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10 Reasons to Become a Landlord and 40 Reasons not to

By Christopher Seepe

Multi-Residential Housing is not a Passive Income

In this, Part 1, we will present 10 reasons why you may want to consider becoming a landlord.

Obvious, and seemingly impelling, reasons to invest in the rental housing industry include:

  1. Multi-residential investments are arguably the most stable, depression/recession-resistant, and relatively secure type of real estate investment you can make. Everyone needs a place to live. Not everyone needs a place to work. Buying a place to live is not possible for many young people and remains elusive for many adults too. Some adults choose the apartment living lifestyle for its freedom from housing-related issues.
  2. Use tenants’ money to pay your mortgage and build your equity. You can raise the rent each year (with restrictions) and adjust for current market rent rates when a property becomes vacant. Long-term investors buy real estate that generate positive cash flow and either hold it until the tenants have paid off the mortgage or until there’s a compelling reason to dispose of the income stream in return for a lump sum; for example, to buy something bigger/better or to create a retirement annuity income stream.
  3. Real estate assets can be leveraged to bargain for additional real estate investments. Unlike stocks, mutual funds, term deposits, etc. you do not have to pay for the whole real estate investment yourself. Tens of thousands of lenders will give you the extra money you need (mortgage) in exchange for receiving interest and the property as collateral if you default on the scheduled payments. When the property’s value has increased enough, some lenders will let you borrow against that value (your equity), which you can use as a down payment to buy another property.
  4. Real estate is tangible and is more easily collateralized than most other types of investments. Ask ex-shareholders of Northern Telecom, Enron, Bre-X and other “blue chip” failures. Lenders generally offer a higher ratio of loan amount versus the value of a real estate property than they would offer on a portfolio of stocks, for example. The building and/or land will still exist if the worst should happen. Mainstream lenders also love the low-risk appeal of CMHC-insured rental housing properties and offer very attractive interest rates.
  5. A modest increase in rental income and/or decrease in operational costs can have a significant positive impact on property value.  For example, increasing net operating income (by reducing costs and/or increasing rent) by $1,000 per year and applying a 6% capitalization rate (better-than-average in today’s southern Ontario market) can add about $16,650 to the value of a property, using the Income Approach. This does not include appreciation for other reasons such as high demand for, and low supply of, rental space, improvement in the neighbourhood, etc.
  6. Several current tax policies (RCCA, capital gain, etc.) discourage long-term owners from selling their rental housing properties because the proceeds of a sale may only equal the cash flow they would receive from keeping the property for a few years. Combine this with the discouraging rent control policies which make investors/developers unwilling to tie up their money in building a rental property. They may have to wait a decade or more for return of their investment, when they can build a condominium and get their money back—often with a huge profit—in just a few years. So what’s good about that? Rental housing inventory is shrinking (see point 19 below), resulting in high investor demand and high sale prices for existing inventory (seller’s market), and increases in average rent rates (low vacancy).
  7. A well-maintained and fully-occupied rental property rarely depreciates unless they have been damaged by stigmatism or an eroding neighbourhood (eg. increase in crime).
  8. If the very worst should happen, you still have a low (or no) cost place to live.
  9. Legitimate and reasonable expenses reduce your taxable income including mortgage and credit card interest, depreciation, a reasonable salary with employment deductions, a percentage of your local travel expenses, relevant long distance travel (eg. trade show), portion of home office and workshop, etc
  10. Despite the perceived stereotype, there is an abundance of landlords who enjoy the satisfaction of helping provide good quality housing to self-sufficient people in need.

In Part 2 we’ll examine many of the reasons you may not want to become a landlord.

Christopher Seepe is President and Broker of Record at Aztech Realty Inc., Brokerage and maintains www.multiresidentialexpert.com, a website dedicated to providing expert advice and sharing his personal investment and ownership experiences to those investing, or looking to invest, in multi-unit residential, income generating properties in southern Ontario, Canada. You can contact him directly at cseepe@aztechrealty.com

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2 Responses to “10 Reasons to Become a Landlord and 40 Reasons not to”

  1. Gary Lambden says:

    Part 2 of becoming a LL is where or when?

  2. Monster Commercial Editor says:

    Hello Gary – thank you for your interest in this article. Please note that Part Two has been published and is available from the link above in Part 1 or can be found on the site.

    Monster Commercial Editorial

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