# Rental property dilemma



## pasha133 (Mar 7, 2014)

I bought my first house in kitchener in 2002 for 210K. In 2012 I had to move to Toronto for a job so I bought another house in the GTA (>600K). I tried to sell Kitchener house for about a month however the market was pretty soft, and then my mortgage broker convinced me to refinance and rent out the house. Financial magic worked wonders, so I was able to refinance, buy a house in the GTA with 20% down, avoiding CMCH fees and getting a very good rate. I was not expecting to get any cash flow, I consider this a long term investment, hoping that the value of the house will grow.

I advertised a rent below market value, got several applications, did credit and reference checks and found fairly good tenants and all was nice. The rent is paid, property is fine. The cash flow has been pretty much around zero ($1,300 in, $1,250 out in mortgage, tax, insurance), as expected, considering the tax I had to pay; however, what's killing this deal for me is the cost of repairs and all associated headache of negotiating with tenants and contractors, which just gets worse. I had a clause in the lease that asked tenants to pay first $100 of every repair; I was not aware that this is not enforceable, so now technically I'm liable for lightbulb replacements and clogged drains. Now, in my house I do most of repairs myself but if I have to go >100km to do this it's not worth it. The highlights of last year were $90 service call for thermostat battery replacement (sic!) and $400 raccoon removal from attic. Ontario legislation makes life impossible for a small landlord because there's just no legal way to ask a tenant to maintain the property, even if they are willing and able to do so.

So, I'm now paying around $1,500 a year for repairs on that house. The furnace is old and $4-5K replacement looms. Dealing with tenants is more and more of a headache as it's not clear what must be repaired and what must not. So at this point, I'm considering selling. My reasons are:

1. The market in kitchener delivered about 4, at most 5% growth over the last 12 years. With lots of new construction and BlackBerry layoffs I see no reason it will change over the next 5-10 years.
2. The further down the road, the bigger maintenance expenses will be. I guess. House is about 25 y.o.
3. My wife had an emotional attachment to this house but now she is also willing to sell it.

So this is my big dilemma. Even in the worst case if I sell now, I could get ~100K equity.

1. I could leave it as is and just pay for the maintenance. Sell in 15-20 years when I plan to retire and when mortgage will be paid off, hopefully make lots of money. Will have to pay capital gains taxes though! NOTE: house is rent controlled because it was build prior to 1996, that's another problem that will manifest itself over time.

2. Sell now for around 310-320. Will have to pay capital gains tax for 2 out of 12 years (my calculation gives about $4-5K) and invest 100K:
2a. Put into current mortgage. Won't make a big dent. I'm paying a variable rate of 2.6%
2b. Buy a small condo close by (Vaughan/Markham) for 200-250 and rent it out. Still headache but manageable. I'm an experienced landlord as I also rent out a basement in my current house; I know it's a hassle but I'd be fine with it. Interest rates are insanely low now, that's the only upside I guess. Plus I could charge market rate.
2c. Put money into TFSA.
2d. Put money into a mutual find RRSP, invest resulting tax returns in RRSP as well.

For now, I find option 2d the most appealing. I have 2 RRSPs from my past and current employer, for a number of years, both delivering very impressive returns (more then 4%!) from Canadian equity mutual funds. I have plenty RRSP contribution room. Plus I'd get to reduce my taxes with those RRSP contributions - it's a very good deal considering I'm at the top tax rate.

So, what do you guys think? Are my assumptions and calculations correct? Looking at it strictly from retirement investment standpoint, 2d seems the best option; BUT, it hinges on my personal rate of return which may not hold in the future.

I tried to calculate it but trying to guess what investment return rates, real estate market rates, and my income and tax bracket in 15-20 years would be makes it increasingly hard.

Thanks everyone!


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## Taraz (Nov 24, 2013)

Sell. It doesn't sound like it's worth the hassle. Stocks or index funds (in a TFSA, RRSP, or regular trading account) are far less work (with less hidden expenses). Also, it sounds like you're highly leveraged between your two properties - that's just asking for trouble, especially when your rental isn't cash-flow positive.


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## nobleea (Oct 11, 2013)

To add to the misery, you have to pay income tax even though your breaking even. The principal repayment portion of the mortgage is not deductible of course. However, given that you just refinanced, maybe that's a small value.

I would sell. Invest in REIT's if you want exposure to RE market. You're income from that will far exceed any positive cash flow you'd ever get with the current place, even by investing only the DP.


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## pasha133 (Mar 7, 2014)

nobleea said:


> I would sell. Invest in REIT's if you want exposure to RE market.


I think I'm enough exposed to RE market owning a house in GTA, with a basement tenant  But it's a good question which I have not pondered yet, how to get a good balance in my case, with retirement 15-20 years away. Apart from the two houses house, I own about 130K in RRSPs, invested in canadian equity funds.


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## Just a Guy (Mar 27, 2012)

Why rent below market if you get the same hassles? When renewals come, raise your rents. I never understood the logic behind low rent means good tenants. Bad tenants come at all prices. 

If you get a good tenant, don't raise the rents, but they should have to prove they're good tenants first.

I've never had a tenant who hasn't sworn they'd be good.


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## pasha133 (Mar 7, 2014)

Just a Guy said:


> Why rent below market if you get the same hassles? When renewals come, raise your rents. I never understood the logic behind low rent means good tenants. Bad tenants come at all prices.


That was my first mistake, if I tried to rent it now I would rent at a market rate. After 2 years they feel they are entitled to it all.
Unfortunately, Ontario law does not make it easy to correct this mistake, as long as they pay the rent...


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## Arshes76 (Jul 5, 2013)

i think in Ontario you can raise rents every year, but only at a prescribed rate. I think it may be 2%???? I'm not 100% sure.


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## Karlhungus (Oct 4, 2013)

Im pretty pro real estate but even i would say to sell in this case.


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## doctrine (Sep 30, 2011)

So, if you end up with $100k equity, and put that in a 7% REIT (or spread over a couple), you're looking at $583 a month cash flow. That's a pretty big improvement, going from leveraged to unleveraged, immediately removing all headaches, having a professional management team worry about the contracts, and going from zero cash flow to 7% cash flow. And you might end up with more equity than that. And since you're cash flow positive, you could reinvest those distributions and 10 years from now, you should have double the cash flow.


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## pasha133 (Mar 7, 2014)

Arshes76 said:


> i think in Ontario you can raise rents every year, but only at a prescribed rate. I think it may be 2%???? I'm not 100% sure.


For housing build before 1991, it's a prescribed rate. This year, it's 0.8%. If built after 1991, increases are not capped. Unfortunately my house is in the first category.


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## Cal (Jun 17, 2009)

This is what I read. you have $100,000 inequity earning you 0, and its a pita. Yes, the full value of the house is increasing, but you do not own the full value.

Sell, invest in your RRSP and TFSA, if you are happy with your investments earning you 4%, then you would be making $4,000. No pita factor.


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