Thinking about Becoming a Landlord?
Years ago when I was still living with my parents I bought a rental property with a friend. Initially we were excited, and had big plans on growing our portfolio. Soon after taking ownership we found a young family to rent the house annually. It wasn’t long after they moved in that we started getting calls from the tenants. Plumbing repairs were needed, so we had to line up contractors to help fix the issues. Soon after the plumbing was fixed we found out the tenants monthly cheque bounced. We met with the tenants and received another cheque and for months everything was fine, then another tenant cheque would bounce. Home repairs and bouncing cheques went on for about 5 years, and with stagnant home sales we were just breaking-even. As time went on we noticed the home was aging, and knowing a big expense to re-shingle the roof was approaching we decided it was time to sell and get out of the landlord business. Back then we were young, and thought it was going to be easy money. Looking back today, we realize if we still owned that house it would be worth 3 times what we paid. To put it simply, if everything lines up well, you can make a lot of money from a rental property. Being a landlord has to be a long term strategy, it requires work, and there’s many pitfalls, but there’s money to be made if you manage your property wisely.
Thinking about being a landlord?
Here’s a list of benefits and pitfalls that you should be aware of.
Income from Renters
The biggest benefit of owning a rental property is collecting the monthly rent. Ideally the rent cheques received total more than any expenses for the month.
Income from Property Value Growth
Another source of income is property value which is difficult to quantify. But over time hopefully you will be able to estimate the amount you have earned, based on nearby sale prices. This is obviously going to be a variable thing, as it depends heavily on the area where your rental property stands.
The other factor that you should consider is that your sweat equity is likely to add additional value to the property as you maintain and upgrade it. Doing things like repainting the home, adding new siding, refinishing the inside, doing some basic landscaping to the yard, and so on will add value to the home without significant financial cost.
Not only will this allow you to charge more for rent, it will also increase the value of the property itself should you choose to sell it in the future.
One strategy worth considering is managed properties. A managed property is one that you own and rent out, but which you pay another company to handle the day-to-day management of on your behalf. The net effect is that you hand over some of the rent you take in to that management company. What this does is reduce the amount of time you have to spend dealing with the property in exchange for a reduced income stream. This can be a good idea for someone who wants to try owning a property, but may live far away, or has no interest in day-to-day property management and can live with a reduced income stream to save themselves the headache. Learn about the Royal LePage Trinity Brokerage Rental Program.
Another investment strategy may be to buy into a Real Estate Investment Trust (REIT). A REIT is a publicly traded organization that invests predominantly in income-producing real estate assets. REIT units are an equity investment, providing investors with attractive yields, plus the potential for capital appreciation.
Canada Mortgage & Housing Corporation
- Just Starting? Get Informed
Helps new landlords familiarize themselves with the relevant rules and regulations.
- Marketing Your Rental Unit
Provides tips to help you find tenants.
- Now that You’ve Found New Tenants
Provides information on deposits, rent increases and how to finalize a tenancy.
- Dealing with Problems
Summarizes your obligations and refers to relevant information in the various province-specific pages.
- When the Tenancy Ends
Provides information on conducting a final inspection, returning deposits and ending a rental agreement.
- When Taking Legal Action, be Meticulous
Outlines steps you can take to handle complaints and offers tips that will help you if you need to take legal action.
On the other hand, there are a number of disadvantages to owning a rental property. Individually, these disadvantages are relatively small, but they add up to a significant cost.
Concentration of Assets
One drawback to investing in a rental property is that for most people, owning a rental property is a serious concentration of their assets. It would take a significant portion of the average Canadian’s net worth to fully own a rental property.
The problem is for most first-time landlords, your investment is not diversified at all. Your investment is in a specific house, in a specific neighbourhood, and in a specific city. If that neighbourhood goes downhill and is neglected, home value will drop and you could lose value on your investment. Also if something unfortunate happens to that house that the insurance can’t handle, your costs to operate will rise. Like it or not, by owning a rental property, you’re tying yourself to the local real estate market in a very tight way.
The concentration of assets is not a wise investment strategy. However, the more wealth you have, the easier it is to diversify your portfolio. Often factors outside of your control can positively or negatively affect your investment value and growth.
Tenants themselves can present risk. Even in the best of times and even with the (seemingly) best tenants, that revenue stream is far from guaranteed. A tenant could get hurt or lose their job, and find themselves struggling to pay the rent and utilities.
Sure, sometimes you’ll get a great tenant that pays their rent on time for years and years and years, but that’s never a guarantee. Some tenants won’t pay regularly, and others might not pay at all. You’ll be out several months of rent and also not to mention the time spent dealing with their non-payment and eviction. Some tenants may also cause more property wear than others.
There’s also the risk of not having a tenant at all, which means that you’ll have periods where the property generates no rental income and you are stuck paying the basic utilities.
Taxes and Fees and Insurance
Regardless of whether you have people in the house or not, you’ll still be facing the cost of property taxes, the cost of insurance on the property, and the cost of any homeowners association fees associated with the property. Those bills will come in regardless of whether there is a tenant in the property or not. This is a pretty steady cost that you’ll clearly know about in advance, but no matter how you slice it, it’s a cost that cuts into your profits.
Even in the most “hands off” of situations, you’re still going to be devoting notable time to this rental property. Eventually, it will need repair; eventually, you’ll have to check on it; eventually, you’ll have to interact with the tenants; and eventually, you’ll have to do paperwork of some kind or another.
You can do away with this problem by hiring a management company – something we’ll discuss below – but in doing so, you eat away at the profits from renting out that property.
Who Would Make a Good Landlord?
As I studied the ins and outs of becoming a landlord, it began to occur to me that some people are personally predisposed to be more likely to effectively manage – and enjoy the management of – a rental property, while others are not so predisposed. Here are a few traits that a good rental property owner should have. The more of these traits you have, the more enjoyable and lucrative owning a rental property may be for you.
You enjoy small home improvement projects. Do you enjoy doing things like installing carpets, painting walls, fixing minor dings and dents in cabinets, doing minor plumbing tasks, installing and patching drywall, and so on? Some people really enjoy these tasks, particularly when doing so rewards their sweat equity with more rental income and a higher property value. Other people don’t enjoy home improvement tasks much at all, which will make this part of the gig a painful drudgery.
You have spare time. You’ll be responsible for things like backed-up toilets in the middle of the night, basement flooding, and so on in another home besides your own. Are you up for that? If you’re on a tight schedule, it might be very tough. Even if you hire a management company, owning a rental property will still eat up at least a little of your spare time. If you choose to go without one, it can eat up a lot of time.
You don’t mind occasionally dealing with difficult situations with people. Being a landlord sometimes means dealing with tenants with overinflated demands and expectations. It can also mean dealing with tenants who don’t pay their rent. Those types of interactions can be difficult and, if handled poorly, they can escalate into progressively worse problems. Are you willing to occasionally deal with these kinds of difficulties?
You have significant liquid assets to invest right now. It’s generally a poor idea to take out a loan in order to buy a rental property because of the financial risk it introduces into your life. If you don’t have the financial wherewithal to pay cash for a rental property – or you don’t have an established business that can handle this via a business loan – you shouldn’t be in the rental property business yet.
Investing in a rental property won’t absorb the majority of your net worth. This is all about concentrating risk and putting all of your financial eggs in one basket, which is never a good idea. If you’re going to have the majority of your net worth tied up in a rental property, you may want to reconsider your plans.
For some people, owning a rental property might be a brilliant personal financial move. If they’re in good financial shape already, have some spare time on their hands, and don’t mind handling home maintenance emergencies, a person who puts in some patient time finding the right property to rent can make a very nice profit on a rental property.
The reality is not everyone falls into that category. Some people might not enjoy the interaction between tenant and landlord from the landlord’s side. Others may not be in a financial position to take on a rental property quite yet. Still others might not feel confident in their local real estate market.
The important thing to remember is that investing in rental properties is definitely one of many options on the table, and it is a good option for some people. Take into consideration your own financial state, your personal strengths, and your interests and make up your own mind about whether rental property ownership is the right move for you.