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During our normal nomadic existence (which we are super chomping at the bit to get back to any day now), we get to meet all sorts of interesting people: entrepreneurs, digital nomads, World-Schoolers, friends from the FIRE community. And because we had been travelling so long, we had gotten into the habit of thinking that was normal. But now that we’ve been back in Toronto for a year, we’ve become re-acquainted with a type of person that we thought we had left behind: Home Boners. Basically people who’ve bought way too much house, are leveraged up to their eyeballs in debt, and as a result are forced to obsessively talk about real estate because they have everything riding on this one asset.
Toronto is FULL of these people and on previous visits back home we’d have to endure endless talk about granite countertops and finished basements and other things that make FIRECracker and I want to die of boredom. I’ve long since given up trying to convince these people face-to-face about the wonders of FIRE. They want to live their lives obsessing over their house, fine. We’ve got a plane to catch.
This year (or, rather, last year) I’ve been forced spend an extended amount of time in this city, and I’ve noticed that some very big issues with owning real estate during a pandemic that have really devastated people’s finances.
You’re At the Mercy of Your Tenant
We’ve lived in many AirBnb’s around the world and almost every place we go to, we’re invited to come back any time. The reason for this is that we’re pretty good tenants. If something breaks, we fix it for them, we keep the place clean and tidy, we don’t host big parties or keep people up until 3 AM. You know, the stuff known as basic human decency. And apparently, that’s kind of rare!
The horror stories I’ve heard from landlords of previous tenants smearing shit on the ceiling (literally), smashing TV’s or setting couches on fire makes me really question if we as a society are truly civilized yet.
Every landlord exists in two states: Patting themselves on their back for all the “free money” they’re getting because they happened to find a good tenant, or tearing their hair out because they accidentally let in a scumbag.
And I’m not convinced at how effective tenant screening is. Some of the worst offenders can be highly paid professionals like doctors or lawyers. How did these people get through med school without learning how to flush their toilet?!?
And once you’re in one of these situations, it becomes an all-consuming obsession as the owner worries about what the maniac might be doing to their property. A friend of ours met up with us in Asia and spent a lot of time on the phone freaking out about their tenant. We later found out someone had set up a meth lab at one of their units.
That does not seem like a good way to spend your retirement to me.
The Government Can Screw You Over
Unique to this pandemic has been two major changes in government policies that have really put the kibosh on would-be easy real estate money.
The first is the eviction freeze.
Back in April, many jursidictions around Canada and the US put a moratorium on eviction, sparking an international protest movement called Keep Your Rent. Over the summer as cases eased up a bit courts started processing cases again, but when the second wave of COVID-19 hit, eviction enforcements were halted once again. Courts can still hear eviction cases, but the police aren’t actually allowed to enforce the order.
Which on one hand is good in preventing further spread of the disease since people won’t be wandering the street homeless, but on the other is a nightmare for landlords. And while I have a great deal of sympathy for people who’s jobs went away and can’t afford rent, I have zero sympathy for tenants who have the money and just decide to stiff their landlord.
This is happening right now to a friend of mine. Her tenant still has a job but has stopped paying their rent for over a year now. When the courts opened back up, my friend tried to file the paperwork to have them evicted, but courts were so backed up it took forever for her case to be seen. And then when it was, a paperwork error forced her to start the whole process over again. And THEN the second eviction moratorium went into effect. She’s gotten no rent for over a year, can’t get rid of their deadbeat tenant, and there’s no end in sight! Yikes.
And the second change in policy was the ban on short-term AirBnb’s.
Toronto, like many major cities, has seen issues where investors snarf up dozens of properties and rent them out on a nightly basis to vacationers. AirBnb was always meant as a way to earn money renting out your spare room, not as an excuse to be convert residential condo units into ghost hotel rooms.
Now, the city has officially banned nightly AirBnb’s. You can still use it as a platform to rent a place in monthly increments (which qualifies as a long-term rental), but the days of being able to charge $150 a night are over.
This has dropped rents in the city sharply over the last year. Now that all these “ghost hotels” can no longer function as hotel rooms, all that housing stock has been forced onto the long-term monthly rental market, and the resulting competition has driven rents down. Year over year, Toronto rentals are down an average of 20%, and personally we’ve seen our rent drop by 30% thanks to FIRECRacker and her negotiating skills.
Your Money Can Be Trapped
Put all this together and real estate can turn into a money trap.
Our landlord friend with the deadbeat tenant has zero options right now. She can’t collect rent, she can’t evict the tenant and find a better one, and she can’t even sell it because who in their right mind would buy a rental unit with a squatter in it? And yet she has to keep paying the mortgage, or she loses it all!
And as for the ghost hotel operators, they bought their units (with leverage of course) assuming they’d be able to make a certain amount of money on the short-term AirBnb market. Now that nobody can do that anymore, not only is the rent that they can collect drastically reduced, but it makes their property worth far less. Add to the fact that these real estate investors tend to leverage each purchase up to the maximum, and these investors are going to be underwater on their mortgages, meaning they owe more than their units are worth.
So they can’t collect the rent they need, and they can’t sell because they need to cover the difference between the lower sale price and the mortgage balance which was based on the original purchase price. Their only option is to put in on the monthly market, collect any rent that they can, lose money every month, and hope that someone comes in and saves them.
FIRECracker and I make no secret of our disdain for Toronto real estate, but our dislike was based mostly on a) They’re too expensive and b) They keep us from traveling. But even we weren’t expecting things to turn this bad for real estate investors this quickly.
When it comes to real estate, when times are good it feels like free money. But when things turn bad, real estate quickly becomes an albatross that drags you down into the water, spewing money all the way with no way to cut it loose.
The funny thing is, at the beginning of the year we owned $60k of real estate ourselves. But in the form of a REIT called XRE. That little baby was sweet, paying us a regular monthly dividend of around 4%. But at the end of 2020, we realized we didn’t need the yield as much and sold it off. It took about 10 seconds. I didn’t even need to put my pants on.
There’s this famous movie called Heat about a bank robber played by Robert DeNiro and a cop played by Al Pacino, and at one point the two meet at a coffee shop. It’s an awesome scene, you can watch it here.
And at one point Robert DeNiro says a line that always stuck with me.
Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner.
That line kind of sums up our investment strategy. Don’t get into anything that you can’t drop in 30 seconds flat. Because as we’ve found out, when things turn bad, your money gets trapped.
Any real estate investors out there? How have your rentals been doing during this pandemic?
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