In the June 15, 2005 issue the advantages of investments
in real estate were covered in the article "Real
estate investments, Part I: The Upside" (Vol 2 No
11). It gave an example of an investor who used $100,000
to make a $25,000 down payment on four homes each valued
at $100,000. Each was rented at $1,000 a month. The article
suggested, in part, that by using all revenue to pay off
the mortgages, the homes could be fully paid off in 10
to 12 years and that the investor could look forward to
profits as high as 15% a year on the initial investment.
The following article examines some of the risks inherent
in this kind of investment.
As with any investment, there is
some risk in owning and leasing out real estate. There's
the risk with a variable rate mortgage that the rate
will rise and that the mortgage payments will exceed
the rental income coming in. Rent increases
for this purpose are not permitted.
In Ontario, for example, you're limited by the rent
increase guideline in the Tenant Protection Act. The
2002 guideline was 3.9% up from 2.9% in 2001. Under
the Act, Ontario landlords may increase the rent for
current residential tenants once a year by an amount
no greater than the guideline.
Another risk faced by anyone who
owns land and buildings is the risk of incurring costs
for major repairs, should they arise. Yet another is
that property values or rents may decrease. You could
also find yourself saddled with problem tenants who
either don't pay their rent or tie you up with an endless
series of demands. The place is too cold. The water
is too hot. The drains are plugged. The toilet is overflowing.
The shower drips. Calls like this from tenants come
in, as a rule, very late at night and on weekends.
Yet another consideration is time
spent on administrative matters, landlord/tenant applications
and notices, collection of rents, and repairs. As a
busy physician you should give serious consideration
to finding someone — a reliable handyman, for example
— who will take care of these things for you. If
you own several properties, consider the services of
a property manager.
If, as the experts agree, gone
are the days of 15, 10 or even 8% returns in the stock
market, real estate begins to look good. But real estate
investment is not for everyone, and you have to have
the temperament and inclination to deal with the issues.
Perhaps start with an initial property, and if you find
you have a taste for it, expand your holdings.
BEFORE
YOU PURCHASE
Some of the same considerations apply when you're looking
for an investment property to purchase as when you are
buying a home for yourself.
Decide on a neighbourhood and
have a look around For your convenience you may
want a property that's near where you live, or that
is in a certain neighbourhood where there will be tenants
you wish to attract (such as students in university
and college areas). Location will also play a part in
the price you will have to pay for the property and
the rents you can obtain.
Consider size/selling price
You will want to have an idea of what houses are selling
for in the neighbourhood you're looking at, and what
level of rents are currently charged. Is the property
a single-family residence, or is it a duplex, triplex
or larger? Whether the property legally accommodates
more than one family is something for your lawyer to
verify; the property may be properly zoned, may be legal
but non-conforming to by-laws, or may be outright illegal.
Other considerations Will
the seller have to make repairs to the property? Are
there fire alarms in each unit or a fire escape for
upstairs units? Is the property currently rented out?
If the property is vacant, you will be able to commence
charging rent at whatever level you wish, whereas if
you take on existing tenants, you will be limited to
the annual guideline increase mentioned above.
AFTER
YOU PURCHASE
If you're assuming tenants, you will want to introduce
yourself to them. Make sure that whoever handled the
closing of the sale has had the outgoing landlord redirect
the tenants to make future rent payments to you. You'll
also want to know which of the utilities the tenant
is paying and which you are responsible for. The property
taxes are almost always the responsibility of the owner,
while utilities may or not be included in the rent.
Finding tenants If you buy
a vacant rental property you'll have to find tenants
by advertising the place. This can be a time-consuming
process. You may, for example, have to show the place
many times before you find the right renter.
Fixer-upper If repairs or
remodelling are required you'd be wise to take care
of it before renting the place out. You may be able
to obtain higher rents, and possibly avoid those late
night phone calls from tenants who want things fixed
— now. Remember too, that your tenants don't have
the same ownership interest you do, and may let problems
fester and become worse over time until an emergency
situation is reached or the costs to remedy the problem
have gotten out of hand.
References From a financial
standpoint, it is important to ask for references from
prospective tenants, and to obtain first and last month's
rent in advance, preferably by certified cheque or money
order.
Other things to consider The
vacancy rate in the area in which you're interested.
The time it would take to sell the place if you had
a sudden need for cash. Will you be able to meet the
payments should prices tumble and tenants become scarce.
Remember real estate prices are historically high in
most areas. Even if rents cover your payments you could
find yourself locked into paying more for a place than
it's worth on the market if prices take a tumble.
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