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Home-based Rental Real Estate: your thoughts
December 27, 2010
9:12 am
Prag
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Hi all, I'm looking for some advice. Please critique my plan. I'm particularly interested in the advice of people who have actual experience in the matter, though any advice is welcome!

Currently, my household (my partner and myself) is 100% debt free, so all our free money goes into savings. I am 35 and we own a small home (mortgage-free) that has almost doubled in value in the last 12 years from our purchase price of $118,500 in 1998 to its current approximate value of $215,000. We live in a bustling mid-sized city that is rapidly becoming a large city, hence the fast increase in property values.

My partner may end up on permanent disability in the next year or two due to a serious progressive blindness disorder, and my web marketing related job may be made redundant in the next year. That means we both expect to lose our approximately $50,000/year jobs around the same general time. I would be eligible to claim EI for several months, but I don't expect to ever find a permanent job with benefits again. It seems almost everything is contract now in the type of work I do, the skill set required changes constantly, plus I want to scale back and work part-time from here on in anyway. We don't have kids and never will have any, so our cost of living is very low. We only have one car and plan to keep it for 20 years.

I've always been interested in living off rental income. Our plan is to sell this place once our current jobs are kaput, then use that money to buy a larger and nicer place in a stable low cost of living area with a good climate and convenient transit (plane, bus, train) access. We have settled on moving to Niagara Falls. Money goes a lot farther there as far as real estate is concerned, and for the current price of our house, for the same money we'd get something far superior in a much nicer upper middle class neighbourhood.

Our new house would be required to have a finished basement apartment with a separate entrance and kitchen and shower, which we would rent out. The main part of the house would have four bedrooms, so we'd have the option of renting out one or two individual rooms, preferably to friends we already know. The basement could be rented to anyone since they would not be sharing our living space. We would require first and last month's rent up-front, and rent out in a term of one year.

We figure a rental fee of $750-$800 for the basement apartment would entirely cover our monthly carrying costs of property tax, insurance, and utilities, as well as providing a modest profit to help pay for our food costs. As for upstairs, individual rooms are generally rented out for around $350-$400 per room, so any room rentals on top of the basement apartment would be pure profit.

The Niagara Falls bylaws state any homeowner can rent up to two individual rooms in their house without having to register as a rooming house. I'm less clear about what's required when one rents a totally separate basement apartment, but would obviously check with the city to see that the basement apartment is legal before buying!

I would pick up a job, likely close to minimum wage (perhaps at the Casino?), although if my husband is trying to live off disability then I have to be careful not to make too much income or his disability payments will be clawed back. The rules are a very strong disincentive for a disabled person's spouse to work to supplement income, as is the case with people on welfare. Perhaps the rental income alone will be adequate as me working AT ALL might cause too much spousal income for someone on disability.

An American tech company owner friend of mine would potentially like me to be his part-time virtual assistant and remote financial manager, since I've already saved him so much money with my ideas, which might be a nice part-time option for me, but I'm not sure of the legalities of working for an American company while residing in Canada. Obviously I wouldn't need a US work permit since I'm not actually in the USA, but does anyone know for sure if it's legal? It seems like a grey area, but I do see ads for virtual assistants all the time on online contractor sites, so it doesn't seem uncommon. I suppose if I'm considered a contractor instead of a full-time worker then it's all fine.

What do you think of this rental income plan, and do you have any experience with pros and cons of renting space in your personal home, whether it's a separate apartment or rooms?

Do you have any knowledge about the legalities or requirements of working for a US company while located outside the US?

Do you see any glaring holes in my plan?

Thanks everyone!

December 27, 2010
10:31 am
Peter
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I can speak a bit on the "working for a US company" aspect. You are right in that it's legal if you're considered an independent contractor. Some of the requirements for that:
- You set your own hours
- You control "how" you do your work
- You buy all your own equipment

Also, try not to travel to the US on business while getting paid for your time there — US customs will likely give you a very hard time and prevent you from entering.

December 27, 2010
1:35 pm
kilarney
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November 8, 2009
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the rental thing is always an attractive dream but its totally based on getting a good quality tenant. Some friends have tried it and many times they end up with trouble getting the rent, damage to the unit, noise complaints, illegal activity, constant changing of tenants….on and on. But if you get that quiet-honest-respectful tenant then youre all set. Possibly if you have a decent size of cash you could invest it in a REIT?

December 27, 2010
3:22 pm
Prag
Guest

Peter said:

I can speak a bit on the "working for a US company" aspect. You are right in that it's legal if you're considered an independent contractor. Some of the requirements for that:
- You set your own hours
- You control "how" you do your work
- You buy all your own equipment

Also, try not to travel to the US on business while getting paid for your time there — US customs will likely give you a very hard time and prevent you from entering.


Yeah — I figured there could be an issue when crossing the border at Customs/US immigration if I declared this kind of virtual assistant employment with a US company. I'm concerned about getting hassled even if NOT traveling on business though. I go visit this person about once a month since he's one of my closest friends, my visits have no relation to business dealings, and I don't want my declaration of this type of job to prevent me from being able to cross the border to go visit.

The border guards always ask where I work. Even though I'm traveling for leisure I assume it's best not to mention the virtual assistant job because I hate being interrogated with 20 questions and dealing with their tough-guy attitude as it is. I can only imagine how much worse it'd get if I declared that kind of job instead of the standard Canadian corporate job I have now. If I instead declare my job as "owner of rental income property supplemented by a part-time casino job" and bring a casino pay stub when the border guards ask, I figure that's the safest bet!

The only time I'd want to cross the border for "business purposes" would be to attend an office Christmas party, as none of the work requires ever being there in person. I guess I could just say I'm going to a party, no need to call it an office party, since no business dealings would be going on.

As an independent contractor, in addition to the stuff you listed, I know I'd need to send an invoice every month for his business to pay, which is easy enough. Then I'd need to set aside part of my pay for the income tax since it wouldn't automatically be coming off my paycheque.

Thank you – I'm glad someone had some experience with this kind of thing! :smile:

kilarney: I am unfamiliar with a REIT. What is that, and are there any disadvantages to a REIT?

I hear you about the prospect of "nightmare tenants" which is why I'm hoping to recruit friends, or friends of friends, as renters rather than complete strangers, to minimize those kinds of issues. I only want renters found via word of mouth, not advertising to the general public.

Requiring first and last month's rent and a damage deposit up front should also help weed out people who have trouble paying the bills each month, since it's unlikely they'd be able to come up with the lump sum up front if they were living paycheck to paycheck.

I'll need to investigate how much home insurance would go up if I have two tenants, to make sure there's no unpleasant surprise!

December 28, 2010
6:15 pm
kilarney
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November 8, 2009
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a REIT is like a mutual fund that invest exclusively in realestate assets. some buy just apartment buildings and in effect allow you to be in control of rental property without having to be a landlord. The income is also paid in a tax smart way to reduce the hit. You may need a lot of cash to make the initial investment but it is secure and pays steady income something like a tenant would without the hassle.

December 28, 2010
11:31 pm
Andrew
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Peter said:

I can speak a bit on the "working for a US company" aspect. You are right in that it's legal if you're considered an independent contractor. Some of the requirements for that:
- You set your own hours
- You control "how" you do your work
- You buy all your own equipment

Also, try not to travel to the US on business while getting paid for your time there — US customs will likely give you a very hard time and prevent you from entering.


Yes, the best thing to do is to be an independent contractor. Your friend should have you fill out a W-8 (probably W-8BEN) form for when / if the IRS starts asking about the company's financial relationship with you.

If you are travelling to the US for business meetings, that is usually acceptable. For other work-related reasons, you should carry a letter stating that you work for a Canadian company that is contractually obligated to provide services to the American company and that you are paid exclusively by the Canadian company and not by any American organization during the visit.

December 29, 2010
3:24 am
mike
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March 25, 2009
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Prag, sorry to hear about your situations.

At first, your post sounded like you were in your 60's (or more), then I read you are 35…not that old. If you wanted to, I could see you working again with a F/T job with benefits.

Rentals.

I would be careful about investing in RE at this point in time. RE has done too well over the past 10 years but it's an up and down, boom/bust investment. I sure wouldn't be buying it now as even a minor -5% or -10% RE drop in 2011 will hurt your savings. (google Toronto RE in the 80's/90's price chart).

REITs are a good suggestion, so is ETF's (google Canadian Couch Potato) or Band Preferred dividend shares. All are good IF YOU ARE NOT GOING TO TOUCH OR NEED YOUR MONEY.

Rentals… well, I have considered them myself and have a friend who has 3-5 of them. In truth, you don't make money till you sell the rental as that is when the mortgage is paid off (25 years); but even then, the renters will have to pay for the mortgage, repairs, property tax, renos, etc over those years… Then there is dealing with renters, damage, litigation and your time at 3am. If RE doesn't boom again, then I would say it would be better to invest in the above suggestions or just get laddered GIC's.

Niagra Falls is a great place BTW, been there many times. But it's always been a beautiful but "poorer area". But that is part of the charm.

Have a great day
December 29, 2010
9:34 am
Prag
Guest

W-8 (probably W-8BEN) form

Thanks for the tip about that form!

At 35 I could see you working again with a F/T job with benefits.

True. I just don't want to bet on it or "assume" I will be able to. It's disheartening how many university-educated intelligent friends I know in the GTA who can't land a job beyond some McJob close to minimum wage with no benefits, even many years after graduating. One 29 year old friend hasn't been able to find work in a year after getting laid off. With every passing year, statistics have shown that less employers offer either full-time permanent jobs (they are moving as much as they can to contract work) or pensions and/or benefits. Even my current employer, one of the oldest companies in Canada, has removed all benefits over the last ten years except for the health care benefits.

Those trends, combined with Niagara Falls having a lower population/pool of jobs and higher unemployment rate, means my Plan must only assume I will be able to find minimum wage part-time work at someplace like a Casino, nothing more. If I exceed my plan though, great, but I think it would be a mistake to expect to – given the economic climate, location, and trends. However, the virtual assistant job would be a real help.

Rentals… well, I have considered them myself and have a friend who has 3-5 of them. In truth, you don't make money till you sell the rental as that is when the mortgage is paid off (25 years)

Just to clarify, we would be purchasing the Niagara Falls 4 bedroom home with basement apartment in full with absolutely no mortgage. We're not looking to sell and profit from real estate value increases later, we are just seeking steady monthly income generated by our own home via a basement renter and possible one room upstairs rented out. There would be NO ongoing mortgage to pay, only property taxes, upgrades (roof and furnace every 25 years) and utilities to concern ourselves with.

I definitely do not want to deal with the hassle of owning other rental buildings located elsewhere in the city. Just renting space in my own home.

Thanks for the tips about REITs, ETFs, and Band Preferred Dividend Shares. I'll be doing some Googling!:smile:

December 29, 2010
6:55 pm
guest
Guest

If you decide to go the rental route, you should consider that you will be competing for quality tenants with many other homeowners who over-extended themselves with home-equity lines of credit back in the boom days and are now having trouble making their hefty mortgage payments after losing their jobs. I know of many people who are rapidly constructing rooms in their basememts in order to get tenants and get some cash flowing into the empty family coffers. It is most definitely a renter's market right now. I also agree with others that getting a quality tenant is absolutely imperative to a good landlord/tenant relationship. Problem is, most people who are quiet, considerate of other's property, and who have a steady income aren't renters; they are homeowners. Your best bet will be to find a professional tenant who has to relocate to the area for temporary contract employment or other similar reason. Of course, there will be a lot of competition for these people, and they are smart enough to know that and will do a lot of rent shopping to find the lowest rate. Good luck.

December 30, 2010
3:40 am
mike
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March 25, 2009
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guest said:

If you decide to go the rental route, you should consider that you will be competing for quality tenants with many other homeowners who over-extended themselves


Guest makes a good point. Also since you are looking at paying 100% (no mortgage) you actually lose out more than buying with minimum down as you can't write off the monthly rent against the mortgage interest. (or at least that is how it was explained to me).

Overall in today's RE market, there are better returns with less hassle than being a landlord.

Have a great day