Friday, April 21, 2023 / by Mario Daniel Sconza
Financial Friday #153: Can you still make money buying a rental property?
It wasn’t all that long ago that very low mortgage rates combined with rapidly increasing home valuations (and equity to borrow) made buying a rental property a viable and profitable investment for homeowners. Even if you miscalculated on the rental income and expenses, chances are the corresponding rise in the value of the home would have saved the day and easily made it a great investment.
Fast forward two years and we now see a very different situation. Variable rate mortgages that were around 2% are now closer to 6% and home values have declined by double digits in many markets. The amount of decline varies greatly by region, but the average price of a house in Canada dropped 13.7% from April 2022 to April 2023.
Although it will cost you a lot more to become a landlord these days compared to a few years ago, rents continue to rise in almost every market and are now about 10% higher than April of 2022 according to Rentals.ca . There is also a housing shortage in Canada which may put upward pressure on both rent and home valuations going forward.
Investors will have to contend with higher financing costs and a lot of short-term uncertainty around which way home prices will go, but the drop in home prices means things may be looking up if you are thinking of entering the rental property market.
Don’t be swayed by those reality TV programs that show how you can't miss at buying a fixer-upper and after a few renos, start raking in “easy money”. It can be done for sure, but there is a lot more that goes into evaluating an investment property than simply comparing that monthly rent cheque to the mortgage payment.
For example, property taxes can rise 5% (or more) annually in many municipalities and repairs and maintenance costs can be hard to estimate. If you have had any work done on your house lately, you already know the cost for both labour and materials has gone through the roof!
You will also have to consider whether you have the time and skills to find great tenants, collect the rent, and manage the maintenance by yourself. Relying on the convenience of a property management company is an option, but how do you find a good one and how much of your profits will that drain away?
Although the demand for rental housing is super strong in most markets, major repairs or delays with finding/vetting tenants could leave you with no rental income for a few months and some hefty bills to cover.
It is more important than ever to crunch the numbers and ensure your projected cash flow remains positive because those enviable gains in equity of the past few years may not be there to bail you out. There has been a lot of talk about the housing market now bottoming out, so you might get lucky with your timing and see the value rise. However, you should hedge that bet by remaining cashflow positive every month and taking a long-term view when it comes to cashing in on any potential increase in the value of the property.
A lot of money and time goes into owning a rental property and that represents a significant barrier to entry. You will need a 20% down payment to get a mortgage if you don't plan on living in the property and that that may be more than you can get (or want to risk), especially if you are leveraging the value in your current home to source the funds.
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There are a lot of variables in the rent vs buy debate, but if just want some quick numbers for many cities across the country this article does a great job.
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