Becoming a landlord unintentionally is particularly common for investors who purchase pre-construction properties, according to James Knull, an Edmonton-area real estate agent specializing in investment properties.
“People like to buy properties pre-construction because they feel it’s going to be a good investment, which is basically speculative investing,” Knull told CREW
. “They’re under the assumption that it’s going to be worth more when construction is completed.”
Sometimes this method works quite well, but the problem, says Knull, particularly in a cyclical real estate market like Alberta, is that if you time it wrong, you end up taking possession of your property just when the market goes down and that’s what is happening to people in Edmonton and Calgary who bought their properties two years ago.
“They end up becoming accidental landlords because they have to rent these properties out because they can’t sell them for enough money to recover the cost of buying them in the first place,” says Knull.
“They not only become accidental landlords, but some of them end up with properties that are in a negative cash flow position because they bought these properties without knowing whether they would make sense as an investment property.”
According to Knull, the lesson for would-be investors is if you’re going to be buying pre-construction property make sure to crunch the numbers to see what would happen if you can’t sell it when you thought you would to make sure that you can actually afford to hold on to it as a rental property in the future.
“Don’t just do a market analysis, but do a rental market analysis as well.”
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The phenomena of “accidental landlords” is a harsh lesson for property investors who rush to buy in hopes of cashing out in volatile housing markets.