I remember it was near the end of 2014. My wife (girlfriend at that time) and I were debating whether or not we should buy a house in Toronto.
The average detached 1,000 sq. ft. bungalow around our area was going for about $450,000 to $500,000 and during that time, we thought the price was insane and expensive. But after biting the bullet and making our first purchase, we would have never imagined the comparables going for over $800,000 3-4 years later!
We shopped around and found one that was right for us. Giving ourselves a reasonable budget to work with, the place we went with wasn’t perfect but it met most of our criteria. The main floor was updated and in very liveable condition -- perfect for renting out. All we had to do was invest some money into our lower unit and modernize it into a liveable space we enjoy.
Once everything was done, we rented out one of the units so we could earn some extra money to help cover the mortgage. In hindsight, our home was good buy -- at least for now (knock on wood)! Of course, if the real estate market in Toronto went south, we would have still been okay with that because we did not have the intention to profit from any short term gains.
Again, we were just looking at options to help us earn some extra money. Plus, we wanted to experience and see what it’s like to be a landlord.
Because we had a good experience with our first tenants, we decided to purchase another property a year later as a long term investment. This will probably be our last purchase because being a landlord isn’t exactly an easy task despite the perks of building wealth (plus who's got money for that??). But of course, you can always hire a property manager as long as the return still makes sense.
After several years of purchasing real estate, here are a few things we learned about rental properties and being a landlord:
1) Stable monthly cash flow – assuming everything goes well, and your relationship with your tenants are good, the monthly cash flow makes a nice income stream.
2) Potential price appreciation – the value of the property may have long term growth. This has been seen in cities like Vancouver and Toronto where demand for homes has been trending upward.
3) Investment diversification – an asset class that makes a great addition to your overall investment portfolio for diversification. Not to mention, this may also be a good way to hedge for inflation in the very long term.
4) Opportunity to learn – when something minor breaks or needs to be replaced, this is the perfect opportunity to learn how to be more of a handyman or handywoman. You are pretty much forced to.
1) The high cost of investment – let’s face it. The 20% down payment isn’t something to joke about. Especially with today’s soaring real estate prices, it makes it even harder to buy. It's just not affordable.
2) HELOC presents more risks – even if you don’t have the 20% in hard cash, and you decide to tap into HELOC, you are highly leveraged which makes it a riskier form of investment.
3) Maintenance cost – you may need to reserve several thousands of dollars on the side for maintenance and in case of any emergencies. They will pop up, and it's not uncommon to hear your tenant complain about something.
4) Tenants not paying – as you may know, there will always be a risk that the tenants may not pay on time, or even at all. Luckily, we haven’t experienced this but we have heard horrifying stories.
5) Tenants damaging the place – another risk is tenants may not take care of your place, which may decrease the value of your property.
6) Not liquid – unlike buying stocks, bonds, funds, and other liquid assets on the market, physical real estate is illiquid. If you ever decide to sell, it’s not as simple as logging into your trading account online and sending a sell order within seconds. It will take time. You’ll also have to consider selling fees and negotiating a reasonable price you want.
Conclusion about becoming a landlord and investing in real estate:
Despite the cons, there are still pros in investing in real estate. You’ll just need to do more research and assess whether it’s right for you.
If you’d like to add real estate investing as a diversification without buying a physical property, there are other ways you can invest indirectly such as REITs (real estate investment trusts). This trust trades like a "real estate stock" that holds and manages a portfolio of real estate properties. Any individual investor like you can purchase shares in a publicly-traded REIT.
Aside from making extra money with real estate, there are also many other ways to earn additional income on the side. Whether you’re looking for extra cash to cover your monthly expenses or to save more on the side, here is a list of ways to make extra money today.