Buying a rental property can be a great way to generate monthly income, which can be an important part of a retirement portfolio. That said, like any investment, it comes with risks, and it’s not a decision to be entered into lightly. There are several factors to consider before you invest in a rental property.

#1 Can You Afford the Investment?

The golden rule of investing is to never make an investment you can’t afford to lose. When it comes to a purchase as significant as property, that’s a difficult benchmark to clear. If you’re hoping you can rent the property for several years and then sell at a profit, you’re taking a significant speculative risk, especially in this real estate market.

Keeping it as a long-term rental property is safer, but there are still risks, such as:

• Maintenance costs
• Unexpected increases to your mortgage payments
• Tenants who can’t make their rent payments

You should be able to comfortably weather financial setbacks like these if you’re going to invest in a rental property.

#2 What Is the Right Location?

As the old adage goes, when it comes to real estate, it’s all about location. With enough time and money, you can change anything about a property except where it is.

When it comes to rental houses in Toronto, rents have risen from one end of the city to another, but properties that are near a lot of amenities will command top rents. It helps to find neighbourhoods where there’s strong demand for rentals, although with nearly half of Torontonians now renting, there is pretty consistent demand across the city.

Location can also determine the types of tenants you’re going to attract, so keep that in mind as you search for a property.

#3 Take a Long-Term Outlook

If you plan to hold onto a rental property for decades, you’re more likely to turn it into a profitable investment. Even a property that’s breaking even from a cash-flow perspective can be a sound financial investment. You’re building equity, paying down the loan, and increasing the length of time you have to see appreciation.

Plus, once the loan is paid down, all of those payments suddenly become income.

#4 Consider a Landlord’s Responsibilities

Owning a rental property isn’t as easy as just collecting rent cheques every month. Landlords are responsible for maintaining their buildings and finding tenants. That means doing repairs on their own, calling and paying for contractors, conducting credit checks on prospective tenants, and showing units when they become vacant.

If you’re not interested in taking responsibility for another property, you can always hire a property management company, but that will take another bite out of your rental income. That said, it can be less expensive to hire a property management company than it is to sign a bad tenant.

#5 Can You Supplement Income with a Vacation Property?

With the evolution of short-term rental platforms, it’s easier than ever to make money from a second property or vacation property that you use personally. You can buy a cottage and rent it out for periods of the year to earn some extra cash without having to commit to a long-term tenant.

A rental property can be a good investment, but it’s not for everyone. Keep your location in mind, plan for the longterm, find out what a landlord’s responsibilities are, and always make sure the numbers work before you make an offer.