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Do you want to be a landlord? How to clarify your investment goals

Do you want to be a landlord? Are you wondering how to clarify your investment goals? Maybe you’ve been toying with the thought of buying a rental investment and are wondering where to start – before you begin, there are questions you will need to ask before you can lay the foundation.

When I bought my first rental property in Fort McMurray over 15 years ago, I thought it would be an instant cash machine. After all, I bought during a time Fort McMurray had a booming economy and an exploding population. I lived in the upper unit of the house, and I turned the downstairs unit into a self-contained suite. I wanted the rent from this suite to cover my mortgage, which it did. Friends also suggested I rent at least one of the bedrooms upstairs for extra cash  – sounded good to me.

After doing some renovations and figuring it was rent-ready, I sat down to write advertisements. The ads had a heading and a bulleted list of the suite and rooms attributes, nothing fancy and certainly nothing that would attract tenants in this rental economy. However, it was Fort Mac during the boom, and within a short while, my phone began to ring with all sorts of callers. From there, I figured out that there was a type of person I wanted living in my house sleeping across the hallway, and sharing a kitchen and bathroom with me. There was also a type of tenant I wanted to live in the separate suite downstairs. Over time, I realized the difference in profiles between tenants who rented rooms and the tenants who rented suites.

Once the suite was occupied and my upstairs bedroom was rented out, the money was great. It came with a cost though and I started experiencing some of the issues that come with living in the same house with tenants – loss of privacy, learning how to set house rules (overnight guests, cleaning, etc.), and managing my expectations. I realized I’d made some assumptions that didn’t fit with reality – like thinking tenants would help with cleaning, yard work, and snow shoveling. In all fairness, most of my tenants worked 12–14-hour days in trades positions, and when they returned home, they just had enough energy to eat and sleep before starting their very long day all over again at 4:30 a.m. When they had time off – they flew home or out of town.

In retrospect, it might have been easier to have invested in a condo or townhouse in a separate location from where I lived. It would have been easier to have dealt with tenant issues from a distance.

I jumped into real estate with little to no preparation, no education, and really no planning. If I had, I would have done things very differently and saved myself thousands of dollars and many headaches.

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In retrospect, there are four questions I should have asked myself before jumping in.

  1. What kind of property fits with your investment goals?
  2. What type of landlord do you want to be?
  3. What type of tenant do you want to manage?
  4. How much/little do you want to manage your investment/s?

Here are the pros and cons for five popular types of rental investment properties: house hacking, single-family dwellings, condos/townhouses, rooming houses, and short-term/vacation rentals.

House hacking or renting rooms/a suite in your primary residence is where many landlords get their feet wet because it’s very manageable, and the rent offsets the mortgage cost. Also, property insurance companies are happy that there’s someone in the house at all times. The cons include loss of privacy, living with tenant issues, learning to communicate with tenants and set firm house rules, and learning the RTA (if renting a separate suite). Also, not all property insurance companies accept rental properties.

Single Family Dwellings  (SFDs) –are usually worth more than condos, sell and rent faster, build equity more easily, and tenants are typically long-term because families prefer to stay in a community. SFDs are easier to manage than condos, and owning properties in different areas of the city or different locations can be a safeguard during tough economic times. With all rentals, you need to know the residential tenancies acts, minimum housing and health standards, and municipal bylaws. Additionally, it’s good practice to set aside 1-5% of the house value for operational and capital expenses so that you’re not caught off guard.

Condos/townhouses –are very affordable and cost less to maintain. Owning one or more condo/townhouse in the same building or neighbourhood makes management easy. Condos/townhouses are more complex to manage than SFDs, though, because, in addition to the RTA, there are condo bylaws governed by the condominium property act specific to each condominium complex. In addition to the condo bylaws, there is a condo board, a condominium property management company, contractors for maintenance, parking, elevator servicing, etc., and multiple neighbours and pets. If there is a bedbug or rodent infestation – every unit is affected. Frequently, there is more supply than demand for condos in Canada which makes them more difficult to sell.

Rooming Houses – in my dad’s youth, single men rented rooms in houses that offered hot meals (because men in my dad’s generation weren’t expected to know how to cook). Rooming houses still exist today and are legislated under the Innkeepers Act, but hot meals are not usually part of the arrangement. They work well for people looking for cost-effective short-term rentals, such as businesspeople re-locating temporarily for contract work, students, and newcomers to Canada seeking inexpensive housing close to work and amenities. Rooming houses/short-term rental properties offer excellent earning potential – even if someone moves out, other renters are still generating income. It’s not all roses though, rooming houses can be difficult to insure, there is tons of maintenance, you may have to spend time mediating tenant issues, and be dealing with high turnover.

Vacation Properties – in an ideal world, a vacation property reduces your vacation expenses, and you can rent it out when you’re back in your own country. The benefit is that someone else is paying for your vacation or retirement property. Before buying, make sure you have a thorough understanding of the tax implications of foreign ownership as well as the rental laws for the country. Finding a trustworthy property manager and or team (carpenter, plumber, cleaners, etc.) can be tricky to find, and people expect 5 star hotel-like standards in desirable neighbourhoods. Some condo associations and municipalities do not allow short-term/vacation rentals, and more and more municipalities create prohibitive licensing and tax requirements that cut into your bottom line.

What type of landlord do you want to be?

Do you have a vision of how you want to run your rental business? Do you see yourself as a DIY landlord who interacts with tenants or as an investor only who outsources the property management and never deals with tenants? Or a combination of hands-on and hands-off for specific components of property management?

I’ve been a hands-on DIY property manager from day one. I’ve hired property managers off and on but have found my properties make more money and are better-taken care of with a combination of self-management and a good maintenance person. I don’t mind dealing with tenant issues. My husband hates dealing with tenant issues and is hands-off, and he has always outsourced to a property manager. I have friends who own 50 properties and have either hired a property management company or hired and trained their own employees to manage their properties. It all depends on where and how you want to spend your time and money.

What type of tenant do you want to manage?

Every city has its working-class, middle-class family neighbourhoods, exclusive communities, established senior communities, and up-and-coming areas. The property you buy and the neighbourhood it’s in will attract specific types of tenants. It’s natural to have favourites. Do you know what types of tenants you are most comfortable working with?

When I owned a property management business, I only took mid to high-end properties. My tenant niche is highly functioning, low-maintenance adults who have the money to rent nice properties, have good people skills, and take pride in their surroundings. I have a colleague who only buys suited properties in Calgary’s lowest-income area of the city. Her niche is blue-collar or AISH/social assistance. She does very well and loves her niche.

How much/how little to do you want to manage your investment property?

This question is tied to the neighbourhood, the type of property, tenant, and where/how you like to spend your time and money. A newish property won’t require much maintenance for 10-15 years. An older property in an established neighbourhood may require ongoing funding for operational and capital expenses. A property with high turnover will require constant advertising, showings, and repairs. If you have a condo with a crazy board of directors, bizarre neighbours, or a bug infestation, it could become your full-time job. High maintenance/pain in the ass (PITA) tenants take up huge amounts of time, energy, and patience.

The adage, measure twice cut once can also be applied to real estate investing. While you’re considering potential rental investment properties – think about these four questions first to clarify your investment goals;

  1. What kind of property fits with your investment goals?
  2. What type of landlord do you want to be?
  3. What type of tenant do you want to manage?
  4. How much/little do you want to manage your investment/s?

Why did you decide to invest in real estate rentals? I’d love to hear about it; [email protected]

You’re invited to my webinar – Do you want to be a landlord? Clarify your investment goals

Friday, February 11th at 11:00 AM Mountain

To take advantage of helpful tips, tools, and educational resources for DIY landlords, sign up for a membership for Landlord Fundamentals 101. To save even more time and money, combine Landlord Fundamentals 101 with one-on-one coaching to qualify for the Canada Alberta Job Grant.

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