The landlord’s lament
Troublesome tenants, costly repairs are among the challenges you can face
It sounds like a good idea. Purchase a second property as a rental investment, and let the rental income pay off the mortgage. Then sell the property and make a profit.
But that isn’t always the case. In fact, what can happen is that second property can lead to financial difficulties and may even cost you money and lead to more debt, according to Robert Hunt, a Halifax-based licensed insolvency trustee with Grant Thornton Ltd.
Hunt said he’s seeing an increase in clients dealing with financial difficulties as a result of this second income property. The reasons can include properties that need expensive repairs, such as a new roof or new furnace, property taxes and insurance.
Other times, the rent is helping cover those costs, but a tenant may have moved out and it’s taking a while to find a replacement. They may also have a tenant that is delinquent on the rent or has damaged the property and left.
As a result, property owners may have to use money they have set aside for normal living expenses to pay for those rental issues.
“That puts a further strain on their financial situation because they have to basically subsidize an income property because it isn’t paying for itself.”
Hunt is concerned with homeowners that are taking out more debt in the form of a second mortgage or a home equity line of credit to cover those costs.
“Sometimes using your home as a bit of a piggy bank doesn’t always work for people because continuing to borrow against your house may be a sign of other, bigger problems,” he said. “There may be some other things that are going on that are forcing you to consolidate debt or to take out another mortgage on your home because, fundamentally, you just may not be able to afford the mortgage payments as they are,” Hunt said.
Recently, the Canadian Mortgage and Housing Corporation released its Mortgage and Consumer Credit Trends report and found that home equity lines of credit doubled in the fourth quarter of 2017 compared to the same period a year earlier. Interest rates are also variable and on the rise, noted Hunt.
“With interest rates continuing to increase, it does make people who might already be somewhat vulnerable more so because they have more debt,” he said.
Hunt added people also assume the value of the property is going to rise over time, but that isn’t necessarily going to be the case.
As well, people run into trouble paying for the second mortgage in cases of divorce or job loss, Hunt said.
Before purchasing an income property, Hunt’s advice is to understand your budget, and if your budget is already showing signs of being strained, think twice about the purchase.
“Oftentimes, buying a second property doesn’t add to your cash flow right away. It can take away from it,” he explained.
He also advises that people have a “reality check” about what being a landlord will involve in terms of challenges and responsibilities.
Overall, he says potential owners should think about their contingency plan, in case things don’t work out.
“What’s your contingency plan if you have a tenant problem or if you have a major repair with the property that you bought? And then ultimately, if it doesn’t work out, what’s your exit from that property without it causing greater financial strain?”
John Eisner, president of Credit Counselling Services of Atlantic Canada Inc., said they haven’t seen an influx of bankruptcies due to rental property related financial difficulties.
But Eisner notes it is an ongoing concern.
Eisner used to work with mortgages in the banking industry. As well, he used to own a rental property.
Eisner agrees people need to be on sound financial footing and have cash reserves before purchasing a rental property.
Relying on renters to pay the mortgage can run into problems.
“Rental income – easy come, easy go. Tenants could leave you tomorrow. They could do massive damage to your property. Guess what? You’re stuck fixing it,” he explained.
He also advises people should realize that rental properties are a long-term venture, and owners may not make money right away. If a renter does leave, it may be difficult to find a quality replacement for a couple of months. As a result, an owner may need to accommodate for that lost rental income.
“It’s not as easy as it looks,” he said.
One issue owners need to be aware of is if they’re not handy with making repairs or maintaining a property, they’ll have to hire someone who can (such as a plumber or carpenter). This side of rental ownership – so-called sweat equity – can be costly.
In terms of home equity lines of credit, he noted these can be dangerous for rental property owners.
“If you’ve got to use up the equity on top of your mortgage to cover the bills, that’s just telling you it’s not getting any better. It’s only going to get worse,” he said.