Real estate investing is not easy. It is about research, preparation and careful negotiation, from the moment you start looking for a property, until the closing day.
For physical property searches, there are home inspection companies to assist you. However, in order to make sure that your rental income stream is protected, both before and after closing, you need a lawyer on your team, right from the start.
In order to properly assess your investment, you need to carefully review the terms of any rental agreement that may be in place, the rent roll, details of the tenants, amount of last month's rent, whether interest on last month's rent has been paid when due, any rental licence that may be required by the municipality, such as for student housing, municipal tax and utility information, including details of any sub-metering agreements entered into by the owner and details of the employment of any employee or superintendent that the buyer may be assuming on the sale.
A lawyer will assist in preparing the necessary conditions in your agreement so that before you commit to the purchase, you have satisfied yourself with all of this due diligence. Utility and sub-metering agreements are very important since it is more advantageous to have a tenant paying separately for utilities. If it is a bundled rent, it is extremely difficult to get the tenant to agree to start paying for the utilities themselves after closing.
The rental licence is going to be a hot topic going forward, as municipalities are using this to limit the number of students that can occupy a home. If you are not careful and buy a home that does not comply, you may not be able to rent to the number of students that you hoped for and the project may then not be financially feasible.
If there is a basement apartment, the appropriate checks will need to be done to ensure that not only is there zoning compliance, but that the unit also complies with all fire code requirements.
Use a local lawyer to assist you, someone who is familiar with any changes or upcoming changes to the local zoning bylaws that may affect rental licences or basement units. If you are going to assume any employee, you may want to consider a provision in your agreement that the seller will terminate the employee and pay all severance owing, and then you re-hire the person as a new employee after closing.
That way you will not be responsible for their prior years of employment should you decide to terminate their employment later. Buyers also need to make sure that after closing, the rental stream is secure and that they are not faced with claims brought up by the tenants after closing. In this regard, your lawyer can assist you with additional provisions to include in your contract.
For example, you will want written acknowledgements from each of the tenants delivered on closing, confirming the terms of their leases, the amount of any last month's rent, that they have received proper interest on the last month's rent when due and more importantly, that they have no existing claim against the landlord.
You will also want to include a warranty from the landlord that all rent increases have complied with the provincial rent review guidelines. This warranty should survive closing for at least one year, so that you have protection in case a tenant tries to challenge a prior rent increase.
By taking the necessary precautions and having the right legal advice before you sign any investment agreement, you will be able to better protect and maintain your cash flow, after closing.
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