This is the latest in a series of video interviews in which Pat McKeough will give his advice on a variety of topics. Some will deal with his overall investment philosophy, others on specific investment strategies and still others will be comments on events that are affecting the markets and the economy. This time, Canadian real estate investing is the subject, as Pat replies to a question from a reader inspired by the increase in property values. Is buying a property and becoming a landlord a good investment? Look beyond today’s prices before you act, is Pat’s advice.
Below is the transcription of Pat’s comments.
Real Estate Investing: Becoming a Landlord
Q: Pat, here’s a question from a reader. Giving the continuing increase in property values, is direct investment in real estate that is, becoming a landlord, a viable option?
Pat McKeough: You have to recognize that direct investment in real estate is somewhat inaccurate. It’s more like, do you want a part-time job running a house that you own, renting it out and being responsible for calling the plumber and chasing down tenants that don’t pay and so on. There’s a lot more to that than many people realize.
When you do it on a businesslike basis, you have a company that owns hundreds of properties and it all averages out. But if you have a single property and you get into litigation with the tenant or into major repairs, there’s a lot of cash flow that you’re going to miss out on.
COMMENTS PLEASE
Have you ever rented out a property? Were you satisfied with the income you received and the appreciation in property value, or was it just not worth the hassle? Click here
So I think you need to go into a real estate investment with a lot of knowledge about how wide the variation is—don’t look at the average price increase in your home market in the past 20 years. Look at the worst case scenario: what if you have to hire a lawyer to get rid of a bad tenant who’s not paying. I think that will take away some of the desire.
Having said that, many people do make great fortunes by buying real estate, using a lot of leverage, and sticking with it for 10, 20 or 30 years. But don’t kid yourself into thinking it’s the same as buying Canadian Pacific, because there’s a lot more to it.
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Comments
Ray
I agree that being a landlord has it’s own special challenges although i disagree that you have to own anything near “hundreds” to make it work. it’s important to distinguish that real estate ownership is first and foremost a business with the secondary benefit of potentially being a valuable investment. Seeing it predominantly as an investment is the first mistake. Like any business, the owner needs to know the business requirements and be organised to succeed. Litigation is a possibility but less of a likelihood than many other more mundane and possibly expensive property maintenance issues soaking up time. There are many factors to be considered in the investment and like stock market investments, not all are born equal. Likewise, distinguishing between being a commercial versus residential landlord is also vital as residential landlords have much less control over their business and investment because of government rent controls and tenant rights. As a landlord i find it a very powerful way to create passive income and create long-term tangible assets and create a successful, but it is not for those who are allergic to work.
Although I agree it helps to have economies of scale to be a landlord I don’t think that is necessary as an investment. My father-in-law was a landlord just by not selling his home each time he needed a larger home (5 kids), and became independent wealthy this way without any investing knowledge.
I currently don’t have rental properties, but have in the past, and did not find it too difficult, and managed to make money each time. I think it depends on the price and your propensity to want to deal with tenants. Personally as an active investor, I find that to be more challenging than to be a landlord.
I have a rental property that has been turning a slight profit since it was bought in 2006. Since then the market value has increased by about 45%, we hope to have it paid off in about 10 years. If housing prices continue to raise in the same manner as they have, we hope to have equity worth about 1M$. We bought in a quiet and more upscale neighborhood. So far we have been fortunate with no legal hassles.
Because I am handy, I have made many repairs myself, mostly painting and yard upkeep. Overall I am satisfied with my investment/business decision. But it does require effort and time to manage.
On the stock market side, with all of my stocks selected according to TSI or SPD, my portfolio has essentially remained static since 2008. I’ve essentially followed a buy and hold strategy, with some exceptions. I sold about half my portfolio just prior to the 2008 correction and re-bought low. I am glad I did this , but recognize I was lucky.
So I think diversifying in real estate is a good thing, but it is a business, which requires much more involvement than the stock market.
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I agree that being a landlord has it’s own special challenges although i disagree that you have to own anything near “hundreds” to make it work. it’s important to distinguish that real estate ownership is first and foremost a business with the secondary benefit of potentially being a valuable investment. Seeing it predominantly as an investment is the first mistake. Like any business, the owner needs to know the business requirements and be organised to succeed. Litigation is a possibility but less of a likelihood than many other more mundane and possibly expensive property maintenance issues soaking up time. There are many factors to be considered in the investment and like stock market investments, not all are born equal. Likewise, distinguishing between being a commercial versus residential landlord is also vital as residential landlords have much less control over their business and investment because of government rent controls and tenant rights. As a landlord i find it a very powerful way to create passive income and create long-term tangible assets and create a successful, but it is not for those who are allergic to work.
Although I agree it helps to have economies of scale to be a landlord I don’t think that is necessary as an investment. My father-in-law was a landlord just by not selling his home each time he needed a larger home (5 kids), and became independent wealthy this way without any investing knowledge.
I currently don’t have rental properties, but have in the past, and did not find it too difficult, and managed to make money each time. I think it depends on the price and your propensity to want to deal with tenants. Personally as an active investor, I find that to be more challenging than to be a landlord.
I have a rental property that has been turning a slight profit since it was bought in 2006. Since then the market value has increased by about 45%, we hope to have it paid off in about 10 years. If housing prices continue to raise in the same manner as they have, we hope to have equity worth about 1M$. We bought in a quiet and more upscale neighborhood. So far we have been fortunate with no legal hassles.
Because I am handy, I have made many repairs myself, mostly painting and yard upkeep. Overall I am satisfied with my investment/business decision. But it does require effort and time to manage.
On the stock market side, with all of my stocks selected according to TSI or SPD, my portfolio has essentially remained static since 2008. I’ve essentially followed a buy and hold strategy, with some exceptions. I sold about half my portfolio just prior to the 2008 correction and re-bought low. I am glad I did this , but recognize I was lucky.
So I think diversifying in real estate is a good thing, but it is a business, which requires much more involvement than the stock market.
Normand