# Rental property investment



## sagsal (Apr 7, 2009)

A group of us (3 possibly 4) are considering starting to purchase rental properties in toronto

We are all in our early 40s, married with kids and make good incomes and own good homes in prime neighborhoods.

Any suggestions on getting started, suggestions, advice etc

Thanks


----------



## Sampson (Apr 3, 2009)

1. Find good lawyers, one for each of you to script out agreements among the multiple parties.
2. Find a good accountant, to sort out the profits.
3. Come to agreement with friends what each party is willing to do/contribute.
4. Determine if you need a professional manager.

Beyond that, you'll have to decide if someone amongst you is capable of valuing rental properties. They would have to look and find the most profitable buildings.

After all that is done, decide if you are still interested.


----------



## marina628 (Dec 14, 2010)

You should figure out what happens if one of you divorce ,lose a job , get sick etc .I personally am not a fan of getting together with friends to buy real estate.


----------



## Cal (Jun 17, 2009)

I am not a fan of this either. My reasoning is that you would potentially be on the hook for 100% of the amount owed, if someone loses their job or falls on financial hard times. But you only get 1/4 of the profits. The potential risk/reward does not work for me.


----------



## marina628 (Dec 14, 2010)

We did this one time and learned from our mistakes.When we bought the house we agreed we will each pay $500 a month extra on the mortgage to retire the mortgage within 8 years.We were lucky to get $75 from the other person and we had a 5.5% mortgage.The house was only 2 years old but was a power of sale.The previous owners had dug the cylinders and put the posts in for the deck but never finished it.If our tenant fell in the yard they could have impaled themselves on the metal post so before we bought we agreed we had to do the deck for liability reasons.Our Partner then said well the tenant rented the house without a deck so he didn't feel we should give them one.Our friend didn't want to put one penny into this house so a year later we bought him out and we never regret it since that time.In a year we prepaid $45,000 on the mortgage and got the rate down to 4% without a penalty.
We did this to do him a favor as he had no money to put into it but we thought in 5 years he could make enough money on the house to buy his own property.We gave him $20,000 cash to get him off the house and six months later he was broke and still renting.


----------



## Mall Guy (Sep 14, 2011)

Not a good idea, unless your partners are loaded (meaning they will carry you, instead of you carrying them) . . . make sure you have a very clear exit strategy (if anyone wants out, property goes on the market . . . perhaps a shotgun clause). Drafting the partners agreement will likely wipe out any short term profit potential.


----------



## Charlie (May 20, 2011)

i've seen it go bad too.

There's rarely concurrence in how much work to do yourselves, vs contract out. And peoples priorities change. Generally problems when one guy wants out. 

If one of you is the real estate guy, and the others simply fund, it can work. But one of you has to be in charge and the others have to accept it. And you cannot be fully reliant on everybody staying the course.

But if you do it, just make sure you figure out what to do if somebody wants out -- voluntarily or involuntarily -- and how you distribute the work. Only then, you can draft up an agreement.


----------



## Four Pillars (Apr 5, 2009)

Just don't do it.


----------



## sagsal (Apr 7, 2009)

So the advice about making sure the contract is clear and concise is very helpful

Please 4 pillars - that is the best you can do


----------



## the-royal-mail (Dec 11, 2009)

Investment? The choice of that word alone suggests the decision has already been made. 

This is not the time to buy, it is the time to sell.

It is also a bad idea to get involved like this with other people. What if someone gets divorced or loses their job or simply wants out? What if prices start to crash? This is an inflated market.

Not a fan of this this type of plan. I can't support it.


----------



## mrcheap (Apr 4, 2009)

> Four Pillars: Just don't do it.


+1



> sagsal: Please 4 pillars - that is the best you can do


Really, it's all that needs to be said (don't be angry because you don't like his advice). Other commenters have told you the potential problems and Mike is backing them up (like everyone else). I got into a deal like this (which Mike has heard all about) and it was a total mess.


----------



## sagsal (Apr 7, 2009)

Again - I appreciate the people aspect - fair enough

But to tell me it is time to sell - come on - you people have been saying this for years - while I appreciate the market is again going up up up - stop comparing to the states with this doomsday nonesense

If one is in for the long term than you can handle some drops

What is the alternative - investing in ETFs or individual stocks and watching them collapse a year before you need to retire


----------



## sagsal (Apr 7, 2009)

All due respect its not anger - its frustration - its not advice


----------



## Plugging Along (Jan 3, 2011)

Here's my advice - unless you have experience with real estate (I am guessing you dont based on the fact you are asking here), and you have thought of all your future outcomes, it's really risky and you shouldn't jump in.

Here are some considerations:
-You need to make sure you have a good legal contract
-I've always been advised never go into business that is doing worst than you - otherwise you may need to float them
-Discussions up front in terms of goals and objectives. How are you going to handle tenants, maintenance, repairs, and all the other things. Do you all agree on how they should be handled. Have clear responsibilities and accountabilities. What is the decision making process and governance within the group. If the place needs a new whatever, will you all agree what kind should be selected (quality vs price)
-What about extra payments on the mortage, etc. 
-Is everyone in similar financial and life situtations? Things like kids, marriage, divorce, death, career moves, really anything that can have a major financial impact can change the investment objectives. If everyone's financial situation is not stellar, I would not allow them in. Each person should be able to float the whole rental investment by themselves if needed. That's the types of partners you want. 
- Exit strategies, you need to consider how to deal with people needing to leave the agreement...

There are a whole bunch of other things, but these are the ones that come to the top of my head. We've had people ask us to go in with them, because I grew up with managing rentals, and have my own. The only people we would consider are the people who are already doing it, and don't need us.


----------



## Sampson (Apr 3, 2009)

Whether the investment is in real estate, or if you are starting a Tim's Franchise together, the agreements MUST be understood, must be followed. If not, you risk your money (invested and potential legal fees) and your relationships. Only you know your friends. If it hit the fan, would some partners want to pull out, would they sue you, would something else happen? Are you able to separate the money and your friendship. I would think these are the important issues to first address.

As for the business, I'm not convinced that there isn't money to be made, look at Canadian public REITs, most of those are making money - don't listen to the doomsayers. BUT, maybe a partner wants to turn a quick buck and is ready to sell out of the partnership, how would that affect everyone else? Hard to manage goals when different people hold them, and they could be diametrically opposed.


----------



## kcowan (Jul 1, 2010)

The structure I would recommend is a limited partnership. The general partner makes all the decisions and makes a significant fee. The others have no say and are just silent partners. Cash calls are all spelled out. So are distributions of any profits. Ideally the limited partner knows real estate and is arms length from the other investors. Marina or Rachelle can possibly ID candidates.

Since you did not ask for investment advice, none is provided.


----------



## Just a Guy (Mar 27, 2012)

sagsal said:


> But to tell me it is time to sell - come on - you people have been saying this for years - while I appreciate the market is again going up up up - stop comparing to the states with this doomsday nonesense
> 
> If one is in for the long term than you can handle some drops
> 
> What is the alternative


Well, first off, not every piece of real estate is a good deal. In fact, in my experience, most aren't in this market. That's one of the reasons some people make money, have low vacancies, good tenants, etc. and some don't.

In some areas, this may very well be the time to sell. In other areas it could be the time to buy.

As for handling the drops, I just picked up a couple of places that dropped more than 60% from their sale price three years ago. Real estate prices would have to recover 120% for the old owner to recover...there is a reason they walked away. Can you, and your partners handle such a loss mentally? The old owner was convinced he had a winner in a hot economy...then there was a minor burp, some mismanagement, and presto, I got a new place.

Knowing when to buy and when not to is important. Knowing a good property and a bad one is also important. Partnerships can be a nightmare.

As for alternatives, there are always stocks that go up in any economy, there are businesses which flourish in every economy, just like there is real estate deals in every market (yes, you may be able to find a good one in Toronto). The question is, do you or your partners have the knowledge and experience to find them.

People who jump in the deep end thinking they'll learn as they go tend to drown. I've recommended a website which may help in the past, and from what I see of your responses, you should probably look it up (check some of my old posts). Your responses seem to indicate you want to get started, impatience isn't a good trait in investing.


----------



## Four Pillars (Apr 5, 2009)

sagsal said:


> So the advice about making sure the contract is clear and concise is very helpful
> 
> Please 4 pillars - that is the best you can do


At the time of writing, I was very tired and just wanted to watch my movie. 

I could write several paragraphs about all the potential problems, but the conclusion would be the same.

The biggest issues with partnerships along with things already mentioned (life changes etc) are things like workload and how it will be shared, compensated for etc. Very difficult to work out. All the contracts in the world aren't going to solve all your problems if the partnership has problems.

The other thing is that real estate is expensive and illiquid (relatively). It's one thing to set up a lemonade stand with some friends - if someone starts slacking off, it's no big deal to kick them out of the group or fold the business. Real estate is much harder to buy out shares or fold it.

The other thing is that having a group will allow you to have smaller shares or buy bigger properties. However, if you look around, you should be able to find smaller condos which are affordable for a small-time landlord. I'm talking about 2 bedroom condos in older buildings for $150k-$200k.


----------



## blin10 (Jun 27, 2011)

why do people convinced to buy property to rent it out, why not just buy a reit fund that pays 5% divi and be done with it, no closing costs, no property taxes, don't need to fix anything, easy to sell shares vs looking for property buyer, etc, etc...


----------



## Sampson (Apr 3, 2009)

@ blin10

Because the returns are higher.

It takes work no doubt, but I guess some, like myself have done the math and I realize it IS worth my time to earn the extra over a REIT.


----------



## Young&Ambitious (Aug 11, 2010)

Also it's tangible. People love tangible.


----------



## blin10 (Jun 27, 2011)

really? I'm just curious by how much? let's say for 1million if you invest into property/properties how much do you think you can pull monthly approx. realistically ?



Sampson said:


> @ blin10
> 
> Because the returns are higher.
> 
> It takes work no doubt, but I guess some, like myself have done the math and I realize it IS worth my time to earn the extra over a REIT.


----------



## Sampson (Apr 3, 2009)

I purchased a property for $195k using 20% down. $39k.

It rents for over $1700, positive cash flow of ~$300/month.
1.5 months of vacancy over 5 years.
Cap rate not spectacular, but I believe it is 5-8%.
Tenants whom pay with a year's worth of post-dated cheques, and whom leave the unit cleaner than before they came in.

Its not hypotheticals - I make money on the unit without considering that the unit is now worth ~$315k and my principal has grown a few thousand per year. I don't think there are many opportunities like this in Calgary now, but it doesn't mean they don't exist.

For record, I also invest in REITS, but they haven't given me the returns this investment property has. Bear in mind, I don't leverage into those investments, but $39k into public REITS would not have given me the same returns over the same period.


----------



## Sampson (Apr 3, 2009)

I wouldn't know how much one could earn on a million dollar commercial property - and I don't argue that real estate investing is the end-all be-all. But I am opposed to people that spout single phrases:

"you can't make money in real estate these days" or
"investing in REITs is always easier and gives better returns than investing directly in RE"

These statements are not true. Maybe the probability of those statements occurring is higher than the chance of making money if you invest on your own, but that's not a certainty.


----------



## blin10 (Jun 27, 2011)

i'm not arguing with you at all just thinking out loud... most likely you purchased that property in 2001 - 2004, let's pick 2002, if you bought REI.UN in 2002 it was around $12 and yielding roughly 9.5% annually so on 195k you would be getting $1543/month, if you held your shares you would be getting $1868 a month right now... not to mention shares worth $26.5 right now so your shares would be worth $430k... so you would be ahead in every way not to mention no headaches with people, fixing stuff, etc, etc...



Sampson said:


> I purchased a property for $195k using 20% down. $39k.
> 
> It rents for over $1700, positive cash flow of ~$300/month.
> 1.5 months of vacancy over 5 years.
> ...


----------



## Charlie (May 20, 2011)

it's unlikely he could have levered REI.UN to level he could with real estate, and it's less likely he would have. So net cash flow is about the same ($39K @9.5%) and his investment gain would be $47K if he bought in 2002, vs $100K+ gain + principal paydown on real estate. If he bought in 2006 (since he mentions 5 yr vacancy), the REI.UN was at $22-$26 so his REI gain would have been much less.

(and I know I'm comparing levered to non-levered, but practically, that's the investment decision that would have been made).

I like REITs for diversification, and liquidity, and ease of hold. But those management and admin fees have to be paid by someone. For those who want to, and can manage a unit, and are OK with the concentration risk, real estate (at reasonable valuations) can work well.

No clear winners.


----------



## Sampson (Apr 3, 2009)

But blin, its not really the same. I paid only $39k. The return has been the $120k from the capital gain, AND the cash flow, which is close to 10% ROE per annum.

I do acknowledge 2 main points that don't make it a fair comparison.
First this type of capital gain is rare, and very likely impossible in this current environment.
Second, the returns are magnified by leverage.

So it would be like buying $39k of REI, and the bank topping that up to $195k with a loan.

The OP really has to consider:
1. whether the partnership model is good - obviously many people posting, myself included feel it is not.
2. whether there are properties out there that can produce very good returns (I believe they exist, but are rare), more importantly, how much effort is the OP and the partners willing to make to find that one good property.


----------



## blin10 (Jun 27, 2011)

you can't compare it like that, I'm comparing 195k vs 195k, you borrowed rest from a bank same way you could take a loan from a bank, it's a same thing..


----------



## Cal (Jun 17, 2009)

sagsal said:


> Again ...
> If one is in for the long term than you can handle some drops
> 
> What is the alternative - investing in ETFs or individual stocks and watching them collapse a year before you need to retire


I would have to question taking on your share of home equity debt if you are a year away from retirement.

And yes the alternative is investing in stocks or etfs.....but if you are in it for the long term you can handle some drops. :biggrin:

Personally I lean towards dividend stocks, if the stock price fluctuates, it doesn't really matter. What matters is that the dividend continues to get increased. Perhaps being so close to retirement preferred shares are a better alternative for you. And they get better tax treatment than the investment income from a rental property does.

Sorry to take the thread off on a tangent. But the question was posed as to what the alternative could be.


----------



## marina628 (Dec 14, 2010)

I wanted to post this to share with OP the situations that may occur with investment properties.Our tenant called us in past couple weeks when we had a big wind storm ,the neighbors tree broke off and took out the back corner eaves of the house plus the side of his garage. It costs us $1400 so far to fix our house and tomorrow my husband has a roofer going out.We reported to insurance but with $1000 deductible we haven't filed a claim YET.the neighbour is trying to get us to share the cost to remove the tree $4000!It is not on our property as ours is completely fenced ,he has no fence and said the tree is on a share piece of land which is BS since we have our survey and deed when house was bought 4 years ago.
Now we have to get city out to take a look at it , Our house is a newer home on a older street ,the neighbour's home is 35 years and original owner and I expect the tree is around same age.
If you are going ahead with this be sure you have adequate emergency fund to take care of things like this.


----------



## Sampson (Apr 3, 2009)

blin10 said:


> you can't compare it like that


You have to compare it like that.

I don't think you understand my point.

I'm saying my comparison is not fair for REIT investing. This is because with the property, I have used leverage, and it worked out. In other words, the return I have gotten is magnified.

If I did the same analysis for a REIT where I borrowed money and invested $195k, then that would be fair.

So let us hash this out. REIT with 6% yield. If I used $39k of my own money, and bulked it up to $195k with a loan, 6% of that $195k would be $11.7k. So on my initial investment of $39k, I get a yield of $11.7k less the debt servicing. That works to 30% ROE (again, less debt servicing costs).

So that REIT would provide a better ROE, since my rental only produces 10% ROE. However, the capital gain on the unit itself means that every year, I make 10%, and my $39k has already tripled.

I was fortunate with the cap gain, this you cannot guarantee - it was pure luck. Then again, you could have been smart/lucky investing in REITs and buy HR at the bottom and have quadrupled you money. Again chance. One can make money going either route, but if you question why people invest in RE, again, like my first suggestion, its because people can make money through these investments.


----------



## the-royal-mail (Dec 11, 2009)

Despite the best intentions, many people are not in anything for the long term. I don't know these 3-4 people in question, but to expect that a relationship with 3-4 people will stay the same over the long term is simply not realistic. As I said above, every single person in this arrangement is vulnerable to things like job loss, disability, moving away, divorce or other financial ruin. What if one party goes through a divorce and the court attempts to seize control over the properties to pay the ex? Are you prepared for that? There are so many things that can go wrong here. This has the feel of a water cooler idea and nothing more.

Just because you can do something, doesn't mean that you should.

Regardless of what anyone says though, it still sounds as though the OP's mind was already made up before starting this thread.


----------



## colossk (May 11, 2011)

blin10 said:


> you can't compare it like that, I'm comparing 195k vs 195k, you borrowed rest from a bank same way you could take a loan from a bank, it's a same thing..


Apples and Oranges, you can't compare the two as they are not the same.


----------



## blin10 (Jun 27, 2011)

they are not in the same category of borrowing but they are both money borrowed from a bank.. 



colossk said:


> Apples and Oranges, you can't compare the two as they are not the same.


----------



## blin10 (Jun 27, 2011)

I'm not sure what you mean. 

- you put down 39k and borrowed $156k for property / you could of borrowed 156k for investment
- both make you roughly same amount monthly (based on my example) minus the interest on the loans
- property now worth $3xxK / investment worth $4xxK (based on my example)





Sampson said:


> You have to compare it like that.
> 
> I don't think you understand my point.
> 
> ...


----------



## Sampson (Apr 3, 2009)

Your example is not correct. The property was purchased in 2005, as someone astutely noticed. The comparative return from REI is not the same. I'm not really sure what your point is because I mention even in my first post that the real estate was levered investing and my REIT investments are not.

I don't think one could borrow 4X against a REIT certificate.

Not even sure what we are discussing. I still hold by my first point that one can make more money by directly holding investment properties. You haven't shown me any evidence against this. My example isn't even a good one, there are plenty of people on this forum that have made a lot more money than me (thinking about those owning 3-4-5 properties, wink-wink).

One can just as easily lose their shirt investing in REITs, there is rampant fraud in the sector, remember just back in 2008, HR dropped by more than 75% when the credit crunch hit and people thought HR would be screwed by the development of the Bow building in Calgary. Neither residential real estate nor commercial properties have fallen by more than 25% over that same period.

There is just as much risk investing in REITs, except that risk is often not magnified by using leverage. The two are different beasts, both can make or lose you money.


----------



## blin10 (Jun 27, 2011)

i'm not a mind reader I didn't know when you purchased that property I was just giving a random example... I never said that you can't make money with properties, obviously you can... anyways it's all good both can make money 



Sampson said:


> Your example is not correct. The property was purchased in 2005, as someone astutely noticed. The comparative return from REI is not the same. I'm not really sure what your point is because I mention even in my first post that the real estate was levered investing and my REIT investments are not.
> 
> I don't think one could borrow 4X against a REIT certificate.
> 
> ...


----------



## Sampson (Apr 3, 2009)

Just trying to give support of "why people bother investing in rental properties". You had posed a question of why people do that and not simply invest in REITs.


----------



## Mall Guy (Sep 14, 2011)

Just to get you guys to stop fighting, substitute HR.UN for REI.UN in 2008 . . . $39K / $4.45 unit price = 8764 units x $24.25 market high = $212,528 (not including distribution) . . . just wished I had put in $39 K instead of $1,000:encouragement:


----------



## Sampson (Apr 3, 2009)

We're not fighting, we are discussing 

Come on Mall Guy. What if you had bought in 2007 and sold into the panic like most did. After all, the price did fall to near collapse, and truthfully, it was possible. The Bow is a nice building, but it almost killed HR and all its investors (myself included) with it.


----------



## Sampson (Apr 3, 2009)

Sampson said:


> We're not fighting, we are discussing
> 
> Come on Mall Guy. What if you had bought in 2007 and sold into the panic like most did. After all, the price did fall to near collapse, and truthfully, it was possible. The Bow is a nice building, but it almost killed HR and all its investors (myself included) with it.


We all wish we had do overs, buying HR in 08, and buying AAPL back in 2004/5 are mine.


----------



## sharbit (Apr 26, 2012)

Does anyone else find it funny that at this exact time on another thread there's a doctor asking for help sorting out his finances from a failed partnership?


----------

