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
