Mail boxes in expensive building

Wealthy Landlord, Wealthy Renter: Should You Really Buy Your Home?

Spring has been a weird one in Montreal. House- and condo prices have jumped in leaps and bounds. Ten offers, bids 50k over asking price, and my clients still don’t get the house. People in Toronto or Vancouver may laugh: prices in Montreal are pretty reasonable. But for the city that real estate forgot, this is all new for us.
It’s an opportune time, I think, to examine just how conditioned we are to believe in owning our homes. I’m a bit horrified when I watch buyers add extra tens of thousands in bidding wars without pulling out their calculators!Alex Avery might say one word to this: opportunity cost.Before laying down large sums for a plex, condo or home that you plan to live in, I highly suggest you run some financial projections. You should probably also read Alex Avery’s book, The Wealthy Renter.

People assume that buying a principal residence makes sense from an investment standpoint. Why throw money away on rent, right?  

Not so fast. Investing is all about leverage.
The question should be, what else could you do with that money?

In The Wealth Renter, Avery argues that your down-payment money may be better leveraged in other ways.

Let’s take a simple example. Suppose you want to buy a condo or cottage for 300k. Let’s assume you put down 20% (60k). At 4% interest, these payments will run you 1250$ / month. Add 200$/month property taxes and the same in condo fees or, in the case of a home, 250$ in maintenance (no upgrades!!), and you’re running 1950$ in monthly payments. None of these expenses is tax deductible. You’re building equity at a rate of about 500$/month. Your ROI in terms of building equity is 6000$/60,000$ or 1%. Sound like a good investment?

“What about market appreciation?” you say.

Okay, let’s assume 3% appreciation per year. (This takes the ups-and-downs of real estate cycles out of the picture). You’re now making 4% on your money. Still sound like a good investment? Remember: your payments are made with after-tax dollars. None of the work or maintenance you do is tax deductible, and neither is your mortgage interest. Sure, you won’t have the capital gains hit when you sell. But still, 4%?

Let’s consider the same scenario, but with a rental property. Your cost structure is the same (1950$ / month), but now you’re making 1950$ in rent. Also, you expense all sorts of things to help create a loss in the early years of ownership, creating tax advantages. You can also expense your mortgage interest.

What about paying rent?
Sure. We all agree you need to live someplace. Let’s make your rent 1000$/month.

Your out of pocket is half the amount it would cost you to own.

Now, let’s say you’re still making 3% appreciation like in scenario one, but you’re also saving 1000$ per month because your tenants are paying your mortgage and building expenses. Add 12k to the initial 6k being capitalized. You’re now making a 30% return, plus the 3% market appreciation. 33% return. Versus 4% as a homeowner. See Avery’s point?

People may argue that there are drawbacks to renting. You can’t upgrade or really customize the place you live.

Says who?

I’ll tell you right now, if one of my tenants offers to redo a kitchen for me, I’d happily agree to reduce his or her rent a bit. Consider what happens if you spend 5k redoing your landlord’s kitchen in scenario two.

Suppose you negotiate a 100$ rent reduction in exchange for 5k of renovations. You now save 13,200$ on your living expenses in comparison with scenario one. Subtract 5k for the kitchen renos from your savings, and you’re still ahead by 8,200$ over the person who bought their home. Now add the 6000$ of equity. That’s a 24% return!

Still think becoming a landlord redoing someone else’ kitchen is such a bad idea?

I don’t want to bash home-ownership. I live in a house that I own, and if I took out my calculator, I expect I’d be horrified at my cost structure. That said, before succumbing to current market nuttiness and tying up vast amounts of capital in a project with a questionable return, you may want to reconsider renting, and save your first purchase for a rental property. This is especially if you prefer to live in a more expensive, trendy area, where the ratios and prices are right now out of whack.

Good luck and play smart!
Yours in investing,



Did you know Airbnb can be risky business?

Thinking of Airbnbing your condo?

Maybe you’re already making extra money hosting guests for a few weekends.

Landlord beware! Here are a few risks to consider before choosing this business model:
  • More and more condo associations are forbidding Airbnb. Even if some continue to tolerate short-term rentals today, there is no guarantee that at the next association meeting co-owners won’t decide to ban the practice.
  • Insurance presents a serious risk. Even though Airbnb offers its landlords some type of insurance, you can be sure your home insurer won’t like short-term rentals. Most insurance companies require that landlords sign long-term leases with tenants (usually 1 year+). Your insurer may not know what kind of lease you have running at this very moment, but you can be sure that if something major goes wrong they’ll go digging. If you’ve been signing short-term leases and your policy forbids it, they may not cover damages. The same goes for your condo association. Co-properties have collective insurance. If something goes wrong with one of your rentals and the condo association gets involved, the building’s collective insurance may refuse to pay. You’d don’t even want to imagine the lawsuit here!
  • Most governments have laws governing rentals and the hotel industry. In Quebec, for example, the rental board requires a lease to be minimum 28 days to qualify as a falling under conventional rental laws. Below this number of days, you are considered a bed and breakfast. This requires special permits, taxes, and inspections. Bed-and-breakfasts also have to have special insurance and fire-code conformity. Although the risk here is relatively low; from what I know most areas don’t police this actively, there is nonetheless some risk.
  • Finally, consider this: insurance companies don’t want short-term renters because they consider the risk very high. This should be a loud warning message. Insurers calculate risk based on statistics of when things go wrong. As a property manager, my experience has confirmed these statistics. Bedbugs, neighbourhood disputes, broken furniture, holes in the walls, loud parties and angry neighbours are just a few examples of the more minor irritants I’ve observed often.
In projecting to the future, it may be wise to consider converting your Airbnb to a long-term rental. In the short term, this may hurt your pockets a bit. No one wants to hear this. But it’s better than building your business model on something shaky and borderline illegal.
Happy renting!
– Terrie Schauer, Rental Property Expert