Category: Real Estate

Most “tenant from hell” stories involve bad people who don’t pay their rent.  This one is a bit different…

This article was written by Rachelle: a real estate guru who works as a property manager and helps investors find rental properties in Toronto and surrounding areas.  She has recently started a very interesting blog called Landlord Rescue.  You can subscribe to the RSS feed here.

If you haven’t read Rachelle’s last post then check out The Stripper With Dirty Feet – A Tenant from Hell Story .  A great read.

Most tenants who can’t pay their rent are very dysfunctional.  How people act in one area of their life reflects in other areas.  It follows that the people who are being evicted are usually the same people who cause damage, break into cars, do drugs, run guns, store stolen cars in the parking garage and cause trouble.

This isn’t a story about those people, but rather an eviction I did that had a real impact on me as a person because I had to make a decision to betray a friend’s wishes for her good and ours.

Mrs. R and the Flood

Every building has a person who comes to the management office on a daily basis.  These residents break up our day, inject a bit of humour, and keep us up to date with the building news.  Usually seniors, they are on watch for every single going on.  If a dog does his business in the elevator, they’ll tell you.  Other people call them busy bodies but generally property managers like them.

In one building I worked in, we had a 96 year old lady exactly like this – let’s call her “Mrs R”.  Every day Mrs. R would read the Toronto Star and then she would bring us the paper so we could read it too.  She would tell us about her arthritis and how much it sucks to get old.

Show and Tell

One time Mrs. R showed me her bed sore, right in the management office.  She pulled down her pants and showed me her ass.  We even got the whole thing on video because the office had security cameras.

Mrs. R took a real shine to me.  I was her favourite.  After all she showed ME her bedsore!

Every two weeks, her daughter would come to see her and bring her food and take her to the doctor or hairdresser.  Mrs. R was getting really old – at 96 she was doing pretty well, but she needed a walker, and she also wasn’t very hungry. She was skinny as a rail and her daughter brought her container after container of food trying to fatten her up.

Mrs. R couldn’t eat all the food and she didn’t want to make her daughter mad.  She would come to the management office with her little containers of weird food and give them to me.  At first I politely refused. Then I didn’t want to hurt her feelings. So the edible deliveries continued the entire time I worked there until she got evicted.

How lies lead to more lies

The whole food gift thing got very complicated. Every day I would go through an elaborate charade – get the food, dump it, clean the dish, all while keeping a sharp eye out for Mrs. R.  The longer it went on the worse it was.  My subterfuge had taken on a horrible life of its’ own.  It got worse when she asked me to comment on which food I liked better or how great certain recipes were.  The other staff would snicker at my inventive replies and my awkwardness.

I really loved Mrs. R.  She was funny and witty and sharp as hell.  She never forgot to pick up one single plastic dish.  She shared her life with us.  Every one in the office liked her.  Religiously she came to see us.

Life was getting harder for Mrs. R as she aged.  Her daughter lived in the boonies and couldn’t visit very often.  Mrs. R forgot her pills or took them twice sometimes.  She was having a hard time getting around and she was getting frightfully thin.

The Fateful Event

One day we got a call from the 12th floor. Water was pouring into someone’s apartment.  The super sprung into action to find the source of the leak.  He followed the leak to the 18th floor, right into Mrs. R’s apartment.  She forgot to turn off her kitchen tap and flooded six floors.

Later Mrs. R calls down to the office.  I sent the super up to her apartment again.  He talks to her for a while and then comes directly back to see me.  Apparently Mrs. R was drying off her socks and pants in her oven and they caught on fire.  That’s what got her evicted.

The Eviction

Nobody wants to evict Mrs. R, but it’s the only way we’ll get her out of the building and into a home where she can get better care.  Her daughter’s been trying to get her into a home for years, but Mrs. R is stubborn.

The next day I gave her a form for impaired safety.  This woman who brought me food and the Toronto Star, I evicted using the same form as I used on the gunrunner and the guy who punched our accountant in the face.  I had to keep the mask intact as I told her she was being thrown out of her home of the last 32 years.  I had to wrestle my own feelings of wretchedness as I stripped away the last bastion of her independence.

Then I held her as she cried and wondered what to do.

And that’s the sad story of how I came to evict Mrs R.

This article was written by Rachelle: a real estate guru who works as a property manager and helps investors find rental properties in Toronto and surrounding areas.  She has recently started a very interesting blog called Landlord Rescue.  You can subscribe to the RSS feed here.

Read Rachelle’s last story – The Stripper With Dirty Feet – A Tenant From Hell Story.

After years in the business, if I were to rent again, these are the places and people I’d check before renting in any building.  Rent the landlord, not the apartment.  Most apartments in buildings look remarkably similar, but your experience for a whole year is likely to be hellish if you don’t do your homework.

1 – Make sure the apartment you have seen is the apartment you are going to rent, not a sample suite.

Needless to say, the old bait and switch is not unheard of.  Ask to see the apartment that you will be renting.  Don’t believe a word your rental agent says about all the work that will be done to the suite.  After they get your money, you’re stuck with it in many cases. If your application is approved you will not get your money back!

2 – Check the Police Department

One place I worked at had 3-5 cars stolen out of the underground parking PER WEEK. Nothing was ever done about security!  Ask the police department.  A police car parked out front doesn’t mean much.  With so many people living in a decent sized building, they could be there for anything.

3 – Talk to some current residents

After the showing by the rental agent, go back in the evening after the office is closed.  The culture in the building will be obvious.  Are there a bunch of drug dealers out front?  Or is it seniors?  In any case, ask people coming or going out of the lobby how they like the building.  Tell them you are thinking about moving in.  Question them in detail.  One bad report doesn’t necessarily mean anything – you could be talking to a guy who’s getting evicted next week!  A majority of “NO WAY’s” means bad news – stay away.

4 – Google your building name and address

A quick Google of the address or building name including the city name may reveal something interesting.  Two of the buildings I worked in have reviews on them.  Country Club Towers and 3400 Riverspray both have poor reviews, and I can assure you with good reason.

5 – Pest Control

The first place I lived when I first moved to Toronto was a huge one bedroom in Parkdale.  The rent was cheap, it was very spacious and newly renovated.  By the second day I knew why.  The place was full of cockroaches.

I went to the super and she actually told me I brought them in.  The next two years were a nightmare of spraying and fighting to get sprayed.  All it did was knock the numbers down.  Within a few days they were back.  Disgusting and unbelievable amounts of cockroaches.

Since then I have learned more about pest control.  Every building has in Toronto has pests occasionally.  It’s what they do to control them that counts.  Look up your potential new building.  Bedbugs are becoming a fact of urban life in Toronto and Vancouver.

6 – Check Google News Archives

Use Google news archives so you can look at any articles that come up on the building and decide if you want to live there.  For 2460 Weston Road, I found this article and this one.

For 3400 Riverspray Crescent In Mississauga, I found this article.

If nothing recent has happened in the building, it won’t show up.  On a regular news search you will find only news for the last 30 days.  If you don’t find any results, click on Advanced Search and then click on Archives.  Don’t be too freaked out if there’s something in the news about your building.  Buildings house a lot of people and there’s always something happening.  If there’s a ton of bad news you may want to take a pass.

7 – Building staff

If your rental agent/super/property manager is showing any signs of being mean, snarky or inconsiderate, take a pass.  If they look stressed/overworked or not happy at their job, find a different place to live.  Believe me this is the best treatment you’ll get when renting in a building.  If service is already poor and you’re not even in the door, what will it be like when your tap is leaking or you find a pest or have a problem?  I don’t like dealing with rude people and I doubt most people do.  Watch how other residents are treated.  Don’t believe any excuses.

8 – Google Search the Property Management Company

Search for “Property Management Company Name” Review.  Don’t be surprised if you have to go back a few pages.  The larger companies have website and ads out so you’ll need to filter that out.  This will give you an idea of what’s in store for you in terms of customer service.

9 – Search for By-law Building Code Infractions

Toronto has a searchable form you can use to check if your potential building has any outstanding building code infractions or city work orders.  I’m not sure about every city or town you’ll have to do your own searching on this one. This is a huge red flag. You really have to be grossly negligent to be written up by the city. Inspectors give multiple warnings and inspections so if a building you are moving into is listed here seriously reconsider. Search the City of Toronto’s database here.

10 – MyHood.ca

This website and others like it exist for many major centers.  This site has searchable reviews and for many buildings.  Keep in mind that anyone can submit a review including building staff.  If you see a large number of distressed complainers and then a couple completely positive reviews, you may want to draw your own conclusions.

So there you have it, a complete and exhaustive list of resources you can check before you rent and sign a one year lease. If you rent the wrong place, one year will seem like one hundred years. If you’re on a budget you can pick the best available in your price range.  It’s unrealistic to expect the same kind of service and amenities in a $650 per month apartment in Parkdale as a nice high end condo for $1200 per month.

Happy Renting!

Do you have any other tips for potential renters?

I always hear from people that their primary residence has been their “best investment”.  Usually this is accompanied by something along the lines of “it’s worth *8* times what I paid for it!” and a satisfied smirk.  As with many things, I suspect that people with this view are selectively interpreting the data to support the conclusion they want.

The actual return from a primary residence is tricky to calculate.  There is the sale price which can be compared to the purchase price, but there is also a massive amount of expenses that have been paid over the years (taxes, maintenance, utilities, etc).  On the other side, a primary residence lets you avoid paying rent, which must also be accounted for.

Last year, Ramit Sethi had a great post “Be the expert:  What’s wrong with this real estate comment?” where he quoted the following statement:

My father bought our family house in NJ for about $27k in 1964; sold it for $350k in 2000. Home ownership is terrific long-term investment.

and invited readers to critique it.

Erica Douglass, another blogger, gives an excellent analysis (along with other commenters), talking about how the house underperformed the market annually by an average of 4% BEFORE any expenses were paid.  Commenters calculate that the father could have put the money in an index fund, then spent almost $40,000 a year in rent and been in the same finanical position.

We’ve had a distortion in the real estate market over the last few years, and while I don’t think the sky is falling, I also don’t think it’s realistic to expect anything close to the returns we’ve seen over the last decade. This has been an extreme outlier, once in a generation, period in real estate.

Money Pit

People my age (mid 30’s) have never experienced it, but in the past real estate has had long period of no appreciation.  The view at those times were that houses are a money pit that you keep shoveling cash INTO (instead of ATM’s you can take cash out of as we’ve all been doing recently).  Rather than a massive crash where everyone is selling their home for 1/2 what they paid for it, I suspect what we’ll see is a long period of little or no appreciation as we pay for the party we threw last decade.

Rachelle recently posted a great quote from one of Warren Buffett’s letters to investors:

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Never Buy Real Estate Again?

Am I saying that no one should buy real estate for the next decade?  Of course not.  I’m just arguing that, today, a primary residence should be viewed primarily as a consumer purchase:  something you’ll enjoy owning.  Like a car, it will possess some value, but buyers should be primarily concerned with whether they can afford it or not instead of what they hope the value will be in the future.  Similarly, investment real estate should be viewed based on its monthly net income, with very little expectation of appreciation.

For those of us who have done well recently in real estate, congratulations!  We shouldn’t expect to repeat it…

This article was written by Rachelle: a real estate guru who works as a property manager and helps investors find rental properties in Toronto and surrounding areas.  She has recently started a very interesting blog called Landlord Rescue.  You can subscribe to the RSS feed here.

I asked Rachelle to write a “tenant from hell” story and she came through in spades.  Let me know in the comments if you enjoyed it and perhaps I can entice her to write more.

I’ve been a property manager for more years than I like to count.  I like the real estate business and I know there’s money to be made. There’s a whole lot of talk about how investors can make a fortune in real estate.  People will sell you books and tapes and courses about how to get really rich in real estate and how easy it is.

Here’s the inside scoop from a person who actually deals with the dark side of real estate investing – tenants, the evictions and damages. I’m the lady who deals with the fallout from the “experts” and saves the landlord’s ass when they can’t deal with it one more second. I feel really bad for landlords who have been lied to, cheated and taken advantage of by everyone from investing networks, real estate agents and finally, their horrible tenant.

So here’s a story…

The Stripper with Dirty Feet

Once upon a time, I was a baby property manager. I was hired by a company to manage and fill vacancies for an investment portfolio of about 50 triplexes and fourplexes with the stated purpose of renting them out and then selling them. The couple who owned all these houses were in the process of divorcing and splitting up assets, which I can assure you, lead to an interesting, but tense office environment.

The previous property manager was kept on for a month to “help” me and “train” me.  His actions lead to educational situations; however, I never did get to meet him. I received the inevitable “bucket o’ keys” and a rent roll with some names and addresses and went on my way to make money for the owner.

Unsuspecting and naïve, I excitedly went to examine my brand new assignment. I had to take stock and inspect every apartment that was vacant.  My mission was to rent those empty apartments pronto! I was full of vim and vigor and ready to prove myself.

It was a dark and stormy night as I checked my rent roll, grabbed my bucket o’ keys and headed down to Sorauren Avenue. The rent roll said EVICTED and I wanted to check the apartment and see what was required. So I get to the house, find the door to the basement apartment and start trying keys from the bucket to open the door. I was working on my 20th key or so when the door opened!

My feeble fumblings had not opened the door, a tenant had!  Oh goody, my very first tenant.

I introduced myself “Hi, you scared the hell out of me. This piece of paper here says EVICTED, so I came to look at the apartment to see what it was like. I’m your new property manager.”  He replies “ I’m not sure what you’re talking about, we’ve never been evicted! I’m really glad you’re here since the last guy was doing a horrible job and I have some things you just have to see”.

He leads the way to the bathroom and shows me the problem. “Look” he says “when I flush the toilet it goes into the bath” He illustrates a few times and I can indeed see for myself that every time he flushed the toilet the level of the bath rose. By then the smell is threatening to overwhelm me.  My virgin nostrils are begging for mercy. There’s about six inches of stuff in the bath, it’s lumpy and vile; it’s definitely not water.

We head back into the kitchen. I’m not sure what’s happened to my sinuses, but it clearly isn’t fatal yet. We sit and talk for a while about how horrible the situation is and how negligent my predecessor had been.  At one point, a bleary eyed girl wanders in.  She had just woken up at the crack of sundown. We all talk about how I’m going to fix the problem for a while, then the girl says she has to get ready for work.  I ask her where she’s working and she tells me she works at the strip joint up the street. She says she’s putting herself through college. I nod understandingly.

I get ready to go. I have clearly assessed the problem. I’m starting to take my leave and promising some prompt decisive action.  I see the girl with a handful of clothes as she heads into the bathroom. I’m still standing there when I hear the unmistakable sound of the shower starting.  The impact of what I’m hearing fails to register right away.  I finalize my goodbyes and take leave of that place.

As I’m heading home, several conflicting thought processes are warring for dominance. Clearly I’ve missed something. There’s no way someone would ever… Then I’m thinking about the libidinous gazers at the strip club “Something smells bad” they’ll think. I shudder, thinking about someone stepping into a bath soup so noxious and revolting. I start gagging and resolve to think only positive thoughts from now on.

The Next Day – The Office

I resolutely enter the office. I ask them what the heck kind of shop they’re running around here. My boss digs up a file on the apartment I had visited.  Turns out they owe 8 months back rent and THEY HAVE NEVER REPORTED ANY PLUMBING PROBLEMS. The sheriff was there the month before and locked them out.

My level of dumbfoundedness, exceeds any stupefication I’ve previously ever been comfortable with. I’m way out of my league. Now, I have to figure out what to do. I drive back to the rental apartment and find that there is indeed a broken window.

I talk to the guy at the apartment and tell him that he is evicted, he’s lying and I have the rental file and the sheriff’s notice to prove it. I’m getting mean already and it’s only my second day on the job.  I’m angry because I got taken for a ride. I tell him I’m coming back with the cops. I call the cops, full of righteous anger. They’ve got murders to solve, they tell me. I call my contractor, he agrees to come, brings another lock and some plywood for the windows. In the meantime the man and the woman are taking whatever they can carry in a few dilapidated suitcases.

The contractor covers all the windows and changes the lock on the door.  We go inside and take stock of the property. Now I’m 5 feet tall, I could jump around down there, but the contractor had to walk with his neck crooked because there was no clearance for him to stand upright down there. It’s truly decrepit and it’s full of garbage bags that are full of trash. There are needles all over the floor in the bedroom. The bathroom beckons ominously, I refuse to take the bait and enter. I have to call the plumber for that one.

I look with satisfaction at my rent roll. It says EVICTED and now it’s true. I dream happily about the day it will say RENTED. Little do I know that my transformation has begun, I am no longer the callow college graduate. Some of the shiny newness has already worn off my ambition to be the best property manager I can be.  Later that night I wonder where the stripper with dirty feet is living now. Did she find a place or is she out in the cold?

That’s what it’s like to be in the trenches, to deal with people so damaged and desperate, they can’t pay their rent. It’s horrible and it will change you. You will learn about thing you never wanted to know and meet people you never wanted to meet.

That’s the reality of what you will eventually have to deal with as a landlord. It’s a numbers game and one day your number will come up.

Do you have any “tenants from hell” stories?  Tell us in the comments.

In a recent real estate post, frequent commenter Ryan Martin made a suggestion, in reaction to a statement at the end of my post:

Mr. Cheap:  “I’d certainly be willing to sell if the right opportunity presented itself, but I’m not in any rush either”

Ryan Martin:  “Mr. Cheap, judging by your last paragraph, it sounds like you want to sell. I suggest you be proactive instead of waiting for the opportunity to present itself.  Real Estate can be stressful if you let a decision like that drag on.”

Which made me thoughtful for a while.  Should a decision to buy or sell be an either/or choice?  Either you want to sell, and will take the best price you can get, or you don’t want to sell and won’t even listen to offers.

My gut feeling is emphatically NO! The best prices will be obtained by buyers and sellers who are willing to walk away from a bad deal (or even hold out for a beter-than-average deal).  Anything we own has an intrinsic value to us, and if market rate is below this, there’s no reason to sell (hang on to it and continue to enjoy it).  Heck, I regularly see people who demand a great deal or they won’t do business.  They may have a hard time finding someone to do business with, but if they do they’ll get a great deal.

In “get rich quick through real estate circles”, finding “motivated sellers” is scheme #1 (a Google search on “motivated sellers real estate” turns up almost 4 million hits).  The idea goes, find people who need to sell urgently, such as people going through a divorce, and demand an insanely low price from them.  I could be wrong, but I’m sceptical that there are many people, even those going through a contentious divorce, who are looking to give away their house (except maybe for this property Mike saw).  In fact, I suspect the opposite situation, where people expect an unrealistically high price for their property, is more common.

I’ve been in situations where I’ve been willing to buy something, but only if I get a great deal.  Often I get that great deal.  Without being obnoxious, sellers realize when a buyer is on the fence about whether or not they are going to buy and a smart seller will bring out their best price.  When I’ve shopped in marketplaces in developing countries, thanking the seller for their time and starting to walk away often resulted in a dramatic reduction in the price:  they realized that the negotiation was going to come to an end without a sale, which made them very motivated to find a price I’d accept.  Alexandra has commented that her husband has used the same strategy to good effect buying triplexes in Toronto.

Comparably, I think being willing to sell something, but only if I get a great deal is an EXCELLENT way to think about something you’re happy to keep.  Years ago I saw a property in Toronto that was a condo being rented to 4 students that had been TRASHED!  The carpet was buckled, they had taken out a lot of the light bulbs and wrapped aluminium foil around the sockets, and there were massive numbers of ants crawling all over the kitchen.  Their asking price was about market rate for the building, which seemed pretty optimistic to me given the state it was in.  I made an offer that was significantly lower (to compensate for the repairs) and they counter-offered $1,500 off their asking price.  Their agent wanted me to make another offer, but at that point I told him we were all wasting out time and I’d let it go (and told him to contact me if they were willing to be more realistic about the condition of their unit).  They never contacted me, and my hat is off to the sellers.  They had tenants in place and were making money, and had managed to find an agent who would actually show the place and try to push their crazy price.  It was no skin off their back to keep waiting and either get the rent checks, or possibly make a sale at an incredibly good price.

That’s smart.

For a personal residence, obviously you wouldn’t want to keep the property in open house condition for month-after-month while you execute this strategy.  Likewise, I’m not going to run off to Toronto to show my property a few times a week and ask a price no one is going to pay.  HOWEVER, if a tenant or someone in the building mentioned wanting to buy, I’d *CERTAINLY* talk to them, and if they were willing to pay a premium I would be happy to sell.

To be fair, I don’t think what I’ve detailed above is EXACTLY what Ryan was saying in his comment.  What I took from his comment was that he suggests, if I decide I’m ready to sell, I should go all out and put a lot of effort into selling it, not just wait around hoping for a buyer.  As far as that goes, I agree with him.  However, I haven’t decided that I want to sell.

I’m gearing up to do a new real estate investment (being a silent partner in the purchase of a mixed use building in small town Ontario). I kept thinking about doing a post iterating all the types of real estate investing I can think of and the pros and cons of each, so this seems like as good a time as any.

Speculation – this is anyone who buys a house hoping it’ll go up in value, whether they live in it, rent it out or leaving it sitting vacant (such as buying land). If you hope it’ll be worth X% more in the future, and the bulk of your profit will come from selling at that future time, you’re speculating.

Pros:
-Very easy and fun (pick an area, listen to the reasons its “hot” and put your money down!)
-Mixed benefit, if you’re renting it out you get some income, perhaps you live in it and get to enjoy the property

Cons:
-No way to reliably pick the next hot area, you’re basically gambling

Land-Lording – This is where you buy a property that’s cheap relative to the rent it can command, find tenants, and make income from the difference between their rent and your costs. You can rent a single unit, a small building, or a 400 unit monster as you learn more and make more money.

Pros:
-VERY well established technique (perhaps the oldest on this list)
-All sorts of data you can use to reduce your risk (i.e. average rental price in an area, vacancy rates, etc).

Cons:
-May have to fix toilets in the middle of the night
-Many laws are very tenant friendly

Wholesaling – This is what the “I buy houses” signs you see mean. Basically you search for “motivated sellers”, quickly buy their properties for cheap, then turn around and sell them for market rate.

Pros:
-If you’re buying at a steep enough discount its a fairly safe way to make money
-Fast return, if you can sell the property you get your money back and are on to the next property

Cons:
-You might feel bad profiting from people who have had some bad luck (or made some bad decisions)
-You need to learn to accurately appraise what a house will sell for
-You need to be able to quickly close, so you’ll either need lots of cash or great credit

Lending – This includes funding mortgages and being a silent partner. Basically you provide the cash, someone else does the work, and you split the profits.

Pros:
-Its great to make money while someone else does the work
-Some security on your investment if your name goes on the deed

Cons:
-Some risk, if the person managing the property messes things up (or takes advantage of you)
-Since you’re not on site checking things out, the property may get into trouble or be under-performing and you wouldn’t know about it

Bird Dogging – Often pitched as the way for people with no money to get into real estate, you look for deals, then sell them to other investors who have money.

Pros:
-No cash risked
-Put as much or as little time into it as you want
-Learn while you earn

Cons:
-I believe this is illegal in Canada and some states.
-Pays quite poorly
-Requires expertise, but is often performed by newbies. People who can properly evaluate a deal to determine if its good or not, can probably pull together the money to buy it themselves.

Flipping – Based on the idea that a house in good repair is worth or then the same house in bad repair minus the cost of repairs (e.g. its worth money to have everything already done).

Pros:
-Great way to capitalize on skills you may have (if you’re handy)
-Not very risky if you can properly appraise property and get the repairs done quickly (before a market shift)
-Fun (according to the home improvement shows)

Cons:
-Very competitive, so it doesn’t pay very well these days (many people are doing it)
-Takes a lot out of your hide (you could have just worked your ass off at work and collected tons of overtime)
-Not fun (according to the reality of having to fix up a crappy house then not even get to live in it).

Any other ideas for big approaches to investing in real estate? Any ideas about more pros and cons?

When I did my condo purchase series I promised to provide an update after I did my tax return and never got around to it.  Better late than never, I’ve completed my 2009 taxes and can provide a summary.

The way most investors (incorrectly) calculate their return is to take the rental income and subtract property taxes, insurance, utilities and mortgage payments.  I actually lucked out this year and that does match my return (if I can consider condo fees as utilities).  In reality, my return also included a risk element (my tenants could have moved out and I would have eaten the vacancy and something could have broken and I would have been on the hook for the maintenance costs).  Just because I got lucky doesn’t mean I can ignore this.  In future years I may lose any profits (and more) on these and other expenses.

Taking John T. Reed’s recommended approach of using my tax return to truthfully calculate my cash flow, I had a net income of about $3,000.  At a monthly rate of $250, I’m pretty happy with this.  Interestingly, this is quite close to the cash flow I projected (which makes sense, since nothing unexpected happened and the tenants remained throughout 2009).  I’ve raised the rent recently (although costs have also risen, so I suspect my return will stay pretty constant).

Return on Investment

Looking at this based on my initial investment of $43,811.68 this gives me a ROI of 6.8% (3000 / 43811.68).  This is nothing to sneeze at, but also not the greatest returns ever made.  There MAY be some appreciation (I think there would be if I sold today),  but I won’t know that portion of the return until I sell (the Toronto real estate market could crash or the building I bought in may develop expensive problems and I may lose money when I sell – the future is unknowable).

I have written in the past about the problems I see with how people think about current value.  Fundamentally, I think there is a problem thinking about investments purely in terms of return on investment.

Return on Equity

Looking at this from, in my opinion, the far more rational return on equity perspective, I currently estimate the property might be worth $160K.  Deducting a 5% transaction cost (in case I sold), and my mortgage which is a sliver above $87K gives me $65K (160*0.95-87) in equity, for a ROE of 4.6%.  This is probably more realistic, and again, is nothing to sneeze at in the current environment, but I’m not convinced it’s totally adequate compensation for the risks associated with the investment.

Tax Benefits

For many real estate investors, depreciation of real estate (and the tax benefits it brings) is a large part of their return.  For me, as a low-income grad student, this wasn’t useful to me (I didn’t take the capital cost allowance).

Moving Forward

I’ve changed my thinking on raising rent and given my steadily rising costs, the tenancy laws in Ontario, and the fact that it seems to be the standard behaviour I’m planning to be a bit more aggressive about raising rent in the future.  Unless there’s a convincing reason not to I intend to raise tenants rents systematically every year after they move in and each year after the previous increase.

I’d certainly be willing to sell if the right opportunity presented itself (if a tenant living there was excited to buy from me for example), but I’m not in any rush either.  I’ve been quite pleased with the (very low) time & effort requirements over the last 3+ years.

I’m often amazed at fundamental misunderstandings landlords and tenants have about the laws governing tenancy in Ontario.  I’m not a lawyer, but to the best of my knowledge the information in this post is correct (and if any commentators correct me, I’ll make corrections in the post).  This post shouldn’t be taken as the complete rules governing tenancies (please see the Residential Tenancies Act for more information).

Myth #1:  The end of the lease is the end of the tenancy

When I was coming up at the end of my first year where I’m currently living, I found out from the women who live upstairs from me that the landlord had offered to let them move into my unit.  After I got in touch with her, it turned out her assumption was that since I hadn’t told her I wanted to sign a new lease that I’d be moving out at the end of the year.  It took repeated communication, but eventually she realized that just because the lease was coming to an end didn’t mean I had to vacate.

The default condition if neither the tenant or landlord has given the other notice of terminating the tenancy is for a fixed period tenancy to turn into a month-to-month tenancy at the end of the lease.  I’ve never actually looked into the detail of HOW to structure a tenancy such that it ends at the end of the lease (I’ve wanted tenants to stay as long as possible), but I believe there are ways to do so (I’ve had friends get summer leases where someone else has already rented the place for Sept 1st).

She repeatedly asked me to sign another years lease or move out and I kept telling her that wasn’t how tenancy laws work.

Myth #2:  Landlords can increase rent when they want by whatever amount they want

Ontario basically has a fairly tight rent control in place.  There aren’t any rules on what rent you can charge when a tenant first moves in (it’s whatever the market will bear), but once a tenant has moved in they get quite a few protections.  First and foremost the rent can only be increased once per year (either 12 months from when the tenant first moved in or from the last rent increase).  A landlord must provide 90 days notice of the rent increase, and can only increase the rent by a set percentage (which varies each year, for 2010 it’s 2.1%).

In order to provide notice of the increase, an N1 form is provided by the province with the required information.

This only applies to older buildings.  For newer buildings it is possible for landlords to increase the rent however much they want (with 90 days notice, only once per year).  [See comments for more details]

Myth #3:  Tenants can leave whenever they want

Although it can be challenging chasing down (and getting money) from tenants who violate this, tenants are required to provide 60 days written notice when they want to leave a property.

Traditionally the 1st of the month is a popular day to start (and end) tenancies, but there’s nothing magical about this date (and if a tenant wants to give notice to move out mid-month they have every right to do so).  If the landlord is providing notice of the termination of the tenancy, it must be for the day a period of the tenancy ends (end of the month for a month-to-month tenancy).

Myth #4:  Landlords can’t enter the unit

Some tenants have the mistaken belief that during their tenancy the landlord can never enter the unit.  In addition to entry for number of maintenance and clerical task, the landlord can also legally enter the unit to show it to perspective tenants.  It is even possible for the landlord to enter the unit without notice in case of emergency.

Myth #5:  Landlords can’t evict tenants

It isn’t EASY for landlords to evict tenants (there are a LARGE number of rules that need to be carefully navigated), but it can be done.  There are some weird urban legends (one popular one is that tenants can’t be evicted in the winter:  they can be).

In a post a while back a commenter left a number of comments about his “air tight” strategy for preventing a landlord from evicting him.  With respect to the commenter, I don’t think he realizes that it will actually be an arbiter deciding how the rules are enforced (not him).  He seems to expect that he can demand any and all evidence he wants from the landlord.  The relevant clause refers to good faith, which I interpret as meaning unless there is evidence otherwise the board will take the landlord’s intentions at face value.  Ultimately, if a landlord really wants a tenant out and is willing to put the time and money in to make it happen, I suspect they can get the tenants out of a property.

Given the trouble and expense involved, if it’s possible to convince tenants to voluntarily move, that is certainly better (and even if they have to be paid a bit of money, it will probably be cheaper).

Myth #6:  Withholding rent is a reasonable response to something bad the landlord does

Some tenants have the mistaken belief that if the landlord is doing something wrong, it entitles them to stop paying rent.  This isn’t how the legal system works.  Just because one side isn’t entirely holding up their end of an agreement, doesn’t give the other side immediate permission to drop their end.  Say a landlord isn’t making required repairs, the correct response is to lodge a complaint against them with the landlord tenant board, NOT to withhold rent.  If a tenant doesn’t pay rent, while the landlord may get in trouble for not doing maintenance in a timely manner, the tenant may also get in trouble for non-payment of rent (the maintenance problem won’t justify non-payment).

There are some more excellent highlights from the residential tenancy act in the comments of a previous real estate post.