23 responses

  1. Mrs Pillars
    March 16, 2010

    Well, I thought it was a good idea because it worked for my mother. But I think she calculated the taxes in with her mortgage for the year and divided that by 12 to get the amount to charge for monthly rent.

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  2. Andrew
    March 16, 2010

    Under the scenario created agree with your logic. At least from personal experience though I’ve factored in those additional costs and compare the rent to the holding cost vs. the mortgage cost. Mortgage, taxes, insurance, upkeep all are included. If those balance your example doesn’t hold weight as you are gaining an asset at zero cost (assuming you have a 100% mortgage).

    The tradeoff between the down payment and other investment vehicles is a different bag of worms.

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  3. Leslie
    March 16, 2010

    Owning a rental property is owning a business. You have to do more than break even or what you have amounts to a non-profit–without the tax benefits. Appreciation on the property at re-sale time should be considered gravy; the revenue should result in enough to also allow for contingencies such as vacancy, maintenance (non-capital improvements), advertising, legal costs, and your own property management services–as well as the mortgage, taxes, insurance, and utilities. An investor can actually lose money on a rental property when you take a close look at the P&L on the business. Those are my thoughts.

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  4. 2 Cents @ Balance Junkie
    March 16, 2010

    Is there such a thing as an intelligent woman that doesn’t frighten you guys? I’m just kidding, but I couldn’t resist. 😉 I know there are lots of guys out there who really do appreciate a smart lady and it sounds like you’re one of them.

    I think your logic makes sense. There are risks in owning any asset and I would be uncomfortable with a 100% mortgage on anything. But that’s just me. If you are as knowledgeable as these 2 ladies seem to be and you are fully aware of the risks, go for it!

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  5. SlackInvestor
    March 16, 2010

    I do agree with your points about tenants and the issues of real estate as an investment. However, I disagree with your logic of comparing this investment model with that of a GIC. The reason is because to invest in the GIC you need 100% of the money up front (or you borrow to invest). In your rental property example, you use a 100% mortgage, so in that case you’re using someone else’s money. By using other people’s money you are still taking the investment risk, but any appreciation in either the increased equity or capital appreciation is a huge bonus, so you’re no longer just breaking even. Compare this with investing in a GIC using someone else’s money, and you’d be hard pressed to make any money since nobody is lending at interest rates as low as GICs are paying.

    Great post as it makes you think. Keep up the good work!

    Reply

  6. Rob
    March 16, 2010

    If you lose a $10 ticket, you lose $10 plus the transaction cost (time, mental effort) of buying another ticket. Whereas if you drop a $10 bill, you just lose $10. So preferring to lose the bill is actually the rational choice.

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  7. Mr. Cheap
    March 16, 2010

    Rob: Sorry, I should have linked to the Washington Post article (link now in main article). It explains the paradox better than I did (along with a psychological study that shows it’s about more than the transaction costs).

    Reply

  8. Matt
    March 16, 2010

    It’s too early to tell whether my investment in real-estate is paying off, but I remember crunching a bunch of numbers prior to purchase with fictional, yet realistic numbers and it certainly looked like a good investment in the longer run. Also, I’m getting some intangible benefits from the purchase and management of the place: I’ve become much handier, I’ve spent more time with my father (who helped me renovate) and I’m learning to become more assertive as well. If I counted my time and energy, it might seem a poor investment, but it works for me!

    Ooh, it’s also an excuse to own a bunch of cool-looking and useful power tools, which, as an apartment dweller, I lacked previously to owning. 😉

    Reply

  9. The Rat
    March 18, 2010

    I’m not a big fan of having tenants pay the mortgage. The best experiences I’ve had with real estate involved me selling my principal residence on two occasions and I think it offers one of the best tax havens for the average Canadian to take advantage of.

    Also, in my portfolio, I hold a sizable enough % of my weighting in REITs. There are a lot of good REITs out there that offer anywhere from 4 to 10% yield and you can sleep at night without the worry of getting a call that a pipe busted and there’s water gushing into the basement or that the tenant needs new lightbulbs.

    Nice post!

    Reply

  10. Adam
    March 18, 2010

    Ultimately cash flow is the point…

    I do think you missed the idea that each rent payment that a tenant pays you every month (which is ultimately equals the mortgage payment + opex in your example) decreases your mortgage principle by a %. So assuming the property increases with inflation, you get the inflation increase + the monthly increase in equity. *Theoretically at $0 cost to you*

    One also needs to consider the increase in rents over time weighted against a decreasing fixed mortgage cost. (assuming steady interest rates)

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  11. Mr. Cheap
    March 18, 2010

    Adam: I do think you missed that it’s an interest-only mortgage (as well as there being other expenses: I provided examples of some of these).

    Cash flow is certainly a large part of the equation, but most real estate investors use a naive approximation of cash flow to convince themselves they’re doing better than they actually are.

    Reply

  12. Adam
    March 18, 2010

    Doh! I totally missed that!

    Yes, in that case, you’re right.

    Reply

  13. Eevie
    March 18, 2010

    we have someone paying off the mortgage on our rental…the actual rent covers the total mortgage (principal and interest) plus taxes plus strata fees. I am using a spreadsheet to calculate the cost of the rental so that when the time comes to sell, i will know in the long run if the we have made money or not. So far, (after 4 years) i need my rental to appreciate by $15,000 to cover the cost we have put in…for maintenance & repairs & other sundries. There are also tax deductions to take into account but I have not included that in my spreadsheet. We are not slum lords and perhaps put a bit too much into upkeep (ie., painting, floors, new furnace, roof), but overall, we have had excellent tenants and the rental has appreciated by $50,ooo-$60,000. Only when we finally sell will we know if it was worth it!

    Reply

  14. Jess V.
    March 21, 2010

    With the example you gave, my answer is Yes, that’s a bad investment.

    But if the renters are paying for all the expense such as mortgage, maintenance, insurance and etc… And have a positive cash flow, then it is a good investment. Even without RE appreciation, increased in equities, hedge against inflation and tax advantages.

    Another alternative is REITs. I own both REITs and Rental.

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  15. youngandthrifty
    March 21, 2010

    Hmm well, if anyone in Canada is considering getting a rental property, they better do it soon, because after mid April you’ll need a 20% down payment.

    I like the idea of tenants contributing to your mortgage, it generates cash flow (provided that they aren’t picky and you don’t have to spend oodles of cash to maintain the property), and the property will appreciate in value over the long term, when you sell the property at a later date.

    Reply

  16. Pacific
    March 23, 2010

    I have been a landlord for about 18 years, and there was always “The 100% Rule” with renting: To make a good deal on investing in property and renting it, you should receive, per month, 1% of the cost of the property. So if an apartment costs $140,000, you should recieve $1,400/month in rent. This simple guide formula covers all the costs, like intererest, insurance, repairs, etc.
    Landlording is a job, you get paid by increasing your net worth.
    As an aside, be careful of the future payments, because there is only one direction for interest rates to go (duhh: up!), and you don’t want to have too big of mortgage paymens that you can’t cover.
    There are places to invest that still have the 100% rule covered.
    BTW, I sold my rental house 2 years ago, and have invested the money in stock market ETFs and GICs.

    Reply

  17. Todd
    April 5, 2010

    I have been buying residential real estate for 8 years. I own 5 houses, a duplex, and 15 town houses. If it cost you nothing to purchase the asset (1o0% financed) then you tied up an asset for nothing. This is VERY rare in investment real estate. But would be good. Yet the real key is cash flow as already stated. If at the end of the month after all is factored in you have more in your bank account than less- you have made a good purchase. People paying my mortgages and expenses has made my balance sheet impressive considering I am not a high wage earner. Think outside the box and do your homework. Anything is risky if you do not understand what you’re getting into.
    Happy hunting,
    Todd
    ending the rat race

    Reply

  18. ltsmash
    May 12, 2010

    its for a retirement nest egg idiot

    Reply

  19. Jeff
    September 1, 2010

    Assuming you’re horrible at business and got a property that only breaks even, if your mortgage is a fixed 30-year, then inflation will drive up rent while your mortgage stays the same. Eventually you will make a profit despite yourself. This article also ignores a slew of tax deductions that landlords enjoy (mortgage interest, taxes, all operating costs, home office, property depreciation, etc.).

    You would of course have to figure out all the numbers before you bought a property, but you should be able to beat your 3% ROI by several fold.

    Reply

  20. Jeff
    September 1, 2010

    Also, you never said how much you put down. Many people misread 100% interest as 100% financed, but if it’s a fully financed purchase, then you have invested nothing. If you’ve invested nothing, you can’t say it’s a terrible investment because there’s no investment on your part at all.

    Reply

  21. JG
    March 20, 2012

    I think it is low class and scummy to have tenants pay off a mortgage. I earned my own home. I did not get a loan and pass off the cost to a tenant. Buying property and renting it is a mindless investment.

    Reply

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