Investing in property: a young person’s game?
Globe and Mail
You buy a duplex, get a mortgage, find tenants and collect monthly rent cheques. What could be easier?
With stock and bond markets spinning their wheels, many Canadians are looking for alternative places to park their money. And while buying an investment property might seem like a good way to diversify, you should do your homework before jumping into the housing market.
When to rebalance, and when to avert your eyes
“Real estate investing is not for everyone,” says Vancouver-based Don Campbell, president of the Real Estate Investment Network.
“You cannot do it sitting in your basement in your pyjamas, like you can when you trade stocks. When you buy a property, immediately upon getting the key, you are running a business.”
Kurt Rosentreter, a chartered accountant and certified financial planner at Manulife Securities Inc. in Toronto, says the decision to buy an income property should be based on two factors: Once you subtract your mortgage and operating costs, will the property generate a steady monthly income? Secondly, will it appreciate in value?
Looking back, investment properties have by and large been financial winners, says Mr. Rosentreter. “In previous years and in most major cities, property values have doubled and the rental income is higher.”
But that trend may not continue. Interest rates have been sitting at record lows for some time now, fuelling a massive run-up in housing prices across Canada.
Mr. Rosentreter is concerned about what will happen to investment property owners saddled with large debt loads when interest rates inevitably rise. “If you are taking on a 20-year mortgage and interest rates hit 5 per cent, could this be a disaster for you?”
Moshe Milevsky, a finance professor at York University’s Schulich School of Business, says surging housing prices have created the potential for a huge downside. “The run-up has been great for anyone who joined this party a few years ago, but latecomers should beware.”
In his opinion, property investors are as vulnerable to economic shocks as those who choose to buy stocks. “If the unemployment rate spikes or real estate prices collapse, both of which happened in the U.S., then your income property investment will run into difficulties as well,” Mr. Milevsky says.
Some people view income properties as pillars of their retirement and financial plan, says Mr. Rosentreter. “They have heard all the good things – that you can raise the rent alongside inflation, that real estate values rise, and so on.”
What they fail to consider is their age. “If you are 55 and buying it with a full mortgage, it will never be a pillar of anything because you will be carrying debt through most of your retirement,” he says. “You need to buy these things young, or not at all.”
John Turner, the director of mortgages at Bank of Montreal in Toronto, says it all depends on how long you intend to hang on to your income property.
“If your time horizon is short, it might be risky and not worth it. But for the folks that are thinking long-term and looking for diversity in their investment portfolio ... in my opinion, real estate is a sound investment.”
His advice for anyone considering becoming a landlord is to sit down with a financial adviser and see how what kind of role real estate can play in your overall portfolio. Crunch the numbers and figure out the tax and estate planning repercussions.
“You need to factor in maintenance, insurance and taxes,” Mr. Turner says. “You need to look at how much you need to put down and your costs, then figure out what your rate of return will be over the next five to 10 years.”
Mr. Campbell says the key to buying a successful income generating property is picking the right region – somewhere with looming job and population growth. “You really need to know where people are moving, where the jobs are.”
In Ontario, Kitchener, Cambridge and Hamilton are all good places in which to buy – as are Halifax and Winnipeg, he says. Edmonton and Calgary will be the big winners in the next few years, he adds.
Toronto and Vancouver, meanwhile, are riskier because it is more difficult for investors to generate a steady cash flow, Mr. Campbell says.
As for running the property, he believes hiring a property manager is the way to go, regardless of the cost. “If you manage them yourself, it can drive you crazy. Much like owning a small business, you hire a property manager to run your business and factor that cost into your budget,” he says.
“The real money is not made in the 7 per cent of the rent that you pay the property manager; the real money is made in finding good quality properties to add to your portfolio.”
Please remember that 35 year amortization and 0 down (cash back for down payment) mortgages. Secured Lines of Credit on the second position also available.
This article was published in the Globe and Mail.