Real Estate

Rental property

  • Last Updated:
  • Mar 8th, 2018 3:02 pm
Sr. Member
Oct 21, 2016
946 posts
718 upvotes

Rental property

If you had a choice to buy a rental property in Oshawa for 500k (on hand cash) or comparable price within an hour of Toronto and you could gain net yearly rental income pre tax of 20k per year index to inflation or invest the 500 k in a diversified passive ETF portfolio what would you do assuming you have a 30 year horizon age mid 30s and stable job and good income you live in GTA and maintaining property is no problem
Last edited by Shaun80 on Mar 6th, 2018 3:06 pm, edited 1 time in total.
27 replies
Deal Addict
Mar 20, 2017
1370 posts
1165 upvotes
Maximize leverage by buying real estate with mortgage instead of hand cash (in a better area with better appreciation & crash proof) and invest rest of the money somewhere else.
Member
Jan 27, 2018
203 posts
201 upvotes
A 500k property with rental income (not revenue; i.e., minus costs) of 20k means 4% return (excluding any capital gains).

If you assume the stock market returns 8% per yr (over long term), that means if you believe the property has a capital appreciation > 4% then its better to buy the property to invest. Else, it is better in expectation to buy stocks.
Sr. Member
Oct 21, 2016
946 posts
718 upvotes
So it seems like stock market wins , atleast in terms of using cash ... That's what I thought I will tell my friend who is considering both options
Deal Addict
Mar 20, 2017
1370 posts
1165 upvotes
I thought its obvious that RE investment only makes sense with mortgage leverage.
Turns out some people seriously estimate RE investing with no leverage, lol.
Sr. Member
Oct 21, 2016
946 posts
718 upvotes
Mortgage makes sense for a rental property Also because you can write off the interest correct on your taxes , stock market outside of TFSA you will pay capital gains and dividend taxes however. I thought stock market return is 6 percent long term not 8 .
Member
Jan 27, 2018
203 posts
201 upvotes
Shaun80 wrote: Mortgage makes sense for a rental property Also because you can write off the interest correct on your taxes , stock market outside of TFSA you will pay capital gains and dividend taxes however. I thought stock market return is 6 percent long term not 8 .
The time period under consideration also influences average returns. For example, while the stock returned an average of 11.31% from 1928 through 2010, it returned an average of 3.54% from 2001 to 2010.

Source: https://www.investopedia.com/walkthroug ... turns.aspx
Member
Jan 27, 2018
203 posts
201 upvotes
GalvToronto wrote: I thought its obvious that RE investment only makes sense with mortgage leverage.
Turns out some people seriously estimate RE investing with no leverage, lol.
I don't see how leverage changes anything, you can leverage in the capital markets as well via options and leveraged ETFs.
Deal Addict
Mar 20, 2017
1370 posts
1165 upvotes
deepzerg wrote: I don't see how leverage changes anything, you can leverage in the capital markets as well via options and leveraged ETFs.
Does not seem logic is your friend:)
Firstly, you need to correctly identify the subject of the quoted discussion. Unfortunately the subject is not "leveraged stock play vs leveraged RE investing".
The subject was "Is it worth to be RE investor without leverage?". Answer is No, its just stupid.

Secondly, Stock games with margin vs RE In vesting with margin is a forever holy war. However, if you say there is no difference - then you again don't see obvious things and waste our time by saying that you never can get up to 20x leverage in stock with margin calls up to 5-10 years.

So unless u have something valuable to say, better don't continue:)
Deal Addict
Jun 11, 2005
2823 posts
460 upvotes
Leveraged ETFs are suitable for only the knowledgeable and are generally short term vehicles only. This is a night a day comparison.
Deal Addict
Jul 29, 2006
4253 posts
1078 upvotes
if your friend amassed 500k and his only advice was to hear from you that a bunch of posters on a forum advised you should do x, then i feel bad for him.
Deal Fanatic
May 31, 2007
5018 posts
2175 upvotes
you realize Oshawa can be a very tough market for landlording? Desireable tenants can be very hard to find. About half of Oshawa (south end) had a bad reputation, there is a lot of welfare and low income.

Just make sure you raise your risk and hassle level much higher then say prime areas of tornoto where your pool of tenants actually have jobs and good income.
Deal Fanatic
May 31, 2007
5018 posts
2175 upvotes
mudd_stuffin wrote: Leveraged ETFs are suitable for only the knowledgeable and are generally short term vehicles only. This is a night a day comparison.
This is very true, these are very risky and often reset daily, which is why holding overnight can really screw you over.
Deal Fanatic
May 31, 2007
5018 posts
2175 upvotes
GalvToronto wrote: Maximize leverage by buying real estate with mortgage instead of hand cash (in a better area with better appreciation & crash proof) and invest rest of the money somewhere else.
I would say this is best advice, a couch potato should delever 6% + year after 10-20 period.
But there are slow cycles in stock market sometimes with prolonged periods of unflattering returns, followed by better then expected returns.

+ all the joys of being a landlord and tenant risk.

If you can understand those areas well, you should know what to expect.
Deal Addict
Apr 21, 2014
2321 posts
1106 upvotes
Alberta
deepzerg wrote: A 500k property with rental income (not revenue; i.e., minus costs) of 20k means 4% return (excluding any capital gains).

If you assume the stock market returns 8% per yr (over long term), that means if you believe the property has a capital appreciation > 4% then its better to buy the property to invest. Else, it is better in expectation to buy stocks.
In Toronto/Vancouver area it is really hard to get a good cash on cash return on real estate. So the only way to earn a greater than 8% return is to use leverage. What I would do personally is put down 25-30% into a rental property and use leverage to maximize your returns. That way you can buy in to a better/more stable area. The rest I would start creating a dividend income portfolio. That way if you are in between tenants you have some cash coming in to cover the mortgage payments etc.

So if you put down 125,000 to a rental, that will leave you with $375,000 to put in high quality dividend growth stocks. Assume you are getting about 4% in dividends that's $1,250 a month. Hopefully you won't have much turnover, and your rental income will grow each year (through rent increases), equity will continue to increase (less and less interest costs), and your dividend growth stocks continue to increase the dividends.

= profit!
Banned
Feb 23, 2009
1670 posts
1496 upvotes
Oshawa
Durham is one place you can currently buy a detached house and rent cash flow positive.
Of course if you want to be a landlord you have to be able to deal with people, collect rent and maintain the asset in a cost effective fashion.
If you don't want to do that, simply don't be a landlord.
Deal Addict
Feb 16, 2018
1292 posts
1311 upvotes
pkrash wrote: Durham is one place you can currently buy a detached house and rent cash flow positive.
Of course if you want to be a landlord you have to be able to deal with people, collect rent and maintain the asset in a cost effective fashion.
If you don't want to do that, simply don't be a landlord.
We must have different definitions of durham and positive cash flow. Ive lived here all my life, have properties in Oshawa and Bowmanville and am actively looking for properties and haven’t managed to find one for over a year that cash flows at all when you take into account all the factors.

There have been some properties that potentially have positive cash flow on paper but dont have positive cash flow in practice when you take everything into account. Only possible way to get a cash flow property in Durham currently is to buy a duplex/triplex crackhouse and deal with the scubs where one slight mistake or unexpected issue wipes out your meager $25 monthly cash flow.

It also may be that I am spoiled and the cash flow that I am looking for in a duplex just isnt available anymore and i need to settle for being cash flow neutral. Fwiw if i cash flow $100 month in a duplex, I pretty much consider that cash flow neutral and amnot interested. Neither am I interested in dealing with south Oshawa crackheads
Banned
Feb 23, 2009
1670 posts
1496 upvotes
Oshawa
HghSsociety wrote: We must have different definitions of durham and positive cash flow. Ive lived here all my life, have properties in Oshawa and Bowmanville and am actively looking for properties and haven’t managed to find one for over a year that cash flows at all when you take into account all the factors.

There have been some properties that potentially have positive cash flow on paper but dont have positive cash flow in practice when you take everything into account. Only possible way to get a cash flow property in Durham currently is to buy a duplex/triplex crackhouse and deal with the scubs where one slight mistake or unexpected issue wipes out your meager $25 monthly cash flow.

It also may be that I am spoiled and the cash flow that I am looking for in a duplex just isnt available anymore and i need to settle for being cash flow neutral. Fwiw if i cash flow $100 month in a duplex, I pretty much consider that cash flow neutral and amnot interested. Neither am I interested in dealing with south Oshawa crackheads
True, South Shwa can be a challenge as I have had properties there for years and you have to screen your tenants carefully.
Still have a townhouse there that is cash flow positive.
I like the Harmony area further NE near Hwy2 where you can get a detached 3+1 or 3+2 for less than $550K and make it work with 20% down.
There are also older detached in the Palmerston area of Whitby at $550K.
Always can go up to UOIT and have a detached student rental that is cash flow positive. These were over $750K last year and now $550-$600K.
I'm not taking about that silly Bull rental plan where rent doesn't cover all expenses and just mortgage interest.
These will cover all expenses at current rents and 20% down.
Plenty on realtor.ca
Deal Addict
Mar 20, 2017
1370 posts
1165 upvotes
HghSsociety wrote: We must have different definitions of durham and positive cash flow. Ive lived here all my life, have properties in Oshawa and Bowmanville and am actively looking for properties and haven’t managed to find one for over a year that cash flows at all when you take into account all the factors.

There have been some properties that potentially have positive cash flow on paper but dont have positive cash flow in practice when you take everything into account. Only possible way to get a cash flow property in Durham currently is to buy a duplex/triplex crackhouse and deal with the scubs where one slight mistake or unexpected issue wipes out your meager $25 monthly cash flow.

It also may be that I am spoiled and the cash flow that I am looking for in a duplex just isnt available anymore and i need to settle for being cash flow neutral. Fwiw if i cash flow $100 month in a duplex, I pretty much consider that cash flow neutral and amnot interested. Neither am I interested in dealing with south Oshawa crackheads
Positive cashflow idea is overrated.
The majority of gains is always received through price appreciation, not cashflow.
And areas with best price appreciation (or relatively stable during overall price crashes) are not cash flow positive.

It does not make any sense to be in positive cashflow zone by any means and then observe how everything around you appreciates in price, except your area.

For instance, take a look at west area close to downtown Toronto. We've got -19% YoY overall in Toronto, but those areas like W02 have almost no losses YoY even for February. And available listing are much lower than a year ago. That's a classic example why location is better than cashflow positive conditions.
Sr. Member
Nov 13, 2007
881 posts
135 upvotes
Toronto
Using $500k to buy bank stock will give you , $20,000/ year dividend (assuming 4%).

$500k rental property will cost $2,000 insurance + $4,000 property tax.

$20,000 (lost Opportunity cost) + $2,000 insurance + $4,000 = $26,000/year or $2,166/month.

Can you rent this property for more than $2,166/month (assuming that tenant doesn't break anything & pay rent every month + your occupancy rate is 100%)?

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