will give you an example. The Realtor recently spoke to a Landlord client of mine about buying one of his rental properties, and “the numbers” conversation went as follows.
The price is $290 000, and the client borrowed 20% from the HELOC to put a down payment on the house. The mortgage, insurance, and condo fees are calculated to break it down on a monthly basis. The utilities were left out of the numbers equation, as the house is currently rented for $1900 + utilities for another 11 months. The net profit from the home is $7200/year, of $600 per month. As a passive income strategy, the Realtor convinced my client that this is a great investment. Unfortunately I have to disagree and I will outline a few reasons why:
1. Purchase Price is a Red Flag
Buying a rental property for $290 000 that only has 4 bedrooms inside is not a wise investment near Western University of Fanshawe College. According to several Landlords, the 5th bedroom in a student rental property is what is considered profit. In this circumstance, the owner is buying the house for too much, and this will not allow them to make profit on the property.
Although there is some new development in North Centre Road, and it is nestled in a nice area in northwest London near amenities such as Masonville, it is not typically a student friendly area. Properties that are several kilometers away from Western University campus tend to rent out for less money, a students will have to bus or drive to school, which includes a larger expense of time and money. Students would rather pay a premium to live a couple blocks away from campus and simply walk to school. North Centre Road is going to be difficult to rent out, especially to students for $475/room on a 12 month lease given its location next year.
3. More Expensive To Run The House
Those numbers listed by the Realtor do not include house insurance, maintenance/repairs, renovation budget, contingency fund (in case the property stays vacant for an extend period of time) or a property rental/management fee. These expenses will be incurred by every Landlord: one week a light goes out, a door knob needs to be replaced; a plumber needs to be called. Next year the furnace needs to be replaced, the property was vacant for a few months, a rental agent needs to be hired to rent the property.
The Realtors give their rendition of “the numbers,” but those numbers do not include all of the expenses that a Landlord actually incurs, and the reason why they do this is to make it an attractive investment for them to make commission from you! If you are a looking to purchase a property in London, Ontario as an investment property, I suggest you give us a call prior to purchase. We can consult you in regards to how well the house rents out, the rental market value of the house, and if “the numbers” actually make sense to us.