The easy way to become a landlord

Next time you move, consider keeping the old place as a rental property. You could earn thousands in passive income.

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Karen and Keith Anderson have never felt better about their finances. They’re sitting on more than $2 million worth of real estate, and they just gained thousands of dollars a year in passive income. And get this: it all happened by accident.

The Andersons’ financial fortune was made when they became landlords, but it wasn’t something they were planning on. Two years ago, they were regular homeowners trying to sell their three-bedroom Okanagan, B.C., ranch-style home. They bought it back in 2007 for $750,000, but with two growing children, they were already running short of space. The problem was, they were trying to sell in 2009: the economy was tanking and local housing prices were falling rapidly. The Andersons (we’ve changed their names to protect their privacy) realized that they would have to sell for at least $50,000 less than they paid.

Rather than taking the hit, they decided to keep the old house and rent it out. In order to pay for their new place—a $1.6-million, 3,000-square-foot custom home just 15 minutes away—they had to take out two mortgages. The first was a $315,000 second mortgage on their old ranch home for the down payment, plus a new $700,000 mortgage on the new place. (The rest of the money to buy the new home came from stock market investments.) It was a gutsy move, but so far it’s working out very well. If you’re interested in renting out your old place rather than selling the next time you move, read on and I’ll tell you how.

How does it work?
There are several things you need to consider when deciding whether to keep your old place as a rental or sell it. The first is whether you’ll actually make money. In other words, whether your investment property will be cash-flow positive.

To do this calculation you first need to find out how much you could rent your old place for. Scan reports released by your local real estate board and look through sites that offer free rental listings, such as Craigslist or Kijiji.ca. Or you can do what the Andersons did and get advice from a local real estate agent and property manager.

Once you know what you can expect in monthly rental income, you’ll need to add up the costs of carrying the property. The largest will likely be its mortgage payments. But don’t forget other operating costs such as insurance, taxes, maintenance and a contingency fund to cover advertising, administration and bad debts, like tenants skipping out.

When they ran the numbers, the Andersons figured they’d get a gross income of $32,400 per year from renting out their rancher. The total costs of keeping and maintaining it added up to $24,400 a year. Those costs included a monthly $1,500 payment on the $315,000 second mortgage to cover the down payment on the new place, plus $285 per month on the rancher’s first mortgage, which they took out when they originally bought it. They also decided to hire a property manager at a cost of $250 per month. (If you don’t hire a property manager, include at least $800 per year for each rental unit to cover maintenance costs.) In their case, that still left about $8,000 a year to cover insurance, possible vacancies and, of course, their profit.

Are you cut out to be a landlord?
There’s one more important thing you should think about before taking the plunge, and that’s whether you want the hassle of being a landlord.

When Mike and Joan Gaye moved from their Scarborough bungalow to a downtown Toronto condo, they initially intended to rent out the bungalow and use the income to accelerate their condo payments. But then the Gayes got honest. “I didn’t want my down time to be consumed with tenant complaints,” says Mike. So, the Gayes (we changed their names to protect their privacy) sold their bungalow, and used the money to make a lump-sum payment against their condo instead. Yes, they lost an asset, but they knew that becoming a landlord doesn’t work out when your heart’s not in it.

What about the risks?
When you go from homeowner to landlord, you are becoming a real estate investor. As with any other type of investing, there are risks.

The biggest threat is a drop in local housing prices, a very real possibility in many Canadian cities where the ratio between property prices and rents is currently at an all-time high. As with any leveraged investment, if you borrow money against an asset and the value of that asset drops, then you could get into trouble. You could find yourself in a position where the bank has loaned you more than your property is worth. Even if a mortgage repayment isn’t demanded, it can make refinancing your home impossible, as no lender will offer a mortgage that’s worth more than the house. Other risks include rising interest rates, which could mean higher mortgage payments, and, if you’re paying down the mortgage on the new home out of current earnings, job loss or disability.

The Andersons currently have a massive debt, but so far everything is working out fine. Their local real estate market is much healthier now and they’re no longer even considering selling the rancher. Why should they? It’s earning them money.

14 comments on “The easy way to become a landlord

  1. wow…. thats how all u guys making fool the common ppl… did u tell how much total morgage will be and how much the payment will be ..

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  2. I cant believe the author forgot a very important bit of information!
    When a home becomes a rental property it ceases to be personal residence and becomes a capital asset.
    With housing prices fluctuating as they do, one needs to consider that, when the house is sold, the seller will be subject to capital gains income on the increase in value from purchase price (even with the lifetime tax exemption).
    A rental property is a business in every sense of the word.

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  3. It is all great and dandy when the real estate market is on the way up – but if there's a lesson to be learned from our neighbor in the south – we know one can't assume this strategy will always work out. Depends on the job of the mortgagor, covenants of tenants etc.

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  4. For your amusement and mine, I crunched the numbers mentioned in this article for the Okanagan property. As per the numbers, the Andersons are charging $2700/ month rent. That sound extremely pricey for a Saskatchewan resident, however, that may be the norm for BC from what I hear. That aside, the $24400 expenses per year only cover mortgage payments ($21420) and property manager ($3000)-give or take $20. That leaves the approx $8000 per year to cover all other expenses. Now consider this. Property taxes in the Okanagan can't be cheap considering the current housing prices. Last numbers I saw were $5000 to $20000 per year. Adequate insurance is a must and could easily eat up $500/year. As landlords, the Andersons are responsible for ALL maintenance and repair work. Although they may be paying a property manager, they are still responsible for materials and professional contractors. Hmmm, considering these factors that $8000/year ($665/month) doesnt go very far. THIS is also an important factor to consider whether to rent out a property, especially one so heavily mortgaged.

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  5. As an experienced landlord is there are advantages as well as disadvantages of this type of investment. This is NOT a passive investment-the exact opposite-very labour intensive you either do the labour or you must hire a property manager. All kinds of traps waiting the novice-complicated income tax rules,legal issues with Human Rights And Landlord Tenant Acts and Strata Title legislation. Fire |Insurance is much more expensive. Grow-Op activities can destroy your investment-don't expect a nickle from your fire insurance policy.
    It can work but you must be prepared to supervise your property and your tenants very closely.

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    • That is absolutely true. I've had 2 properties that I've been renting out for the past 7 years. Both lovely homes in great neighborhoods. Thought I had screened the tenants as best as anyone can be screened, but people never treat someone else's property as well as their own. I've had to spend thousands and thousands of dollars on repairs, upkeep, new flooring, painting, etc., etc. whenever a tenant leaves. And then you've got the laws always favouring the tenant and no matter what you have in the lease, it doesn't matter. i.e. no dogs or cats. Forget it. Tenants can bring pets into the house and smoke in the house, even IF they sign a lease saying they won't. I've just sold one of the houses, after spending 6 weeks doing major repairs for a tenant who only lived there one year. The other house, I've asked the tenants to leave because we are moving to that town and need the house for ourselves. Not as much damage to this one, but TONS of cleaning and vaccuming endless amounts of dog hair. Don't think I'll jump into the landlord foray again.

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  10. Hey I am always on the look out for ways to get healthy, I like your article! This is actually really great info!

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  11. As a former landlord for 20 years I would never do it again. I sold and live in a bungalow with peace and tranquility. For the extra income I was receiving at the end of the day it was not worth the headaches, taxes and constant upkeep. Especially today with all these new condos being built the competition will be fierce. You have to offer a lot to a tenant as in some cases the rent will be higher than a mortgage payment

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  12. We followed this plan twice (renting out our current residence and buying a new one) and it's worked out very well for us. We wanted a rental property but coming up with a 25% down payment is difficult – especially if you want to buy more properties. When you follow this route, you only have to put 5% down on your next place as it will be your residence. Yes, there are ups and downs to being a landlord but it gets a lot easier if you put a good system in place. I ended up writing a book for beginners about buying and managing your first rental property. There's a ton of things you need to know but if you do it all properly your chances of success are much greater. We currently have fantastic, long term tenants in both places. I'm a firm believer in looking at the positive side of life and follow the philosophy of "you get what you give". I love this business and we've now ventured into the commercial side of things which is a whole different ballgame but actually a lot easier than residential. Feel free to visit my website if you are a beginner. I'm happy to help!

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