Can you believe that at the end of this month we will be half way through this year? Time flies quickly my friends. For those of you who have been keeping up with my monthly updates, you know that the Toronto income market has been quite challenging on the buy side so far this year. It seems like there wasn’t near enough inventory of proper duplexes and triplexes to keep up with the demand. Multiple offers were common-place and sub-five cap rates are more the norm than the exception these days. Usually the market quietens down going into the summer months, but there is still a lot of pent up demand out there, so I’ll be very curious to see what the inventory looks like over the next few weeks.
Do you have what it takes to be a landlord?
The following article originally appeared in Canadian Wealth magazine earlier this month and has been copied by other media on-line. It is an excellent checklist for you to decide if income-property ownership is right for you. I have interspersed some of my own thoughts into the story based on my years of experience dealing with landlords first hand.
Despite the long list of potential hazards, the possible rewards of being a landlord often outweigh the downsides. Here are the top 10 reasons why you should become a landlord.
- You use tenants’ money to pay your mortgage and build your equity. You can raise the rent each year (within the allowable guidelines) and adjust for current market rent rates when a property becomes vacant. Long-term investors buy real estate that generates positive cash flow, and either hold it until the tenants have paid off the mortgage or until there’s a compelling reason to dispose of the income stream in return for a lump sum; for example, to buy something bigger/better or to create an income stream for your later years.
- Real estate assets can be leveraged to bargain for additional real estate investments. Unlike stocks, mutual funds, term deposits, etc., you do not have to pay for the whole real estate investment yourself. Lenders will give you the extra money you need (mortgage) in exchange for receiving interest and the property as collateral if you default on the scheduled payments. When the property’s value has increased enough, some lenders will let you borrow against that value (your equity), which you can use as down payment to buy another property. This kind of positive leveraging is a great way to fast track building a great real estate portfolio.
- Real estate is tangible and more easily collateralized than most other types of investments. Ask ex-shareholders of Northern Telecom, Enron, Bre-X, and other “blue chip” failures. Lenders generally offer a higher ratio of loan amount versus the value of a real estate property than they would offer on a portfolio of stocks, for example. The building and/or land will still exist if the worst should happen. Mainstream lenders also love the low-risk appeal of rental housing, especially in a strong rental market like Toronto.
- A modest increase in rental income and/or decrease in operational costs can have a significant positive impact on property value. For example, increasing net operating income (by reducing costs and/or increasing rent) by $1,000 per year and applying a 6 per cent capitalization rate (better-than-average in today’s southern Ontario market) can add about $16,650 to the value of a property, using the Income Approach. This does not include appreciation for other reasons such as high demand for, and low supply of, rental space, improvement in the neighbourhood, etc.
- Several current tax policies (RCCA, capital gain, etc.) discourage long term owners from selling their rental housing properties because the proceeds of a sale may only equal the cash flow they would receive from keeping the property for a few years. Combine this with the discouraging rent control policies which make investors/ developers unwilling to tie up their money in building a rental property. They may have to wait a decade or more for a return on their investment, when they can build a condominium and get their money back– often with a huge profit–in just a few years. So what’s good about that? Rental housing inventory is shrinking, resulting in high investor demand and high sale prices for existing inventory (seller’s market), and increases in average rent rates (low vacancy).
- A well-maintained and fully occupied rental property rarely depreciates. Unless they have been damaged by stigmatism or an eroding neighbourhood (eg. increase in crime), property values have traditionally increased over the long term. This has been the case in pretty much all of the downtown Toronto neighbourhoods.
- If the very worst should happen, you still have a low (or no)-cost place to live. This is why owner-occupied duplexes and triplexes continue to be in high demand.
- Legitimate and reasonable expenses reduce your taxable income. Tax deductions include mortgage and credit card interest, depreciation, a reasonable salary with employment deductions, a percentage of your local travel expenses, relevant long-distance travel (eg. trade show), portion of home office and workshop costs, etc.
- Despite the perceived stereotype, many landlords enjoy the satisfaction of helping to provide good-quality housing to self-sufficient people in need. It is a very rewarding and necessary business to ensure that there is as much accommodation as possible.
- Multi-residential investments are arguably the most stable, depression/recession-resistant, and relatively secure type of real estate investment you can make. Everyone needs a place to live; not everyone needs a place to work. Buying a place to live is not possible for many young people and remains elusive for many adults too. Some adults choose the apartment living lifestyle for its freedom from housing related issues.
Treat your investment like a business, and your tenants like valued customers; know your rights and those of your tenants; maintain tight control on your cash flow; act promptly in everything you do; surround yourself with high-quality industry professionals, and you’ll experience the success you’ve dreamed was possible, especially if you can expand your holdings.