Some readers have inquired as to what is involved in the purchase of a residential rental property. While I am happy to provide residential rental property investing tips which we learned through experience, we have only purchased residential condos in Ontario.
We are certainly not real estate experts. I, therefore, strongly encourage you to seek professional help from a reputable real estate broker/agent and a lawyer with extensive experience with investment properties if you are interested in residential rental property investing.
When my wife and I decided to purchase our first residential rental property it was definitely not a spur of the moment decision. This was a process that took years. It was also a decision we made long after the mortgage on our principal residence was fully repaid as we had no intention of having mortgages on rental properties while we had a mortgage on our home. The reasoning for this is that while we knew people who had created considerable wealth through the ownership of rental properties, we were also well aware that many people have paved their way to financial ruin, for various reasons, by investing in rental properties.
We certainly did not want to be a statistic such as that in an article in the November 25, 2016 edition of The Financial Post.
I also recalled starting my career in Calgary in 1980 just before the oil crash. I remember:
- when the average 5 year fixed mortgage rate was almost 19.5%
- people losing employment and subsequently losing their homes.
- being a tenant during my 4 years (1980 – 1984) in Calgary and having to move 8 times; sometimes these moves were because the lender was foreclosing on the property.
- paying $375/month rent for a 1 bedroom apartment when I moved to Calgary and the rent for each subsequent rental being less than the previous rental.
By the time I moved from Calgary to Ontario in 1984, I was paying less than $200/month; I was sharing a 4 bedroom house with one person.
Needless to say, we were extremely cautious when it came time to entertaining the thought of purchasing a rental property.
Residential Rental Property Investing Tips Learned From Experience
We identified the target market we wanted to attract which in turn helped us narrow our focus. We determined we wanted to:
- rent to graduate students attending a major university in Ontario.
- avoid the responsibility of having to maintain the exterior of the property
- be able to contact a property manager to address certain issues
- have a reliable handyman we could contact to promptly take care of maintenance related issues within the rental property
- purchase a unit within a condominium complex located within walking distance of the university, steps from public transit, and within walking distance of shopping and entertainment.
Using these criteria, we engaged the services of:
- a real estate broker recommended by an acquaintance;
- our barristers and solicitors as they had experience acting on behalf of buyers and sellers of residential rental properties;
- a mortgage broker who could shop the market for us even though I worked for a financial institution (not in personal banking).
We reviewed the numbers, determined the best way to finance a purchase before starting our search, and prequalified for mortgage financing before looking at properties.
Since we did not want to incur the expense of Canada Mortgage and Housing Corporation (CMHC) insurance, we needed to come up with 25% of the purchase price plus all closing costs.
We had various non-registered equity investments we could have liquidated to arrive at this 25% downstroke. I did not, however, relish the thought of liquidating these high quality investments and being faced with capital gains tax. We, therefore, borrowed against an unsecured line of credit to come up with our equity. Knowing full well that we were going into the transaction with 100% financing, we made a commitment to ourselves that we would fully repay all advances on the unsecured line of credit within 1 year.
Our offer was presented and accepted which started the ball rolling. An appraisal was obtained and all the conditions which needed to be satisfied to obtain mortgage financing were met (eg. we had to provide evidence our principal residence was unencumbered). Within 1 month from the date our offer was accepted, we were the proud owners of our first rental property.
The following is the actual Statement of Adjustments for the first rental property we acquired in 2006.
Our experience with the first rental property was positive so we continued to acquire more rental properties.
One of the key decisions we made was that we were prepared to sustain negative cash flow on each rental property for a period of time. Our rationale for doing this was so we could have all our rental properties unencumbered within a few years.
We took full advantage of the prepayment options available on our mortgages. This included the options to:
- make weekly mortgage payments;
- increase the weekly payment by 20% on an annual basis;
- make lump sum payments up to an aggregate of 20% of the original amount of the mortgage each calendar year.
I recognize this rapid mortgage repayment strategy might be out of reach for some readers. This, however, is what we did and it has worked out well for us.
I would really like to hear about your real estate investing experiences.