My husband and I made very few new investments since the launch of this blog.
And there was a perfectly solid reason for that: we have been saving for the down payment of our first rental property, so we needed to keep our money liquid.
Rental properties are an awesome investment if you could get great deals in the right market. Let me list the ways:
- Potential capital appreciation
- Monthly cash flow
- Loan is paid down by renters
- Financial leverage
- Demand for rental properties is likely to grow as qualifying for a mortgage becomes more difficult
- Multiple paths to profit
- Tax benefits
Our goal is to buy 1 or 2 rental properties within 3 years, and we’re dead serious about making it happen.
Since November 2017, we have been semi-actively hunting for rental properties and began the process of talking to realtors and looking at mortgage options.
We’re fairly new at this, so we’re treading exceedingly carefully.
With a buy-and-hold strategy, we really want to ensure that our rental unit has long-term growth potential and can cash flow right away.
So with that in mind, we set out to look for affordable rental properties.
Initially, we wanted to get something fairly close to where we live so we can manage it ourselves.
When I was a university student, I lived in a 5-bedroom condo with roommates that also attended the same university. The rent was more than reasonable, and I never had any complaints about my living situation. The building was a 5-minute bus away from the university, so the vacancy rate was effectively 0%.
I knew this could potentially work, so I searched for new listings in that building and the surrounding area and ran the numbers.
Alas, the prices have shot up drastically since the last time I checked, so has the maintenance fee.
Sadly, I had to pass on that.
Then we decided to expand our area to the entire west side of GTA (Greater Toronto Area), including Hamilton.
Thanks to some serious urban revitalization efforts, Hamilton has taken on a new reputation in recent years as a hip place to live.
You know what that means: a growing number of folks who fled Toronto because of rising housing prices have begun to establish roots in Hamilton.
The real estate investors have been eyeing this part of Ontario too, so property deals are extremely tough to find.
We were primarily eyeing the duplexes, and quickly decided that this market is too hot for us.
As we move our search area further and further away from home, it finally dawned on us: perhaps we should look in Montreal.
My husband and I have lived in Montreal for a combined 12 years, so we’re intimately familiar with the various neighborhoods.
Being one of Canada’s hottest real estate markets in 2017, sales growth in Montreal has dwarfed that of Toronto and Vancouver for the first time in 20 years. A few factors were in play: low unemployment, economic growth, and the lack of foreign buyers tax.
The moderately high rental prices coupled with new infrastructure projects (such as the new Champlain Bridge and the light rail network) also make Montreal an attractive market in the eyes of savvy investors.
Of course, we’re not the only ones aware of that. In fact, it appears that we were unprofitably late to the party.
After viewing many properties in Montreal, including pre-construction units, we decided to bow out gracefully.
Soon after, we threw in the towel on the whole idea.
Here are the reasons we ultimately decided not to buy a rental property this year.
Reason #1: We can’t find a good deal
Finding a property that cash flows is akin to capturing a unicorn for us.
Once you take into account the monthly costs of the loan payment, insurance, taxes, property management, maintenance and repairs, most rental properties listed on the MLS don’t generate a positive cash flow.
Good deals DO exist, just not always in plain view. Although I feel shy about admitting it, finding great deals requires more time, expertise and connections than we currently have.
Reason #2: We won’t qualify for a sizable mortgage
The properties that we are most interested in – duplexes in certain parts of Montreal, for example – are currently out of our price range.
We can come up with the 25% down payment. The challenge lies in finding a lender that could lend us the rest at a reasonable rate.
Our current mortgage provider does not fund purchases in Quebec, and given the size of our existing home mortgage, it is unlikely that we can get additional funding anywhere else.
We have inquired with major banks and multiple mortgage brokers, and received some variations of “it would be challenging” in every case.
Reason #3: Opportunity cost
In early February, the Dow Jones industrial average fell 180.24 points in response to a sharp rise in interest rates, followed by a 4-day winning streak.
Market swings like this happen once in a blue moon, but they can be a godsend to investors who want to acquire stocks at bargain prices.
I am actively tracking 50+ stocks, and receive a text message whenever a stock hits my target price. On the day that Dow Jones nosedived, I was bombarded with messages left and right, but couldn’t do anything about it: our cash savings are earmarked for the down payment of our rental property.
As long as we hold on to our cash in the hopes of finding a property, we would continue to miss out on other great investing opportunities. That opportunity cost is getting harder and harder to justify.
Reason #4: We want to renew our mortgage with a major bank
We like our mortgage lender for various reasons, but we do hope to switch our mortgage provider to one of the Big Five later this year (for those who aren’t familiar with Canadian banks, Big Five is the moniker assigned to the 5 largest banks in Canada).
There are significant upsides of doing so, including:
- Access to HELOC (home equity line of credit)
- Lower mortgage rates
- Ability to make extra monthly payments toward principal
On the flipside, major banks tend to have more stringent mortgage qualification requirements. If we want to secure a mortgage with them, we have to strengthen our finances.
We fear that borrowing more (thus increasing our debts) could jeopardize our chances at getting a mortgage with the Big Five, even if it is for the purchase of a rental property that generates additional revenue for us.
Reason #5: Investing for the sake of investing is rarely a good idea
We would really like to add a rental property to our investment portfolio as soon as possible.
On some days, it’s all I can think and talk about.
But we can’t settle on buying any property that we can afford, just to check the task off the list. I have to remain vigilant about not letting my desire to own a rental home trump rational decision making. Great investment decisions are rarely made when emotions are at play.
Now that we have decided to not buy a rental property this year, the money that we have saved for down payment is freed up. Here is what we plan to do with that money:
- Maximize this year’s RRSP contributions
- Put as much as we can into our TFSAs (we don’t have to worry about going over the limits yet)
- Invest in P2P lending (I’m trying a new platform, I’ll let you know how it goes)
- Paying our 2017 taxes
Of course, while our real estate journey is temporarily halted, it does not end here.
We figured that our best course of action going forward would be to partner with a joint venture (JV) partner — a common practice among experienced real estate investors.
Finding the right JV partner and negotiating a fair deal for all parties involved? That’s a whole other topic on its own.
More on that later.