Weekend Reading: Rental Property Edition

Weekend Reading_ Rental Property Edition-1

We’re building a new home and should have possession of it sometime in February. I’ve been asked a few times if we are going to hang onto our existing home and rent it out. After I stop laughing I explain why I have no desire to own a rental property.

I admit that I have a preference for owning a small slice of nearly every publicly traded company in the world through a low cost, total market ETF. I’d never want to get my hands dirty working for any of those companies, but I’m happy to share in their profits over time.

The thought of being a landlord and having to worry about finding and managing tenants, dealing with general upkeep and maintenance, and holding a contingency fund for larger renovations or repairs is not at all appealing. 

Being a financial planner, I also have many clients who do own rental properties, and while some are happy to own and manage multiple properties, others have shared their horror stories about bad tenants, expensive repairs, cash flow troubles, and the lack of price appreciation in areas of the country outside of Ontario and BC.

Still, I like to explore my options. The risk our house doesn’t sell in a reasonable time and for a price we’re willing to accept is not 0%. If the local housing market dries up, it might make sense to take down our listing and rent out the home, at least temporarily (for a year or two).

A property appraiser determined we could fetch about $2,800 per month for our house. That sounds pretty good on the surface, but a closer look at the numbers gives me pause.

Let’s assume we extract a good chunk of the existing home equity for a down payment on our new house. That leaves a mortgage of about $390,000. Paid over 25-year, the mortgage payment would be $2,284 at an interest rate of 5%. Property taxes and insurance add another $650 per month. That comes to $2,934 per month in expenses. Tenants would pay for their own utilities.

Even if we managed to get $3,000 per month, we’d only make about $800 for the entire year, which is not nearly enough of a contingency for maintenance or minor repairs (let alone if something major breaks).

A smaller mortgage of, say, $340,000 would bring the mortgage payment down to $2,000 and make the numbers more palatable. But that’s just robbing Peter to pay Paul, meaning the smaller the mortgage on our existing home, the bigger the mortgage will be on our new home.

Then there’s the actual issue of being a landlord, even temporarily. It’s not for me. After all, I’m Canada’s worst handyman. I’d end up hiring out the property maintenance, further eroding the already razor thin profit margin. 

Finally, there’s my faith in the local real estate market. Lethbridge seems to have more of a steady 2-3% a year housing market than a boom and bust housing market. So, likely no potential for a real estate lottery pay-off in a short-time frame.

Related: Was My House A Lousy Investment?

For those reasons, turning our existing house into a rental property after we move is a last resort option. 

This Week’s Recap:

Last week we got the official word that the annual TFSA limit will increase to $6,500 in 2023. That takes the lifetime TFSA limit to $88,000.

Also of note, CPP recipients will get a 6.3% increase in their benefits in January based on the inflation numbers for 2022.

Many thanks to Paul Brent of the Globe and Mail for including my comments in this piece on tax loss harvesting.

Promo of the Week:

I didn’t take part in Black Friday shopping, but if you’re looking to take advantage of any online deals this weekend make sure to go through a cash back website like Rakuten first to earn a rebate on your purchase.

If you’re new to Rakuten (formerly Ebates), you’ll get a $30 cash bonus when you join today.

Weekend Reading:

In addition to a higher TFSA contribution limit and indexed CPP benefits, Erica Alini says most Canadians will get some tax relief as tax brackets also get adjusted upwards by 6.3% (subs).

What should you do with your mortgage in a rising interest rate environment? Jason Health at Objective Financial Partners shares some strategies.

Andrew Hallam says that by saving $500 a month, you could have $12,100,000 over 60 years if you keep asking this one question.

Should RRIF withdrawals be based on the younger spouse’s age? It depends.

A Wealth of Common Sense blogger Ben Carlson rights says the markets can’t save you if you can’t save.

Of Dollars and Data blogger Nick Magiulli turned 33 and wrote a great piece on learning to live.

Stop thinking about what you are retiring from and start thinking about what you’re retiring to.

Most investors are experiencing hefty double-digit losses. Andrew Hallam explains why we aren’t far removed from chimpanzees:

Smart investing isn’t about chasing past returns or coveting what others own. Instead, it’s about owning a globally diversified, low-cost portfolio. It’s about maintaining a consistent allocation through thick and thin. That means rebalancing as needed: selling pieces of “winners” and adding the proceeds to the “losers.”

Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. Ben Felix explains what this paradox means:

Rob Carrick on what the Algonquin Power debacle says about dividend stocks versus GICs (subs).

My Own Advisor Mark Seed shares his financial independence update. Inspiring stuff!

A Wealth of Common Sense blogger Ben Carlson again, this time comparing now disgraced FTX founder Sam Bankman-Fried versus The Match King Ivar Kreuger.

Finally, long-time Wall Street Journal personal finance columnist Jason Zweig shares his suggestions for the books every investor should own.

Have a great weekend, everyone!

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  1. Brian on November 26, 2022 at 6:01 pm

    Oh come on Robb, give it a try! You might like it!

    To be fair, the house you’re moving out of would not make for an ideal rental home. Aside from your analysis, the target tenant demographic is narrow, which can mean higher than normal vacancy rate.

    Being a landlord seems easy up front, but it requires an understanding of legislation and the rights of the tenant and the landlord. It must be approached as a business, as opposed to “just rent it out”.

    • Robb Engen on November 27, 2022 at 7:56 am

      Hi Brian, let’s just say I’ve learned enough from my clients’ experiences that I don’t need to try it out for myself 😉

      Very true about the target tenant demographic being narrow. I could see offering lower rent just to get a stable tenant situation.

      And, yes, it’s 100% a business and not something to be taken lightly.

  2. Frito on November 26, 2022 at 7:39 pm

    I’m right there with you on not having the stomach to be a landlord. Sometimes it’s hard enough just to keep on top of dealing with maintenance and improvements on our own home! All those piddly little things a homeowner can put up with or set aside for awhile becomes high priority when the tenant is calling.

    Having said that, there’s a bit more benefit to renting out than just month to month profit. Most landlords look at the benefit of having the tenant pay the mortgage, interest on which is tax deductible – as are all other related expenses. AND you still have ownership of a house!

    A downside to renting the house you used as a primary residence is the resulting affect on your 100% tax free status when you sell. So many things to consider. Not sure if people really understand the complexities when they get into the game.

    • Robb Engen on November 27, 2022 at 7:51 am

      Hi Frito, I hear you loud and clear that it’s hard enough to deal with regular maintenance on your own home. On the one hand, we’re lucky that we’re buying a new home and shouldn’t have many issues, but on the other hand we’ll still need to landscape the front and back, build a fence on one side of the yard, etc.

      Great point on also complicating the primary residence exemption.

  3. Scott on November 26, 2022 at 9:23 pm

    Have had rentals for 15 years. My characteristics and skills are similar to yours. In the instance of your present home as a rental, it would be a poor choice. Even if the numbers made sense, you would have too much emotional attachment to it. There are +/- to real estate investments as well as investment portfolios consistings (equities/bonds etc). Yes we had some bad experiences with rentals, however a lot more good. I wouldn’t change a thing. I would recommend to all investors to having a diverified investment portfolio that would include rentals. However, its imperative to buy the right property, at the right time, for the right price. Its not like an ETF where you could $ cost average in.While there is going to be excess rental demand, its very hard to make the numbers work right now with the higher interest rates and current house prices. Recommend anybody considering to wait to house prices fall back and they will. Lethbridge is a stable market and doesn’t have tremendous swings like other markets. Just slow steady growth(like a dividend aristocrat).

    • Robb Engen on November 27, 2022 at 7:46 am

      Hi Scott, thanks for sharing your experience. Good to know that someone with my skill set can still be a happy and profitable landlord.

      I know there are plenty of investors who prefer real estate to owning stocks, and many have done very well. It’s not for me, but if you’ve got the right aptitude for it then I’m sure you can do well.

      The trouble is that our views are shaped by recency bias and real estate has done very well in parts of Canada over the years. There’s a huge difference in the number of clients in BC and Ontario who ask me about real estate versus those in Alberta and Saskatchewan.

      To echo your comment about buying the right place at the right time for the right price, my job as a planner is to point out that it’s not reasonable to expect positive cash flow in a pricey market, and it’s not reasonable to expect 20%+ price appreciation every year. That way you go into your investment with eyes wide open to the potential risks.

      • Scott on November 27, 2022 at 3:36 pm

        Robb, you are right about the interest by BC & ON individuals about real estate in AB & SK. Even those that only had a principal residence in BC & ON could cash out to buy a comparable or nicer house in AB or SK and have $1M+ cash in their jeans to put into investment portfolio. The other reason many are cashing out of BC & ON is to be closer to their chidren and grandchildren. A win/win situation for them and their families.

  4. Jason on November 27, 2022 at 6:52 am

    Hi Robb, would your view of the economics of renting change if you could pay cash for an investment property? For example, if you bought for $350K cash, and netted $2300 per month, that’s a reasonable source of income, no? Or would you see the opportunity cost of that $350K invested as too high?

    • Robb Engen on November 27, 2022 at 7:38 am

      Hi Jason, if the situation was that I had $350k, and my registered accounts were full, I would most likely still invest that money in a taxable account. It’s just my preference to own stocks rather than deal with the potential headaches of real estate.

      While the idea of receiving income is attractive, you also need to look at the big picture and how this investment fits into your long-term plans. Are you going to keep the rental property into retirement? Will your kids use it?

      In the plans I do for clients we often see that selling an investment property before taking up their government benefits can lead to more spending in retirement and avoid messy tax / estate implications down the line.

      Finally, for our own unique situation, adding rental income complicates our very neat tax situation (paying ourselves dividends from our small business). I’m at the point in my life where I want to fight for simplicity in my finances.

  5. Jerri on November 27, 2022 at 8:02 am

    Re: your Rakuten Link. I used it and signed up, but do not see any $30 offer for new members in my account. Just that the referring person gets $30.

    Can you clarify this?

    • Robb Engen on November 27, 2022 at 8:10 am

      Hi Jerri, thanks – it’s definitely not clear on the site. Looking through the T&C it looks like the new user gets $30 when they “make purchases totaling $30 or more that earn Cash Back within 90 days of their sign-up date.” Same for the referrer, the $30 refer-a-friend bonus only gets paid out if the referee signs up and spends $30 through the Rakuten portal within 90 days.

      I’ll clarify in the article.

  6. Gene on November 27, 2022 at 9:57 am

    I’ve never been a residential landlord but my father was. He dealt with way too many issues resulting from bad tenants. It seems that all the laws are written in favour of the tenant and the landlord is the one that gets screwed whenever there’s an issue ex. payment, eviction, damage, etc. After seeing what he had to deal with, I decided long ago that I would never be a residential landlord. I would only consider a commercial situation such as owning a property rented by a doctor, lawyer, accountant, etc., where the issues would generally just be maintenance and upgrades.

    • Neill on November 27, 2022 at 5:39 pm

      Hi Gene,

      I agree with your comment about commercial tenants – far fewer issues to deal with on triple net leases – no toilets to deal with 🙂 – the downside is that at turnover, the vacancy can take longer to fill.

      With regards to residential, we were fortunate enough out of the chute to be advised to treat it like a business, and screen, screen, screen – it is often better to have a month of vacancy (rare in today’s AB economy, but we have seen it in the past) than to take the first person that “fogs the mirror” and is applying. We run employment and credit checks, and do previous landlord reference checks.

      In AB, the tenancy laws are as reasonably fair and equitable. A non-paying tenant can be out on the street within 4-6 weeks after missing a payment – not like the current situation in Ontario – up to a very scary 8 months for a hearing, and BC – up to 6 months. Bad LLs get held accountable in AB as well, making it a two-way street. We advocate for both LLs and tenants with bad LLs, as the bad LLs give us all a bad name.

  7. Mary on November 27, 2022 at 12:10 pm

    Hi Robb,

    Interesting discussion. Like all financial decisions, it depends on the goals and circumstances.

    We live in Vancouver, own our house (bought in1991), and have a few rental properties. The first was bought years ago for my MIL, and is now just recently paid off. The other two are “place holders” for when our kids are ready, likely 3-5 years from now. Between the three, we barely break even. We are extremely cautious when screening new tenants, and treat our properties as our own home to keep good tenants. Still, no guarantees.

    However, for peace of mind, it has been worth while, as our kids will have the possibility of owning in the future, even if it keeps us quite frugal for now. That said, I will be relieved when we can let go of the two properties and attendant costs when the time comes, likely when we are ready to retire.

  8. Neill on November 27, 2022 at 5:31 pm

    I’m curious as to why the vast majority of financial advice website tend to eschew revenue properties. Where else can a person get a return on investment that also has a leverage factor included – on an estimated $400k property there, you would need 20% down, or $80k invested – agreed, it should have a rainy day fund established on top, or a line of credit dedicated to act as one. The mortgage paydown alone on a $320k mortgage is just shy of $34k after five years, and if the property is legally suited it will be cash flow positive to boot.

    Appreciation becomes a bonus – if that same property increases by $20k in that same five years, that adds another 25% 5 year cumulative ROI to the initial down payment amount. Screen like heck before you accept a tenant, and it can be quite rewarding – or outsource the property management if that is not your forte.

    In Lethbridge, I know of more than a couple of landlords that are getting a successful return on their investment with far less gut-wrenching roller coaster ride than that of the stock markets. I agree with the comments above that your personal residence may not be the best property to put into use as a revenue property, but there are definitely opportunities in your city.

    Yup, I’m biased – we are full time real estate investors, real estate investing allowed us to quit our day jobs almost ten years ago, and we have enjoyed far more freedom of time for family, friends, and travel since.

    • LW Sparling on November 28, 2022 at 5:55 am

      Thank-you for the commentary including the math. I agree 100%.
      With a quality property & a steadfast calculated screening process for potential tenants, a worrisome headache is mitigated. Interesting that you are self-employed real estate investors / landlords & no 9 – 5 day-job.
      Stock-Market Roller-Coaster: if I may, unfortunately Government policy does impact the Investing landscape. Historically the TSX will be statistically positive 7 out of 10 years with 1 major decline with 1 moderate & 1 minor negative years. With our current Federal Tax’n-Spend Regime, the TSX is heading for a 4th negative year in only 7 that the Spenders have been in power. Never ever has happened before… not even close… so even more of an argument to purchase & maintain a rental property if one is suited for that endeavor & if they have the financial sustenance over the longer term. The Spenders also plan to increase immigration to over saturated levels, thus ensuring rental property demand in most urban areas. Enjoy the Pro$perity…

      • Robb Engen on November 28, 2022 at 6:47 am

        @LW Sparling – Just responding to a couple of your claims. One, the Canadian stock market was down in 2015, 2018, and 2022 (YTD). That’s 3 years out of eight. Not sure why you’d want to pin negative years on the sitting government, let alone use incorrect data to support that claim.

        Besides, a responsible investor should have a diversified portfolio, where Canadian equities make up no more than 30-35% of their portfolio (if that).

        As far as immigration goes, the policy surely aims to counter our abysmally low birth rate (368k babies born and 323k deaths last year).

    • Robb Engen on November 28, 2022 at 6:39 am

      Neill, it probably has something to do with wanting to curb the unbridled enthusiasm that our finance media, housing industry, and TikTok influencers has for investing in real estate.

      Amateur landlords don’t properly take into account all the phantom (unrecoverable) costs that go into home ownership. They don’t know what a cap rate is, and probably couldn’t tell you if they are cash flow positive or not.

      Can you make money investing in rental properties? Absolutely. But as other readers have pointed out, you need to treat the venture like a business.

  9. cmack on November 28, 2022 at 9:56 am

    Hey Robb,

    We are in a very similar situation here in Lethbridge and have chosen to become landlords for our current family home as we move on to our forever home. I really appreciate your breakdown of the numbers and while I do agree with them, I see the modest (but steady) appreciation in this market, there is potential to build a substantial nest egg as we reach our retirement horizon (10-15 years). Even if we aren’t positive cash flow every month I see any costs contributed as a monthly investment into the asset as well as the tax and expense incentives. I’ll let you know how it goes!

    • Robb Engen on November 28, 2022 at 10:26 am

      @cmack – thanks for your comment and good luck with your rental. You’re certainly braver than I am! Definitely keep me posted.

  10. Pam on December 5, 2022 at 11:37 am

    I am currently renting out my condo as selling in Edmonton was looking hard 2 years ago. I will evaluate where I am at the end of the 5 year term on the mortgage and may look at selling then. At that point my principal residence will be paid off and I can afford to carry it even if slightly cash flow negative but its just me coming to terms with selling it (likely at a loss) to the original purchase price in 2014.

    Being a landlord was never in my list of goals but we’ll see where it all shakes out.

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