I should specify, when I say real estate investing, I’m specifically talking about rental properties… not flipping or REITs (Real Estate Investment Trusts).
I should also specify, this blog is written with someone with low to little knowledge about real estate investing in mind. Consider it food for thought for the someone that is considering purchasing their first rental property.
I’m a big fan!
When I see mortgages for rental properties come across my desk, I secretly think “way to go”. It’s a solid investment! Housing growth is usually (after the pandemic, I use “usually” loosely) consistent/stable and the best part…. Someone else pays the mortgage!! Someone else is literally paying for your investment!
(image taken from https://napkinfinance.com/napkin/investing-real-estate/ )
Like every investment, it has risks and rewards. There are 3 big stumbling blocks: tenants, toilets and down-payment! Some tenants can cause headaches, you can be called in the “middle of the night to fix a toilet” and the down-payment required for a rental property is a whopping 20%! Let’s talk about them….
Tenants
Finding “good tenants” is hit & miss. Some are great, some can be a pain in the rear! Some are high-maintenance, complain a lot, not to mention the risk of late rent payments. There's no way to predict how a tenant will behave, but there are some precautions you can take.
Do a credit check. This helps weed out anyone who may not be responsible with their finances (it’s not a guarantee, but a good starting point). When the potential tenant visits the property, have a chat! Ask them questions. Do you like them? Are they friendly, pushy, picky, messy…. Get a vibe. Finally, make sure to show them all the “booboos”. Don’t hide the parts of the house that are “less than ideal”. If they’re aware of the issues at the beginning, they’re less likely to complain about them later.
Toilets (or furnace or dishwasher or fridge….)
Let’s be honest, I bet less than 1% of landlords have been called “in the middle of the night to fix a toilet”. That “S**t” (pun intended) happens during the day and is not common. Like your own home, this stuff breaks down. There’s nothing we can do to avoid it, but being prepared can help! When you’re shopping for a rental property, pay special attention to the condition of the house.
Get an inspection!!! Your inspection report should give you a list of “things to fix” in order of priority. Keep it in the back of your mind, so when you need to repair/replace anything, there’s no surprises. Have a backup fund dedicated to the rental property, so your family’s finances aren’t affected when something breaks or needs to be replaced.
Avoiding tenants & toilets
Does the idea of taking care of tenants & toilets make you lose sleep?
You can totally avoid it!! Hire a property manager and let them take care of the headache for you! Yes, that’s a job!! The cost? A small portion of the rent, often +/- 10% of the rental income (this may vary in different areas).
Down-payment
To purchase a rental property, you need 20% whopping down-payment (as of May 2022)!! Meaning, if you purchase a rental property for $500K, you need $100K for down-payment. Now, most people might not have an extra $100K in savings, so what can we do??
TIP #1)
If you’re already a homeowner, an option is to refinance your home to pull out enough equity for your down-payment. If you’ve owned a home for 5 or 10+ years, you’ve paid off some of the mortgage and likely, the value of the home went up. You can access the equity in your current home, to pay for the down-payment for the rental property.TIP #2)
Move & rent your previous home. If you’re purchasing a home for yourself, the minimum down-payment is still +/- 5% (technically, 5% for the first 500K + 10% for the next 500K), even if you own a rental property. So, if you’re thinking about moving, maybe keeping the old home as a rental is an option!
TIP #3)
If your child is off to college/university, you can purchase a “2nd home” with +/-5% down-payment, since it’s for immediate family. The parents buy a property and their child finds roommates that pay the mortgage.
The benefits
A nerdy fact…. In Ottawa, over the past 65 years, houses have doubled in value almost 6 times!! Roughly speaking, houses double in value every 10-15yrs!!! Let that sink in. When you get a rental property, someone else is paying the mortgage and you’re sitting on a property that will likely double in value in 15 years!! The few complaints from a tenant (or the random annoyance of replacing a fridge) pales in comparison, no?
Let’s look at Sam & Lou, a couple living in Barrhaven, a suburb in Ottawa. They're having a baby and have decided their condo is too small. They want to move to a bigger home. They decide to refinance the condo to pull out enough equity for the down-payment of the new home. Their realtor says they can get $2000/mth in rent for the condo, which is $200 more than their condo’s mortgage! They decide to use the $200 to pay for a property-manager to take care of the “tenants & toilets”. (Note: they are breaking even, no profit.)
Fast-forward 20-25 years…. Sam & Lou own 2 properties!!! In 20-25 years, Sam & Lou will have 2 homes completely paid off (maybe) that have at least doubled in value, have rental income coming in every month (or sell one to "boost their retirement") and have never dealt with the tenants & toilets!
“Rent isn’t enough to cover the mortgage”
This is a big no-no for seasoned investors, but I have a different perspective.
For aggressive investors, the golden rule is : properties MUST BE cash-flowing (meaning, there’s profit at the end of the month). I wrote this blog for people who don’t have any investing experience, so some of my ideas might not appeal to seasoned investors.
If your intention is to own only 1 or 2 properties, in my opinion, it’s fine if you must “pitch in” a bit for the first few years. Even if you have to invest a couple hundred dollars per month towards the mortgage, the vast majority of the mortgage is paid by someone else!! How often do you find investment opportunities where someone else pays? Not many!! Plus, it’s temporary. Once you’ve paid off enough of the mortgage, you can refinance and lower the payment, then you’ll have a cash-flowing property.
Who knows, maybe your first rental property will spark a passion and you set a goal to own many “doors”! If so, you may want to follow, read, listen to podcasts that are specifically targeted to real estate investing and get advice from the pros! YouTube is full of them!! One Canadian podcast I love is Erwin Szeto’s The Truth About Real Estate
Real Estate Investing is a long-term game…years long. Be patient & the future will look great!!!
Hope that was helpful! I'd love to help you find a mortgage to start building your real estate investment portfolio! Email me at natalie@yourhomemortgage.ca.
Natalie