Making a Profit off Renting Homes

[TibHockeyPlayer]

Hi, I'm a newbie to the notion of renting homes to make money, and I seeing how the CP community has rather knowledgeable members, I have a few questions. I'm of university age, and I've been considering putting down a small down payment on the purchase of a house which I'd like to rent out. I'm guessing I would have rather large mortgage payments, so i would have to rent the upstairs and basement separately or adjust price to receive a payment(s) in excess of what I would be paying in mortgage and bills per month. Ideally, I'd also like to sell the house (also considering the tenants timetable) hopefully within a 2-3 year period for a profit. As I'm new to this, I'm sure there's a ton of things I need to look into more closely, what things should I be considering, worrying about, weighing etc? Just anything that I need to be aware of when making a foray into the renting out and selling a home for a profit. If it was so simple, I'm sure a lot more people would be doing this, thus I'm hoping this topic will be a good start, not just for myself but for anyone interested. Thanks for any information in advance!

[Phanuthier]

Given that you are a university student, your looking at 2-3 years and a mortgage, I'd look at what your mortgage is. For 2-3 years ownership on a long-term mortgage, I don't think you'll be earning very much at all. Not to mention you'll have some learning mistakes you'll have to pay for.

[photon]

The biggest quesiton is do you think that a) rents will stay the same or increase in the next 2-3 years and b) property values in Calgary will increase enough in the next 2-3 years to make it worth your while? If you do or don't think so, why?

If you don't know enough about the economy and such to be able to answer those questions for yourself, then you aren't really investing, you are just gambling.

That aside.

It's not an easy process for sure, and it's a bit tough to find houses in Calgary that will rent for a proft. But it isn't impossible. But I don't think you'll be able to do it for a small down payment.

On the practical side it might be good to look for something that is already rented, then you don't have to worry about finding tenants and paying while it is empty.

But when you say small downpayment, how small are you talking about? In Calgary for a rented house up and down you would probably be looking at at least $350,000 and probably more. So your down payment would be 25% of that.. plus a reserve fund and various closing costs so at least $80,000.

Finding something in Calgary that you could put down 5% or 10% and rent out for a profit is pretty much impossible unless you find a super steal or rent it out by room (ie a 6-7 bedroom place at $500 per room).

[Sylvanfan]

^^^
Yeah right now it's tough to rent a place and be in postive cash flow at todays prices. I bought my place 2 years ago with 10% down and today to rent it and pay the costs of owning the home I could break even with todays prices. The rental market for my house for about $2000 per month right now with our so called Super high rents around here. In order to buy it on a 40 year mortgage with 5% down you'd need about $25 grand for down payment legal costs, and a mortgage payment of $2750 per month. So for the most part residential houses are no longer a very feasible option as a rental.

The only way it can be done without a large down payment is if you have separate suites being rented, or as Photon suggests renting out room by room. And that will be a big pain in the arse.

I still think money can be made as a land lord...but you need to have really deep pockets to buy into that game. Also unless you're a real do it all yourself type...home maintenance can get quite costly.

[Flames_Gimp]

you want to look for a CTM (cash to mortgage) assumable mortgage, but look to pay about 50000 minimum now a days.

[calf]

As a University student, will you even get a mortgage to buy the place? I don't think many brokerages/banks will qualify you based on potential rental income, but rather, what your current income is. Getting off the ground could be the toughest part of it all...

[Flames_Gimp]

Originally Posted by calf

As a University student, will you even get a mortgage to buy the place? I don't think many brokerages/banks will qualify you based on potential rental income, but rather, what your current income is. Getting off the ground could be the toughest part of it all...

assumable probably his only option....don't need to qualify

[guzzy]

Originally Posted by photon

The biggest quesiton is do you think that a) rents will stay the same or increase in the next 2-3 years and b) property values in Calgary will increase enough in the next 2-3 years to make it worth your while? If you do or don't think so, why?

If you don't know enough about the economy and such to be able to answer those questions for yourself, then you aren't really investing, you are just gambling.

That aside.

It's not an easy process for sure, and it's a bit tough to find houses in Calgary that will rent for a proft. But it isn't impossible. But I don't think you'll be able to do it for a small down payment.

On the practical side it might be good to look for something that is already rented, then you don't have to worry about finding tenants and paying while it is empty.

But when you say small downpayment, how small are you talking about? In Calgary for a rented house up and down you would probably be looking at at least $350,000 and probably more. So your down payment would be 25% of that.. plus a reserve fund and various closing costs so at least $80,000.

Finding something in Calgary that you could put down 5% or 10% and rent out for a profit is pretty much impossible unless you find a super steal or rent it out by room (ie a 6-7 bedroom place at $500 per room).

Very good points. The key to what you said is that you have to have 25% down for a rental property, plus closing costs.

[urban1]

And dont forget about tenants who start up a grow-op, or dont pay the rent, or pi$$ on the carpets, or whatever else.

For evey person whos made a buck of a rental, theres a person whos sold their house and sworn off rentals for life.

[ken0042]

Originally Posted by fotze

That is one of the great mysteries of banks. They give you the gears, check up into your rectum to be sure you can pay the mortgage, yet this same mortgage is assumable by any Joe Dicksniff. Something doesn't jive. Is the prequalifying process just for show, much like a lineup outside of Cowboys?

Well, the one thing is the original mortgage holder is still on the hook for the first year after JD assumes the mortgage.

But yeah. When I assumed my mortgage it was due to me not being able to qualify otherwise. I kept waiting for the other shoe to drop- wondering when everything that was going so well to start coming apart on me.

[HelloHockeyFans]

As an alternative, you could look into purchasing a condo instead of a house. Less up-keep compared to a house, but you'll have monthly maintenance fees to pay for which can be quite pricey at times. If you go this route, make sure your condo comes with a parking spot and a storage locker. You'll have to pay more upfront but you end up charging more per month on top of the rent if you have these things for the tenant.

[photon]

Originally Posted by guzzy

Very good points. The key to what you said is that you have to have 25% down for a rental property, plus closing costs.

Or 20% at least.. though there are a lot more options now for landlords as far as high ratio mortgages go. There's three new mortgage insurance companies coming into Canada this year, so there'll be a lot more choices soon. I know Genworth is insuring a high ratio mortgage for investors.

[Flames_Gimp]

Originally Posted by ken0042

But yeah. When I assumed my mortgage it was due to me not being able to qualify otherwise. I kept waiting for the other shoe to drop- wondering when everything that was going so well to start coming apart on me.

i assumed too. the only thing is, the mortgage i assumed is up in a few years and then the bank will have to approve me to renew it.

[ken0042]

When mine came up for renewal I didn't have to re-qualify. However I did just go with the original lender that the previous owner used. They just sent me the papers with the offer to renew, and I accepted.

THP- you may want to explore assuming a mortgage. If you can get one in this kind of market; that might be the hardest part. 2nd hardest is finding a realtor who deals with assumables. My first realtor told me that assumables were dead. I found another guy who advertized he specialized in assumables. He got me all set up. If you are looking at assuming, PM me and I can give you his contact info.

[photon]

Originally Posted by Flames_Gimp

i assumed too. the only thing is, the mortgage i assumed is up in a few years and then the bank will have to approve me to renew it.

If you go with the same lender then you shouldn't have to.. what are they going to do, kick you out of your house?

Yeah assuming can be good, though even that can be tough right now. A lot of sellers got their mortgages before the big run up, so the values have gone from $160k to $300k with a mortgage of $140k, so the cash to mortgage becomes HUGE

[Sylvanfan]

I'm a bit surprised a few of these exodus folks havent' tried getting 400k in mortgage and than letting someone else assume it and buggering off back to Saskatchewan or Nova Scotia. In most cases they should have enough cash in pocket to buy their next place so that they could deal with having messed up credit for a year.

[ken0042]

I don't think you could do that, Syl. To mortgage up to that high of a value; wouldn't you need to get a 2nd mortgage? And IIRC it's just the first mortgage is assumable.

[Flames_Gimp]

Originally Posted by photon

If you go with the same lender then you shouldn't have to.. what are they going to do, kick you out of your house?

they can, but realtor has never seen it happen. banks don't want to be in the business of selling homes, they want their interest. but ya, as long as you don't miss any payments there is no reason they wouldn't.

[firebug]

The other alternative that many forget, is to go the way of a REIT. Many have had capital gains to equal that of the Calgary housing market.

No qualifying, no maintenance, diversified rental portfolio, professional management, monthly distribution, small frictional costs, high liquidity, increased leverage.

Speak to your financial advisor.

Best regards,

~bug

[Sylvanfan]

Originally Posted by ken0042

I don't think you could do that, Syl. To mortgage up to that high of a value; wouldn't you need to get a 2nd mortgage? And IIRC it's just the first mortgage is assumable.

I don't know never tried to get a mortgage for that much. I was thinking like a Calgary couple who's had their house for 3 years have a 120k per year combined income refinancing their house. Essentially they owe 200 on a house worth 475 type of thing. Refinance on a high ratio mortgage so that they're walking away with 250 in their pocket and can have their house with a 25k cash to mortgage assumable. They go back to Nova Scotia and buy the house with the money from the refinance and after a year they get their credit rating back.

But I don't know for sure that you can do that. I had a co-worker pull a thing like that like 3 years back when prices were low. Refinanced his house for like 100% of the mortgage. Than sold it as an assumable with 20k cash to mortgage. His problem was it messed his credit and it took him 7 months to find someone who'd lend him to buy another place while he was on the hook for the assumable. Of course that was back when people who ran their own bussiness had trouble getting a mortgage. Rules are different now, and of course so are prices.