We’ve talked before about how to pitch your parents on buying a house for you while you go to school. Today I figured I’d think about taking it to the next level. I should admit right up front that I have no personal experience with this sort of thing, but since this is the internet that’s not going to stop me from offering my opinion as if I’m an expert.
Buying a property with the intent of being a small-scale landlord means that you are looking at a house not only as a place to live, but also as an income property. This reality means there is quite a bit of legalese you should probably catch up on before anyone moves in. If you aren’t up to date on your rent rules and regulations your renters can put you over a barrel in a hurry. If you have a family friend who is a lawyer or has some experience as a landlord talk to them and see what sort of contracts/agreements they have in place. They will likely also have a handful of tough lessons that they had to learn the hard way. Don’t let this small hurdle be what holds you back from a great way to produce a little income as you go through school though. Personally, I wouldn’t have been able to do this at 18, or probably even at 20. As someone taking a second degree or in a graduate program however (with a little more life experience) I can see this making a lot of sense.
The Raw EconomicsThere are 99+ books out there on Canadian real estate and how to pick the best properties, what renovations to attempt on your own, how to set rental rates, and many other things that you might want to read up on if you are serious about making money through an income property. I certainly don’t have the chops necessary to give such an in-depth evaluation of real estate, but I have read enough to give a basic idea of what you might be in for if you decide to buy a cheap place and fix it up in order to rent it while going to school.
In order to determine if a venture like this is worth it for you, you need to consider what your basic expenses and cash flow will be. If you’re from Vancouver or Toronto for example you looked at the title of this post you might have laughed at the idea of a student putting up the capital to purchase a $2 million+ duplex. If you’re going to school in a place like Regina, Brandon, Thunder Bay, or anywhere in the Maritimes however, then it likely makes a lot more sense. In most cases it boils down to if you are willing to manage the property yourself, and if you have the ability to do most of your own repairs. Most large-scale real estate investors have property managers that oversee everything, but you can cut out this middle man if you’re comfortable with handling your own affairs.
When looking at expenses most books I’ve read on real estate investing will tell you to budget in for a 10% vacancy rate in terms of measuring your cash flow. I don’t think this will be much of an issue if you purchase a location with easy access to a major university/college campus. Make sure and have an experienced engineer or appraiser take a look at the property and give you a realistic assessment of what your renovations are going to cost before you commit to anything. Home renovations are famous for running way over budget. Just because a house price is low, doesn’t always mean it’s a good investment. After you do renovations and are confident your property now offers good value, most places will tell you to budget in 1.5-2% of the house’s value yearly for repairs. Some years it will be over, some under this figure. Finally, remember to calculate in taxes, utility costs, and other monthly expenses in addition to your mortgage on the property when looking at your monthly cash flow.
Will It Work?
In a perfect world, I think a duplex would work the following way. You and your 2-3 buddies that you met over your first two years in school (the ones you know will care about not destroying the place) would stay in one of the units with you, and then you could rent out the other unit to another group. Many renting gurus will tell you never to rent to students since they are terrible tenants, but I’m not sure I buy into that. Sure, young adults might be prone to partying a little more than the average person but in most cases if they’re attending the local university their parents will make sure that the rent is paid, and they often have very little expectations in terms of what they want out of a landlord (since this is their first rodeo). In a perfect world if you had someone else in your extended family, or a few more close friends going to school that you could really trust, this would be the best case scenario.
After looking at rent levels in your area you’d have to run the numbers to figure out if your rental cash flow from your roommates, and/or basement suite renters, and/or duplex tenants is enough to cover the expenses outlined above. Even if you’re only generating a couple hundred dollars in “profit” at this point, remember that you are getting to live in the building rent-free as well, so that should be a major factor. In some regions right now it just isn’t possible to find property close to a campus that would fit these criteria, but in certain parts of Canada these opportunities remain. If this infamous Canadian housing bubble ever bursts like many are predicting there might be several properties that suddenly become viable in a hurry.
Why I Never Tried This
Being a landlord has never been for me. I don’t have a lot of patience with people, so that interaction with less-than-ideal tenants would not go well. I’m also not much of a handyman. I can handle the odd jobs that creep up around my home most of the time, but I wouldn’t want the responsibility of maintaining other residences and/or trying to do my own renovations to increase the value of the property I have purchased. Come to think of it I really do need to start challenging myself in this area a little more…
Is It For You?
Buying a place and fixing it up on your own time would be a perfect side project if you were really into doing home repairs and worked at a place like Rona or Home Depot. It would be a great way to get experience and improve your surroundings, as well as making some decent coin when it came time to sell (hopefully). Being a landlord would be a cool part-time gig in theory as you went through school and would give you a taste of what managing an income property is like so that you could know if it was something you wanted to pursue as part of your long-term investing strategy. It certainly isn’t the best idea for everyone, but for the right person who is focused on building long-term wealth it is an attractive option in certain situations. Making money sometimes boils down to playing to your strengths. If you’re confident with large financial transactions and know your way around a set of tools, being a landlord could be a great way to leverage your time, money, and abilities into a great jump start towards financial independence.