Rental
properties can be profitable. But there
are risks involved. How do you decide if
you can afford to become a Landlord? And once you are a Landlord, how much money
can you earn with the rental income  or how much will you earn selling the
property in the future? Will you lose
money during the process? Will your investments be worth the risks involved?
There
are lots of questions you must consider before risking an investment. The
current owner may be making a profit solely because his mortgage is smaller
than what yours will be. Is the monthly
rental income able to cover your price for the building? Is it enough to cover the mortgage plus the
property taxes and insurance?
How
many apartments/units are you looking for in a building, 4, 10, 20, 30, over a
100? Naturally the more apartment units you have the more the monthly income
can be, but the building will be more expensive too. Depending on your geographic area, the price
for each unit could be between $70,000  $100,000. Therefore a 20 unit apartment building could
cost $1,400,000  $2,000,000.
Suppose you bought one at $85,000 / unit, cost will be $1,700,000. If all the units have two bedrooms, and
receive a monthly rent of $650, the monthly rental income will be $13,000. Will this be enough to cover all your
expenses? Of course, that example
assumes you have 100% of the mortgage to cover and doesn’t consider any
mortgage rates. So let’s delve a little
deeper for a more accurate example.
How
much deposit are you putting down on the mortgage? Are you going to take out
extra mortgages or loans to cover the deposit? Assuming that you are putting a
20% deposit down and needing a 2^{nd} & 3^{rd} mortgage
loan to cover the downpayment deposit:
For example:
First Mortgage

2nd Mortgage

3rd Mortgage


Building Cost

$ 1,700,000.00

$ 200,000.00

$ 140,000.00

Deposit

$ 340,000.00

$ 

$ 

Mortgage

$ 1,360,000.00

$ 200,000.00

$ 140,000.00

Mortgage Rate

6.50%

6.70%

6.80%

Mortgage Term Years

25

25

25

PMT

$ 9,183.00

$ 1,376.00

$ 972.00

Total Monthly Payments

$ 11,531.00

What are your monthly
operating costs?
Cost / Year

Cost / Month


City Taxes

$
12,000.00

$
1,000.00

Building Insurance

$
2,500.00

$
208.00

Utilities

$
1,000.00

$ 83.00

Building Supervisor

$
3,000.00

$
250.00

Accounting

$
1,300.00

$
108.00

Total Expenses

$
20,500.00

$
1,649.00

Mortgage Payment

$ 11,531.00


Total Monthly Expenses

$
13,180.00


Monthly Income

$
13,000.00

As
can be seen the rental does not cover the monthly debts, you could be losing
$180 every month ($2160 / Year).
It
may not seem like a good deal, but you may be willing to lose a little up front
for a better long term investment. For example, if the rents are low, and the
following year’s rents are raised say 3%, (Check your local bylaws for any
rental increase laws).
This
3% would increase the monthly income $250 and yearly $3,532 including the
previous year’s loss the accumulated rental yearly income will be $1372. Of
course, we have not yet taken into consideration a vacancy percentage (you may not have all the apartments filled
every month of the year), and other expenses – for example in addition to your
rents going up, the city taxes will increase..
You
also have to consider any future improvements to be done to the building (new
roof, painting, flooring, repairs, etc) and when you expect to do them – this
year or next or sometime in the 5, 10,
15 & 20^{th} year. Will the rental cover these future costs
too? Will these improvements to the
building bring you higher rents or add to the buildings value when you sell it?
In
addition to increases in the building value due to improvements, there is also
an average increase in the building value over time. With a 4% annual increase in real estate –
not including any improvements to the building, the apartment building for
$1,700,000 after 5 years might sell for $2,070,310. Now subtract realty fees of
6% and your final amount is $1,946,090  a profit of $246,090!
But
don’t forget, when buying the building there are closing costs to pay, Lawyers,
Building Inspectors, Bank Inspectors,
possibly land transfer taxes, surveys and title insurance too. This is money you have to have upfront; cost
may be $20,000+. But don’t get too
discouraged, these costs taken from the profit would still show a profit of
$226,000 in 5 years.
What can be done to
Increase your Revenue?
Are
there empty apartments if so can they be revitalized by a fresh coat of paint
and any other faults that are found, fixed?
What
are the rents that other apartments in the area are receiving for a 2 bedroom
unit? If for example your competitors
are charging $725 then you could ask for $695 for your empty apartments. If you could rent your apartment now for $695
or hold out for the full $725 what should you do? It depends – if it takes you 4 months to get
a new tenant at $725 verses one month to fill the vacancy at $695, and tenants
stay on average 2 years – then every 2 years you would earn $15985 for the $695
rent and only $13775 for the $725 rent.
You would earn less by charging more!
Plus your tenants are apt to stay in your apartment longer to avoid
paying higher rent elsewhere – which means less work for you cleaning and
painting each vacancy period between tenants.
But every situation is different, if you don’t have much competition
then you may not have to deal with long vacancy periods and can charge the
higher rent and earn more.
Do
you have laundry facilities? if not is
there somewhere in the building they can be installed, other than the cost of
plumbing you could have a firm install the laundry fixtures at no cost and
receive up to 40% of the intake.
To
better your chance of having a 100% occupancy can the building surrounds be
improved by landscaping, is the building dreary and in need of a fresh coat of
paint. If you have great apartments but the outside of the building is stopping
prospective tenants from coming in to see them you could be losing monthly
income due to vacancies. The cost to
improve the curb appeal may be $5000+ but it could also increase the selling
price of the apartment by 2% since all improvements reflect on the resale of
the property. You may even be able to
write off the landscaping on your taxes too!