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.
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!