Home wreckers

The landlord blues

DAKSHANA BASCARAMURTY

From Tuesday’s Globe and Mail

Published Monday, Oct. 18, 2010 3:18PM EDT

Mathieu Mazur-Goulet has three tenants living in the house he bought a year ago in an up-and-coming Ottawa neighbourhood, but he’s still waiting to break even. The 26-year-old government policy analyst bought the triplex for $257,000 and expected he’d pull in $2,700 each month to cover his fixed costs and return a modest profit.

But unexpected repair costs have made what he thought would be a great long-term investment a major drain on his personal savings. He bought the house thinking it was the perfect “passive” investment: He wanted to live in it after he started a family and planned to rent it out until then.

In a time of economic uncertainty, the idea of investing in property rather than mutual funds can be attractive, and figures indicate that more Canadians are getting into the landlord game. The Toronto Real Estate Board says the number of leased properties is on the rise; between May and August, 6,712 condominiums and townhouses were rented – an increase of 18 per cent from last year’s figures. “Many newly completed units are held by investors who have chosen to rent their units,” the board says in its most recent newsletter.

But new small-scale landlords are often hit with the costs of unexpected repairs, the struggle to find good tenants and the stress of not knowing whether the rent will be paid each month. While it may seem like a lucrative way to invest your money long term, getting cash flow out of an income property is not always a passive affair.

Without properly evaluating how rentable a unit is, income properties can lead to bad credit. “Maybe the property is vacant for a period of time,” says Ryan Chelak, an Oakville, Ont., real estate broker. “You start getting behind on your mortgage, which is a tight leash to handle.”

For Mr. Mazur-Goulet, the problems began just hours after he bought the house. His insurance broker said he wouldn’t cover rental properties. Another wanted to charge him $5,000 a year, while some required detailed (and expensive) inspection reports. He finally found one that was willing to insure the house without making it unmarketable.

But that was far from the last hiccup.

It turned out the previous owner fancied himself a handyman. The bathroom in the basement apartment was industrial carpet on top of poorly laid vinyl tile on top of plywood. The unit sat vacant for months (the two others were occupied by long-term tenants) as Mr. Mazur-Goulet fixed the bathroom and made other repairs.

But poor maintenance wasn’t limited to that part of the house.

“One Sunday, I received a voice mail from my tenant telling me, ‘Mathieu, my ceiling is raining,’ ” he says. “You couldn’t imagine the dread that came over me at the time.”

He had to dip into his personal savings for the $5,500 to cover a partial roof replacement. This month, the hot water heater went bust and he had to spend $2,500 to replace it. Neither of these were costs he could pass on to his tenants, though he can write them off against his income at tax time.

Now, with all three units occupied, he’s bringing in $2,700 a month in rent, while trying to stay on top of expenses of $2,500 (which include mortgage payments, insurance and property tax as well as some repairs). But he has some financial catch-up to do.

What’s he’s thankful for, though, are good tenants. He joined the Ontario Landlords Association, which gave him tips before he purchased the triplex. After reading other members’ horror stories, he learned the importance of finding the right people. He carefully checked the references of those applying for the basement unit before he found the ideal candidate.

Jane Schweitzer wasn’t so lucky.

The 39-year-old, who works in dental administration, says she went through much turmoil last year when she tried to get rid of a problem tenant who lived in a Brantford, Ont., house Ms. Schweitzer and her husband own.

While real estate is affordable in Brantford, the rental market is hardly booming, which meant she did not have much choice in tenants. Various problems mounted until Ms. Schweitzer initiated eviction proceedings, a process that dragged through the Landlord and Tenant Board for months before the woman left.

“It consumes your life,” Ms. Schweitzer says. “You feel your house is being held hostage on you.”

Income properties just aren’t worth the trouble to her now. She plans to sell the house.

Dave Peniuk also chose a seemingly good deal over rental-market research and had to pay for it in a big way.

He was inspired to buy two multiunit houses in Niagara Falls, Ont., after seeing a late-night infomercial on investments properties. He forked over a few thousand dollars to attend a hotel seminar that promised no-money-down deals and that he’d make enough to retire after just six months. He waited for the money to roll in.

He had little idea who was renting his units, since he paid a property manager (whom he’d inherited with the house) to find tenants. After 10 months, about half the units were vacant on a semi-permanent basis. The rental income wasn’t covering Mr. Peniuk’s $3,600 monthly expenses.

He spent $10,000 trying to spruce up two long-vacant units in the six-plex but even that wasn’t enough to attract tenants to what had become known in that seedy neighbourhood to be a crack house.

He eventually sold the houses. By the end, he lost $35,000 out of his own pocket.

Mr. Peniuk still wasn’t ready to give up on the income property game – he knew he just needed to gain skills to play it better.

He moved to Burnaby, B.C., in 2006 and started to buy properties in Kelowna, Nanaimo and Toronto. He hired some highly recommended property managers to look after the B.C. units. He has a strict process in place for screening tenants, and he makes sure that all sign detailed rental agreements.

Now, he and his wife are full-time investors with $5.5-million in rental real estate.

“It’s not a superactive business, but it should not be considered passive,” he says. “It’s like any investment. You don’t just buy a stock. You should do your research on it.”

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/the-landlord-blues/article1762225/