# Buying Investment Property While Renting?



## AlwaysBroke (Jul 28, 2011)

Hey all,

I've decided to put off buying a house in Toronto because for one, it's too freaking expensive right now. Two, I haven't decided where exactly I want to live in the GTA (I'm open to Toronto, Mississauga and Oakville). It really actually depends on where my career takes me and if I remain working in the downtown core, or uptown maybe. I do know that I want to live in the GTA and preferably close to the company with whom I establish my career. So I probably won't be buying a house to live in for at least 5 years, and I'm curious to see where house/condo prices will be by that time.

Anyways, I currently rent for pretty cheap ($700/mo.), so I have a lot of disposable income at hand that I can invest and save. I've been saving for a long time now and have a decent portfolio of stocks and mutual funds, and emergency savings. If i happen to lose my job then I'm set for 6-12 months.

Would it be completely insane to buy a condo/townhome for investing....for the purposes of renting out, even though I WANT to continue renting my own place? I can't be tied to a condo/house right now for years on end cause I like the flexibility of being able to pick up and move in certain circumstances (i.e. if I get an amazing career opportunity). I know it seems contradictory, lol. But to me it would seem like a great way to make extra income.

Has anyone done this, and maybe would you recommend a website or book where I can start doing research on this possibility? Maybe include the risks and downfalls of this? Know any realtors that are familiar with this? I know it'd be taking on a big debt load but someone would be paying that off for me.

Your help is greatly appreciated.


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## HaroldCrump (Jun 10, 2009)

Sounds like all you need is some extra income.
Take your disposable income targeted for investment, buy some REIT units (or a diversified REIT ETF), then sit back, collect the cash distributions every month while you sip martinis, smell the roses and feed the ducks.


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## Berubeland (Sep 6, 2009)

Buy *anything* that cash flows according to the handy dandy cash flow spreadsheet. 

Once all your expenses are calculated in... you'll find that you are cash flow negative. 

If you aren't they buy it quick before someone else does.


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## Berubeland (Sep 6, 2009)

Uhhm I think I'd better put the link where you can get it... right?

http://www.milliondollarjourney.com/landlord-math-cap-rate-and-return-on-investment.htm

Read the post and at the bottom there's a link where you can download the spreadsheet. 

I didn't create the spreadsheet. I had tons of help. People have been critical of me for not including mortgage paydown in this spreadsheet. They can create their own spreadsheet if they want. Personally I don't include that because you can't really spend that money! For a property manager like me I just care that I can pay the bills over time. 

The real problem with RE is that it slowly degrades over time.

Take for example you buy a brand new condo. Life is good and let's assume the rent covers the mortgage and taxes and insurance. Tenant 1 comes along and lives for a year. All your appliances are 1 year older. They are great tenants and you don't need to touch up the paint or fix anything and they leave it clean. Because they are great they let you come in and show the property to tenant 2. 

You rent it again, this time for 2 years. You break even, the appliances are now 3 years old, but this time when they give notice, you have to repaint the apartment, this costs $1000. There are also a few more small items that need fixing which costs another $200. You can't rent it while this is going on, so you suffer one month of vacancy. 

Now you're $2400 in the hole...

Tenancy #3 happens and they are great too, they give you post dated checks until they split up and move out with 10 days notice. You still have their last month's rent and you rent for the following month. Whew, close call! 

Tenant #4 agrees to move in and she's great too. She pays the rent in full and on time till the dishwasher breaks. It's 3 years and 6 months old and out of warrantee, the appliance repairman charges you $100 for a service call to tell you he can't fix the damn thing. Then you hire a plumber to install the new dishwasher $300 plus $200 for installation. 

Now you're $3000 in the hole. 

Tenant #4 decides to get a puppy after her first six months in the place. Unfortunately it takes up to a year to fully house train a dog. While she was at work, she locked the dog in the bathroom and he scratched the inside of the door to crap. Then you suspect that there were a few accidents on your carpet...in any case it's pretty shabby after 4 tenants. 

The door costs $150 with installation and the carpet costs $1000

Now you're in the hole $4150. 

These are real expenses and building managers know exactly how to budget for them the soft costs of this is about 22% of your rent. You are incuring this from day 1 of the tenancy even if you don't pay it out. 

But if you a buy a place where the rent = the mortgage/taxes/insurance you're going in the hole 22% over time.


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## Cal (Jun 17, 2009)

In theory your idea is not bad at all.

I do however question the timing of it in regards to the GTA RE market. As well, for me, I would rather invest 300K in equity into dividend paying equities or some preferred stocks, if I were looking for cash flow, as I can sell when needed online, for a cost of $29 or less. To have the hassle of tenants, repairs, and 4 1/2% commission to sell. No thanks, not all tenants are as good or respectful of a tenant as you are.


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

</sugar coat>
<bubble burst>
It's a terrible idea. If you don't want to be tied down to property, why would you do it? I've rented out a condo and lived in an apt before and it's a huge hassle and expense. The tenants are a constant worry and you pay out most of your profits to management expenses, condo fees, taxes and other levies they dream up. There's no meat on the bone in the GTA condo market unless you make substantial down payments in advance of building completion or you buy a junk place in unsafe neighborhoods that require major repairs. You are enslaved to the bldg. It is not freedom and it is not profitable.

Do you have the 3-tiers of savings ready and on hand? The need for those tiers is esp high if you proceed with this.

I put this in the same category as borrowing to invest.


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## balexis (Apr 4, 2009)

I agree with TRM: you don't want to be tied to a home since you don't know in which neighbourhood you want to live in. Imagine if you end up living 50km from the property. How much time to you want to waste to check up on small stuff the tenants may call you about?

If you want RE exposure, REITs are a good option, otherwise keep pumping surplus money in your current portfolio, nothing wrong with that 

(edit: I bough a duplex while still renting. It is perfectly valid to do so if it makes sense, even though I had some very weird looks from RE agents and bankers when I explained my situation)


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## HaroldCrump (Jun 10, 2009)

Berubeland said:


> Now you're $3000 in the hole.
> ...
> But if you a buy a place where the rent = the mortgage/taxes/insurance you're going in the hole 22% over time.


As they say on Dragon's Den : _You can do nothing and break even_


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

^ exactly Harold. That's why cash and GICs are so great. So much easier.


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## Berubeland (Sep 6, 2009)

Cash and GIC's lose buying power because of inflation every single month. They are not investments. 

An investment is something that has the chance of making you money. Cash and GIC's are the opposite of investment. They are guaranteed to lose you money over time just like a negative cash flow property. 

Just saying...

A properly cash flowing property is an investment that will make you money and pay you to own it....if you can find one. 

You are substituting security for lack of aggravation and risk and then saying that it is superior which is a completely specious argument. Buying negative cash flow property and keeping money in GIC's and cash are both examples of non investments.


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## andrewf (Mar 1, 2010)

Well, GICs essentially preserve purchasing power or a bit worse, especially once taxes are taken into account. Definitely not a wealth strategy.


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## HaroldCrump (Jun 10, 2009)

Just to clarify : I wasn't recommending GICs as an investment, neither keeping all investable funds as cash.
Simply that why go through all this hassle just to break even, or infact even lose a little money year over year, as Berubeland's example shows.
You can do nothing and have the same result.

Keeping cash and GICs, on the other hand, does serve a different purpose : security of principal, as well as to take advantage of opportunities as and when they come up.


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## dagman1 (Mar 3, 2010)

It's not as easy to make money on a rental as you think, even in this low interest rate environment.

A couples of things to consider: 

(1) It will be almost impossible to find a cash flow positive property in the GTA right now, there seems to be a huge inventory of condos that are going to come on the market, and interest rates are bound to go up increasing your costs; 

(2) Try managing a property in the GTA after you have moved away (I've tried it and it's impossible to monitor your tenants and even simple problems that you could handle yourself require you to spend out of pocket), so buying a rental property doesn't alleviate you of your moving woes; 

(3) Berubeland is right about maintenance, some tenants will treat your apartment like gold while others will destroy it (I replaced a carpet for a complaining tenant only to have it destroyed less than a year later), so these costs are real (and rarely budgeted for). Paiting a whole unit is $1000. Replacing a carpet is $2000. Depreciation of appliances is $500 a year. Other miscelaneous expenses is easily $200 a year. That is for a two bedroom apartment. If you have not even a bad tenant, but one that doesn't respect your property, that can all need to be done after only a single year of renting. I haven't mentioned insurance or property tax yet.

Bottom line it's not really that profitable unless your timing is right and you buy before a property boom. If you want to speculate why don't you short gold. Otherwise you need to be getting a rock bottom price for a property in an area where you can be cash flow positive, then be very handy in fixing it up, and finally experienced (and lucky) in tenant selection.


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## AlwaysBroke (Jul 28, 2011)

Thanks so much all for your candid honesty!

Part of my idea is because condos are currently being snapped up left and right, had two colleagues just purchase their own on Fort York. So while I do not want to commit myself to a mortgage now, a big part of me feels I'm missing out on the buying action and will regret it later! Half a mil may get you a bungalow in Toronto now, in ten years when I'm ready to buy that price is gonna double.

Thanks so much Berube and TRM for breaking it down for me, I guess landlords don't sit and collect rent cheques, lol. Though I assume they have money put aside for repairs etc, but I didn't know it could add that that much. In fact I totally remember when I rented a basement, one day there was flooding coming in under the baseboards, the tub and the sink was filling with water. We called the city and they came to look at it. My landlord came inside cursing up a storm cause the city wouldn't pay for it. So roto-rooter came by and it was found there were tree branches blocking the pipes, I think he had a hefty bill.

(In fact, I remember how pissy he would get with me when I called to tell him the faucet was leaking or something, cause that was another thing he had to pay!)

Anyways, guess I`ll look at some REITs, lol.


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## andrewf (Mar 1, 2010)

If average Toronto house prices are $1 million in 2021, we're in trouble.


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## Jungle (Feb 17, 2010)

Don't do it. I run a rental due to circumstances of getting married and renting vrs selling with a huge loss. SO I choose renting, until I get some decent equity to sell. If a good tenant stays, I'll let them pay the mortgage off. 

This year we had to make some expensive purchases PLUS two tenants left.. Just to show the house for two tenancies cost around $200 in gas and cell phone minutes. The one tenant left the country and skipped on a bill.. Add that to plumbing repair and other maintenance, cost us around $650.00. We are not making much or any cash flow this year. The major expense could have been my fault, I deferred it over the last three years beacuse it was expensive. 

The only thing is, the tenant is paying the mortgage off. (very slowly). Thankfully I got an appliance for FREE off kijiji. Cost $15 gas to deliver it. And I do everything my self.. 

Other than a mortgage providing the opportunity, right now I think some cdn dividend blue chips stocks should give you a higher ROE without the hassle of being a landlord. Problem is, getting a cheap loan to do that is not easy, unless you have a HELOC.


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## andrewf (Mar 1, 2010)

You can get pretty cheap rates on margin at Interactive Brokers--better than HELOC. It is effectively Prime-0.5 right now.

Only downside is you have to have some equity. But I think using 30 or 40% LTV margin on a diversified equity portfolio is a better idea than using 90% LTV on a concrete box in the sky.


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