# Case study - buy or walk?



## Chris L (Nov 16, 2011)

What's your opinion?
http://beta.realtor.ca/propertyDetails.aspx?PropertyId=13959122

1) University city with full year tenancies the norm. 
2) Rents $400-$550/room x 4 rooms 
3) Taxes $300/mth 
4) Insurance $100/mth 
5) Maintenance $150/mth

Buy or walk?


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## lb71 (Apr 3, 2009)

Here's why I would avoid this particular investment: University Students. You are going to get constant turnover, so you are always going to have to work at keeping your rooms full. These will not be the cleanest or attentive of tenants.

However, if you are willing to live with those headaches, based on your above numbers you would net about 17k a year. If you pay for it in cash, it yields you a bit more than 5%. More than a GIC, but with more risk. Not sure if you are including capital maintenance in your item #5, but I doubt it. (What about utilities?) I didn't think real estate yielded that much in this market, but my knowledge is based on the Toronto market, Guelph is different.

If you borrow the whole thing, say at a secured LOC of 3.5%, you would net over $5k a year.

Seems a bit too good to be true. How certain are you of those numbers?


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## Pvo (Jul 4, 2013)

What specifically is the 'sweat equity' needed?

Major or minor repairs??


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## DayTek (Sep 26, 2013)

lb71 said:


> These will not be the cleanest or attentive of tenants.


THIS.

I've visited my cousin on several occasions while she did 4 years of University. Saw a lot of residences. You might get the odd group of people who are quiet, mature, sanitary and organized, but I saw A LOT of dumps for the most part. These were once really nice homes completely trashed after years of tenant renting. So the resale value was crap...If you could sell them at all. Some of them just became abandoned foreclosures after landlords couldn't sell them. The end of the school year especially was horrific - I moved my cousin out of one place she stayed at shortly and tenants had left behind dirty dishes, garbage and their broken furniture. 

After that experience, I'd say walk...No, RUN from renting to students of any kind.


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## Just a Guy (Mar 27, 2012)

320k that generates only 2k per month...no need to go any further. Run away. It won't make enough money long term, forget the upgrades required, forget the vacancy as students tend to leave for 2 months of the year. The initial numbers aren't close enough.

Taking the 3.5% numbers calculated above, if interest rates rise only .5% your payments would increase by about $450/month eating away any profits assuming he did the number crunching correctly.


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## doctrine (Sep 30, 2011)

If you had $319k cash, you'd get ~5% cash flow - you would be better off with a REIT given the headache of (university) tenants and maintenance. At 5% down with a mortgage, it is barely cash flow positive and you're depending on price gains for your returns. Therefore - walk.


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## donald (Apr 18, 2011)

I don't know the area and don't know the rental business but just because it's in a university section doesn't mean you have to rent to the students no?
There must be a decent segment in the community that are not students?maybe that voids the point of even looking in a area like that but one would think there are non students in or close to the area(could market/screen for that)
Maybe young teachers?or try to tap that angle(interns)
Hospital nearby?(nurses)ect ect


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## cldellow (Feb 16, 2012)

donald said:


> I don't know the area and don't know the rental business but just because it's in a university section doesn't mean you have to rent to the students no?
> There must be a decent segment in the community that are not students?maybe that voids the point of even looking in a area like that but one would think there are non students in or close to the area(could market/screen for that)
> Maybe young teachers?or try to tap that angle(interns)
> Hospital nearby?(nurses)ect ect


If it's truly in the student ghetto, your tenant options will be limited. Waterloo's student ghetto in 2003-2008 was in an area 15 minutes east of UW. No one cared about their properties, people were loud all the time. If you weren't desperately poor, you wouldn't choose to live there.


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## bgc_fan (Apr 5, 2009)

I've noticed a trend in these type of questions. Everyone seems to be pretty negative about almost every situation regarding housing rentals. While being a landlord is not my cup of tea, it seems odd that someone will most likely end up buying this property and renting it out and will be losing money on the deal. I.e. I find it difficult to believe that almost all the situations that have been brought up recently are going to be money losing propositions. If that is the case, why would landlords exist unless they lucked out on some great deal?
What is it that am I missing? Is being a landlord on a whole a money-losing proposition outside of the savy, experienced ones that seem to occupy this board?


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## Just a Guy (Mar 27, 2012)

Well, why is it that 9/10 businesses fail within 3 years? Just because anyone can start a business, doesn't make them a businessman. 

Just because you can buy a place, doesn't make you a landlord. Not all properties will make you money, especially in today's market. Most successful landlords today bought years ago before prices went through the roof. 

Now, that's not to say there aren't places available, I bought 5 last year, some buddies I know bought similar amounts, but the deals are few and far between when compared to the number of places on the market. I haven't seen an apartment block listed for less than 100k/door though in years, so I don't buy them now. That doesn't mean there aren't inexperienced people out there willing to pay the price for a 4% cap rate when the interest is a historic lows. I'll wait a few years until the interest rates rise and these people lose their shirt to buy them at a reasonable price out of foreclosure.

Being a landlord is starting a business, my guess would be 9/10 new landlords may fail within a few years because they aren't businessmen.


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## Taraz (Nov 24, 2013)

Is it legal to run a rooming house in that area? Where I live, you're not allowed to have more than two roommates, according to city bylaws. You might need a license to run it as a boarding house. 



Chris L said:


> What's your opinion?
> http://beta.realtor.ca/propertyDetails.aspx?PropertyId=13959122
> 
> 1) University city with full year tenancies the norm.
> ...


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## Potato (Apr 3, 2009)

bgc_fan said:


> I find it difficult to believe that almost all the situations that have been brought up recently are going to be money losing propositions. If that is the case, why would landlords exist unless they lucked out on some great deal?
> What is it that am I missing? Is being a landlord on a whole a money-losing proposition outside of the savy, experienced ones that seem to occupy this board?


There are a great many reasons why landlords exist despite the hard work and money-losing propositions that houses/condos can be in bubbly cities, as individual as the landlords themselves.

The biggest of course is that today's situation has only existed for the past few years. For decades before that it _was _a worthwhile investment to buy a house/condo/apartment block and rent it out. Many landlords bought back them and don't much care about the change in yields because they think about yield-on-cost if they think about it at all. Others know the heuristics and mantras that were established by so many years of success, so they buy without actually doing the math. Or, they do the math on some costs but forget others (e.g., finding that after their property tax and mortgage payment they're making money, while completely forgetting about the thousands of dollars in repairs they sunk into the place earlier in the year). Or they trust the mantras more than the math, assuming that they must have just made a mistake because landlords are constitutionally guaranteed to make money.

Deeper than that is that the people on this board are quite familiar with alternatives like balanced portfolios, equities, and REITs, and what expected returns such investments might bring. So having something that might get you 3% with a fair bit of work is really kind of a terrible deal when you can get 5-6% in REITs and never break a sweat. But for many others out there in the world, a savings account is the only investment option they know, and being tangible is somehow a desired quality in an investment option that serves as a kicker. 

Worst of all though are the ones who simply don't understand how money works, and when a realtor says that they'll lose money buying a place to let out "but that's a good thing because you'll get a tax deduction" they grunt "tax deduction _good_. Buy house now!"

And of course, we can't forget the speculators.


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## Just a Guy (Mar 27, 2012)

You forgot the people who put down a huge down payment to make it cash flow, yet forget to include the down payment which isn't earning anything.


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## 30seconds (Jan 11, 2014)

I am in a very similar situation actually looking at guelph or st Catherine's. I'm more so interested in a detach and thinking of living in the basement while renting out three or four rooms upstairs depending on the size of course. Im young and do not mind any noise that could be cause plus living there I can control the place better. 

For some one looking to move out of the birds nest..running close to the same numbers is this more ideal then renting?


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## bgc_fan (Apr 5, 2009)

Potato said:


> There are a great many reasons why landlords exist despite the hard work and money-losing propositions that houses/condos can be in bubbly cities, as individual as the landlords themselves.
> 
> The biggest of course is that today's situation has only existed for the past few years. For decades before that it _was _a worthwhile investment to buy a house/condo/apartment block and rent it out. Many landlords bought back them and don't much care about the change in yields because they think about yield-on-cost if they think about it at all. Others know the heuristics and mantras that were established by so many years of success, so they buy without actually doing the math. Or, they do the math on some costs but forget others (e.g., finding that after their property tax and mortgage payment they're making money, while completely forgetting about the thousands of dollars in repairs they sunk into the place earlier in the year). Or they trust the mantras more than the math, assuming that they must have just made a mistake because landlords are constitutionally guaranteed to make money.
> 
> ...


All good points (yours as well Just A Guy). So what I'm gathering is that part of the issue is the housing market at the moment, i.e. it is a little overpriced to get into the game so to speak. Which makes it difficult to find a deal. The only other factor that I see bandied about is the idea that your tenants are paying off the mortgage. Does that not factor into the calculations somehow? I.e. Let's say that you have a somewhat positive cash-flow property that covers all expenses, including mortgage, at the time of burning the mortgage papers, wouldn't you have a "free" property, minus original downpayment?


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## Just a Guy (Mar 27, 2012)

Currently, yes. However, you've got to think long term...mortgages last a long time, so if interest rates increase (very likely over 20+ years) you can quickly be underwater for a long time with no way to offset the losses. Besides, I don't believe in losing my down payment.

When calculating your profits, you could also add in your priciple pay down, but if this is your only profits, when interest rates are this low, then you'll be in trouble long term.

If you could find a two bedroom apartment for around 90k max, in an area where the rents in a bad economy is around $900/month. (but is currently renting at higher rates) it will make you a profit even when interest rates are at 8%. If you could pick it up for 75k, it would be a great investment. If you pay much more than this chances are it will fail sometime down the road, and the costs to get out (capital losses, legal fees, realtor fees, etc.) will make it impossible to get out unscathed.

Also remember, a two bedroom apartment sold for around 40-45k a few years back...so to say the market is slightly overpriced is like saying the government is only slightly inefficient...


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## Potato (Apr 3, 2009)

Yes, paying off the mortgage or building equity is already factored in if you're doing your math correctly. Whether you get a mortgage, find an interest-only loan, or buy entirely in cash, it will be factored in. Some people will try to factor it in two or three times over (literally: "yes, I see your math there Potato, but the tenant will be paying down my mortgage, and at the end I'll also have a paid-off house!")

Somehow it's more satisfying to have "a tenant" be the source of your returns than "a set of large, profitable companies." Dreams of feudalism I guess.


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## RCB (Jan 11, 2014)

Chris L said:


> What's your opinion?
> http://beta.realtor.ca/propertyDetails.aspx?PropertyId=13959122
> 
> 1) University city with full year tenancies the norm.
> ...


1) many will want to ditch the lease May 1. Be prepared to fight for the rent for thise last months.
2) inclusive or exclusive of utilities? Utilities are not included in your expenses above.
4) your insurance amount must be at least doubled. On my two student houses I pay approximately $2,300 each per year. Unless you lie to your insurer, you will have to go with commercial insurance because the tenants are not related.

Maintenance is a crapshoot from year to year, depending on the tenants. Screening only does so much, since it's not likely many will have previous references.


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## Chris L (Nov 16, 2011)

REVISED NUMBERS

1) University city with full year tenancies the norm. (with end of year turn-over almost guaranteed - MOST will not stay an additional year)
2) Rents $400-$550/room x 4 rooms (we are legal up to 4/house)
3) Taxes $300/mth
4) Insurance $100/mth (should be under $150 a month - my experience)
5) Maintenance $150/mth (not factoring any required improvements).
6) Students pay own utilities.
7) Renting to a family would yield around $1400-$1600 + utilities and will require more upfront upgrades.

Junk-outs can take 1 full day with 20-30 bags of garbage normal. Carpet (if any) lasts about 3 years because students keep their shoes on no matter what you tell them.

The house was shown many, many times once it was listed.


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## Just a Guy (Mar 27, 2012)

Look, here's a simple rule to live by in this current low income market...

If the rent isn't AT LEAST 1% of the purchase price, walk away. More than 1% is even better.

This will protect you from rising costs and lowering income.

I don't care how many people look/buy it. Many people lose money, do you want to be one of them?


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## lb71 (Apr 3, 2009)

Chris L said:


> 6) Students pay own utilities.


I am curious as to how this would work. Will you be billing the tenants, or are they responsible for setting up their own utilities?


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## Chris L (Nov 16, 2011)

lb71 said:


> I am curious as to how this would work. Will you be billing the tenants, or are they responsible for setting up their own utilities?


I'm not going to buy this property. I had a debate with the listing agent as she was sure it was a gem. I disagreed.

Having said that, I have owned a student rental for 10 years which I sold. One of the students would put their name down on the bill and they'd split it evenly. In the recent past, I have had parents beg me to put the utilities in my name because for the life of them, they couldn't figure out how to motivate their friends to pay their portion.

I always refused. If they can't get their friends to pay, how would I? It was a "not my problem" conversation. Funny, seemed to get worse and worse with time. So did the politics, junk-outs and damage. The parents were the worst. 4 students, 8 parents = 12 tenants!


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## lb71 (Apr 3, 2009)

Chris L said:


> Having said that, I have owned a student rental for 10 years which I sold. One of the students would put their name down on the bill and they'd split it evenly. In the recent past, I have had parents beg me to put the utilities in my name because for the life of them, they couldn't figure out how to motivate their friends to pay their portion.


That's what I was concerned about. How do you get them to pay up.



> I always refused. If they can't get their friends to pay, how would I? It was a "not my problem" conversation. Funny, seemed to get worse and worse with time. So did the politics, junk-outs and damage. The parents were the worst. 4 students, 8 parents = 12 tenants!


I'm surprised you don't roll up the utilities into the rent given you rent out multiple rooms. I know it's not easy to forecast utility costs, but you could have padded the costs to ensure they didn't go over.


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## Chris L (Nov 16, 2011)

There are two strategies which work equally well - depending of course.

1) Have them put the utilities in their name and wash your hands of things. They don't pay, it's the utility company's issue to deal with.
2) Put it in your name and charge for it and pray they don't leave the doors open in the winter and have 2 hour showers.

If you call hydro, they will give you a rough estimate on the usage for the year to help you come up with something fair.

I usually had enough to worry about, then fret about the hydro bill. What real advantage does me having it in my name guarantee? I'm not in the biz of providing utilities. Just my opinion.


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## Chris L (Nov 16, 2011)

An update from the agent: 

"54 Steffler sold firm today 7 days, with multiple offers."


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## RCB (Jan 11, 2014)

Chris L, IIRC, there are two major student apartment buildings going in soon at Stone Road, catty corner from the campus. I believe they expect them to be renting for the upcoming school year.

I use a third alternative for electricity in my student rentals. I keep it in my name, but bill each tenant based on usage of the house. My utility company has the time of use data online, so the first or second of each month i go online, screenshot the data, plug it into a spreadsheet, and email both to tenants. It's due with the following month's rent. So far it has worked well, no non-payment, they watch what they use. They don't have to interact with each other financially, and don't have to take responsibility for the account. I receive the money before the utility company bills me for that period.

I lease the rooms individually, but it may work in a group lease setting for electricity. I will be adding water for tenants in the fall, it's the same bill, but will require me to physically read that meter.


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## Just a Guy (Mar 27, 2012)

Wait for interest rates to rise, and see how it fares over the next 5 years. Real estate is a long term game unless you're a flipper.

Better still, remind me of this in 5 years and I'll compare profits to the 5 doors I bought last year for about 300k total, not to mention capital gains. So far, my rental income from these doors is 750, 850, 900, 975, and 1075. I'll have to look at my fees and taxes, but I clear about 2k/month after expenses if I remember correctly...but I'm not in front of the right computer. Also, I've got no money in on these, they are 100% financed so my profits aren't skewed by a large down payment.


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## Chris L (Nov 16, 2011)

RCB said:


> I use a third alternative for electricity in my student rentals. I keep it in my name, but bill each tenant based on usage of the house. My utility company has the time of use data online, so the first or second of each month i go online, screenshot the data, plug it into a spreadsheet, and email both to tenants. It's due with the following month's rent. So far it has worked well, no non-payment, they watch what they use. They don't have to interact with each other financially, and don't have to take responsibility for the account. I receive the money before the utility company bills me for that period.
> .


That sounds like too much work for me! I'd look at the average then add 25% or something like that and add it to their rent cheque. I'm not sure how you put up with all that collecting of rent and paperwork! It would be worth the small risk just to bill it in.

I've always preferred to rent out the entire house to a group and be done with it. Make them all accountable for each other's portion of rent and utilities. If I got another student rental, I'd MAKE the parents co-sign. I used to keep them off the paper so I didn't have to answer to them, but over the years, parents refused to back off and bothered me anyway. Moving forward, I'd deal with them in exchange for the security of getting paid my rent. 4 students, 8 parents, all on paper guaranteeing they will 1) pay rent 2) keep the place clean and damage free.

There would be a lot of extra paper work upfront, and videos of the condition of the property.


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## RCB (Jan 11, 2014)

Chris L said:


> That sounds like too much work for me! I'd look at the average then add 25% or something like that and add it to their rent cheque. I'm not sure how you put up with all that collecting of rent and paperwork! It would be worth the small risk just to bill it in.


There was some work involved, initially, in setting up the spreadsheet to match the actual bill and it's calculations. I must change numbers in formulas when there is an increase in rates twice a year, but it just takes 2 or 3 minutes. The actual usage data input, calculation, attaching to email, and sending out by email to all tenants takes about 5-10 minutes per house, once a month. I use email lists so it's only one email sent per house, but each tenant receives it.

I won't rent inclusive because my experience is to do so encourages windows open in blizzards, even when they leave town for a few days. To cover that, I would either not cashflow enough, or drive tenants away by pricing myself out of a very small market. Total out of town students number roughly 1500-2000 in this city.



> I've always preferred to rent out the entire house to a group and be done with it. Make them all accountable for each other's portion of rent and utilities. If I got another student rental, I'd MAKE the parents co-sign. I used to keep them off the paper so I didn't have to answer to them, but over the years, parents refused to back off and bothered me anyway. Moving forward, I'd deal with them in exchange for the security of getting paid my rent. 4 students, 8 parents, all on paper guaranteeing they will 1) pay rent 2) keep the place clean and damage free.
> 
> There would be a lot of extra paper work upfront, and videos of the condition of the property.


Two years in, I have never rented out a whole house on one lease. It has it's advantages (no expense for snow removal, lawn care), however it has it's disadvantages (by-law complaints because yard isn't maintained, party house in family neighbourhood, with typical damage and excessive wear and tear). Renting by the room gives me control in that I can enter the common areas at any time for detector and extinguisher checks, change the furnace filter, etc. Right from the start, however, I have required guarantors for all. 

With the exception of two "entitled" tenants last year, all has gone well. Two out of nine chose to remain, which is pretty good as they were all first year. I find the individual leases helpful in that respect, as when one wants to find other accomodations for the following year, I have no lease changes for the others. Screening and credit checks probably remain about the same as if it were one lease per house.


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