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Rental too high

Social, economic and environmental issues in our ever-changing world.

Rental too high

Postby TylerM4 » Jun 7th, 2017, 7:41 am

https://www.castanet.net/edition/news-s ... htm#198830

I got a chuckle out of this letter. The writer claims landlords are ripping people off, then goes on to say she rents a 10yo 2000sqft fully furnished townhouse out for $2000 with utilities included and still makes money.

Let's do some simple math, using some assumptions:
- 10yo 2000sqft fully furnished townhouse in Rutland is worth approximately $400,000 depending on location and condition (Perhaps this is a little high?)
- 5 year fixed mortgage rate with 25 year amortization: Best rate I could find is 2.59%

Using an online calculator - that's a bi-weekly payment of $941! Assuming an average of 30 day month - $2016 a month!
Leaving nothing for utilities, property tax, repairs, maintenance, insurance, and the odd missed payment due to bad tenants or turnover.

If that same $400,000 was invested you could expect a nearly risk-free return of 6% (more if you're willing to take some risk) with no effort on her behalf. That calculates to 24,000 a year AKA $2,000 a month.

I think this women needs some help assessing her investment strategy. Even if the place is only worth $350,000, the numbers aren't even close to adding up.
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Re: Rental too high

Postby dominik » Jun 7th, 2017, 8:20 am

While your argument is right Tyler, the issue is that if you buy a property just to rent it out you should be aware that you simply will not make money unless you put a lot more down.

Now that is a bit of a convoluted statement I just made let me try to explain.

We have a lot of people buying homes that they simply cannot afford themselves. To ensure though that they can afford it, they rent out suites but not for just part of the mortgage, but the full mortgage. This shows a serious disconnect with reality and the economy.

Usually renters are doing so to keep cost low so they may save for down payments or deal with their financial situation. The problem we are facing now is that renters are being asked to pay other home owners mortgages in full as well as add some profit. Now I am cautious here as not all home owners do this, and there are plenty of home owners who don't buy just to rent and very well able to afford their homes. The issue here is many seem to mistake the "average rent price" with the actual "affordable and economically supported rent prices".

This is a touchy subject as it will bring many up in arms about "leave town if you can't afford it" and "better education" or "find another job". The reality though is, our housing market (not just kelowna or bc) has become a market for speculation. This is extremely dangerous, if we are talking commercial properties this does make sense but the moment we do this with residential we are talking about impacting social needs/requirements.

I firmly believe that yes you should be able to rent at whatever rates you seem affordable to you, but please unless you own a development where you have contracts with maintenance workers, you have a larger amount of renters (through which you drop your bottom line in cost and bring up your profit margin). This is not saying you can't do this with a single home/condo however the most you should budget for is basic covering of costs, and if you bought at a too high price you may be looking at paying for it yourself with the help of a renter not by the renter.

What many forget is that when renting:

- Their investment is not short term, we are talking long term past the 10 year mark
- The property, and maybe the home on it may bring value when it comes time to sell (here it is smart to know or anticipate future developments)
- Their tenants are not paying for all of this. If you are looking into creating a retirement fund through the purchase of a home that you rent, understand you will STILL need to pay for it as well, it isn't the tenant who is going to set you up for retirement alone.
- If your costs are low enough that tenants could take care of your investment that is great, however more and more unlikely.
- Renting out properties costs, again unless you have volume it is unlikely you will make profit.


Now there will be disagreement with this, which is okay. However seeing the rental situation getting worse, and seeing people who have full-time jobs not being able to afford to live here should give us all pause and wonder how it went so sideways.

(Yes inventory matters too, and there are issues with the buildings going up as well as neighborhood designs but we are looking at a pretty big issue here)

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Re: Rental too high

Postby jimmy4321 » Jun 7th, 2017, 8:32 am

I think a home owner should rent their property for whatever they are comfortable with. They stuck their neck out, the market could've went flop.
Sometimes you outgrow the property, but see value in it in the future.
Sometimes you have to take a hit to rent to good stable tenants your familiar with.
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Re: Rental too high

Postby TylerM4 » Jun 7th, 2017, 9:00 am

dominik wrote:While your argument is right Tyler, the issue is that if you buy a property just to rent it out you should be aware that you simply will not make money unless you put a lot more down....


I agree with you.. sorta. Except for the following:
- No investor is going to lay down that kind of money to not see any return until the 10 year mark. Not unless the returns are going to be VERY substantial - which isn't the model you are proposing.
- Even with the approach of making 0 income above the mortgage and bills (relying on the fact that you'll own the property after 25 years) you still need to at least break even with the bills. Nowhere even close to what that letter proposed.
- You'd be crazy to invest the way you are proposing when you could simply put the money in the bank at get 6% with little risk, stress, and work involved.
- You seem to be underestimating the risk involved with renting. 1 set of bad tenants can cost you years worth of profit. A change in the housing market could also cost you significantly.

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Re: Rental too high

Postby dominik » Jun 7th, 2017, 9:12 am

I agree a home owner has the right to charge what he feels comfortable with. Sticking their neck out however, that is their choice simple as that. If they want to create a future retirement plan involving property and rentals that is up to them not the tenants.

A market tanking is a real possibility, with any investment, that however does not mean that you try to take "advantage" (this is not necessarily the right word but it fits for the moment), of tenants who literally cannot find anything else. Worse yet and I have seen this, change the potential rental price when the tenant is looking at the unit. That is opportunism at its worst, and has little to do with sticking their necks out.

Yes it is their right and it is not illegal but it makes you wonder. There are many landlords out there who are more than fantastic when it comes to helping, understanding and working with you but when you have a market as captive as the one we have naturally the few bad leave a lasting impression.

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Re: Rental too high

Postby jimmy4321 » Jun 7th, 2017, 9:24 am

Like i said it's your property to rent , and it should be done in accordance to the residential property act.
There is no obligation to keep your rent low when you can get more.
There are countless reasons why a homeowner can't afford to leave money on the table.

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Re: Rental too high

Postby dominik » Jun 7th, 2017, 9:29 am

TylerM4 wrote:
dominik wrote:While your argument is right Tyler, the issue is that if you buy a property just to rent it out you should be aware that you simply will not make money unless you put a lot more down....


I agree with you.. sorta. Except for the following:
- No investor is going to lay down that kind of money to not see any return until the 10 year mark. Not unless the returns are going to be VERY substantial - which isn't the model you are proposing.
- Even with the approach of making 0 income above the mortgage and bills (relying on the fact that you'll own the property after 25 years) you still need to at least break even with the bills. Nowhere even close to what that letter proposed.
- You'd be crazy to invest the way you are proposing when you could simply put the money in the bank at get 6% with little risk, stress, and work involved.
- You seem to be underestimating the risk involved with renting. 1 set of bad tenants can cost you years worth of profit. A change in the housing market could also cost you significantly.


You are absolutely right, but in normal investments you hedge your bets. If you can make it for the better that is naturally in your best interest but if you damage the market which supports your investment, you will be faced with similar issues one way or another.

In regards to the profit, you are right a "professional" investor would see renting a single home as a loss and not do this unless the return is substantial (in this case it is not rent but the property/location). This is why normally if you are renting a normal "condo/apartment/house" your monthly return being +-0 if not - however the return of the sale or development of the property at a later point is where the profit comes in.

For example self storage units and parking lots are amazing platforms to protect/reduce the cost of your investment in the property until that time that you develop. These tend to be revenue neutral, only in the best cases do they become revenue positive.

In regards to the risk with damage and bad tenants... It is a reality, this is where insurance (to some extent) comes in as well as the commitments as the landlord (repainting after so many years, replacing carpets, etc.). These however are all facts of renting a property. The bigger the property the higher the cost, renting simply isn't cheap if you do it on a single property platform unless you increase volume/density.

In reality it comes down to weighing your win/loss ratio. Are you ready to be a landlord, are you able to handle the costs if they come up, are you "willing" to deal with the headaches? Not everyone should be a landlord and some of those who aren't should be... It is the normal damned if you do, damned if you don't.

Damage, wear and tear, all these things are a reality in renting property, using that as a reason to ask for outlandish rents would indicate to me that there is maybe an issue in the perception of what comes with renting. There are many ways to limit damage for example by retrofitting the property/unit so wear and tear is minimal (again this is done in larger scale rental situations to protect the investment).

I think the simple way of saying it ... renting isn't easy for either party and requires a lot of consideration and should not be seen as an immediate return of investment when it comes to single units.

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Re: Rental too high

Postby Liquidnails » Jun 7th, 2017, 10:52 am

Your numbers assume no down payment.

You can't buy a house with no down payment.

You do not know the value of the condo when it was purchased

You do not know how much the value of the unit has appreciated

You do not know the amount of the utility bills.


You basically know nothing. Starting at a conclusion you like and grasping at straws to justify it. Welcome to Castanet, I guess.

I think the owner could absolutely come out ahead if she sold the unit today. You did include the unit's increased value as profit, did you not?

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Re: Rental too high

Postby Queen K » Jun 7th, 2017, 11:22 am

jimmy4321 wrote:I think a home owner should rent their property for whatever they are comfortable with. They stuck their neck out, the market could've went flop.
Sometimes you outgrow the property, but see value in it in the future.
Sometimes you have to take a hit to rent to good stable tenants your familiar with.


Which is exactly what my friend's landlords do. They've kept the rent down to keep the excellent tenants. Win/win.
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Re: Rental too high

Postby TylerM4 » Jun 7th, 2017, 11:39 am

Liquidnails wrote:You basically know nothing. Starting at a conclusion you like and grasping at straws to justify it. Welcome to Castanet, I guess.



OK Mr "You know nothing". Answer this question for me then.

Why is the vacancy rate so low?

If landlords were truly making good returns everyone would be buying property to rent out instead of investing in other markets. I'd love to hear your explanation for why that's not happening.
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Re: Rental too high

Postby Queen K » Jun 7th, 2017, 11:43 am

Liquidnails wrote:
I think the owner could absolutely come out ahead if she sold the unit today. You did include the unit's increased value as profit, did you not?


I believe a profit on an increased value depends on a number of factors including what the unit sold for, fees and income tax liability. Maybe there are some accountants here that could shed more light on this matter. Please and thank you.
The NDP Government: 2017 thread is not in the Bickering Room. Money can't buy what I want for Christmas.

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Re: Rental too high

Postby Liquidnails » Jun 7th, 2017, 12:06 pm

TylerM4 wrote:
OK Mr "You know nothing". Answer this question for me then.

Why is the vacancy rate so low?

If landlords were truly making good returns everyone would be buying property to rent out instead of investing in other markets. I'd love to hear your explanation for why that's not happening.


This is absolutely happening, but with short term rentals such as AirBNB rather than traditional tenany. That definitely robs vacancy.


A very small percentage of the population has enough money to purchase a home in this market. They'd rather rent, which is why we see such low vacancy rates. Couple that with a high student population, short term rentals and the fact that "putting all your eggs in one basket" is not an advisable investment strategy. And we have our current situation.

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Re: Rental too high

Postby TylerM4 » Jun 7th, 2017, 12:25 pm

So.. your explanation basically boils down to:
- There are better alternatives (AirBnB)
- Cost of entry is too high (Kelowna is full of multi-millionaires but whatever)
- It's not a good investment strategy (All eggs in 1 basket)
- High turnover makes it less profitable and high effort (dealing with tenants coming and going)

One side of your mouth is saying "Landlords are charging too much" while the other says "It's a bad investment for landlords".

Which is it?
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Re: Rental too high

Postby Liquidnails » Jun 7th, 2017, 12:38 pm

Where did I say landlords are charging too much?
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Re: Rental too high

Postby jasond_71 » Jun 7th, 2017, 12:41 pm

Vacancy rates are low because it is too expensive to buy a house so people rent.
Also because it is expensive to buy a house you would need to get a higher rent than the market would bear in order to make it a good investment. Not to mention the hassle of being landlord so people are not buying investment properties so there is less rental available.
People *bleep* about rent gouging but who in their right mind would buy a rental property that didn't achieve enough rent to pay for itself?

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