In Canada, in 2015, being a landlord sucks.
I realize this probably sounds a little odd from someone who actually owns houses and rents them out, but hear me out. I’ll explain. OH GOD WHY WON’T YOU LET ME EXPLAIN?
Back in the day when I was buying real estate, the returns were succulent. Just how good? I was able to get 15-20% annually before expenses, or between 10-15% after I paid for everything — the taxes, insurance, repairs, additions to the sex dungeon in the basement, etc. I didn’t add in mortgage interest because the plan was to pay these properties off as fast as possible, not stay in debt for 25 years while pocketing the cash flow (i.e. the difference between the mortgage payment and the rent).
These days, the return is far less. Where I live, you’re looking at anywhere between 6-8% returns on a gross basis, or between 4-6% returns once you pay for all your expenses. And that’s actually pretty generous. There are thousands of “investors” in Toronto, Vancouver, and Calgary who are barely making enough to pay for the interest on their mortgage.
Investors delude themselves into accepting less return in a number of ways. They count on the value of the place to go up each year. They look at GICs paying 1-2% and are happy to accept 4-6% on a house. Some of them even just factor in the return on the invested money (minus the leveraged part) and declare the investment a success. And some just aren’t that good at math.
No knowledge advantage
You know why else being a landlord sucks? Because of Reddit. Okay, not really Reddit, but the site is sort of a representation of what’s wrong.
Whenever you enter into a business relationship, the person with more knowledge will always have the upper hand. In the landlord-tenant relationship, the person with more knowledge is just about always the landlord. If he’s smart (which most are, at least those buying before 2009), the landlord will know the various laws that surround tenancies. When I was in real estate and I would get a call about selling a house to a wannabe landlord, I’d print out a copy of the applicable law and tell them to read it.
These days, all a tenant needs to do is go onto the Google, and it’s filled with all sorts of strategies about how to screw over landlords, and how to use certain clauses in the laws to make an owner’s life miserable. A landlord who makes a reasonable request like “hey, don’t cover my walls in cancer air” is now shouted down as discriminating bastard. Screw that. My house, my rules.
I liked it better when tenants had no idea what the rules were. Most still don’t, but finding the out is a whole lot easier in the age of any moron having access to all the information in the world.
Just buy a REIT instead
There’s another reason why being a landlord sucks. It’s because you probably suck.
If I had a nickel for every landlord I met that didn’t do his paperwork correctly, or had no idea how to kick out a delinquent renter, I’d have enough to fund the latest season of The Bachelor. Don’t look so impressed, that show has a budget of $1.40 a year.
People trust their tenants. At the beginning of the relationship, it’s usually all fine and good. But then something happens. Maybe the tenant is constantly late on rent. Maybe the tenant is mad because the stupid stove doesn’t work right and GODDAMMIT WHY AM I PAYING $1500 PER MONTH FOR A STUPID STOVE THAT DOESN’T WORK GOD.
So the relationship breaks down. Some people are good about it, while others aren’t. And before you know it, you have a tenant who constantly whines about everything because you wouldn’t shell out $500 for a new stove.
This is why most people should just buy a REIT. RioCan is Canada’s largest REIT, pays a 5%+ dividend, and you don’t have to worry about a damn thing. Pick a couple more to diversify (I hold Dream Office REIT, personally, although it’s a little risky, and Extendicare, which I suppose is technically a REIT), and you’re in business. Getting an average yield of 6% is easy, and most of the income is from dividends, which are taxed much more favorably than rental income.
Plus, there isn’t all the risk associated with leverage. I don’t care how smart you are, borrowing 10x your investment to borrow something adds risk. I’m okay taking on risk for succulent returns, but not for something I can easily match my buying a couple of REITs.
This isn’t to say I’ll never buy physical real estate again. But because being a landlord sucks so much, I need to be compensated for my time and energy. At a 4-6% return after expenses, I’m not very excited. At between 9 and 12%? That’s much more attractive. Those opportunities will come once again, but at this point, I’d say not to bother. Just buy a REIT if you want access to real estate and call it a day.