income properties.
Before developing your contract, you need to purchase your properties first! However, obtaining a mortgage, or multiple mortgages, has recently become more challenging. Lenders also need exact paperwork for income verification. If you’ve owned your current income property for at least two years, they’ll want to see a copy of your Statement of Real Estate Rental (T776) showing your past rental income. Plus, since you’ll be renting out your new purchase, a lease agreement or an evaluation with reasonable rent fees is also required.
Zoning is another consideration to keep in mind. Typically, a single-family home, or building with four units or less, is zoned residential, while a property with five or more units must be zoned commercial. Obtaining a commercial mortgage is more challenging with higher interest rates. Always be sure to confirm the type of zoning your unit will require.
Don’t forget, a minimum 20% down payment is required for a non-owner occupied investment property. However, if you plan to live in one of your rental properties—and it falls under residential zoning—the down payment can be lowered to between 5% and 10%. Residential investment properties are also eligible for mortgage default insurance, which reduces the risk for lenders and can qualify you for a more favourable mortgage rate.
Finally, legality for rental properties vary from province to province and city to city—this includes fire safety regulations, property standards, and zoning bylaws. Confirming laws with the local government is always recommended.
How multiple investment properties affect your income tax
When it comes time to submit your income taxes, you’re required to include all amounts you received as rent. This includes income earned as well as the fair market value for goods or services given in lieu of rent, such as a tenant snowplowing the parking lot or cutting the lawn in exchange for a reduction in rent.
While there’s a number of specific pieces that can impact your income tax, it’s important to speak with a professional who has experience working with investment properties. From capital expenses, current expenses to submitting your taxes, a professional account can help make the process run smoothly.
When to incorporate multiple investment properties
When adding another investment property to your portfolio, it’s important to confirm with the seller and your lender if there are any obstacles to selling a property to a corporation. Some properties can only be sold to individuals, while mortgage financing given to a corporation often has a different set of criteria. That said, as your real estate portfolio grows, incorporating your investment properties becomes a critical consideration. As mentioned, business income is taxed and claimed differently than standard property income—which is potentially favourable to you (or not).
Incorporating your rental properties typically doesn’t offer many tax benefits, unless you turn the corporation into an active business and employ five or more people. If you pay yourself a dividend, most of the taxes paid can be recovered. But don’t forget, dividends paid out to yourself must be declared on your personal taxes.
Next, if one of the properties is your primary residence, you may not want to include it in the corporation. Doing so means risking your principal residence exemption which provides a significant tax break should you decide to sell your home; Canada’s principal residence exemption saves you from paying tax on capital gains during the sale. However, if you live elsewhere, and if you purchased your investment properties with another individual (a spouse, friend, or partner), incorporating might make sense. This gives each co-owner a legal stake in each property, with responsibilities and ownership percentages outlined in a partnership agreement. Not only does this clearly identify who is responsible for what, it also simplifies reporting for each party come tax season.
Finally, there’s a fee to incorporate your income properties, along with additional administrative costs, so it’s important to determine if these costs are worth it. Of course, incorporating does spread out some of these administration costs across multiple properties—such as your annual corporate tax return—and provides limited liability protection, which guards your personal assets in the event of a lawsuit / litigation. For complete details including associated fees and how to register a corporation in Canada, visit Corporations Canada on the Government of Canada’s website.
As you can see, there are a number of pros and cons to owning multiple investment properties, with several considerations to bear in mind. Building up your real estate portfolio is serious business and not something to be rushed—be patient, be methodical, and don’t be afraid to lean on the advice of experienced individuals such as accountants, lawyers, and REALTORS®.
*The information above is for informational purposes only and should not be used as investment or financial advice.
