This is the final question in a 3 part series answering a few of our newsletter subscribers biggest real estate investing questions.
Two of the previous questions and answers can be found here:
This week’s email is from Scott in Toronto, Canada:
Hey Julie and Dave,
I purchased a property in downtown Toronto [Julie edited out the location and a few other details] nearly two years ago for $329K (putting 25%
down) which will rent out furnished for approx. $2500 (below the1% rule and just above .7% – loved that article by the way).
I have occupied this property since the purchase, but am looking to make this rental property #1. It is fully managed, with a maintenance cost (which keeps rising!) and has since appreciated to approx $345K.
Here’s the tough part, I prefer to have the property management here
take care of finding a tenant (it is my first one and all) but they want to
charge a month’s rent in order to do so. This is standard, but unfortunately, it puts my monthly cash flow in the negative by about $35 a month ($420 total).
Alternatively, I can try and place it on my own and eliminate that fee
which would provide me with a positive monthly CF of either ~$175 or
$85 if I have to still give a realtor half of the month for bringing me
the tenant. Either way, my mortgage is a ridiculous rate of prime -0.85%
(1.4%) variable open until March 2013, but can be switched to a fixed
mortgage at any time without fees (and if done, could actually lower my
mortgage payment depending on the amortization used).
Do you think it makes sense to operate at a negative cash
flow while the financing is so advantageous? I realize this banks on
property appreciation predominantly, but even if the value stays
stable (now that we are theoretically at the bottom ; ) you have
somebody else creating equity for you and that’s not a bad thing.
And Here’s Our Response to this reader’s Biggest Real Estate Question!
Thanks for the GREAT question(s) Scott!
And, since we know you’ve been reading Rev N You for awhile you probably know that we’re going to say the answer really depends on your goals. 🙂
Let’s start with renting your place out. Whether you should pay a management company a full month’s rent to find, screen and place the tenant or do it yourself is a great question. It’s something we recently struggled with on our Triplex in Toronto. Our friends that were living there and looking after it for us moved out so we turned it over to a management company.
One month of rent is a serious kick to the cashflow pants. Personally, we chose to place the tenant ourselves because there are a lot of other things we’d rather put that $1,700 (1 month’s rent) towards. Being so far away this was tricky but our friends helped us out with the showings.
If you are planning to do a furnished rental there are plenty of other considerations that you should factor in. The biggest is that typically furnished rentals are shorter term. This means you will be dealing with more turnover. Turnover always costs money even if you are renting it out yourself. We recently did a furnished rental and will write an article about the advantages, disadvantages and considerations involved in a furnished rental in August.
It really comes down to how much time you have and whether you want to deal with your tenants at all. If you want a little challenge you could always try it once (renting it out yourself). In Toronto in particular we love the Viewit.ca and Craigslist.org listing combination. It hasn’t failed us yet. Check out our article on the 5 steps to rent out your propertyfor more details.
As for operating at negative cashflow… we did it for awhile with a
condo we had in North Toronto. When you consider the principle paydown
and tax write offs you’ll USUALLY find that you’re still coming out ahead by a
few thousand dollars every year even when you’re in a negative cashflow
situation without appreciation. That said, I always remember something I read (in I believe, Rich Dad Poor Dad) which said “How many houses can you own if
they all cost you $100/month?”
In other words, it really does come back to your goals. It will be tough to build a giant portfolio of negative cashflow properties. But if you are starting out slow and your goal is to use as little of your own time and energy as possible to begin building your portfolio then you may be best suited to find stable easy to manage neutral or slightly negative cashflow properties. But, if your goal is to begin making money from your properties and build a large portfolio then I’d consider approaching this from a more hands-on perspective to maximize your profit and your learning.
Our Nanaimo property manager once said to us “when you’re making good money in a job it does you no good to make a bunch of money on your properties – the government just takes it anyway“.
So, there are plenty of perspectives on this. You’ll have to figure out what works for you.
The call we recently had with William Lederer was a great one for learning to find, screen and select tenants and he had a 59 page e-book that went with the call. It might be worth checking the call out or his Ultimate Property Management book. While not Canadian, it’s really an excellent resource for landlords and property owners.
As for the financing – go back to your goals once again but that financing is sweet and prime minus anything has gone the way of the dinosaur. For the most part I think you’re better off to keep that sweet mortgage and just pay down the principle on your mortgage while you can. If you fall on hard times or find you need to lengthen your amortization period to improve the cashflow then you’ve got that option.
That said, the experts we follow are calling for rates to continue to increase. So … take a look at the possible scenarios and determine what risks you are and aren’t willing to take.
I will make a few final notes on your situation only because I happen to be very familiar with the building you live in. I do have a few concerns with that area because of the glut of other very similar units that are also rentals, the poor access to the Subway, and the maintenance fees which, which last time I looked at them, were substantially higher than most other buildings in the downtown area.
Given these concerns I would try to do whatever you can to make this a positive cashflowing property from the start because you may find it’s tough to keep renters in there at times and rent rate increases could happen very slowly over time due to the continued growth of similar units all around it. It’s just something to be aware of as you’re weighing the risks and the rewards.
Phew!! I do hope this helps you a little bit Scott. You’ve definitely given us a really big case study to share with our students. We’d love to know what you end up doing and how it works out for you.
Posted on July 6th, 2009