Toronto Income Property Newsletter: January 2016
Happy New Year everybody. I hope you all have a great 2016 and all your hopes and dreams come to pass. It should be an interesting year with the upcoming US election (a lot more fun to come from Trump I expect) and some pretty high profile criminal trials. (Ghomeshi and maybe Cosby). I always like the even years because that means there will be a major soccer tournament in the summer as well.
The Toronto real estate market should continue to roll along at the frenetic pace we have become accustomed to. I don’t mean to sound like a broken record, but interest rates are still crazy low (we may even hit some new low points this year) and the demand for properties in the Toronto core is still very high. I was involved in trying to buy a property just before the Christmas break and there were 20 competing offers on it. This gives you an idea of the on-going discrepancy between supply and demand.
2015 Income Property Highlights
Every year at this time, I like to look back on the previous year and point out some of the more interesting plex sales from the preceding 12 months. There’s no point to show how many properties traded over asking price, because pretty much they all did. It is difficult to pinpoint how accurate a listing agent’s asking price is since the demand usually pushes it over the list price anyway. Here are some observations:
There were 117 sales of income properties in 2015 in the downtown core with three or more kitchens. If you count duplexes or houses with basement apartments that number would be considerably higher. The average price was approximately $1.35M which gives you an idea of how expensive investment real estate has become. Many of my clients often ask what the average cap rate of these properties would be and my guess would be around 4%, if even that. When the acquisition price is approaching a million and a half dollars, one has to wonder what kind of returns we’re getting since rents certainly haven’t increased commensurate with prices.
In the east side (E01, E02, E03) there were 50 sales during the same time and the average price was closer to $1.1M. The average price for 3+ unit buildings is about $100K more on the west side (W01, W02). I have always felt that the east side is a little stronger than west side since you pay a little less for around the same rents and cash flow. There is more choice on the west side since it is a larger geography and is comprised of more neighbourhoods.
Here is something interesting. The average price for a bungalow on the east side in 2015 was approximately $515K. Prices for bungalows with a basement apartment or nanny suite sold for an average of $100K higher. This points to the conventional wisdom that an income-generating property is going to be more desirable for buyers. Since it will carry for less, buyers are protected to a degree if interest rates suddenly start to finally increase.
If there is any specific market information that you would like to know about, please don’t hesitate to get in touch. We like all of our clients to be armed with as much information as possible when contemplating the purchase of an investment property.
Six Signs that You Should Not Be a Landlord
I came across an article online over the holidays that I would like to share with you. I often talk about the things you need to know to be a good landlord, but I seldom touch on the things you need to be in order to be a good landlord. There are certain character traits that are an advantage to have when being a landlord.
The following was written back in 2011 by Kathy Kristof for CBS Moneywatch:
Are you wondering whether you can make a fortune in rental real estate? With real estate prices and interest rates in the basement, the opportunities for landlords look mouthwatering.
Buying the right property at the right price allows you to generate long-term profits -- maybe even short-term income-- with a minimum of cash. That can spell double-digit returns. And there are tax benefits involved in owning rental real estate too.
But no matter how tempting the economics, there are some people who just don't have the temperament to be landlords. This is one investment where your personality can kill your profits, so it's important to be realistic. Otherwise, you can lose your investment and your credit rating all at the same time.
"If you can't roll with the punches, this is not an investment for you," says Mark Brandemuehl, vice president of marketing at the San Mateo-based real estate site Movoto, who happens to be a landlord himself. "This is the type of investment that literally wakes you up in the middle of the night--and not just because it's losing money."
What are the warning signs that you don't have the temperament to be a landlord?
1. You're a soft touch: You've been renting to a darling young couple named John and Sue for three months and are just thrilled that they're expecting their first child. You've hidden their shower gift in the trunk of your car. Then John sheepishly explains that their rent is going to be a little late this month because he lost his job. "Don't worry," he says. "I've got some good job leads." He gives you the sad puppy eyes.
If the notion of evicting this darling young couple is something you can't stomach, you're too sweet to own a rental. You can love your renters, but you can't let your personal feelings get in the way of your business judgment. If your contract demands rent on the 1st of the month, you should start eviction proceedings on the 5th of the month, says Adam Leitman Bailey, a New York real estate lawyer. That's because the wheels of justice move slowly. The faster you file the paperwork, the sooner you can replace the cute freeloaders with somebody who can afford your rental unit. (You are, however, perfectly welcome to give John & Sue the shower gift while you help them move back in with their parents.)
2. You think a "cushion" is what goes on the couch: Let's just say that John and Sue can't make the rent, but they are not going to move out without a fight. Guess what? You've got what bankers call a "non-performing asset." Worse news: You are still on the hook for the mortgage, taxes, insurance, repairs and other costs, even when there's no income coming in. You may even have to hire a real estate attorney.
Before you buy a rental, you need to amass an economic cushion amounting to at least six-months of housing expenses, plus a few thousand dollars to pay attorneys. That gives you the staying power required to manage most worst-case scenarios.
3. Semi-annual payments always come as a surprise. Sure you know that your auto insurer bills you just twice a year, but you have to scramble -- or borrow against credit cards -- to pull together the money every time you get the bill. When you own a rental, ordinary/extraordinary expenses are a common occurrence, says Brandemuehl.
To be a good landlord, you have to be a master of cash flow, planning ahead for everything from property taxes and insurance to major repairs. "Maintenance expenses come in big chunks," he adds. "You'll have nothing for a while, then all of a sudden, you've got to fix the roof or the air conditioner and it is $4,000. You've got to be prepared for that."
4. You love to decorate and know just how to trick out that rental. If you're a master at inexpensive home decorating, you may be fine. But if you're thinking designer tile and a granite countertop, you're pricing yourself out of the rental market. Decorating should be light, bright and inexpensive, unless you want to have the prettiest vacant rental on the market.
5. You're a heavy sleeper. Mutual funds won't call you in the middle of the night to tell you what's going wrong in your portfolio. Renters, on the other hand, can have a broken water pipe at any hour of the day or night. If you don't have a 24-hour handyman to call, you are the 24-hour handyman. It's the kind of nightmare you can't just roll-over and ignore.
6. You hate technicalities. If you're going to become a landlord, you need to get intimately familiar with tenant's rights laws in the area where you buy, experts agree. The reason: If you don't know the rules and follow them fastidiously, you can be sued by your tenant and your tenant could be allowed to stay in your home -- rent free -- almost indefinitely. "I've seen it take years to evict a tenant," says Bailey. "If you don't follow the rules, there are times when you can't evict them at all. It can be a living nightmare."
And before you rent to anyone, you need to pull their credit report; get their criminal record, if applicable; talk to their personal references; and their former landlords. Pay attention to the details and collecting the rent will be a relative breeze. But lose sight of the checklist that ensures you rent to responsible, well-adjusted people and your rental can become a nightmare.