The Burn Your Mortgage Podcast: How to Find Cash Flow Positive Rental Properties with Jelani Smith

Full  Transcript

Sean Cooper
 Hi, Jelani. How are you doing today?

Jelani Smith
Hey, Sean. I'm doing great. How are you?

Sean Cooper
Pretty good. Thank you. It's wonderful to have you back on the show. I believe this is your third appearance on the show. I was looking for a realtor to regularly have on the show to discuss what's going on in the market, and you're pretty knowledgeable about the market. So, yeah, thanks for agreeing to come on the show and excited to discuss what's going on in the real estate market and some other interesting topics that I'm sure the listeners will find riveting.

Jelani Smith
No problem about our show. And thanks again for having me on the call. I'm looking forward to this podcast session as well. So basically informational and as always, appreciate it.

Sean Cooper
Okay, great. Well, thanks for your time. And let's get started here. So yeah, the first topic that I wanted to discuss is opportunities for investors. So you know the Ontario real estate market bears. But I mean yeah I feel free to talk about it for the rest of Canada. If you know anything about what else is going on, because we have listeners all across the country.

Sean Cooper
But yeah, I guess, you know, they work in the GTA. So yeah, you could just talk about all the good opportunities for investors. Mortgage rates are coming down. So it's easier to cash flow these days. So yeah, how are things going right now? And somebody is looking to get into the market as an investor. What are some of the things that they should be on the lookout for?

Jelani Smith
Most certainly so for today's market on those, you know, the interest rates have come down over the past couple of months. Briefly, I think, of all time. But however, despite the interest rate being reduced, which obviously does benefit the purchasing power as most of the prices are holding stable. So for example, if you look at the October 2024 markets that the Toronto real estate agent bought, the sales actually increased 44% year over year.

Jelani Smith
However, if you look at the average prices, they only increased by just a little bit over 1% year over year, right? So that speaks to the volume that there's buyers. There's certainly returns to the market at a steady pace, which have been modest as well for various types of listings across the GTA. However, despite the fact that some properties, maybe multiple offers, I'm still noticing that the prices are still holding steady.

Jelani Smith
And I personally do feel that we won't see the true impact of the interest rate cuts until quarter one quarter two of next year. However, all of the external factors that are involved depend on the employment data, the buyer confidence, etc.. So with that being said, from an investors perspective, there are still opportunities in the market to cash flow positively.

Jelani Smith
This is one of the many reasons why investors choose to invest into real estate, not just appreciation. It's also the cash flow that you're looking for. So looking through obviously the GTA region, purchasing a single family home such as a condo, a townhome or a single unit detached home, see, that doesn't cash flow in today's environment, unlike, you know, putting down a larger down payment more than 20% down.

Jelani Smith
So you. What I'm noticing in today's market, what will make the most sense from an investment standpoint is purchasing a duplex property. So in other words, purchasing a home has three units in it. So where you can get to a rental income potential within the one property, in the case of 9 or 10 times, you'd be positive cash flow.

Jelani Smith
So that's the trend that I'm noticing in this market that makes the most sense from an investor standpoint. It's not just benefiting from appreciation, it's also benefiting from the cash flow, which will also improve over time as interest rates do come down gradually.

Sean Cooper
Thank you for your insight there, Jelani. And my thinking is as well that, yeah, at 28, 25, it's expected that we're going to be seeing the lion's share of the interest rate cuts there. Like we started seeing interest rate cuts in the second half of 2024. But 2025 is where we'll really see the most interest rates cut. So yeah, my thinking is that interest rates are the single biggest driver of home prices.

Sean Cooper
And home prices are inversely related, meaning as interest rates go down, home prices go up. So my thinking is if you're in the financial position, you might as well get into the market now before interest rates go down even further and home prices go up even more. Do you tend to agree with that sentiment there? Because yeah, when interest rates go down, like we could see the return of bidding wars and that will drive home prices up, so might as well try to get in sooner rather than later and beat the rush.

Jelani Smith
Most certainly. Most certainly. Because once interest rates do come down, that indirectly benefits the buyers purchasing power. Right? And that also brings some more buyers into the market as well. So that indirectly increases the demand. And also I've noticed the most interesting issue is the museum issue, which is going to be effective as of December 15th, where you can do less than 20% down payment for a home up to $1.5 billion and 30 MT season instead of 25 years.

Jelani Smith
So aside from the interest rate being gradually declining over the next couple months, I also do think the CMC will the new CMC rule is also going to increase the demand, especially for first time home buyers, for those who are looking to move up from one primary residence to another very soon. So it's going to be interesting to see how these regulations also have an impact on the market.

Sean Cooper
Yeah, I'm glad that you brought that up there, Julie, because yeah, that was one of the topics that I wanted to talk about. And yeah, I think these changes of increasing the maximum home price for insured mortgages, up to $1.5 billion for being able to put less than 20% down is long overdue, because, yeah, like previous to that, if you wanted to buy a single family home in expensive markets like Toronto and Vancouver and put less than 20% down, it just wasn't possible.

Sean Cooper
So yeah, these changes are long overdue. I mean, I don't think it's fair that basically, like everyone's forced in the expensive markets to buy a condo or, or townhouse, that they have less than 20% down. So I definitely think these changes are long overdue. And with the lower interest rates, it should help people qualify for these properties as well.

Sean Cooper
So yeah, I'm definitely happy that these changes are here. And they were definitely long overdue in my opinion.

Jelani Smith
Most certainly. And also people look at the Toronto VSP market and also the Vancouver area estate market. Typically speaking, the average selling price, it usually has been over $1 million over the past couple of years at least. Right. So I think some increase in the limit up to $1.5 million. It truly does open up more opportunities for options for especially first time home buyers looking for properties that are usually priced above that $1 million ballpark.

Jelani Smith
But given that opportunity to secure that property, that would be doable for that 20% down payment mortgage.

Sean Cooper
I couldn't have said it any better myself. So yes, thanks again for your insight there lady. And yes, I just wanted to quickly touch on this here. So I received the rental report from rentals. Okay, just talking about the rents right now and if you read the headline, it says rents in Canada declined nationally for the first time since Covid.

Sean Cooper
But again, it's important to read below the headlines there, and maybe you can talk a bit about the rental market and what's going on and how it can be a bit cyclical in nature. Like the rental market seems to be kind of like the ice cream stores, like they're the best selling time is during the summertime, and it seems like the rental market, that can be a busy time as well, because people typically want to move before the start of the new school year if they have kids there.

Sean Cooper
So yeah. Did you want to share some thoughts on this report from rentals? Okay. And what's going on with the rental market and what you're seeing on the ground as well with some of your rental properties and for helping your clients lease out properties as well.

Jelani Smith
So I do a quick event listing from the GTA region. I do know this especially compared to last year, the demand has to be strong or I'm doing all this so that there's a little bit less competition within the rental market. However, just a few factors are involved behind that. Obviously one of the biggest things is we're pretty much at the time of filming this for pretty much going into the Christmas season very shortly.

Jelani Smith
Specifically speaking of the winter months, there is a little bit more for the rental market. I do find out that the rental market is a little bit more active in the spring and summer market, especially for families who prefer to move outside the school year as opposed to moving in the middle of the school year.

Jelani Smith
Secondly, it also speaks to the state of our economy at the moment, despite the fact that the interest rates have been declining over the past couple of months, we do have to keep in mind that there's been quite a few layoffs that have been happening over the past couple of months as well, right? Especially from corporations, etc. so I do feel that it's also having an impact on the rental market.

Jelani Smith
However, given the fact that the interest rates are gradually declining, we truly want to see the impact of interest rate cuts until a couple of months after this kind of thing is noticed. So we'll have to see how, please, over the next couple of months. But I do foresee the rental prices stabilizing for the near future.

Jelani Smith
I think that these rapid rent increases year over year increase longer on. I think going for it will be more of a steady appreciation or may stabilize at a certain price point for a certain period of time.

Sean Cooper
Sure. So not all doom and gloom like the headlines say there. And yeah, I wouldn't necessarily be in a rush to get it. Tell me, either you want to do due diligence so that you find a tenant that's well-suited for your property, and you're going to have a good long term relationship there as landlord and tenant. So that's important as well.

Sean Cooper
So perfect. Well, let's switch gears for a second here. And yeah, an interesting topic that you suggested that we talk about is gardens. Weeds as well as fourplexes are in Toronto. So yeah, there's been a lot in the news headlines about garden suites. And yeah, it just seems like that's an interesting way. For example, like for multi-generational households or people looking to earn some extra rental income from additional property on their lot there.


Sean Cooper
So yeah, I'd love to hear your thoughts on and experiences with Garden Suites and how the city's been changing the rules to try to make them easier. And if you think that's a good opportunity for investors as well, for sure.

Jelani Smith
I think just for this, we can just say that this has been very exciting. So as you know, recently, the city of Toronto has passed me by law saying that you can have up to five units on a property within a Toronto region. So how that works is the existing dwelling to be built up to four units.


Jelani Smith
And in addition, you can build the 50 unit as a garden suite, which would typically be in the back here or laneway, depending on where in the city you are or where the property is located. The main reason is practice. But I like to combat the housing shortage that might have been facing over the past couple of years.

Jelani Smith
Or I'll say over the past decade. So I think it's a great way for them to increase the housing supply within the city, bring them more affordable options for renters, or help homeowners pay down the mortgage for the equipment. So with the garden suite, typically speaking, let's see the houses around the block size of say, 55 145 ft long.

Jelani Smith
This all sits around the average size for a bungalow within the Toronto region. So in many cases, obviously depending on the setback and etc. however, I would say on the average, if you build a garden suite that's about five ish square feet per level, so five square feet on the main floor, probably square feet in a basement level.

Jelani Smith
So technically speaking, with these gravity suites, it's easy to get around 2 to 3 bedrooms in total. The rental income could be around 3000 to $3500 per month. That's a ballpark that we'd be looking at. So that would be the 1% rule. And the reason why I say that is because this is, typically speaking, the greatest construction, the cost, let's say around $300 to $250,000, obviously, because this contractor used the type of material and etc. let's say it cost $250,000.

Jelani Smith
You can rent and sell for about $3,500 per month right away. You are beating that 1% rule, which we both know is very hard to achieve in Toronto or the GTA region. Typically speaking, you have to go to the smaller towns to meet that 1% rule. So that's the pinnacle of greatest weakness, you know, pretty much maximizing your property, bringing in that additional revenue stream.

Jelani Smith
And in many cases when you do the numbers at the building ground, it will be very easy to build positive cash flow over $5,000 per month, depending on how much you rent the existing home for. So I personally think that greatest weakness is a no brainer, and I'm excited that we've finally passed on the bylaw for this type of build.

Jelani Smith
And I'm starting to see lenders also provide financing programs for college students as well.

Sean Cooper
Yeah, I just heard about the Canadian government making it easier for homebuyers. They can refinance up to 90% of their property's value to do some renovations to help with the rental market as well. So yeah, I definitely think that's a step in the right direction there. And as you said earlier, the way that you can get a positive cash flow in this current environment that we're in is by adding more units.

Sean Cooper
So I'm glad that through less government red tape and also through adjustments to the mortgage qualification rules, that that's becoming a lot easier because yes, prior to these changes here, I heard it was almost next to impossible between getting the permits and, and it was difficult in terms of the financing to get this done. Like I looked at stats and yeah, there were maybe a handful of you could maybe count the number of garden suites on, like on one hand or something like that in certain cities, because they were so far and few between.

Sean Cooper
But yet I'm not going to say that everyone has a garden suite, but yeah, there's even one in my neighborhood being built there, so it's great that the rules are being loosened up, and it's making it a lot easier to actually put shovels in the ground to build these, because it seems like it was. If we were talking maybe 5 or 10 years ago, it would be pretty challenging then, but definitely seems like there's been a lot of steps taken to make it a lot easier these days.

Jelani Smith
Definitely, definitely great. If 510 years ago you'd have to go to committee adjustments, pretty much get the same from the neighbors etc. but now fast forward to today. This is within the building bylaw. It was easier to get the garden suite application built.

Sean Cooper
That's great. And I just wanted to finish off by talking. We talked with the investors earlier, but yeah, let's say you're a first time homebuyer or you're somebody looking to move up in the market or make a lateral move or even downsize. Maybe you can just talk a bit about what's going on in the real estate market right now.

Sean Cooper
I know that you mainly know Toronto, but yeah, feel free to touch on the rest of Canada if you know what's going on. But yeah, what would you say to somebody either looking to buy their first home or looking to move from property to property? What are your thoughts on the current market, and would you buy first or sell first?

Sean Cooper
And yeah, what would you say for first time homebuyers as well?

Jelani Smith
Definitely. So for first time homebuyers, the key rule number one would be to get speak with a mortgage broker, get a pre-approval, complete it with I see this because as you see, many first time homebuyers make the mistake of of shopping for a house first and then trying to seek a modest pre-approval later. It's always good to get much pre-approval beforehand for two reasons.


Jelani Smith
The first reason being is so you know what your budget is. You know what you can be qualified for up to a certain purchase price. And the second reason is, if you find your dream home that you're very interested in, you have it in order to submit an offer on that discounted property. Rather, if you didn't have a mortgage pre-approval, you wouldn't be able to offer, right?

Jelani Smith
And you could potentially do so on that property. However, aside from that, what that you see, there's a steady influx of new training to the market. Maybe for the freehold market that sold freehold franchises, homes, semi-detached homes and detached homes. I'm sorry to see the demand uptick for those properties, however, called the condo market. It's wrong to be buyers at the moment.

Jelani Smith
Typically speaking, a call the market doesn't really pick up you easily pick up a quarter or two after the freehold settlement. That's picking up on the past market trends I have seen. However, I do see all the opportunities out there and the main reason why I do see this is because the prices are relatively flat. I mean, they only increase by about 1.1% year over year as of October 2024.

Jelani Smith
However, the interest rates are unprecedentedly lower compared to this time last year. Right? So the way I look at it is to purchase a home that will also be around the same price as last year, but the current cost is going to be quite a bit lower because you could be benefiting from the lower interest rate. Where are we going to be going through a variable or fixed let's him I mean the advice for first time home buyers.

Sean Cooper
Great. And what about people looking to like they already own a house and they're looking to buy another house? What would be your best piece of advice for them? Would you buy first or sell first? And yeah, what advice would you have for them?

Jelani Smith
Definitely. I think it truly depends on where in the GTA they're from, where it is, and it would be varies based on the location of the property and also the type of vendor in the city for the condo, for example, because condo, I usually recommend selling first, try to get a 90 day course date and then find purchasing a home afterwards for freehold homes.

Jelani Smith
Again, it depends on which region in the GTA. I would say the same will apply to first with a 90 day cozy and then fine afterwards just for the peace of mind of the bunch that you're working with. Then, because for the most part, the market is still balanced, even though we're starting to see as we turn to the market.

Jelani Smith
Obviously, this is a seller's market, and I would emphasize buying first and then something would make more sense. But in today's market, I would say selling first and then buying it would be the safest bet.

Sean Cooper
Okay. Perfect. Well, thanks so much for your insight, Giuliani. It was great to speak with you today. It's always wonderful to have a realtor like yourself who is so knowledgeable about the market on the podcast. And yeah, thanks so much. I'm sure the listeners found your discussion very helpful today. And yeah, looking forward to having you back in the future.

Sean Cooper
Talk about what's going on next year. So again, thank you so much for your time. And it was great having you on the show again today.

Jelani Smith
More seriously, and thanks again for having me on this show. It's a pleasure as always.

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Sean Cooper  

Thanks for listening to another episode of the Burn Your Mortgage podcast. Besides being a podcast host, I’m also an independent mortgage broker. If you or anyone you know, family, friends, co workers or neighbors could ever use any unbiased mortgage advice or a second opinion, feel free to reach out. Email me at sean@burnyourmortgage.ca or call or text me at 647-867-3711 for a free mortgage consultation.

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