Choosing A Rental Property

Choosing a Rental Property

Where I totally spend my summer playing Cricket and Croquet.
Where I totally spend my summer playing Cricket and Croquet.

When comparing two or rental properties, it is key to look at what you can charge reliably for rent and it’s listed price. If it is 200,000$, you want at least 1% of it’s price as rent each month, so 2,000 a month. If another 200,000$ property rents for 1,500$/mo it is a worse deal. If it is 100,000$ and rents for 1,500$/mo it is a better deal than the 200,000$ property renting for 2,000$/mo.

I did some digging around on real estate listings in my city to show the things to look at making this decision. Keep in mind, in my city of Edmonton, Alberta rental prices have been hit by oil crashing so much. In turn, it is difficult to find a profitable rental property out there.

House A is 1268 sq. ft, 3 bed 3 bath and costs 299,900. This equates to a monthly mortgage payment (for a fixed five year term @2.22% and 25 yr amortization) of 1247$. Rent for a place like this ranges from around 1350 – 1400/month. Also, 1350/mo is a far cry from the ideal 1% rent to price ratio. Plus, with property tax of around 1200 a year you’ll be losing money. Not so good.

House B is much much cheaper. It’s a one bed condo on 118 ave, AKA the ghetto. However it is in Beverly which is not the worst neighborhood you could go with in Edmonton. Yes you’ll see sketchy people stealing steaks in your grocery store, but that makes for a fun story. At 58,000$ and made in 1969 it is far from nice. The best part however, is the fact you can get at least 600/month rent (basically right on the dot for 1% rent to price ratio) on 241$/month mortgage payments. Take away property tax and there’s 330$/month of buffer to absorb all the damage from your shitty tenants. And there’s just about only shit tenants that are willing to live on 118 ave. I’m sure you could find a diamond in the rough by doing some proper screening. After hours of looking at real estate listings, this is the only property out of dozens of potential ones that could possibly turn a worthwhile profit. I’m not saying do it. But on paper and not really taking the risks all that seriously, something like this is about the best bet to turn a profit. Which makes me feel sad about owning real estate here.

Thanks For Reading!



Some thoughts on Renting and Owning

Yes, owning some very tangible assets that are no doubt needed in the future is great (who doesn’t need shelter?). However, in today’s market renting and investing the difference will usually net you greater returns. Dividends on your holdings are also taxed much more favorably than rental income. If you want to own “pieces” of real estate assets without worrying about a property manager or sketchy tenants than REIT’s are a great option. REIT’s also usually offer higher yields than current rental yields (8-10% vs 4-6% after expenses).

Being a landlord is hard work, and until it offers better yields than owning REIT’s, it’s very hard to find a reason to own and rent a property out instead. Buying and selling real estate also costs a lot as I’m sure you all know. A ~10$ commission getting in and out of your REIT investment is miles better than the ~6 percent of the house value you lose on realtor commissions.

The whole REIT vs actual real estate problem comes in when you look at your ability to leverage your money. It’s much easier and incurs lower interest to take out a mortgage on a first house than going and trading REIT’s on margin. My takeaway is to re-evaluate the market every time you plan to take on an investment. Once you own a house and build some equity, you now have better options to put other people’s money at work through HELOC.

Although a little unrelated to REIT’s and Real Estate, I wanted to share my favorite book on investing, which has taught me just about all I know about value investing. The Intelligent Investor from Benjamin Graham. You can pick it up here: The Intelligent Investor: The Definitive Book on Value Investing