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News from The Globe and Mail

JOHN HEINZL

Saturday, July 31, 2004

Derek Lobo had a trick when he was checking out prospective tenants for his rental properties.

Without notice, he'd show up on their doorstep and pretend he needed their initials on the rental application. The ruse allowed him to get a glimpse inside their current residence -- which helped him avoid "tenants from hell."

"If a guy's got a motorcycle taken apart on the living room floor, he's probably going to be that way with you," says Mr. Lobo, who now advises landlords through his consulting firm, Derek A. Lobo & Associates of Burlington, Ont.

Finding a quality tenant for an income property can be challenging at the best of times. Now, with vacancies rising as low interest rates lure more renters into home ownership, it's getting even tougher to find people who will pay their rent on time and keep the apartment clean and in good repair.

The average vacancy rate in Canada's 28 biggest metropolitan areas rose to 2.2 per cent last year from 1.7 per cent in 2002.

The highest vacancy rates were recorded in Toronto (3.8 per cent), Calgary (4.4 per cent), Saskatoon (4.5 per cent) and Saint John (5.2 per cent), according to Canada Mortgage and Housing Corp.

Rising vacancies have given more leverage to renters, who are playing landlords off each other and demanding inducements before signing a lease.

But even in a soft rental market, there are steps landlords can take to keep vacancies down and tenant headaches to a minimum. Investors can also maximize their returns by taking advantage of the many tax writeoffs available to income property owners.

Pay heed to these expert tips and keep those rent cheques coming in:

Investigate tenants thoroughly.

In addition to inspecting a prospect's current apartment, landlords should always perform a background check. This involves delving into the person's credit history, calling previous landlords and checking with the person's employer. Credit information can be obtained from Equifax Canada or TransUnion Canada.

Don't offer free rent.

Offering one or two months of free rent -- as many landlords are now doing -- may make it easier to sign up a tenant, but it could backfire in the long run. Such deals attract transient tenants who often move on to the next apartment offering free rent when the lease is up -- if they stay that long.

Spruce up the place.

Upgrading appliances, painting the apartment and performing other work will attract higher-quality tenants and boost the market value of the apartment. Tenants will often return the favour.

"If you give people a nice home and treat them well, they will treat it like it's their own home," says Roman Bodnarchuk, chief executive of Toronto-based digital marketing company N5R.com and an owner of several rental properties."They'll cut the grass and shovel the driveway and paint the porch and renovate with their own money."

Create excitement.

When prospecting for tenants, Mr. Bodnarchuk prints up flyers with a description of the property, a photo, and a list of amenities in the area. He then arranges to have 10 or 15 people view the apartment at the same time. "What happens is people see other people and they're, like, 'Wow, if I want this place I'd better jump quickly.' "

Write a snappier ad.

A headline featuring dramatic language such as "Super-big bachelor" or "Stunning City View" will attract more eyeballs than one that merely states the apartment's location. Also, make sure someone answers the phone number in the ad or returns calls promptly.

With tenants able to choose among properties, "if they don't get you, they're going to move on to the next guy," Mr. Lobo says.

Don't act out of desperation.

It's better to have a unit sit empty for a month than to rent to a problem tenant. Evicting the tenant, getting a court judgment for unpaid rent and collecting the money -- no easy task -- could easily cost more than a month or two of vacancy.

"When landlords fall behind in renting, they get desperate and will rent to anybody. That's when problems happen," Mr. Lobo says.

Don't overpay for a property.

Mortgage rates are low, but real estate prices have climbed sharply over the past few years, so it's critical to look for value. As a rule of thumb, some investors aim to pay no more than 10 times the expected yearly rental revenue from the property.

Minimize income taxes.

Rental revenue is treated as income for tax purposes, but Canada Revenue Agency allows deductions for costs such as mortgage interest, utilities not paid by the tenant, repairs, insurance, advertising and depreciation on capital expenditures.

For landlords who also own a principal residence, it's important to shift most of the debt to the rental property in order to maximize interest deductions. That's because, in Canada, mortgage interest on a principal residence is not tax deductible.

"The biggest mistake people make is . . . they forget interest deductibility," says Brian Quinlan, a partner at Campbell Lawless chartered accountants and co-author of Tax Tips for Canadians for Dummies.

"The worst thing is to have a mortgage on your principal residence and the rental property is fully paid for. You want it reversed."

Another tax consideration is the capital gains exemption. If you buy a new house and keep your old one as a rental property, any capital gain on your former principal residence is tax free only up until the time you rent it out. After that, any incremental capital gains will be subject to tax, he says.

Mr. Quinlan doesn't own rental properties, but some of his clients are landlords. He's heard enough horror stories about pipes bursting in the middle of the night to know that owning a rental property isn't for everyone.

"I've seen people do very well, but it does take being a bit of a Mr. Fix-It," he says. "You can't just sit back and collect the rent. There will be tenant issues or maintenance and repair issues. There's always something."

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