September 25, 2020

Is turning a profit as a landlord a realistic and worthwhile plan?

Rentals less liquid than stocks, but outperform them
By Tina McFadden, For The Calgary Herald March 15, 2012

Leaky faucets, broken water heaters, late rent – these aren’t the only issues that landlords have to deal with.

In the 12 years Rod Faulkner’s been renting out properties in Calgary, he’s dealt with unpaid gas and water bills, one physical threat and three trips through the civil court system to sue for damages.

“In the 12 years, people have scammed me in just about every way imaginable,” says Faulkner, who owns 12 Calgary revenue properties. “And every time I get scammed, it costs me money, and I learn a new lesson.”

Property managers can help landlords head off some of the challenges associated with rental properties. Typically, property management companies advertise vacancies, screen tenants, arrange for any maintenance work, deal with tenancy problems and collect rent. However, they typically charge 10 per cent or more of the monthly rent, as well as a tenant finder fee.

“All it takes is one bad tenant and costs go through the roof,” warns Gerry Baxter, executive director of the Calgary Residential Rental Association. “It’s very expensive to get rid of bad tenants. . . . More than anything, I think (being a landlord) is a challenging business.”

But the tenant headaches are still worth it, according to Faulkner, because the capital appreciation on revenue properties can pay off big-time – that is, if you can find a good deal in Calgary’s high-priced real estate market.

“Property values have definitely increased, and it’s harder to find a good property nowadays,” Faulkner says.

Realtor Janet Miller, who owns two rental properties in Calgary and one in Sparwood, B.C., says she’s figured out a way to pick good tenants – and keep them. She checks references for all tenants, and then undercharges in rent. For instance, on a single family home that would normally rent for $1,200, the rent may be dropped by $100.

“If we drop that rent to $1,100, for tenants it’s huge,” she says.

“For us, it’s not that much.”

The benefit is twofold. First, tenants don’t turn over very often. Second, the tenants rarely bother Miller with complaints.

By keeping her rents low, Miller says she also minimizes the maintenance factor with tenants.

“We have tenants who truly believe that they are flying below the radar, and they do not want to phone us when the doorbell fails,” Miller says. “They just go out and fix it. . . . They want to talk to us as little as possible because they know that they’re getting a crazy good deal.”

Faulkner doesn’t have any trouble finding tenants. But he says you need to pick your tenants carefully: “It’s a bit of an art to pick a tenant.”

And his guiding mantra when considering a property is: “Right building, right price, right neighbourhood.”

He looks for properties near downtown or the C-Train stations, as well as in neighbourhoods that exhibit pride of ownership. His portfolio includes townhouses, duplexes and triplexes, as well as the harder-to-come-by multiplexes.

He says multiplexes with four to 12 units are harder to find because they’re owned by guys like him who have accumulated properties and know how profitable multiplexes are.

“They’re not usually willing to sell them,” he says. “You can get 50, 60 years of good solid returns out of a building like that.”

A good revenue property should be “cash positive,” says Faulkner, meaning it should pay down your mortgage, and ideally, provide positive monthly cash flow after expenses.

Faulkner has managed to find the right properties at the right price (his latest purchase was less than a year ago), and he believes you can still find positive cashflowing properties in Calgary today. Again he says it all comes down to the right property, price and neighbourhood. He factors in rising interest rates when determining whether the price is right.

A systems engineer, Faulkner, 42, plans to retire in less than 10 years – many years earlier than he could retire without the revenue properties. He expects to earn approximately $200,000 in cash flow annually from his revenue properties. Alternatively, he says he’ll be able to sell his entire portfolio for $4 million to $5 million. Of course, that’s assuming he continues to make the right purchases and the economy goes well.

“You have to believe in the Alberta economy, that we’re going to have a constant influx of immigrants,” he adds. “Calgary’s forecast to grow and grow and grow.”

As a realtor for MaxWell Canyon Creek, Miller advises clients looking for revenue properties. During the past year, about 20 per cent of her buying clients purchased rental properties. She has recommended single family homes and condos – it all depends on her clients’ needs and goals.

If clients can’t come up with the mandatory down payment for a revenue property (20 per cent), she’ll suggest renting out the property they’re living in, and buying a new primary residence for themselves with five per cent down.

Miller, unlike Faulkner, believes it’s highly unusual to find revenue properties in Calgary that cover all your costs or provide positive monthly cash flow. However, she’s not looking to make money on her rental properties each month. If she starts to make money, she shortens the amortization on the mortgage and reinvests the money into the property. That way, she keeps her mortgage payments high, pays off her mortgages faster, and deducts the mortgage interest and other expenses.

In the meantime, her tenants are paying down her mortgages. By the time Miller and her husband retire, the mortgages will be paid off.

“And somebody else will have bought the houses for us,” says Miller with a laugh. She expects the income from their rental properties to account for a significant portion of their retirement income.

“The beautiful thing about buying a house instead of stocks is that somebody else is paying off the investment for you,” she says.

“I really believe in real estate as an investment.’

What real estate can do is diversify stock portfolios, says Frederick Montilla, a financial consultant with Investors Group.

“If you speak to affluent Canadians, they have a combination of everything – they’re totally diversified,” he says. “That means they have money in the stock market, they have money in their pension, they have money in their corporations, and they have rental properties as well.

“The person who has an investment property will be better off than the person who is just investing in the stock market because the person buying rental properties has two advantages – the value of their property is appreciating while their tenant is paying their mortgage, and their mortgage is depreciating,” says Montilla.

“The only problem is (real estate) is not liquid,” adds Montilla. “But if you were to compare both, the rental property will outperform the stock market returns.”

In Faulkner’s case, the revenue from his rental properties has enabled him to launch an additional business. He recently opened a liquor store in Canmore, The Market Beer, Wine & Spirits.

You have to look at your rental properties as a business, he says. “Some people get attached to them. They feel it’s their home, and when a tenant puts a hole in the wall, they feel personally affronted . . . . You have to be detached from it . . . . The only reason you’re putting in the extra effort is to make money on it.”

Calgary real estate and rental facts

– – The average price for a single family home was $469,983 in February 2012; the average price for an apartment-style condo was $288,656, according to CREB.

– – The average monthly rent for single family homes with three or more bedrooms was $1,458 in the fall of 2011; the average monthly rent for two-bedroom condos was $1,460, according to the CMHC.

– – The apartment vacancy rate in the Calgary CMA reached 1.9 per cent in October 2011, according to the CMHC.

– – The market is presently fairly balanced for renters and landlords, according to Gerry Baxter, executive director of the Calgary Residential Rental Association.

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