Author Topic: Is it possible to become a landlord in an expensive city?  (Read 6338 times)

CheckEngineLight

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Is it possible to become a landlord in an expensive city?
« on: July 02, 2013, 09:21:02 AM »
I've been meaning to get into the landlord game for quite some time, still plan to, but I am not sure if it's possible to accomplish in my area at this time.

I live in Toronto, Canada. I have a principal residence and I've converted the basement into an "in law suite" and have been renting it ever since I bought the the house.   I'd like to purchase another home and do the exact same thing (convert to duplex), but at the current prices vs. rental cost it doesn't seem to make sense and it's not looking good into the future either.  The whole case for becoming a landlord is actually laughable.

I will use my house as an example, currently it can be purchased for $550k, with about $10k and all work done by me I can add a kitchen/shower/separate entrance/etc and make it into a "legal" duplex as per the by laws here.  I did all the work at my own house for $6k with a lot of donations and deals I got on craigslist for everything from tiles to laminate flooring and trim. 

At $560k I can get $900 for the basement and about $1500 for the upstairs, so a total of $2400.  This is a pretty reasonable estimate based on what current rents are going for.

Based on MMM, a simple rule to being a landlord is to get 1% in rent/month of the value of the house, in this case at $560k I'd need to be able to get $5,600/month, which will never happen (not in Toronto).

I've done the math (much more extensive than what I am posting here and on multiple properties such as condos, commercial/residential mix, etc - I am an Accountant) and the Greater Toronto Area simply doesn't make sense for becoming a landlord at the current inflated prices.  There doesn't seem to be an end coming to this and I don't want to look outside of the immediate suburbs as I'd like to be close the property in case it needs emergency service/maintenance/etc.

Thoughts?  How are those of you managing to do this in high cost of living cities with insane real estate prices like Vancouver, NYC, anywhere in California, etc.

arebelspy

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Re: Is it possible to become a landlord in an expensive city?
« Reply #1 on: July 02, 2013, 09:48:31 AM »
at the current prices vs. rental cost it doesn't seem to make sense and it's not looking good into the future either.  The whole case for becoming a landlord is actually laughable. ...
I've done the math (much more extensive than what I am posting here and on multiple properties such as condos, commercial/residential mix, etc - I am an Accountant) and the Greater Toronto Area simply doesn't make sense for becoming a landlord at the current inflated prices.

(Emphasis added.)

You said it yourself.  You get it. 

Thoughts?  How are those of you managing to do this in high cost of living cities with insane real estate prices like Vancouver, NYC, anywhere in California, etc.

Anyone landlording with numbers like those is losing money every month (if leveraged) or making a very, very small return on their money (less than CD level return).

They are willing to take a negative cash flow to speculate on appreciation.


I don't want to look outside of the immediate suburbs as I'd like to be close the property in case it needs emergency service/maintenance/etc.

We're probably done with this thread, so I'll take it on a tangent: Why?
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CheckEngineLight

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Re: Is it possible to become a landlord in an expensive city?
« Reply #2 on: July 02, 2013, 09:59:36 AM »
I'd like to become a landlord and explore all of my options.  Plus, it's always interesting to know what others are doing in their respective cities with similar issues, I can't possibly be the only one.

oldtoyota

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Re: Is it possible to become a landlord in an expensive city?
« Reply #3 on: July 02, 2013, 10:02:12 AM »
In the past, I have had the same question.

Then, I came up with what I think might be a solution--my current home. I started thinking about this after seeing MMM quote the rule--IIRC--not to buy a home if you can't get at least 1% back in rent.

My current home could be rented out while I move to a new one. I have done some research and think I can get back the 1% of the purchase price in rent.

My question is would I want to aim to get back 1% of my total purchase price, or 1% of what I still owe on the property? If the latter, I can swing that.

I am trying to figure out what I need to calculate to make sure I can swing the rental and a new home. Since I want to move anyway, this seems like a good plan. I am thinking of purchasing a semi-distressed property and fixing it up while I live there.

Thoughts?




oldtoyota

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Re: Is it possible to become a landlord in an expensive city?
« Reply #4 on: July 02, 2013, 10:08:43 AM »
PS: This thread might help. One poster noted that an expensive city doesn't matter. What matters is can you make money on the property?


http://www.mrmoneymustache.com/forum/real-estate-and-landlording/is-it-possible-to-make-$$-on-rentals-in-expensive-areas/

[Mod Edit: Fixed Link.]
« Last Edit: July 02, 2013, 10:09:30 AM by arebelspy »

arebelspy

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Re: Is it possible to become a landlord in an expensive city?
« Reply #5 on: July 02, 2013, 10:09:07 AM »
My question is would I want to aim to get back 1% of my total purchase price, or 1% of what I still owe on the property?

1% of the fair market value (what would it get if it sold on the market today).  I personally shoot for higher than 1%, but that's a minimum.

I'd like to become a landlord and explore all of my options.  Plus, it's always interesting to know what others are doing in their respective cities with similar issues, I can't possibly be the only one.

I think you misread my question.  See what I quoted right before it?  I'm asking why do you feel the need to be close to the property?
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aclarridge

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Re: Is it possible to become a landlord in an expensive city?
« Reply #6 on: July 02, 2013, 01:27:49 PM »
I am in a similar situation as you. I think this is what we are running up against:

http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home

If I'm reading that right, they're saying that according to their own house price index and rent index, current price/rent ratio is 78% higher than the long term average (since 1975 I believe) and that's one of the most extreme departures from the long term average in the world. This index is obviously one of the biggest indicators of RE-investment-goodness.
Now of course this averaging over the whole country is a big generalization, and the economist is using some methodology with a bunch of assumptions to make their indices. However, you've come to the same conclusion I have about Toronto. I am betting that there aren't any good opportunities in Toronto and there aren't any great opportunities in the entire GTA if you assume everything will just appreciate with inflation. Properties are often double what they should cost, based on the rent they generate. It's not a difficult decision.

See this thread: http://www.mrmoneymustache.com/forum/real-estate-and-landlording/toronto-real-estate/

sdp

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Re: Is it possible to become a landlord in an expensive city?
« Reply #7 on: July 03, 2013, 11:33:26 AM »
I live in Flagstaff, AZ.  A very expensive place to live and real estate is quite expensive here.  The average single family home 1800 sq feet 3br/2ba sells for 13 times the median household income.  "Poverty with a view"  I rent out three single family houses and one duplex.  I bid my time and found the right house at the right price and passed on LOTS of deals that weren't quite right.  I have lived in three of the 4 houses I own over the years and have made it work, slowly but surely.  the houses rent for .86%, .825%, and .69% respectively and the duplex is .94%.  Arizona property taxes are cheap and insurance is cheap and I do all the management and maintenance and repairs myself, it is definitely not a passive income stream! But it doesn't take up too much of my time.
   so my strategy was to buy high quality properties in the right part of town that are rented long term with as little involvement on my end as possible ( except the duplex, which is right across from the University...and a pain in my ass).  I make the most on the duplex, but then again for the little I do make, it uses the most amount of my time as well, so I get paid less per hour on the duplex.  One bonus to Flagstaff is the low vacancy rates, I can pretty much guarantee occupancy.  I have mortgages on all the properties at less than 4% and have invested amounts in the properties so my cash on cash yield is around 9.5%  not super great market here, but I get a decent return and diversify with this portion of my portfolio for only a little bit of sweat on my end, but I know many real estate investors here that do not have a positive cash flow or break even.  My strategy has been to hold these properties indefinitely, their strategy involves appreciation when they sell.
  In this type of market you have to be very patient and picky.  Definitely a different story than what I hear from my friends down the hill in phoenix or in Las Vegas where the propertry values have always been cheaper and then also fell so much during the housing bust, Flagstaff with its limited private land and smaller population is just different...  Anyway, hope this helps.
Cheers,
Scott

nataelj

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Re: Is it possible to become a landlord in an expensive city?
« Reply #8 on: July 03, 2013, 01:54:45 PM »
I don't have much to add other than to commiserate. I'm in the DC area and started looking recently only to find that all the houses are far more expensive than the 1% rental rule of thumb would warrant. More than that, I wanted to get a house that I'd be able to fix up and learn new skills on, and the high values of all the houses in my area means everyone else has already done that, I should have jumped in a year or three ago and missed my shot.

I did recently find one house that I thought this was untrue of. It was a dump in a great location needing to be completely gutted. When I got my RE agent inquire though it turns out there are already four bids in on the property, three of them sight unseen, and it's only still on the market because the short sale process isn't done. Clearly I have a good eye for opportunity but it all leaves me still renting with no place to try my plumbing, carpentry and electrician skills on.

I'm going to keep an eye on the local market in case another opportunity comes through that I manage to grab, but the more I look the more I think it's unlikely. A sad state of affairs...

Daleth

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Re: Is it possible to become a landlord in an expensive city?
« Reply #9 on: July 04, 2013, 10:17:25 PM »
My brother used to live in San Francisco, so to get into the landlording game he bypassed SF entirely and bought a duplex (or was it a triplex) in Sacramento, which is about 2 hours away. Ultimately they ended up with I think four properties in Sacramento (all duplexes or triplexes) and made so much money that they kept a couple of them even though they now live thousands of miles away--the cash flow is that good, and during the years they lived nearby they built a roster of excellent contractors so they basically tell tenants, "If your toilet's leaking, don't call me--call one of these plumbers and they'll bill me."

They picked Sacramento because it's the seat of state government and has a couple of universities and hospitals. Any town with even two of those things, much less all three, is a good bet for rentals--there's a constant flow of grad students and young professionals. So, is there a town that fits that profile within about 2 hours of you? What are the prices there for investment properties?

Kazimieras

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Re: Is it possible to become a landlord in an expensive city?
« Reply #10 on: July 05, 2013, 09:43:08 AM »
I live in Toronto, Canada.

I am a fellow Ontarian and also a landlord. My advice - if you are truly looking at becoming a landlord, consider it in another city. I am in Ottawa and the prices are a bit more reasonable, but still landlording doesn't always make sense (unless you happen to get a great deal on a property). Oddly the biggest thing to consider if renting in Ontario is how old the building is. A law was passed that put a cap on annual rental increases to match inflation (to a max of 2.5%) for any property built before Nov 1, 1991. If the building is after that, you have no cap in increases (although increases must be reasonable). If it is before, remember this when renting it out.

The Resident Tenancy Act is a very powerful piece of legislation in Ontario and while it does protect the interests of tenants, it can be slightly challenging for landlords. I suggest you strongly read up on it before considering becoming a landlord. You do not want to get burned.

Shelby

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Re: Is it possible to become a landlord in an expensive city?
« Reply #11 on: July 11, 2013, 03:26:24 PM »
An alternative to becoming a landlord in an expensive city is to buy a turnkey property in another state (if your neighboring cities are also too expensive).  Turnkey companies buy a place that needs a cosmetic rehab, fix it up and sell it for a profit.  You can get turnkey SFH's in some states for around $100k that rent for $800-1000 per month.  These turnkeys generally come with a years' worth of guaranteed rent at a specific amount with a tenant and property manager in place (thus the term "turnkey").  After the year is up, you're welcome to shop PM's on your own if that partnership isn't working out for you.  Of course, you can always change PM's before the year is up, as far as I know you don't have to sign any contracts that keep you with a particular PM for a year.  Those who like to "force" appreciation (buy cheap and fix up themselves) don't like the idea of a turnkey because you really don't have any equity going in.  But if you're looking for positive cash flow (which is generally the circle in which the rental investment group runs in) then equity doesn't matter.  And it's too hard to guess what appreciation you'll have someday (that's called speculation and as we all found out in the last few years, it doesn't work!).  Be careful if you go this route...you still want to see the property and neighborhood in person!  Do your due diligence!

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Re: Is it possible to become a landlord in an expensive city?
« Reply #12 on: July 11, 2013, 05:06:49 PM »
I have two investment properties in a more expensive area. (North Puget Sound - 10 minutes to Boeing) These are new acquisitions for us (12/12 and 4/13) and both came in under the 1% rule, however the low property taxes combined with the low mortgage interest rates made them cash flow well enough for us to pursue.  Everything listed in the north end is well over assessments and both buys we made were over list price. Multiple offers are in the first day for a good investment property, its like a feeding frenzy. We never were the top offer and the two we closed on were because the first person in line backed out. In fact the first property, in the second round we were $2500 lower than the second round's top offer but our "package" was more to the banks liking so they asked us to make up the difference (it was a foreclosure). We have learned that the offer itself is critical, how much down, inspection timing and financing qualifications. Then when a buyer backs out is really tests your constitution as you step up to the plate and decide if you want to swing! The first property was sold as is, the second was a private seller doing a 1031 who was happy to drop the price back down by the estimated repairs we wanted to be compensated for.

These are NOT 500k properties but they aren't 100k either, so more expensive than less... we put 25% down.

In both cases the final signed leases far exceeded our initial estimates AND the appraisals which pleased us. We also had overestimated the water/sewer, did not end up paying garbage, and finally I negotiated with our PM on the monthly rate.  You need to do a lot of research, listen to what your gut says and if the deal starts feeling wrong, back out. We bailed on 4 deals before landing these two, and between the 2 we lost one that we still kick ourselves for losing. It is 2 units away from our first property and it had been vandalized. We came in too low and our offer wasn't enticing enough for us to play, it was also a Government owned property so they don't do as much haggling.

I am banking on the tax assessments rising slow enough to keep pace with rents which I need to stay where they are. (2 doors are a newer building on a nice flat lot and it rents for over $1/sf, the older 2 doors are just under $1/sf. but the second property is HUGE, great for folks needing storage)

Our residence is in a rural part of the city with higher property taxes. We wanted the lower taxed  part of town (its split into two "boundaries"), high walk-ability, near the hospitals, CCs and the military base. We also wanted our drive to care for the properties to be no more than 15 minutes.

property #1 - .84 projected / .94 actual
property #2 - .86 projected / .92 actual (we have one more door to rent at this property, it is a storage unit that will bring in an extra $100/mo)

My DH does all the maintenance, the PM handles the tenants.

#1 clears about $830/mo. We've spent $340 on maintenance so far. The tenants came with it and have been there 7 and 16 years. the 16 year tenant is section 8, I don't think she's going anywhere. Both families are great, and when we drive by its obvious the tenants take pride in where they live.

#2 clears about $950/mo. (if we rent the extra garage, it will be $1050) It is a large enough lot that we maintain the back and side green space. the tenants each have their own front fenced yards they maintain. Maintenance so far has been "moving in" stuff like, 2 missing screens we didn't notice (DH made them from parts bought at HD $25), a new fire extinguisher and the tenants broke the screen door trying to slide the glass, which fell out and broke, that was $200 to replace. We never even tested the screen door, it was a total rookie mistake on our part as its the ONLY unit with a screen door, and had we been smart we would have removed it before renting.

Were on the hunt for #3 now, but like Las Vegas and Texas I fear our window of opportunity is dwindling. We don't want to look out of state. In fact we started looking out of state but because my DH's maintenance skill set, we make more when he can be actively involved.

HawkeyeNFO

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Re: Is it possible to become a landlord in an expensive city?
« Reply #13 on: July 30, 2013, 11:59:23 AM »
1% of the fair market value (what would it get if it sold on the market today).  I personally shoot for higher than 1%, but that's a minimum.

I understand your logic, and it makes sense when buying, but I'm not sure it's relevant if it's property that you've had for a while and has appreciated. 

I only have one rental (DC burbs), which we bought in '03 and lived in until '09, it has appreciated in value about 50%, and rents out for much less than 1% of the current value, but it is highly cash flow positive, primarily for 2 reasons:  1. we bought it at the '03 price, but rent is as the '13 price   2. the fact that I have a mortgage at 2.625%.  It would not make sense to buy it today as a rental, but this specific situation is profitable.  Rent is about 1% of the current remaining amount of the mortgage.


arebelspy

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Re: Is it possible to become a landlord in an expensive city?
« Reply #14 on: July 30, 2013, 12:18:46 PM »
It's still relevant as long as you can reposition the capital into something better.

(We'll assume your new investment is in an equally nice area with good renters, etc. otherwise you wouldn't be making the trade.)

If you purchased at 1% (1k/mo on 100k purchase price) and your house has doubled in value so now the rents are 0.5% (1k on 200k), and you could sell, net 180k after taxes and fees, and buy something that rented at 1% (1800 of that 180k), why wouldn't you?

The point is that if the yield on that individual investment has dropped due to appreciation outpacing rents, but you can purchase something else with a higher yield, that's immediate money in your pocket every month.

It's more complex than that, of course, but I would look at yield on equity much more than I'd look at ROI based on what I put down over a decade ago, or you're losing out big to opportunity cost.
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Re: Is it possible to become a landlord in an expensive city?
« Reply #15 on: July 30, 2013, 03:11:36 PM »
Got it - big picture.  Real estate is just one piece.

CanuckExpat

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Re: Is it possible to become a landlord in an expensive city?
« Reply #16 on: August 04, 2013, 01:42:21 PM »
at the current prices vs. rental cost it doesn't seem to make sense and it's not looking good into the future either.  The whole case for becoming a landlord is actually laughable. ...
I've done the math (much more extensive than what I am posting here and on multiple properties such as condos, commercial/residential mix, etc - I am an Accountant) and the Greater Toronto Area simply doesn't make sense for becoming a landlord at the current inflated prices.

(Emphasis added.)

You said it yourself.  You get it. 

Thoughts?  How are those of you managing to do this in high cost of living cities with insane real estate prices like Vancouver, NYC, anywhere in California, etc.

Anyone landlording with numbers like those is losing money every month (if leveraged) or making a very, very small return on their money (less than CD level return).

They are willing to take a negative cash flow to speculate on appreciation.


I don't want to look outside of the immediate suburbs as I'd like to be close the property in case it needs emergency service/maintenance/etc.

We're probably done with this thread, so I'll take it on a tangent: Why?

On the same point though, if it doesn't make sense to buy these properties to rent to others, it equally doesn't make sense to buy them to "rent" to yourself (principal residence) does it? Though people in Toronto etc, including OP, are still buying their own houses.

arebelspy

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Re: Is it possible to become a landlord in an expensive city?
« Reply #17 on: August 04, 2013, 03:29:48 PM »
On the same point though, if it doesn't make sense to buy these properties to rent to others, it equally doesn't make sense to buy them to "rent" to yourself (principal residence) does it? Though people in Toronto etc, including OP, are still buying their own houses.

Correct.  In general the buy versus own ratio is lower on an owner occupied than a rental (because you do need a place to live, you don't need management for it, and you will likely get a lower rate on the mortgage), but the same type of calculation exists for buying versus renting.

In other words, if it doesn't make sense to buy rentals, that doesn't automatically mean it doesn't make sense to own, but it absolutely wouldn't make sense to buy rentals if it doesn't make sense to own.  If that made sense.  ;)

I wouldn't be buying in Toronto right now to own or to rent out.  But someone who is going for a speculation play might. That's cool, just not my investing style.
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