Rental properties becoming more attractive, but managing them is not easy
The recent weakness in stock markets and the poor interest rates paid by banks have left investors with few attractive places to place their money. However one investment vehicle that has seen substantial momentum lately is rental properties.
"Becoming a landlord can be a good investment," said Jacques Dionne, a software programmer, and co-owner of two buildings in Montreal's Plateau Mont-Royal district. "There is a shortage of apartments and the real estate market has done well during recent years."
According to the Canada Mortgage Housing Corporation the average selling price in the "plex" market for properties with between two to five units on the Montreal island rose 18.0 per cent during 2001, and 8.0 per cent for the 12 months to July 31, 2002.
Dionne and his associate were big winners in that run-up. They purchased a six unit building on Brébeouf street, with three 3 1/2s and three 4 1/2s in 1997 for $210,000. Since then, Dionne renovated several of the apartments and lined up reliable tenants. The effort was well worth it. An evaluator recently estimated its resale value at $323,000. Encouraged by the result, the team bought a five-unit building on the same street during 2000.
Much of the price increases in the rental unit market can be attributed to lower interest rates, and the huge apartment demand on the island of Montreal. According to October 2001 CMHC statistics, the vacancy rate stood at 0.6 per cent.
However while the rental unit market may be good, according to Dionne, life as a landlord is not easy. "There is a lot of work involved, especially during the first few years after you buy a place," Dionne said. "Many of buildings on the market today are old, and they need either or repairs and renovations."
For rental property owners the difference between success and failure lies on the margins say numerous sources. Landlords need to make a lot of good decisions to come out ahead.
For one, the entry price is crucial. "It starts with buying the building. It has to be in a good location, and you can't pay too much," Dionne said. He recommends a ballpark figure of eight times gross rental revenues as a good estimate of a property's value.
"You also have to be a jack-of all trades, because there are a lot a repairs and renovations to do." Dionne said. "If you pay contractors every time something comes up, they will eat away all of your profits."
According to Martin Messier, president of the Association des Propriétaires du Québec, getting along with tenants is another crucial prerequisite to a landlord's success.
"Many of the existing regulations are stacked in the tenants favor," Messier said. "And if they want, they can really make life difficult for you."
According to Messier, one of the big challenges that landlords face is the long delays they face in getting hearings at the Régie du Logement, when they want to get rid of problem tenants.
A standard hearing can take six months or more to arrange. And while the process speeds up somewhat in cases where a tenant stops sending his rent checks, a non-paying tenant, who knows how to work the system, can cost a landlord a bundle. So Messier advises landlords to screen new applicants carefully.
Most of the city's long-time tenants benefit from rents that are far lower than market value due to rent-control regulations. So it is very hard for landlords to get rid of problem tenants even in the best of times. But Montreal's apartment shortage has made it even more difficult, because tenants are fearful of not being able to find a new place
Several years ago Dionne discovered that one of his tenants was working as a prostitute, using her apartment as a base, and when he found out he was able to quietly get her to agree to move. But Dionne fears that would be much more difficult today.
Landlords also have to be very careful about managing their tax situations said one expert. "Taxes can equal between 30 and 35 per cent of revenues," said Louis Robert, a chartered financial planner, who completes tax returns for approximately 200 property owners each year. "Landlords need to be aware of tax laws, so they make the right decisions."
One crucial distinction is that between money landlords spend on building maintenance, which is fully deductible in the year it is disbursed, and renovations that add value to the building, which are written off over 20 years.
But Martin Messier from the Associations des Propriétaires du Québec, cautions that just because rental properties have done well during the past two or three years, there is no guarantee the trend will continue.
"Property rates have risen quickly recently, but they went through a period of about ten years of modest returns," Messier said. "Notice not many people are building new units. That's an indication of the tough environment property owners face."
According to Messier, the government needs to take steps to make rental property ownership more attractive over the long-term. These include allowing landlords to write off renovations over a more reasonable amount of time, say five years, and allowing landlords to rent out apartments at market value, when older tenants move out, something rent control regulations currently prohibit.
Robert agreed, and also warned that today's rental property boom could be temporary. As a result landlords should build a financial cushion to shield themselves against tough times he said. "Today conditions are ideal. Interest and vacancy rates are low," Robert said. "But that could change quickly, and those who are not prepared could lose a bundle."
Photo caption: According to Jacques Dionne, being a landlord can be profitable, but it's a lot of work.
Sidebar: Tips to running a profitable rental property
o Find a property that meets your needs. A good entry price
and location are crucial.
|© 2002 Peter Diekmeyer Communications Inc.|