Toronto Income Property Newsletter: September 2008

Happy Labour Day everybody. I hope everyone enjoyed the Olympics and that all of you had a chance to take a little break over the summer. It is now September, the kids are going back to school and we’re all settling into that fall mentality. Since the Toronto real estate market started to slow down a touch at the end of May, the burning question on everyone’s mind is will the market come back from the usual summer slowdown or will the declining number of trades continue?

Unfortunately, I won’t have that answer for you until next month’s newsletter. Traditionally, business always picks up after Labour Day. But will it roar back to levels that we’ve seen in the past? I’m sure that we’ll get a good sense of what’s going on two weeks into September. If there are a good number of listings in the GTA and agents are holding back offer dates, then the market will heat up again. Remember that interest rates are still quite low and the resale condo market is still strong. However, if the pent-up demand that we have seen in past quarters does not lead to multiple offers, then we may find houses sitting longer and prices not going through the roof. In my opinion, this would be a good thing because I’m in the business of fiscal real estate – properties that make financial sense. Multiple offers always lead to inflated prices and an exaggerated market. If we can start trading income properties based on the numbers again, Paul is one happy agent.

Some sectors that are likely to experience difficulty this fall are the commercial and cottage markets. A client of mine forwarded me an article from the Star that stated commercial real estate investment in Canada is forecast to fall by as much as 40% or more this year, the biggest drop since the start of the decade. Reasons for this include economic uncertainty, hesitation by investors, a reduction in availability of financing and a smaller pool of available properties. Lenders are also becoming more stringent in their lending requirements. Remember that until we get into six units, income properties usually fall under the residential resale umbrella. So if the housing market in Toronto is strong this fall, duplexes and triplexes should follow despite larger commercial trends.

The cottage market is also suffering. I communicate regularly with realtors in Muskoka and the Kawarthas and at the moment there are a staggering number of cottage properties available. There was a time where rural properties were snapped up in multiple offers just like the City, but that has come to an end. My guess is that with the price of gas, one has to look very carefully at the cost of continually driving an extra four or five hours each weekend. Also, fractional ownership has made it easier for people who don’t need to be away every single weekend of the year. That’s an interesting market to keep an eye on because many folks believe that this market too will come back so there may be some opportunities. We all know that everything is cyclical; we just don’t know the absolute crests and dips of each wave. So if we are getting close to the bottom, the investors, renovators and speculators should take note.

Now what happens if the Toronto market goes completely down the tank in the upcoming months? Are there any areas of the city that are “crash-proof”? First and foremost, by buying an income property you are mitigating that future risk since your property will always be able to at least partially able to fund itself. Any property that is on the main subway line is likely always going to be attractive. Certainly, triplexes and multiplexes that have better than average cap rates or returns should be less impervious to a down-turn as well. Some of the areas that I think will maintain their current prices levels would include anywhere down and mid-town from Dufferin over to Yonge as high as the 401. This is a big box, but it encompasses a lot of tier 1 neighbourhoods that have seen dramatic increases in value. Areas like Annex, Leaside, and Riverdale will always be in-demand areas. If the market slows down, I do not think there will be huge price drops. The sell cycles will definitely take longer though. I’m also still big on Leslieville – there’s a lot more room for growth there and there are many old Victorians that I’ve seen, especially on Queen towards Logan, being completely renovated anew. It’s also a great rental area given its proximity to the beach and to the subway and Danforth shops.

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A client asked me last week if I had any tips on being a successful landlord. I quickly replied “Yeah, make sure you get paid” and then I thought that I should come up with a proper checklist for prospective lessors. I think that it is very admirable when looking for income-generating properties to think about your upcoming role as a landlord rather than how much money you will be earning. So here is the Paul Anand “Top Ten Landlord Success Strategies” list:

1. If something goes wrong at you rental suite, fix it! Right away. If you are not handy or unable to repair problems as they arise, hire a property manager.

2. Keep your rents at market rates. Do not charge an excessive amount or jack up the rents for your suite and you will always keep good tenants.

3. Read and understand the Residential Tenancies Act and know what your rights and obligations are under the Act. An informed landlord is a smart landlord.

4. Before you buy a property make sure that you have adequately assessed the existing rents and determined that they can be sustained. A realtor that focuses on income properties like me will always ensure that this happens.

5. Have a home inspection before you purchase a property. I know this sounds straight-forward, but in multiple offer situations, buyers often forego this in order to get the deal.

6. Call the references and run credit checks on prospective tenants. Also, make sure that you meet them in person and get a “feel” for what they are like. If you think someone might be dodgy, do not rent to them just because they are the only people interested.

7. Draw up formal leases that contractually address every aspect of the tenancy. Do not do handshake deals.

8. Join the Landlords’ Association in your neighbourhood. Joining an association will provide you with a wealth of experience as well as sample leases, copies of laws and regulations, and lists of decent lawyers, contractors and inspectors. Some associations may even allow you to join before you buy a rental property. Hire a good lawyer, insurance broker, lender and accountant. These professionals will be called upon from time to time.

9. Keep a slush fund in case something goes wrong. This is essentially money earmarked for unexpected expenses that are not covered by insurance. There is no set amount for an emergency fund, some say 10% of the value of the property, but anything is better than nothing. If you are getting current income from a property, you can pool that money into an emergency fund.

10. Keep revisiting the Plex website for the latest news and views as well as to keep abreast of my feature properties. It’s great to stay on top pf the market and always have a sense of what your property may be worth. Since it is an investment, unloading it at the right time is often critical.

Remember that being a landlord is a privilege, not a right. Be smart and dutiful to your tenants and your income property experience will be a good one.

That’s it for this month. Take care everyone.

P.A.