Author Topic: Looking to buy first rental property  (Read 3633 times)

MasterStf

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Looking to buy first rental property
« on: June 15, 2015, 08:51:41 PM »
Hello community,

I have been lurking this forum for a long time now and I learned so much here.

I am looking to maybe buy my first rental property in 1-1.5 years and would like some advice.

I am 24 years old, from Canada and just graduated in Software Engineering. I recently got a permanent job in the public service where I did my internship making 55k to begin. I am still living with parents and I can save around 1.5-2k per month. No debt. My girldfriend is still in school but she could probably help me a little bit.

What I would like the most is to buy a triplex where I could live in one of the apartments. Triplexes around here are around 400-500k. Taxes are around 6k per year. I have seen a brand new triplexes for 460k.

My question here is there any way I could get a mortgage this big? I could get my dad to co sign also? I'm really not an expert. Also, how much should I save for downpayment? Is a duplex maybe a better idea or multiple condos?

Any advice is appreciated and if you need more info, dont hesitate!

hokiegb

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Re: Looking to buy first rental property
« Reply #1 on: June 16, 2015, 04:55:49 AM »
I can't help you too much, since I'm sure the mortgage rules are different here in the States than they are in Canada.

Down here you can get a loan for much less than the standard 20% down if you are going to be living in the property. How handy are you? Do you need to buy a brand new house, or could you buy an older house and fix it up? Is the 400-500K number for top of the line communities, second tier, etc.? What sort of rents can you expect in that area?

I guess the biggest question would be what is your purpose for buying the property (cash flow, free housing, etc.) and how long do you plan to stay there.

Cococola

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Re: Looking to buy first rental property
« Reply #2 on: June 16, 2015, 05:39:21 AM »
Which part of Canada?
Is the province pro Landlord or pro tenants?
What are the other expenses, such as water, heating, insurance, common electric expenses?
What kind of rent income can you get from other two apartments?

MasterStf

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Re: Looking to buy first rental property
« Reply #3 on: June 16, 2015, 06:37:41 AM »
I can't help you too much, since I'm sure the mortgage rules are different here in the States than they are in Canada.

Down here you can get a loan for much less than the standard 20% down if you are going to be living in the property. How handy are you? Do you need to buy a brand new house, or could you buy an older house and fix it up? Is the 400-500K number for top of the line communities, second tier, etc.? What sort of rents can you expect in that area?

I guess the biggest question would be what is your purpose for buying the property (cash flow, free housing, etc.) and how long do you plan to stay there.

I think we can get a loan with 5%. Yes, I am handy. I don't need a brand new house, but it would be nice for sure. All triplex I see around here are normally built after 2005 so they are not that old because it is a pretty new neighborhood. It's good community: 2 schools close, a big shopping center, 20 min from downtown Ottawa. A lot of rental properties can be found here.

The purpose for this triplex is to live in it a few years and then maybe buy a house or another rental property. Not really sure yet, but my ultimate goal would be to have a few rental properties to be able to retire sooner.


Which part of Canada?
Is the province pro Landlord or pro tenants?
What are the other expenses, such as water, heating, insurance, common electric expenses?
What kind of rent income can you get from other two apartments?

I am in Gatineau, Quebec, juste beside Ottawa so I think it's more pro tenants but I am not exactly sure. From what I saw, insurance is like 80$ per month for the triplex, gas and electricity 50$ each per condo and not sure about water but it's not expensive here.

The rents I am expecting and seeing here is around 900-1100$ per rental.

billygoat

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Re: Looking to buy first rental property
« Reply #4 on: June 16, 2015, 08:33:31 AM »
Hello MasterStf.

I too am in the Ottawa region and have been looking for rental properties for a few years now. Unfortunately, this is a very tough market for landlords, as the numbers are just not very conducive to buying here.  After reading dozens of landlord blogs and speaking to countless real estate investors and agents, here are my thoughts on the matter - others may want to add or express their own understandings/experiences.

Firstly, the biggest debate/controversy in the landlord world today appears to be "Does the property absolutely have to be cashflow positive?" By that, the question is does the property have to generate a monthly cash surplus after expenses.

In your case, let's make some very basic assumptions. $500K triplex property generating three units at $1000 each. (Although you are living in one of the units, you still count that $1000 because it is essentially you paying yourself the rent... you have to live somewhere). Let's say the property value includes closing costs. You put the absolute minimum down, obviously, in order to get the best possible return on your investment, meaning 5% down, for a mortgage of $475K (because you are living in it, Canadian law permits you to put only 5% down, with CMHC mortgage insurance).  - -d - Therefore, your monthly mortgage payment is approx. $2200.
- Municipal taxes are $500.
- Hydro, insurance and expenses approx. $300.
- Provisions for repairs $100 (even though this might not be paid every month this includes a small set-aside for larger repairs)
- Provision for vacancy: I have seen 5-8% of rent for the Ottawa region. Let's use 5% since you are living in one of the units are are likely to be a stable tenant(!): $150

So your net cashflow is $3,000 - 2,200 - 500 - 300 - 100 -150 = -$250
You have a negative cashflow under this scenario. Feel free to tweak the numbers, but I venture the result will still be negative, or break-even at the very best.

The problem with a negative cashflow is that you are not paying yourself, and that you are then stuck waiting for the equity to build up on that one property in order to generate wealth (which you can only access when you sell the property many years down the road). And most importantly, you are stuck with the financial institutions because no one will loan you more money for additional properties if your existing properties are not generating cash which you can use for future down-payments! (future downpayments would be at 20% because you would no longer live in them). In an ideal world you would be cashflow positive and have your monthly stream pay for additional downpayments and/or early retirement.

For this reason, many (but not all) more serious investors would avoid this property because it is cash-flow negative. Personally, this is what has kept me out of the Ottawa/Gatineau real-estate market, and kept me invested in the stock market/REITs instead.

Please note - this does not mean the property is a bad investment for you! Many of the expenses are tax deductible (you absolutely need an accountant for this) and you can use these deductions to off-set your income. Deducting municipal taxes, interest on the mortgage, depreciation, hydro, expenses etc. is a very attractive proposition. And most importantly, it can also be attractive to have someone else pay for your equity build-up, through rents. The problem is that the payout is so low that you are much better off in the stock market. Plug the numbers in the spreadsheet and have a look at your return on investment. Even with just $25K down I venture that you are looking at a meager 2-3% ROI.

Notice that I did not talk about housing appreciation (increasing value of the property over time). Any investor/landlord which is buying based on the hope that property values will continue to go up faster than the rate of inflation needs a serious mustachian face-punch.  You should treat this as a happy by-product, but not as a factor for your decision-making.  I also did not get into annual rent increases, which is another topic entirely. I also did not make a provision for management fees, which you should probably include (even if it is your sweat equity).

Happy to chat more and have my assumptions debated and my answers questioned. I'm still learning a lot every day, but so far have yet to find a feasible way to make landlording work well in this overheated market. The rents are just not high enough for the high property values. Ottawa is a renter's paradise.

Best,

BillyGoat

MasterStf

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Re: Looking to buy first rental property
« Reply #5 on: June 16, 2015, 11:22:09 AM »
I agree with you billygoat, this region is not the best for landlording. Specially Ottawa, because the properties are much more expensive than on the Gatineau side. I have seen people in other regions with incredible cash flows, I don't even understand how it is possible.

Here are some tweaks to your numbers:
500k for a triplex is a lot.. Normally they are 450k max. So lets take a mortgage of 430k.
Also, tenants pay for their electricity and gas.

- 2000 for mortgage payment
- 500 for taxes
- 80 for insurance

2000 + 500 + 80 = let's say 2600.

So I would have to pay from my pocket 600$.. It's still better than paying a condo (170k condo) 1000 mortgage + 150 condo fees + 200 taxes.. I could take that extra money and put it aside. So 750$ on the side per month for repairs, vacancy, etc.

But then again, I agree with you this not comparable to what other people in other regions have. I guess I would have to wait to get a really good deal on a property to be profitable.

Cococola

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Re: Looking to buy first rental property
« Reply #6 on: June 16, 2015, 08:35:24 PM »
You can get creative to buy a below market property, such as:

Find an area is next to the upcoming area, so the price is better
Find properties from owners directly by asking around or mailing, seller saves realtor's commission, in return, less than market price.

Stock market go up and down, real estate is tangible, I personally prefer real estate if the number work out right, make sure you have enough cushion to weather some down time - meaning vacancy, repair, bad tenants.

Best luck!

CashFlowDiaries

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Re: Looking to buy first rental property
« Reply #7 on: June 16, 2015, 08:42:42 PM »
Totally agree with Billygoat.  Ultimately what you are getting yourself into is not a good investment.  Its all about running the numbers.  You absolutely should be going for positive cash flow from day 1.  Anything else is speculation at best and big fat risk!

Where I live, there are no more positive cash flow deals which is why my last 3 rentals have been in a different state entirely.  i strategically chose a new city/state that fit my investment criteria and just started pulling the trigger. So far its been great and I will continue to build my real estate portfolio in other places until if and when the market ever cools off where I live.

If you are 100% dead set on real estate investing, you should either think of moving to another area where the numbers work, or just flat out buy an investment property in an other area without you living in one of the units.  I know this is this difficult to do but its probably your best option if real estate is where you want to go.

lostamonkey

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Re: Looking to buy first rental property
« Reply #8 on: June 16, 2015, 09:10:11 PM »
I agree with you billygoat, this region is not the best for landlording. Specially Ottawa, because the properties are much more expensive than on the Gatineau side. I have seen people in other regions with incredible cash flows, I don't even understand how it is possible.

Here are some tweaks to your numbers:
500k for a triplex is a lot.. Normally they are 450k max. So lets take a mortgage of 430k.
Also, tenants pay for their electricity and gas.

- 2000 for mortgage payment
- 500 for taxes
- 80 for insurance

2000 + 500 + 80 = let's say 2600.

So I would have to pay from my pocket 600$.. It's still better than paying a condo (170k condo) 1000 mortgage + 150 condo fees + 200 taxes.. I could take that extra money and put it aside. So 750$ on the side per month for repairs, vacancy, etc.

But then again, I agree with you this not comparable to what other people in other regions have. I guess I would have to wait to get a really good deal on a property to be profitable.

What about heat and water?

Also, Quebecs tenancy laws are very pro-tenant. It is very difficult to evict bad/non paying tenants.  You are not allowed to collect a security deposit or not allow a tenant to smoke/have pets.

Also, it's extremly unlikely that you will be able to get a mortgage that big. Most banks require 2 years of income to give you a mortgage in general.
« Last Edit: June 16, 2015, 09:31:29 PM by lostamonkey »

SwordGuy

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Re: Looking to buy first rental property
« Reply #9 on: June 16, 2015, 09:11:45 PM »
Why the heck would you want to learn the real estate business by putting yourself HALF A MILLION DOLLARS in debt before you actually know what you are doing?

Buy something inexpensive and make your inevitable mistakes on the cheap.  Then go for bigger properties.

And you simply must learn how to do the numbers correctly.

Check out http://forum.mrmoneymustache.com/real-estate-and-landlording/real-estate-book-recommendations/
« Last Edit: June 16, 2015, 09:13:51 PM by SwordGuy »

MasterStf

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Re: Looking to buy first rental property
« Reply #10 on: June 17, 2015, 01:27:42 PM »
Why the heck would you want to learn the real estate business by putting yourself HALF A MILLION DOLLARS in debt before you actually know what you are doing?

Buy something inexpensive and make your inevitable mistakes on the cheap.  Then go for bigger properties.

And you simply must learn how to do the numbers correctly.

Check out http://forum.mrmoneymustache.com/real-estate-and-landlording/real-estate-book-recommendations/

I know that's true. That's why I came here to get some advice and to see if it was possible. I will continue to do much more research before getting into this.