Buying a Rental Property

By: GenXinvestor

buy real estateIn this post I look at buying a rental property.  I’m always on the hunt for great investments and one of the things that I’ve looked into over the past few years was buying a rental property.  

Owning real estate has historically been a great way to build wealth and get a steady monthly income.  Ever since I purchased my first property in 2004 I’ve always wanted to hold onto it as a rental.  In that case, I wasn’t comfortable with the carrying costs if it were to sit vacant for a couple of months.  So I decided to sell instead.

Back in 2011 I looked hard at some condo apartments.  Again, the numbers just didn’t work out between the cost of the unit plus the condo fees.  So I never pulled the trigger on anything.  What I learned with condos is that it’s tough to make any money on them because the condo fees eat up much of the profit.

Of course the Canadian housing market has been on fire for the last 15 years so it’s not surprising to find a lot of homes overvalued based on expected rental income and operating expenses.  That said, as is the case with buying stocks, I still believe that it’s possible to find the right rental property that throws off some decent monthly cash flow at a reasonable price.  I just have to look harder.

Well that’s been my experience with considering a rental property as an investment.  More recently, however, I’ve been looking more closely into buying a rental property.  For now I’ve just been running numbers endlessly.  I’ve wanted to diversify my investment income for a few years now and I think the time is right to look more seriously at a rental property.  I’ve already looked into it quite extensively: I set up my financing, made some calls to get some insurance quotes, talked with property managers and found a realtor who deals specifically with investment property.

I realize that rental income is by no means purely passive income like my dividend stocks, but I think with the right tenants, the right property and the right manager, things could work out for me.  Now I know some of you may be thinking “those are big Ifs,” but have some faith there are opportunities out there.

While owning a rental property is not exactly a hands-off affair, I do plan to run it at arms length through a competent property manager.  My job will be to oversee their work – things like checking the utility bills and other expenses for anything unusual.  I want to try to develop a system that I can replicate that will require minimal effort on my part to run a few rental properties.  It may cost a bit more than if I were to do everything myself but my time is important right now so I’ll hire out and expense it.  That’s my plan anyways.

But then there’s that nagging voice of doubt inside my head.  What if everything goes wrong?  There are so many risks involved in owning  a rental property.  Bad tenants could trash the place, I may need to evict tenants for not paying the rent, the basement could flood, sewer backup, leaky roof, lawsuits etc.  The list could go on and on.

That’s why I’ve spent the past few weeks aggressively researching and talking to as many people as I can about their experiences as a landlord.  As with any kind of investment, the more knowledge you have up front, the better off you’ll be.  I find that I need to really think through the worst-case scenarios to try and imagine how I’d handle them and what things I could do beforehand to help mitigate them.

I find that I only ever feel comfortable making a large investment once I fully recognize and understand ALL of the potential risks involved.  After all, as Warren Buffett once said, “risk comes from not knowing what you’re doing.”  Planning for, or even just thinking through, worst-case scenarios is an important form of risk management that can protect you from loss.

So why am I thinking about investing in real estate?  Well I figure that my financial assets will deliver somewhere between 8 and 12% if I hold them for the long term.  A rental property could potentially deliver 15-20%, not including any appreciation of the property itself.

Some important things that I’m looking for in a prospective property are:

1.  That it throws off positive cash flow each month.  Net of all operating expenses and carrying costs, I wanna get paid for owning this asset like I do with my dividend stocks.

2.  an opportunity to build equity in another type of asset where I may one day borrow against to finance another property or even to buy more dividend stocks.

3.  Price appreciation.  Honestly, with the housing market being overvalued in much of Canada, I’m not factoring any price appreciation whatsoever.  Whatever I may get is gravy.  So I’m strictly looking at expected monthly cash flow and how much equity will be built up in the property.

Not every property can produce those kinds of returns.  So it’s a matter of finding that one that’s been overlooked.  I’m in no real hurry to jump into this.  In fact as I mentioned above, 4 years ago I looked into it and determined that I couldn’t find the right property for me.  Also, my finances weren’t as strong as they are today so that was another concern of mine at that time.  Maybe now I’ll find something that fits with my plan and I’ll buy it.

Do any of you have experiences with rental properties?  If so, I’d like to hear from you.

If you’re interested in buying a rental property and becoming a landlord then I highly recommend picking up a copy of Douglas Gray’s The Canadian Landlord’s Guide

If you liked this post, check out my other posts on real estate:

Building Wealth with Real Estate

Investing in Rental Property

How to Build Passive Income Streams

Image Credit: Photo by phanlop88 / Freedigitalphotos.net

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