Real Estate Investing

[Crazy Flamer]

Well, I'm about to purchase a piece of real estate as an investment and I'm wondering if anyone has any tips to share. I'm looking at purchasing a condo in the inner city. This is my first time venturing into real estate investment and I'm hoping for some insight:

1) Any red/green flags to look for from potential renters?
2) How can I do a credit check on potential renters?
3)Any specifics I should include in the rental agreement? Is there a template I can use?

I've been coming across all these real estate investors in the US that seem to buy up copious amounts of property. I'm guessing the real estate investment game is different down there? In Canada, is they any way to grow a real estate portfolio besides constantly putting down 20% on each property?

[Hemi-Cuda]

As someone who finally managed to sell their condo after many years of trying (at a loss), it confuses me greatly to see the word condo and investment in the same post

[I_H8_Crawford]

Originally Posted by Crazy Flamer

Well, I'm about to purchase a piece of real estate as an investment and I'm wondering if anyone has any tips to share. I'm looking at purchasing a condo in the inner city. This is my first time venturing into real estate investment and I'm hoping for some insight:

1) Any red/green flags to look for from potential renters?
2) How can I do a credit check on potential renters?
3)Any specifics I should include in the rental agreement? Is there a template I can use?

I've been coming across all these real estate investors in the US that seem to buy up copious amounts of property. I'm guessing the real estate investment game is different down there? In Canada, is they any way to grow a real estate portfolio besides constantly putting down 20% on each property?

Why not take that down payment money and invest in a REIT?

Then you are subject only to capital gains taxes, AND don't have to deal with renters, fixing stuff, condo fees, special assessments, etc.

[Weitz]

What’s the cash flow look like? Do you expect to sell and make money in X years?

The last thing I would be investing in right now is a condo.

[blankall]

Originally Posted by Crazy Flamer

Well, I'm about to purchase a piece of real estate as an investment and I'm wondering if anyone has any tips to share. I'm looking at purchasing a condo in the inner city. This is my first time venturing into real estate investment and I'm hoping for some insight:

1) Any red/green flags to look for from potential renters?
2) How can I do a credit check on potential renters?
3)Any specifics I should include in the rental agreement? Is there a template I can use?

I've been coming across all these real estate investors in the US that seem to buy up copious amounts of property. I'm guessing the real estate investment game is different down there? In Canada, is they any way to grow a real estate portfolio besides constantly putting down 20% on each property?

I've never rented in Calgary, but have been renting in Vancouver for 10 years now. With tenants the main things your looking for are:

1. Will they pay; and
2. How much trouble will they be.

For #1, you want someone with a stable job who is not transient.

For #2, you have to meet the person and get a feel for them. Obviously, as a landlord you have duties to upkeep a place. However, some tenants are a huge PITA, and will complain about everything and demand unreasonable upgrades on things within the unit. There's a movement to treat all landlords like they are capitalist. In reality, most have their own mortgages to pay.

Tenancy law right now is not very landlord friendly, and it's pretty easy for tenants to hold a landlord hostage and not pay for months on end while a dispute is being settled.

My greatest worry, in Calgary, would be that the Calgary rental market can go completely dry. The rental has worked out for me in Vancouver, but its also been a lot of work. Honestly, I'm not sure I would go through the hassle in a market where condo prices don't increase dramatically form year to year. If you're making cash purely from paying down the mortgage via rent, there are likely better investments out there.

[puckedoff]

Originally Posted by I_H8_Crawford

Why not take that down payment money and invest in a REIT?

Can't likely leverage investment 5x to put in a REIT the way you can with a mortgage.

[opendoor]

Originally Posted by I_H8_Crawford

Why not take that down payment money and invest in a REIT?

Then you are subject only to capital gains taxes, AND don't have to deal with renters, fixing stuff, condo fees, special assessments, etc.

There'd be no leverage that way, so the potential returns would be lower.

Of course it's also far less risky. If you put $50K down on a $300K rental property and the price drops by 40%, you're underwater and you'd need to pay to get rid of the place if you ever needed to sell. If you invest in an REIT without leverage and it drops 40%, you can still get 60% of your money back.

[Crazy Flamer]

Originally Posted by Weitz

What’s the cash flow look like? Do you expect to sell and make money in X years?

The last thing I would be investing in right now is a condo.

Cash flow would be positive, but not by much. I would agree that with most condo's I would have to supplement monthly costs. But there are a few good deals to be had out there where I believe a reasonable rent charged that's comparable to other rents in the area would cover mortgage, condo fees and monthly property tax.

[Bill Bumface]

Evaluate your risk exposure.

If Calgary turns into Detroit, how many dimensions of your finances get hit:

Job?

Primary residence equity?

Rental income?

Rental equity?

[bizaro86]

Originally Posted by opendoor

There'd be no leverage that way, so the potential returns would be lower.

Of course it's also far less risky. If you put $50K down on a $300K rental property and the price drops by 40%, you're underwater and you'd need to pay to get rid of the place if you ever needed to sell. If you invest in an REIT without leverage and it drops 40%, you can still get 60% of your money back.

It works the other way as well though - if prices go up by 40% you've tripled your money. We bought a number of rental condos between 2009-2012 and sold half of them in 2014-2015 for really significant percentage gains. The ones we kept went down in value (both rents and prices) and have likely still not recovered to peak pricing although it has gotten way easier to rent things out now than it was during peak Covid.

Calgary has been a terrible market for the past ~8-10 years. But it isn't ordained that it will always suck just like it isn't ordained that Vancouver real estate will always go up. Oil being back to $100/bbl will almost certainly remain a catalyst for Calgary real estate, as will the huge disparity in prices between Calgary and the other large Canadian cities. Obviously rising interest rates are a risk.

I think the biggest issue is lifestyle. Now we have a couple of little kids and I'd be interested in cutting back due to the time involved. I keep my places well maintained so generally don't have issues during tenancy, but finding new tenants does take time (showings, meet to sign lease, do a move-in inspection).

[Fuzz]

I'd think you'd want to plan to own it for the long term, considering real estate transaction costs and capital gains taxes. How much does it need to go up in value, even if tenants cover all your costs, to make sense over what time period to offset those 2 big items? That's what I would look at, and see if that value in growth makes realistic sense.

[Crazy Flamer]

Thanks everyone for the input so far. I've balanced out the risks vs potential reward already. And yes, this is more of a long term play and I'm comfortable taking this on.

But part of the process will be to find renters and good ones at that. I know most rental applications come with credit checks. Is that something I can do on my own or do I have to hire a third party to do that? I'm guessing employment verification is something I can do myself?

[Calgary14]

Condos aren't a good investment (in Calgary). Watch out for condo fees (guaranteed to increase every year and eliminate any positive cash flow), special assessments and condo board politics

[opendoor]

Originally Posted by bizaro86

It works the other way as well though - if prices go up by 40% you've tripled your money. We bought a number of rental condos between 2009-2012 and sold half of them in 2014-2015 for really significant percentage gains. The ones we kept went down in value (both rents and prices) and have likely still not recovered to peak pricing although it has gotten way easier to rent things out now than it was during peak Covid.

True, but then you could also use a HELOC to buy equities that generate income or REITs and experience the same leverage (and risk). If someone bought $200K worth of something like CAPREIT 10 years ago with 80% borrowed money, it'd be worth about $570K today and they'd have collected about $115K in dividends. And that's after a 20% drop in CAPREIT's price; it was worth more like $700K 6 months ago.

But even at today's lower value, if you take out the $160K loan and probably $70K in interest over that time period, you've turned a $40K cash investment into $450K without having to lift a finger. I doubt many places in Calgary that cost $200K 10 years ago would generate that kind of return, particularly when you consider the costs of acquiring and disposing of real estate compared to an REIT. And obviously you have to consider the time investment of managing the property (or the cost of paying someone else to manage it).

And it's also more tax efficient, as rental income is taxed as straight income while REIT dividends are mostly capital gains or return of capital (which eventually gets taxed as capital gains by lowering the Adjusted Cost Base).

[Mazrim]

Originally Posted by blankall

There's a movement to treat all landlords like they are capitalist. In reality, most have their own mortgages to pay.

Why should I, a renter, care that you have your own mortgage to pay? You took on the risk by buying a property to rent. I'm also curious what you consider "unreasonable" demands. I've seen quite a range of what landlords consider "unreasonable", from painting cupboards that haven't been done in 30 years to getting a smoke detector installed.

[craigwd]

Originally Posted by Crazy Flamer

Thanks everyone for the input so far. I've balanced out the risks vs potential reward already. And yes, this is more of a long term play and I'm comfortable taking this on.

But part of the process will be to find renters and good ones at that. I know most rental applications come with credit checks. Is that something I can do on my own or do I have to hire a third party to do that? I'm guessing employment verification is something I can do myself?

I believe you can pay RentFaster to do credit card checks for you.
In my experience employment verification is similar to job hunting, a quick email to the employer to see if the tenant is a good person.

[blankall]

Originally Posted by Mazrim

Why should I, a renter, care that you have your own mortgage to pay? You took on the risk by buying a property to rent. I'm also curious what you consider "unreasonable" demands. I've seen quite a range of what landlords consider "unreasonable", from painting cupboards that haven't been done in 30 years to getting a smoke detector installed.

I've had a renter demand to have the strata's heating system replaced as it made a very light humming noise. He opened it up and tampered with it. I had another renter demand that I replace the blender that came with the furnished unit with a Vitamix branded unit. I had another renter demand free cricket PPV with the cable I included. I had another renter demand that a toilet be replaced with a toilet with a built in bidet unit.

I'm totally warry of your complaints about negligent landlords, but it definitely works both ways. As the renter you have signed a contract that states you will pay rent, and the landlord relies on that rent. That's why you should care. The renter took on the obligation of paying rent by signing a tenancy agreement.

[Weitz]

The real key is hoping your tenants aren’t brutal. Damage or missed rent can’t quickly wipe out years of profit.

[Mazrim]

EDIT: Nevermind

[sa226]

It's almost like there are good landlords and bad landlords. Or good renters and bad renters.

We rented a house in Renfrew, when we moved out they took over half of our damage deposit for some bogus reason. (I forget why, it was 10 years ago)

A week later they demolished the whole place to make room for an infill.