As every landlord surely knows, running a credit check during the tenant selection process is paramount. However, not every landlord realizes what to do with the information the credit check reveals.
“Every independent landlord knows that to screen a tenant, you have to look at their credit, but a lot of them have no idea how credit relates to a tenant’s ability to pay rent on time,” said Jerome Werniuk, director of sales at Naborly Inc., which runs free credit and background checks. “Ninety-five percent of landlords have tenants show up with their own credit file, meaning they go to Credit Karma or Equifax, but when we hear professional tenant stories, these people come with doctored credit checks.
Doctoring a credit check is as easy as finding a template online and filling it in as one wishes. It’s what Werniuk describes as a huge problem within the industry.
While savvy landlords realize they can obtain credit checks from Equifax or TransUnion, many still don’t know, nor have time, to mine the information therein to decipher a tenant’s capacity for prompt rent payments.
“To get a credit file from either of the credit bureaus, they have to pay for it and a set-up fee for the individual’s report, but there’s a heavy credentialing process to pull somebody’s file,” said Werniuk. “Even when the landlord gets a credit file, they don’t know how to read it. They don’t know exactly what an R9 is or how someone paying a cell phone bill on time impacts their ability to pay rent. So credit is not necessarily a good tool for independent landlords.”
Naborly builds a different type of credit report using critical criteria like contemporary cost of living and verifiable income to determine a potential tenant’s ability to pay rent. It has proven so popular that, when it launched in February 2018, Naborly screened 100 people a week. Now, it screens at least that many people in a day.
“The biggest feedback we’ve received from landlords is our tool is amazing at assessing risk so that they can properly evaluate whether or not to accept the rental application,” said Werniuk. However, there remain risks that are extremely difficult to predict. Landlords have said that many of their previous evictions were due to circumstances that changed after the tenant moved in, like job loss or some other unforeseen, and expensive, event in their lives. Nobody can predict those things.”
The average cost of eviction in Ontario is $9,000, and that could cripple an investment. In response, Naborly has rolled out Rent Guarantee, which doesn’t just risk assess but also protects the landlord for the full term of the lease. In effect, Naborly cats as the tenant’s co-signor, which shields the landlord’s investment.
“It’s based on the Naborly report and the risk score we give, which directly correlates to a tenant defaulting on rent,” said Werniuk. “We give a quote for how much rent guarantee will cost. They can have Naborly become a guarantor on the lease, meaning if the tenant ever defaults then Naborly steps in and covers the rent for up to six months. Our primary customer for Rent Guarantee is the landlord who only owns one or two units because if they don’t collect rent for two or three months, they’ll have issues paying their mortgages and they could lose the property.”
Source: Canadian Real Estate Magazine – by Neil Sharma 04 Feb 2019
For the last 25 years, I have been helping families and individuals identify goals, establish a plan and determine a clear vision of their financial future. While a financial plan is a future road map that is normally put into writing, it is also a guideline that is used to track results, and make adjustments when needed. Since this is an ongoing process, there are several areas which should be discussed.
When it comes to investments and cashflow, many financial planners will focus on the Equity, Bond or Alternative markets, but I feel it is important to also be aware of the power of investing in cash-flowing residential real estate in areas of the country which make sense.
An important part of many people’s financial plan is the home they live in. The choice between buying a home and renting is among the biggest financial decisions that many adults make. But the costs of buying are more varied and complicated than for renting, making it hard to tell which is a better deal.
Owning a home is potentially the largest investment most people will make during their lifetime. Many purchase homes with the hope that the value will appreciate, and they will be able to build a sizable amount of equity, sell one day and live off the proceeds after investing in a 1 percent Certificate of Deposit (CD).
Homeownership Tougher in High-Priced Markets
While homeownership is great for some, there are segments of the population which find that renting a home and investing instead in income-producing real estate is a better financial decision.
In many areas of the country, home prices are reaching unaffordable levels for many homebuyers, especially in California. According to an article in the Los Angeles Times, California’s median home price is now $537,315, reflecting a compounded annual growth rate of nearly 10 percent since 2012, according to real estate website Zillow. During the same time period, the median rent for a vacant apartments jumped an annual rate of nearly 5.5 percent to $2,428.
As a result of rapidly increasing housing costs in California, more people are leaving, according to a study conducted by Beacon Economics and Next 10, cited in the LA Times article. In 2016, 41,000 more households left the state than moved in, according to the study referenced in the article.
What this means is that people need a place to live no matter what the economy is doing. Unlike the commercial, retail and industrial real estate markets, the residential rental market (in many areas of the country) is less likely to drop as far down.
Money Out of Your Pocket
So is owning a home for your primary residence a good investment? To answer that question you need to understand that your personal property takes money out of your pocket each month. Every month you have to pay the mortgage, insurance and property taxes. Even if the house is paid off you are still spending money maintaining the house and paying your taxes and insurance. The house is still taking money out of your pocket, not producing income.
While your paid-off house might make your net worth look good, the equity is locked up in the home. If you actually need to access that money, you either need to refinance or sell the house, and then you are back to having mortgage debt or looking for a place to live.
A growing numbers of Americans — millennials, baby boomers and Gen-Xers in particular — are showing less and less interest in owning a home, according to new data from Freddie Mac.
The study released by Freddie Mac Multifamily, found that while economic confidence is growing among renters, affordability concerns remain the dominant driver of renter behavior. The study found that 63 percent of renters view renting as more affordable than owning a home. That includes 73 percent of baby boomers. And 67 percent of renters who plan to continue renting said they would do so for financial reasons. That’s up from 59 percent two years ago, according to Freddie Mac.
Additionally, recent trends indicate that segments such as the millennials and baby boomers are electing to rent where they want to live and invest in a single family residence to create cash flow in another, more affordable market. The following are five advantages to such an approach:
If you pay 10 percent to 30 percent as a down payment, a bank, lending institution or private party will provide the rest of your funding. That means you can own a $100,000 piece of property for just $10,000 to $30,000.
2. Cash flow
If purchased and managed properly, your property can offer long-term positive cash flow, and this ongoing stream of income you receive from an investment offers other benefits — see below.
If the value of your property has gone up, and you decide to sell, your profit is called appreciation. Cash flow and appreciation are two forms of revenue from rental properties. Remember, even though you aren’t buying in hopes of selling to earn a quick profit, you should always have an exit strategy in place.
4. Fewer highs and lows
A cash-flowing property is not subject to the daily ups and downs of the markets. It is typically a longer-term play — as opposed to paper assets or the Equity/Bond Markets, where you can have daily ups and downs of up to 10 percent.
5. Tax advantages
Tax credits are available for low-income housing, the rehabilitation of historical buildings, and certain other real estate investments. A tax credit is deducted directly from the tax you owe. You also get an annual deduction for depreciation, which is typically a percentage of the value of the property that you can write off as an expense against revenues. Finally, in some countries, the gains from the sale of real estate can be postponed indefinitely as long as the proceeds are reinvested in other real estate, known as a 1031 exchange.
Important factors to consider when choosing a real estate market for single family rental property investing include population and employment growth and home value appreciation. When buying single family rental properties located in a different city or state, investors also research purchase prices, taxes, and housing regulations.
Other investors also look at the percentage of the population that are renting. For instance, D.C., New York, and California have the most renters in terms of percentage of the population. Another important consideration is that you want to use the 1 percent rule, which means that the monthly rent generated is at least 1 percent of the sales price of the home. For example, if you have a house worth $250,000, you want to be able to generate around $2,500 per month in rent. This is going to eliminate a lot of areas of the country — in particular coastal California, New York and even some middle-America markets such as Denver, Colorado.
Ahead of legalization, most property owners believe cannabis use will decrease the value of their residential assets
The majority of landlords polled in a new survey have responded negatively to cannabis use in rental units, going so far as to offer lower rent to tenants who agree to not smoking in units.
The survey conducted by real estate website Zoocasa was conducting in anticipation of cannabis legalization, coming into effect across Canada tomorrow (October 17).
A whopping 88 per cent of landlords say they plan to prohibit smoking in their buildings, with 65 per cent willing to consider lowering rent for tenants who don’t smoke cannabis inside their suites. Sixty-four per cent of Canadians agree that building management or strata councils should have the right to ban cannabis use.
Tenants seem to be on the same page – with only 35 per cent of respondents who identify as renters affirming their right to smoke cannabis inside their homes.
Stigma towards cannabis use remains high among homeowners and buyers, despite impending legalization; sixty-four per cent of property owners still believe smoking inside of homes with decrease the property’s value. Fifty-seven percent believe growing cannabis inside a home for personal use would decrease its resale value. Prospective buyers agree, with 52 per cent saying they’d be less likely to purchase a home if they knew marijuana had been cultivated there.
Cannabis retailers are also seen as less-than-desirable neighbors, with only 31 per cent of Canadians comfortable living near one. Fifty per cent of Generation Xers (those born between 1961 and 1981) believe a dispensary in the neighbourhood would devalue their home.
Zoocasa conducted the online survey of more than 1,300 Canadians from Sept. 27 to Oct. 3.
For Terri Ronci, renting out her in-demand Toronto condo meant having the financial freedom to seek out a career change.
After years in advertising she wanted to go back to school to pursue other interests and return to her hometown of Montreal.
“I had a really great conversation with my dad who (said), imagine if you could rent that place for more than you’d have to pay out, it might give you that cushion and (be) a retirement nest egg,” she said.
“If you sell it, that money is available now, but in the long term, think about the steady income that this investment will bring in, along with the fact the selling price will go up. It’s the best way to maximize the return on your investment.”
Ronci, 40, decided to rent – and the decision paid off. She was able to cover her mortgage and expenses with the rent she got off her condo, and have enough money leftover to pursue the lifestyle changes she was after.
In Ronci’s case, having a well-situated apartment and trustworthy property managers made renting her condo on the side a lucrative and stress-free process.
But while an income property can be rewarding, would-be landlords need to think about what they’re buying and the kind of return they’ll get for their efforts, said Milton, Ont-based realtor Andrew Roach.
“When I talk to my investment clients, we sit down and we say, what are you willing to invest … and we’re not talking just about money,” said Roach, 38, who owns multiple properties on his own or through side ventures.
“When buying a property people are investing more than just their hard-earned money. They’re also investing their time and energy.”
A property manager and the careful screening of your tenants will go a long way toward safeguarding your free time, but it’s often the finances that can trip people up the most.
““You have to make sure the income being produced, the cash flow, can support the debt, said Brenda Burjaw, director of commercial services at Meridian Credit Union Limited.
Whether you’re renting out one condo to supplement your income or a slate of properties, she adds, the money side is the same.
You have to do your due diligence up front to make sure the property will give you the return you want, you should be clear on your risk tolerance (since that will guide your strategy) and you need to carefully budget to make sure you can cover off the operating cost of running the unit – both in terms of capital needs for big expenses and to service the debt outstanding on your mortgage.
Operating costs are the part of the equation that you can have some level of control over by budgeting for repairs and maintenance, said Burjaw.
“You need to be mindful of always having some sort of a reserve set aside for when you have to re-lease the unit – paint it, replace an appliance, fix a window,” she said.
“Each year a prudent property owner should look and budget what the coming year operating costs are going to look like, and find efficiencies where possible.”
A condo is a good option for anyone who is low risk or doesn’t want to spend much time worrying about their side property because condo fees take care of a lot of the maintenance. If your tenant agrees, you can also automate payments and appointment bookings by signing up with a company like Get Digs, which lets renters pay with their credit cards and make sure landlords get the rent on time.
That will keep you from having to chase tenants for their rent, since legislation brought in in places like Ontario means you’re no longer allowed to ask tenants for post-dated cheques to cover their rent for the year ahead.
Property managers can help ease the burden, for a fee, and so can having a go-to list of people to call in an emergency to replace a window or fix a leaky toilet.
If you choose to outsource that work, you’ll need to factor property management fees into your budget and consider how that will impact your cash flow.
You should also be thinking about whether your tenant will pay the hydro bills and whether you can charge extra for amenities like parking.
When you’re estimating your costs and possible return, it’s also important to be conservative, said Pauline Lierman, director of market research with Urbanation Inc., a firm that tracks the rental condo and new purpose build market in Toronto.
“You have to look at what the balance sheet of the condo is, what the maintenance fees are,” she said.
“Be aware of what the type of unit you have in your building is renting (at), be aware of who else around you may be adding new units going forward.”
But while careful math and planning is needed to make sure a rental side hustle pays off, for landlords like Ronci, the result is worth it.
“If you’re wanting to make a change in your life, an investment like this can give you the break or pause you need to breathe.”
Q: I own a condo in my hometown of Duncan, BC, but my partner and I have just bought a house across town and have moved into it together. Should I keep the condo as a rental property or sell it and invest the equity?
Every time I ask friends or family what I should do with the property, they tell me I should keep it because ‘property values keep going up and one day, I’ll just own it!’ But my rental income wouldn’t cover my cost for keeping the condo and I feel like sinking money into the unit every month just to keep it afloat is a bad idea, no matter what the long term gain might be.
The two-bedroom condo was built in 1993 and it’s in a highly rentable part of town (most units in the area are renter-occupied). I think I could charge about $800/month for it. Vacancy rate is pretty low here, so I probably wouldn’t have too much trouble finding a tenant. The building is well maintained (I chair the strata council) and has a solid contingency reserve. I expect strata fees to increase at a rate of about 2% per year for the foreseeable future.
A: One of the best things about investing in real estate is that it is generally much more empowering than investing in stocks. Stocks are difficult for a lot of people to understand, whereas real estate can be more intuitive.
It helps to understand what you’re investing in and when it comes to a property you’ve already lived in and a neighbourhood you know, I can appreciate the appeal, Harmony.
I prefer condo investing over detached houses, because condo expenses are pretty predictable. Expenses for a house can be a lot more sporadic.
I think that real estate investors are probably better off focusing on cash flow than capital appreciation. In other words, avoid owning on speculation to sell the property in the short-term for a profit. You appear to have a long-term cash flow approach, Harmony, but the cash flow–or lack thereof–seems to be a cause for concern.
A property that runs cash flow negative can still be a good investment though, so I think you need to consider why the rent won’t cover the costs. Do you have a short amortization on your mortgage? You may be able to reduce your costs by extending the amortization on the mortgage back to 25 years so that the property runs neutral or positive.
I like to project the after-tax cash flow and net equity for a rental property over a number of years in order to fairly evaluate the property. To me, this is a true representation of the investment, rather than simply looking at the cash flow in isolation or speculating on the appreciation in the property value.
If a property runs cash flow negative, you may be able to claim a deduction on your tax return that leads to a tax refund. I say “may” because the mortgage principal is not tax-deductible and once you back that out, your property might be running cash flow positive for tax purposes, Harmony.
After you have determined the tax implications of your rental property’s cash flow, you need to consider the change in the net equity. If your property is running cash flow negative by $2,000 after-tax annually but you’re paying down your mortgage principal by $4,000 annually in the process, that’s an important consideration.
But does that mean you’ve invested $2,000 and earned $4,000? Not really. You also have to take into account how much equity you have tied up in the property. In other words, if you have $48,000 in equity in the property and you’re cash flow negative $2,000, you’ve made a $50,000 investment to earn $4,000. That’s an 8% return. Add in a bit of property value appreciation and you might have a double-digit return (at least on paper) in this notional example.
On the other hand, are the rents just not high enough in the neighbourhood to justify the carrying costs on the property? It may just be a renter’s market. In some cases, the all-in return on a rental property just isn’t enough to beat out other alternative investment options. If the condo proceeds could enable you and your partner to put down a larger down payment on the house and avoid CMHC insurance premiums, or provide cash to make an RRSP or TFSA contribution, I think you need to be sure the cash flow/net equity return is enticing.
The point is, you can’t just focus on top-line cash flow for a rental property. Dig deeper, consider the tax implications, mortgage principal repayment and your existing equity.
And while I hate to be a pessimist, the realist in me can’t help but point out that your condo represents a reasonable back-up plan in the event things don’t work out with your partner. Also keep in mind that after two years of cohabitation, the same laws that apply to married couples apply to common law couples in B.C. when it comes to a division of assets. In your case, you may both be entitled to half the house as well as half the appreciation during your relationship on your condo. So consider a consultation with a family lawyer as well.
Canadians will soon be able to add marijuana to their collection of household herbs, and that’s creating a nightmare for the country’s landlords.
With Prime Minister Justin Trudeau set to legalize recreational weed in July, apartment owners are concerned about safety and potential damage to their buildings if tenants grow plants and smoke up in their units. Landlords are lobbying provincial governments for legislation that would ban marijuana use in rental units or allow them to add restrictions to lease agreements.
“We’re hammering away at this pretty tirelessly,” according to David Hutniak, chief executive officer of Landlord BC, a housing-industry group in the province of British Columbia.
“Can you imagine you’re living in a 100-unit apartment, and in theory, there could be 100 grow-ops in that thing? I mean, that’s ridiculous,” Hutniak told Bloomberg.
Cannabis stocks have jumped and businesses are primed to cash in on Canada’s long-awaited pot party. Yet federal regulations on recreational use of the drug in the country, where medical marijuana has been legal since 2001, are still being worked out. Proposals include allowing people to smoke in private residences and to grow as many as four plants per rental unit. Provinces have the right to set rules in their own jurisdictions, including age limits for possession of weed and whether landlords can restrict use on their properties.
One reason landlords don’t want tenants lighting up is that many rental buildings are fairly old, so “smoke and smells are easily transmitted through hallways between units” and can disturb others who don’t want to partake, Canadian Federation of Apartment Associations president John Dickie explained.
Growing pot requires certain humidity levels that may damage apartment walls, and the electrical wires required to run the operation can start fires, according to Hutniak. Budding plants also give off a pungent aroma that can seep through door cracks.
Failing to implement regulations that allow landlords to ensure smoke-free, grow-free units could lead to higher rents, according to William Blake, spokesman for the Ontario Landlords Association. Some provinces, including Ontario, block landlords from extracting damage deposits from tenants, said Blake, who once spent more than $5,000 to clear the smell from a marijuana smoker’s unit.
“This is not a political issue for us – we care about taking care of our tenants and keeping costs low,” Blake said. “When we have to pay out thousands of dollars, landlords will want to raise the rents for the next tenants.”
Finding an affordable apartment in supply-squeezed cities like Toronto and Vancouver is already challenging, and vacancy rates are at record lows. For people who use pot, the search may get even tougher: It is “legal and legitimate” for landlords to select tenants who don’t smoke, Dickie argued.
Did you know that three of the leading causes of financial losses for renters are fire, crime, and liability suits? Lucky for you, tenant insurance can help you keep your bank account in tact — and get things back to normal as quickly as possible.
Fire doesn’t care whether you rent or own your space. Thankfully, tenant insurance covers all the things that make your rental a home.
Nearly one quarter of all residential fires in Canada happen in apartments
The average cost of damages in an apartment fire is over $65,000
The most recent study of fire losses in Canada found that in 2007 alone, fires in apartments led to more than $185 million in damages
That same year, Ontario had more apartment fires than any other province: a total of 1,650 fires that led to more than $55 million in damages
In British Columbia, the average cost of damage caused by one apartment fire is over $140,000 — that’s more expensive than in any other province
Source: “Fire Losses in Canada (Year 2007 and Selected Years).” Council of Canadian Fire Marshals and Fire Commissioners.
Coming home to find that a stranger has been there — and worse, that they’ve stolen your TV and smashed your glass coffee table — is something no one should ever have to experience. But if something like this happens to you, know that renter’s insurance has your back — your insurer could pick up the tab for your stolen or damaged belongings.
Burglars don’t discriminate — and rental properties aren’t exempt from break-ins. Do your best to deter those pesky thieves, but know that tenant insurance has your back when you need it most.
In Canada, renters experience the greatest number of break-ins per household, with a whopping 125,000 cases reported in 2014
That same year, there were 248,000 reported cases of theft of personal property from rental homes
Cases of vandalism are decreasing year after year, but there were still 143,00.0 cases of vandalism to rental properties reported in 2014
Source: “Household victimization incidents reported by Canadians, by type of offence and selected household, dwelling and neighbourhood characteristics, 2014.” Statistics Canada.
Of all the types of coverage in your tenant insurance policy, liability coverage could be the most important when it comes to protecting your finances. This is the coverage you need when, for example, a court decides you’re legally required to pay for your friend’s Ray Bans and medical bills after you break his nose and glasses at one of your weekly baseball games. Plus, it can cover any legal fees you encounter in the process. Accidents happen, and battles over money are never pretty. Talk to your broker to make sure you’re covered.
In the event of a liability lawsuit, tenant insurance can protect your savings — and your credit rating.
A lawsuit can virtually bankrupt you if you’re held responsible for covering expenses that result from an injury or damage you caused to someone’s belongings — say goodbye to your savings and your credit rating
If you’re taken to court for a liability issue and need to pay a lawyer, you could be in the hole for thousands of dollars in legal fees
When your toilet backs up and the questionable puddles in your bathroom start to trickle into the apartment downstairs, you’ll have to pay for the damage
Don’t forget your landlord: if she claims that you ruined part of your rental unit, get ready to forfeit your damage deposit plus additional repair costs
You have options
Get protected before the unexpected happens. If you’re ready to get set up with your very own tenant insurance policy, connect with a licensed broker to learn about your options.
Source: Economical.com – Stephanie Fereiro | Published on: December 12, 2016