Five Ways to Know that You’ve Found a Great Investment Property

Great Investment Property ChecklistAfter our reviewing the responses to our October newsletter reader survey (thanks for participating!!), we found that next to financing your real estate investment, the next most important thing you want to know about is how to find (or know you’ve found) a great investment property. So, I’m going to take you through what I call the 5 Ah Ha’s of finding a good investment property. I call them Ah Ha’s because you will go “Ah Ha!” when you find a property with each of these features!

Ah Ha 1: It meets your objectives
Making decisions based on your real estate investing objectives is the foundation of our strategy, so it makes sense that the first AH HA is that the property meets your objectives.

For example, if your objective is to make $200 per month in positive cashflow you need to go out and find a property that will produce the money! Usually, it’s easier to obtain positive cashflow from a multi-unit property. It could be a house with a basement suite (2 tenants – 2 rents), a duplex, a tri-plex, or a small apartment building with 4 or more units. One of the easiest and quickest ways to determine if it will cashflow is using the Gross Rent Multiplier or GRM.

To Calculate the GRM
Asking/Purchase price = $150,000
Monthly rent = $1,100
$150,000/($1,100 x 12) = 11.36 (GRM).

Speaking generally, a property with a GRM of approximately 10 or less will likely produce neutral or possibly positive cashflow. And this is just a “quick and dirty” way to determine if a property will cashflow (you can read more here). You can search through realtor.com or realtor.ca to find potential properties and some will include current rents. These rents you can apply to the GRM formula above to quickly check where the GRM sits. If it’s well above 15, you will not be positively cashflowing. If the listing does not show rents, you will need to do some additional research to find out the approximate rents for properties/units of that size, type, and location. Use rentometer, viewit, or craigslist to do some comparative research (these can all be found in our Resources page).

Ah Ha 2: It’s in a Growing market
Ok – so the property meets your objective. The next thing to check is that the market is growing. We’ve talked about this a bit before, but searching the local papers for news about new jobs entering the market (either a new company moving in, lots of new construction or corporate expansions), learning of new plans for infrastructure (public transit lines or major roadways being added) as well as getting some sense of population shifts are all good things to do to make sure you’re investing in a growing market.

Government websites are also a pretty good source of information about the area (although the data is usually a year or two old). Check municipal and city websites along with provincial or state websites and look for census information including population, household income, number of children, number of schools, number of households, average person per household, etc. The information you really want to see is the direction these numbers are trending in. Is the area growing or shrinking or fairly stable? If the trending shows it’s growing, you’ve likely found another Ah Ha!!

Ah Ha 3: The area is improving or recently improved
Your objectives will be very relevant to whether you find a good area or one in transition. If you want a no mess, no fuss type of property you are likely looking for an established area. But if you want to chase some potential appreciation or can’t afford the established areas yet, you might be looking for a neighbourhood that is still having some “growing pains”.

No matter what your objective, we wouldn’t advise buying in the crappy area if it has no signs of hope. Bad areas attract difficult tenants and your property will likely go down in value and be impossible to sell later on. Instead, seek an area that is improving (have no idea where to look? Julie likes to follow the new Starbucks locations). In these new Starbucks locations, you will often see plenty of signs of improvement… people renovating homes, cleaning up yards, government investment in roads and parks and developers buying land are just a few.

Another word of caution, just because the area appears to be improving, does not guarantee that you will make money buying a property there. However, if you’ve done your research on the economy, vacancy rates, population changes and negotiate well, you will likely have an AH HA property.

Ah Ha 4: You find a professional Property Manager that is willing to manage your prospective building
Owning an investment property does not mean you HAVE to have a property manager. In fact, we don’t always hire one. But the properties where we have professional property management in place are less stressful and much less time consuming for us. A good property manager will cost you around 10% of your gross rent and even up to 1 full month’s rent to place a tenant in your property, but unless you want to buy yourself a part time job when you buy your property, a good property manager is worth every penny.

The key to this AH HA is to locate a property manager BEFORE you buy the investment property. Even if you decide you want to save some cash and just manage it yourself, it would be wise to speak with a few PM’s to find out if they would manage your property, determine what their fees are, and what their fees pay for! Why do you look for a PM even if you are going to manage it yourself? Well, if down the road you accumulate too many to manage or you can’t take the stress of managing it anymore or you start to enjoy your time down in Mexico for 2 months per year and don’t want to have to always answer your tenants phone calls… you will want to know that you can hire a reputable property manager to take over for you!

Don’t assume there will be one waiting when you are looking! The best way to find out about Property Managers is to ask around. Speak to realtors, lawyers, accountants in the area you want to invest in, and ask for their recommendations. You can also search in the Yellow Pages or online. The key is to do reference checks by speaking with other individuals who are working with the prospective manager. Want to learn what to watch out for? Check out our article on Five Ways to Protect Yourself from a Bad Property Manager.

Ah Ha 5: The vacancy rate in the area is dropping and/or is sub 5%
Our last Ah Ha is really geared towards the long-term holder of real estate. This type of investor buys with the intention of renting the property out for a fairly long period of time. Having a low or dropping vacancy rate is very important to help keep your place rented (high demand, low supply), and it also will help your cashflow and improve your bank financing.

Sure, you can buy a cashflowing property with a GRM of 5.5, but what if it’s in an area with a vacancy rate of 25%? We have had some Rev N You readers ask about investing in places like Prince Rupert or Kitimat, BC or Windsor, Ontario. Well, a quick look at CMHC’s reports and you’ll see that the vacancy rates are 14.3%, 23.2%, and 13.2%, respectively in those areas. As a long-term investor, you have to try to discern whether those vacancy rates will continue to be that high or will they drop in the not too distant future? If you don’t see a drop in the vacancy rates coming very soon, then I would stay away from that area (at least until the rate drops well below 10%). At the end of the day, you want to hold properties where the demand for rental units is strong. You’ll experience less vacancy and better rent rates.

PublishedNovember 7, 2008

The Real Estate Investing Courses You Should NOT Take

Real Estate Investing Courses

If you like this article you’ll really like Julie Broad’s blog post called:
A Broad Rant About Guru Investing Courses 

It started innocently enough – there was an ad on t.v. at about 11pm one night promising to make me rich through real estate. We’d already bought a couple of properties, but I wasn’t getting rich. I thought that this would be a great way to learn some tricks and maybe even quit my job within a year or two. So, on my lunch hour, I went to the hotel where their free course was being offered.

They didn’t teach me a darn thing about real estate investing, but they sure had me PUMPED UP and ready to be a millionaire real estate investor. I barely flinched when I paid $2,000 to attend a weekend course. I could even bring someone at no additional cost! I could already taste financial freedom.

Well, at this one course, I learned a lot. But what I really learned was that I didn’t really know much at all.

Sure, they gave me tools that I could use, but they were quick to tell me how their other courses would really help me achieve my goals. Before I was done with this program, I spent a further $20,000 on more courses. Through the course I completed one assignment deal (basically a property flip) to make some cash and bought two properties for no money down. Doesn’t sound that bad, until you find out how off track that course sent me! All hyped up and fully believing in what they were teaching, I made some really bad real estate investing decisions and those bad decisions cost me for many years to come. 

Despite the detour these courses sent me on, I still believe there are a lot of GREAT reasons to take real estate investing courses:

  • Networking! You might meet a future partner or mentor.
  • Can learn a great deal about real estate in a very short period of time.
  • Learning tricks that may take you years to learn on your own, if at all.
  • Motivation – the courses I took got me so excited about real estate investing it was all I could think about for months!
  • Opens doors to an investing network where you may learn about opportunities long before the general public.

But, keep in mind the drawbacks to the real estate investing courses that get the late night t.v. time slots:

  • Once you’ve attended the FREE seminar, the weekend courses are usually pretty expensive.
  • You can easily experience information overload! In less than 48 hours so much stuff is thrown at you that you don’t know what to do with it.
  • Upselling! Once you are at the weekend seminar, much of the speakers’ efforts are spent selling different courses. And, when you are a beginner, you feel like you NEED all of these courses to get started!
  • Techniques don’t always apply to your area, or your target property type. For example, I enrolled in a course that largely applied to the United States market which is different in many respects to the Canadian real estate market..

Despite the drawbacks, I would never discourage anyone from taking a good course. I believe signing up for a real estate investing course is a good starting step for beginner investors, but what can you do to ensure you find a good one and get your money’s worth?

Know Your Objectives: What do you expect to get out of investing in real estate (quantify this if you can)? What is your risk tolerance? What is your aptitude (can you or do you want to fix things and/or be a landlord)? Write your objectives down, and have a good idea of what you are trying to do before you look for a course.

Do your research! A quick online search for real estate investing courses will turn up a lot of options. Go online and look for forums or reviews of the course. Ask friends and family if they know of anyone that has taken a real estate investing course.

Request their company information by mail or go online to learn more about the founding company. Have they been around for awhile? Who, specifically, will be teaching the course? Try to obtain the speakers bio’s before you sign up. What is their experience? Trust me, Robert Allen, Russ Whitney and Donald Trump do not even stop in to say hello during their courses!

A Word Of Caution We’re in real estate for the long term. I have tried no money down deals (where you finance 100% of the purchase price of a property), and have found that they aren’t in line with our goals. Personally, I would avoid these programs.Generally if you buy with no money down, you are either buying a property in a bad location OR you are financing so much that it is very difficult to cover your mortgage costs AND your other expenses. It’s a very high risk way to make investments – especially in a down market. One of the most famous No Money Down authors and programs was created by Robert Allen. This is only one person’s opinion, but I agree with much of this reviewers feelings about this program: http://www.onlyreviews.com/robertallen.html 

Leave Your Visa At Home, or At Least Know Your Limits

Before you leave the house to go to the FREE course or the paid weekend on real estate investing, decide what is the maximum amount you will pay for the initial course or any subsequent courses and materials. It’s important to do this BEFORE you attend the course. When you attend the FREE or the less expensive courses, the up-sell is going to be a very hard sell. You will be given a rock bottom price if you sign up at that instance. And every bone in your body might be absolutely convinced that you NEED this to achieve your greatest dreams. If you go in with a threshold of, for instance $3,000, then you can hopefully better control what you actually spend on a future course. Emotion plays a big role in your decision to spend more money, and the programs out there feed on this. Take the “impulse” decision out of the equation by knowing what your objectives are and how much you’re willing to spend to achieve those objectives.

Take Action!

So you found a course that meets your objectives, you met some great people and you’re now armed with some tools and tricks to start building your real estate portfolio. Here’s the key to making your course work for you: Get off your butt and use what you learned!

I met with a few different people at one of the courses I attended and they said this was their 4th or 5th course and they still hadn’t bought anything! I estimated they spent about $30,000 on courses and did not have anything to show for it – well, except a fair amount of theoretical knowledge!

Published on August 17th, 2008

5 Steps to Rent Out Your Property

Money is tight, and you’ve got to rent out your vacant basement unit. You live above the unit and you need the rent money to make the mortgage payment. What do you do? Rent it out to the only person who is willing to move in right away. And you allow yourself to justify why that person won’t let you speak to their current landlord or why the collection agency is after them.

What could go wrong? This lovely tenant could be unstable and pull a knife on her roommate. Yes – it happened to us at 3am on a Wednesday night about 4 years ago. We had to call the police and have them separate the two tenants. The victim moved out the next morning and we were left with the knife wielding tenant who then stopped paying rent but refused to move out. It took us three months to evict her. We had to live above her the whole time. Once we FINALLY got her family to come to town and move her out (we were still a few weeks away from legally being able to throw out her stuff and change the locks), we had to send a collection agency after her for the rent money. We never received a dime.

As you can imagine we’ve taken great pains to find good tenants ever since. Here’s the overall process:

  • Step 1: Prepare the unit for showing
  • Step 2: Get your paperwork in order
  • Step 3: Research the market rents and place your ad
  • Step 4: Show your space
  • Step 5: Choose your new tenant.

Step 1: Prepare the unit for showing

The better it looks the more likely you’ll find a good tenant for the space. Make it easy for someone to visualize themselves living happily in that space.

Some suggestions to prepare the unit:

  • Fill any holes and put a fresh coat of paint over the walls.
  • Check all of the doors, locks, plug ins, appliances and light bulbs to ensure they are in working order.
  • While you are doing this, create a checklist to use when the tenant moves in or out. Include all of the rooms, doors, windows, drapes/blinds/shutters, plugs and light switches, shelving, appliances etc.). When your tenant moves in you both need to sign off on this sheet – it’s required by law in B.C. If you’re not sure how to start this sheet check out docstoc for examples.
  • Air the unit out before showing it – open up the doors and windows to let fresh clean air in.

Step 2: Get your paperwork in order

To attract a good tenant, you will need to be a professional landlord and have the right paperwork on hand. Contact your local residential housing branch of your government or go online and do a search for landlord forms to find the following:

  • Tenant application forms
  • Rental/Lease Agreement forms
  • Eviction notices or other forms you might need later – sometimes you have to order the forms so it’s better to just have them on hand.

Each provincial government has different requirements and rules for what must and what can be in each of the above documents so be careful what you download. Ensure you’ve got documents that are legal in the same province as your rental unit.

Step 3: Research the rent rates and place your ad

Make sure the Price is Right!

See also: How to Determine the Rent Rate You Should Charge for Your Rental Property

Research like units online to make sure you’re not asking too much for your unit. We check Rentometer for a ballpark range and then research in detail on Craigslist and Viewit to understand what the competition has their units priced at.

Make Sure the Price is RightDon’t get too greedy– it’s better to price just below the market. You will rent your unit faster, have a larger tenant base to pick from, and you will have a better chance of retaining a tenant for a longer period of time. When you find yourself thinking “but I could make $50/month more easily!”, counter that thought with “but it will cost me even more if this unit goes vacant for a month or if I have to re-paint or fix up this unit in 12 months when the current tenant leaves in search of a better deal”. I’m not saying leave a stack of money on the table, I am just saying, that it’s better to be slightly below market and have a great tenant in there quickly then to get a few more dollars every month.

Get the word out! We’ve found tenants through all of these methods:

  • Word of mouth– we email all of our friends and let them know we’ve got space for rent. As a result, we have rented several units out to friends over the years. We also let our good tenants know about other units that are available and sometimes they move into the units and we keep them as tenants for longer, or they have friends they can recommend to us.
  • Advertise online! We love the viewit.ca and craigslist combination in Toronto. Viewit.ca takes pictures of your rentals. You can place a free ad in Craigslist with a link to the Viewit.ca ad so your prospective tenants can see the unit.
  • Craigslist on its own is also very effective and it’s free!
  • Put a sign up on your lawn or in the window of the unit with a phone number. Viewit gives you a sign to put up which is another benefit of advertising with them.
  • Local Newspapers can be a fairly inexpensive way to advertise. Ask the classifieds agent what is the best day to advertise a rental unit on to get the most eyeballs seeing your ad. We don’t advertise in the paper anymore as we find online to be very effective, but in some areas your target renters may be best reached by the paper.
  • University Housing Boards: We haven’t done this for awhile, but we have a tri-plex near the University of Toronto, and we used to advertise there. These days every university student seems to use Craigslist.

Step 4: Showing your space

The most efficient way to show your space is to have an open house. Pick a time to show the space for a two hour period one evening or during the weekend. Then have a back up time. When a tenant calls about seeing the unit, tell them that you will have a showing for all interested tenants at time slot one, and if it’s still available, there will be a second showing at the second selected time.

Prepare for the showing by having the unit as clean and fresh smelling as possible. Be dressed in business casual attire with tenant application forms on hand when you greet the prospective tenants.

You could show your unit to one tenant at a time. This is a great way to get to know the applicant a bit more, but it is very time consuming and inefficient, especially if you don’t live nearby. An open house environment creates an air of demand which helps get applications completed much quicker. When a prospective tenant sees the other interested parties, if they want your unit, they will act quickly to try and get it. Encourage the prospective tenants to complete the application before they leave. Then you will have the application in hand and can make notes on the application about who they were and what your initial impressions of them were. Alternatively, ask them to drop off the application the next day (especially if you’ve already received other applications – you can tell them you plan to make your decision in the next few days).

Step 5: I choo choo choose you! Choose your new tenant.

  1. Review the Application: Look for gaps where a place of residence is not indicated, or look for conflicting information. If you liked them but there are gaps or issues with their application, ask them about it. If you start to hear things like “well my previous landlord didn’t like me because of….”, or “there is a credit agency after me because of…” then it’s not a great start. Some reasons make complete sense, others are just elaborate stories. If you can’t be sure what the case is, keep looking. Or you could end up with a tenant that pulls a knife on another tenant like we did!
  2. Run a Credit Check:Once you’ve found one or two that you like and that has a good application, run a credit check. This is a critical piece. Many veteran landlords say they just trust their gut. Well, I trust my gut, and then verify it!
  3. Reference Checks: Call the reference and ask them simple questions like “how long have you known the applicant?”, “What’s your relationship with them?”, and “Would you rent to them?”. This is also a good gut check, but keep in mind that a current landlord might be anxious to get rid of the tenant so they might not tell you the truth.
  4. Final Gut Check: So they have decent credit, nothing came up on their application that makes you uncomfortable, and the references had nothing negative to say. What’s your gut telling you? Do you get a good feeling about them? Do they seem honest? Do you think they will be too messy? Or too picky? If you are happy with the gut check then you are ready to choose your new tenant.

For more on selecting your tenants – check out our tenant screening checklist.

WaitWAIT! What if there is a tie? What if you can’t choose between two tenants? I go back to the prospective tenants with some additional questions to break the tie:

  • How long do you plan to stay?
  • What will you be doing for the next couple of years: work, school? what type of work or school?
  • What do you like about my place versus others that you have looked at?
  • Why are they moving out of their current place of residence?
  • Will you sign a one year lease?
  • Do you like to have people over on a regular basis?

After hearing the answers to these questions, you’ll usually find yourself leaning towards one tenant. Once you’ve selected your new tenant, have them complete rental agreement and collect the first months rent. Depending on what province your unit is in, you will also collect a security deposit or last months rent at this time.

Once you have a signed agreement with rent cheques in the bank, you will need to let your other prospective tenants know that the unit is rented. If a prospective tenant asks why they didn’t get it never tell them it was because of age, race, gender, or because they have or don’t have children. No matter what your reason was for choosing one tenant over another, you cannot be discriminating about the choice. It’s probably safest to say ” the other tenant had a very strong application”.

Published July 2008

You Might Also Be Interested in Reading:

>> Troubleshooting Your Vacant Rental

>> 5 Steps to Hiring Your Property Manager

>> How to Live for Cheap(er) – Renting Out a Unit in Your Home

>> Tenants Who Break Their Lease & Other Tenant Issues

>> Tenant Move Out Inspections & the 5 Things Tenants Never Remember to Clean

Buying Pre-Construction Condos in Canada

The Profits and Pitfalls

Pre-Construction Condos in Canada

Toy Factory Lofts: one of Toronto’s few true loft conversions. The developer has taken the old Irwin Toy Factory building and has converted it into work/live condo units.

We bought two pre-construction condos,in this loft conversion building over 3 years ago, but not before we did a ton of research.

We put our limited cash resources into this project because:

We had the opportunity to buy before the units went on sale to the public (and these units were slightly discounted to us),

  • The builder/developer involved in the project has a very strong reputation,
  • The King West Liberty Village area of Toronto was clearly an up and coming area at the time with a very close proximity to the downtown core (a planned community that has converted a huge industrial plot of land into a massive young professionals haven),
  • And the price gave us the strong, positive numbers we needed to take on the risk.

The one thing we didn’t foresee was having our money tied up for so many years because of the countless construction delays. Apparently that is pretty common for a conversion project. But, the value has continued to appreciate at higher than average Toronto rates, giving myself and my fellow investors a very nice return on our 15% down payment. When we finally get occupancy, we will rent out the 2 units for an amount which will cover all of our costs (mortgage payments, taxes, condo fees, insurance, management). Our renters will pay down the mortgage for us, Liberty Village will continue to grow and appreciate (at least we hope and expect it too!), and we’ll build equity, for the most part, effortlessly. Nice!

With strong results based on this project, I know I am always on the lookout for new pre-construction condos. If you aren’t afraid of a pretty risky scenario, there is an appetizing profit potential in buying pre-construction condo’s. Buy today, at today’s prices (or sometimes even less), for a small portion of the down payment (usually 5% to 15%). Then all you have to do is sit back and watch the value go up and up and up, right? Well, not necessarily.

As you can imagine there is a lot more risk in purchasing pre-construction condos in Canada than if you buy a resale property, or at least one that is finished construction. Some things to consider before you walk into the next condo sales office and buy that pre-construction condo:

  • One of the most important factors to consider: reputation of the builder/developer (not sure how to find out about the reputation check the local homebuilders websites like the Greater Toronto Homebuilders Site, called BILD, or check out the latest JD Power and Associates Builder Survey;
  • What will the area be like 1, 2, 3 years from now once it’s built;
  • How many other units, condos, pre-builds are in the area;
  • What will YOUR financial situation be upon completion – will you qualify for a mortgage;
  • What is your objective in buying pre-built: rent, assignment, move-in;
  • If you intend to rent it out, what are average rents in the area (check rent-o-meter as a quick tool) and how many units are being bought for the same purpose as yours;
  • What might interest rates be doing years from now.
There are several large advantages to buying pre-construction condos:
  • The power of leverage, you buy today with little down and the building (theoretically) appreciates on your minimal down payment;
  • Your financial situation may not be great today, but by the time it’s ready for financing, you should be in good shape;
  • You get a brand new home!
  • Buy at today’s prices for future value;
  • If you buy early in the sales process, you get a wide selection of floorplans to choose from; and
  • You can often make changes to your unit which improve and differentiate it from the others and these changes are usually much less expensive during construction than doing reno’s after.

From the above considerations, it’s easy to see that there are a lot of factors at play and most of them require a working crystal ball to answer them correctly.In addition to the unknown elements you are dealing with, there are also some things to watch out for, including:

  • Buying new means paying the government GST, so even though it’s down to 5% now (and you often get a 2-3% rebate), you still have to pay the piper on the New Home -OUCH!;
  • Your money could be tied up in this project for more than three years; compare your likely return to that of the other options out there. Your money might be safer and better to sit in a high interest savings account like ING offers;
  • Floor models, detailed floorplans, and great marketing can never truly represent the final product you are buying. What view are you REALLY going to have when it’s done?;
  • Will it be ready in 1 year, 18 months, 2 years? Be ready for delays, it seems that they are NEVER ready when they say they will be;
  • If your intention is to assign (sell the contract to another purchaser) your property, not only do you need the builders permission, there is often an assignment fee IN ADDITION TO regular sales agents commissions;
  • Further to above, even if you assign your contract, if the assignee is unable to close (get financing), you are still responsible for getting the mortgage;
  • Be careful if you plan to rent it out. If you have that tenant lined up with a signed lease for your brand new unit a week after your scheduled “move in” date, you will be responsible for providing them with a place to live if that occupancy date gets pushed out;
  • If you intend to rent the unit, you may want to find out how many other “investors” have bought in the complex. Too many units for rent will decrease the rent and saturate the market; and
  • Deficiencies, deficiencies, deficiencies! “The toilet, tub, and dishwasher don’t work”, you say. “Oh, we’ll get those fixed soon” says the builder as they work on their next project. Any reputable builder will eventually fix them, but on their own schedule. Their schedule may not make a tenant (nor you) very happy.

Buying pre-construction condos is not for the faint of heart. In our experience, if you do your research, know your objectives, and have some luck, your purchase should turn out strongly for you. Ensure you complete your due diligence by considering all of the items I noted above and luck should be on your side (as “The Donald” was quoted as saying recently “the harder I work the more luck I have”).

Why it’s OK to Sell Your Property at a Loss

It’s hard to admit that you messed up. It’s even harder to admit the mistake, have it cost you month after month, and then just walk away from it (in my case, by selling the property at a loss). It’s almost like fighting a gamblers impulse – if I just put in a few more dollars this machine will pay out.

I did it for years with one of my Niagara Falls Crackhouses (If you’re new to Rev N You – you might want to read about my two “no money down deals” that have done nothing but cost me!). After initially getting the properties for next to nothing, I shelled out a lot of money year after year for repairs, court fines and more repairs. I took out a line of credit to cover the extra expenses.

The area in Niagara Falls where the real estate investments are located has been improving. A very nice Motel 6 went up across the street. Land has been bought all around the area for new development. I kept thinking if I could just hold on to the property for a few more years I would hit the jackpot and be holding very valuable land. I thought if I just fixed it up, I would attract better tenants and would have an easier time with it. Bottom line is that I just kept thinking if I put a few more dollars in that slot machine I would eventually win big.

Here’s just a sample of the problems/issues I had with this real estate investment, and why I chose to sell at a loss rather than feeding the nasty slot machine:

  • It was costing me a lot of cash every month to service all the expenses;
  • It caused me and my wife considerable stress with all the problems it always seemed to have;
  • After my new property manager helped to evict the bad tenants, he couldn’t get good ones to replace them;
  • No matter how much work and refurbishing we did, there always seemed to be another problem;
  • Although the neighbourhood was getting better, it was improving at a snail’s pace.

Hopefully by reading Rev N You, you’ve learned enough real estate investing lessons that you don’t end up with your own crackhouses or troublesome properties, but if you do and you find yourself unhappily evaluating the situation regularly, know that it’s ok to sell your property at a loss, especially because:

  1. Assuming you make money on the sale of another property within the next seven years, the capital losses from the sale of the money-loser will make a nice good offset for capital gains you realize in the future.
  2. Continually throwing money at a problem waiting for it to magically become a winning investment is foolish. Yes, some people get lucky but hoping you are going to be a lucky one is not really a good strategy.
  3. Stress is bad for your health and for your relationships. If selling the property, even at a loss, will rid you of a lot of stress then it’s worth it. What good is building a big real estate portfolio to be rich from, if you’re not healthy enough to enjoy your wealth?
  4. Owning a negative cashflow property not only costs you money out of your pocket, but can hurt your chances of financing other investment properties because you may not be able to service the debt on the new property.

So, when the deal closed this month, we went out and celebrated it’s sale. We couldn’t toast with the finest wines or the best foods because that deal didn’t make us rich, but we could smile that our Niagara Falls Nightmare is over.

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May 21, 2008

As we wandered through some open houses this past weekend we found a big house on a nice corner lot a few blocks from us. It’s a bargain when you consider what townhouses are selling for in our area. And, as we calculated the potential rent revenue versus expenses for it’s main suite and finished basement, it’s almost tempting to make an offer. BUT, the house is not lovely at all and is a real handyman’s project. And the sellers, like those of most of the houses we’ve looked at recently, are still asking prices that are too high in hopes that the buyers haven’t noticed the slowing market.

The unreasonable price tag and the daunting nature of the work it needs will keep us from making a move on it. Besides, May has not been a profitable month for us. As of May 15th, we have one less property in our portfolio. That is six less rental units that we have to rent out and make money from. And, all we have to show for the sale of that property are scars and line of credit debt. But we are glad to be rid of it.

And, alas, a routine replacement of the shingles on our Toronto tri-plex brought about the discovery that there were actually three layers of shingles on our roof already. Those had to go and they didn’t go away for free! The roof repair cost us almost two thousand dollars more than we expected! The good news is that we have some nice tax write offs from all of the above to offset the income from our good properties and our other income.

It’s almost summer time – the real estate market typically slows a bit during this season. Will you be buying, selling, or sitting by the lake and not worrying about either? Let us know, and let us know if you have questions for us. Contact one of us directly at: dave@revnyou.com or julie@revnyou.com.

Published May 21st, 2008

Featured Article:

We’re very pleased to share that recently a Rev N You article entitled Real Estate 101: Making Money When You Buy was featured in Early To Rise (Internet’s most popular Health, Wealth and Success E-Zine). We love Early to Rise and have been reading their publications for nearly four years. It was a real honour to be published in their great newsletter. Thanks ETR!

Real Estate Agents: Whose Side Are They On?

Yes, I said it, is your real estate agent really on your side? We have worked with some outstanding real estate agents, some good real estate agents, some mediocre ones, and some real estate agents that should NOT be agents. Like any industry or profession, there are people who are good at their job, and people who are not. Nobody is going to debate that with us, but what we will debate is whether you actually need a realtor when you’re buying a property. It may seem like they only have their commission on their mind and not your best interests. And if you do need one, how do you actually get a good one? Like a bathroom renovation, your taxes, your wedding and so many other things, you have the option to do the work yourself or pay someone else to do it for you. Doing it yourself is always more time and work, it can be a bigger hassle than you expected because of your lack of expertise and it can end up costing you more than you think it will. But, it can also ensure you know exactly what was done, get exactly what you want, and it can be a source of much self satisfaction when it’s done. At least half of the properties we bought were done so without the aid of a Buyers Agent. I did the research online using Realtor.com or Realtylink  or CLS , tabulated details in a spreadsheet over a period of time to help me spot opportunities and then, when I find what I think may be a good buy, I contact the listing agent for more information.

I’m not advocating you head out there and buy properties without a Buyers Agent, I’ve just found that when I venture into a geographic location where I haven’t got an existing relationship with an agent, I do better research on properties because I know exactly what I want. Without that pre-existing relationship, when I’ve told a realtor what I want they either don’t provide me with enough details on properties for evaluation or they’ll put me on their automated e-mailing list and send me every 3 bdrm, 2 bth house in X area for X dollars or they’ll limit the search too much to find the ones I want.

But, if the agent doesn’t know you and doesn’t have all of the details, it’s difficult for a Buyers Agent to find the “perfect” property for you. And if they don’t know you, many of them won’t go through the effort and time to go through each and every property on a detailed basis to find the right property for you (because that is a lot of work for an agent to do for a potential client that could just be “kicking tires”). But before the real estate agents on our subscriber list get angry, let me note that some of our purchases have come with your help! In those cases, they were almost always agents we’d worked with before, that knew what we were looking for and knew we were serious shoppers. For the most part, I have found most of our properties completely on my own and have done very well (cashflow and appreciation) without help from an agent in the property selection phase of the process.

But, before you fire your agent, let me say that not everyone is up for the market research detail that I do (just ask my wife – sometimes she bans me from using MLS because I get so out of control), and we still prefer to use a Buyers Agent when we buy. Having an agent represent you is not just about finding a property. Remember all the other things an agent does for you:

  • Provides you comparable sale information for properties in your area of interest;
  • Books and takes you to appointments for viewing properties of interest and fields all calls from Sellers Agents;
  • Handles all of the negotiation on your behalf when you put in an offer to purchase;
  • Handles the paper work mess that follows the acceptance of a purchase offer;
  • After the purchase the agent will usually keep in touch and provide you with updated market information for your area to help you identify new opportunities in the area and keep tabs on your property value.
  • And having your own Buyers Agent removes the bias or collusion that could exist if only a Dual Agency Agreement is in place.

You don’t want to grab just any agent though. No matter what, they still are on commission and only earn their commission when you buy a property. So, it’s in their best interest for you to buy that house, whether it’s really the best one for you or not.

Get a Great Real Estate Agent Working For You

It’s IMPERATIVE that you work with an agent that has helped in the purchase of many investment properties, and even better, owns several properties him/herself! (Although Julie argues with me on this point – she says “If they invest in real estate themselves how do you know they are going to bring you the good deals they find? Why wouldn’t they buy them for themselves?” – so the only thing she and I agree on here is that the agent MUST have experience working with investors).

As a residential mortgage broker I used to seek out agents that said on their website that they specialized in helping real estate investors. That was one of my specialties too so I thought we’d have a lot in common! Well – I can’t tell you how many realtors I met that said their “specialty” was Investment properties yet they a) have never owned one, and b) don’t even know what a GRM (Gross Rent Multiplier) or CAP rate is! So, if you do intend to start looking to purchase, go out and research your prospective real estate agent first and then ASK QUESTIONS:

  • How much experience do you have working with investment properties?
  • How many investment properties do you currently own?
  • Can you provide some referrals from investment property purchasers you have worked with?
  • How will you find good investment properties for me to evaluate?
  • Besides sending me automatic emails that show general listings that may fit my desired property criteria, what else do you do to find that “perfect” match?
  • What criteria would you use to pick an investment property for yourself?

Of course, you’ll need to have a good sense of what you actually want before you contact the realtor. Your agent will only be as good as the information you provide him or her. If you tell your agent that you want a property that makes money each month that doesn’t give them much to work with. Narrow down your area before you call them. And, as always, know your objectives! Do you intend to manage the property yourself? Do you care if it is a single family home or multi-family? How much money do you have to put in as a down payment? Are you willing to do renovations to improve the property? And, a good realtor should ask you these questions to help narrow down what you’re looking for. If a prospective realtor doesn’t ask you any questions, you might want to keep looking.

 PublishedApril 21st, 2008


Zero Down Financing – Dream or Curse?


100% FinancingOn the surface, zero down (100% Financing) on an investment property seems like a fantastic idea. With no money down, it seems you can’t go wrong. But, that is not necessarily true.

Recently CMHC (Canadian Mortgage and Housing Corporation), who insures non-conventional mortgages (less than 20% down payment mortgages) in Canada, introduced the 100% financing for investment properties. This same product has been in existence for a couple of years for primary residence purchases but now, if you want to get into real estate investing (and your credit is great and you can qualify for the 100% financing), you no longer need a stack of cash to jump in! The challenge is obtaining rent that’s high enough to cover the mortgage and the 7.25% insurance premium they hit you with! Here’s an example: 

  • $300,000 purchase price (100% financed) 
  • 7.25% CMHC insurance fee ($21,750)
  • Total mortgage of $321,750
  • Amortized over 25 years at a 5.99% interest rate =
  • $2,056.67 monthly payment!

So, right off the bat you have negative equity of $21,750. If you wish to sell that property after 5 years, your mortgage balance will be $289,008. The property will have had to appreciate at least 15% over those years just to get a little bit of money out of it (remember there’s sales commissions, legal fees, property purchase taxes, etc. that will also come out of the sale price).

The next challenge is getting the $3,000 in rent each month that you would need to carry this property. Remember, it’s not just about covering the mortgage. You also have:

  • Insurance fees (approx. 5% of rent); 
  • Management fees (approx. 5% of rent);
  • Maintenance fees (5% to 10% or more);
  • Water, hydro, other utilities (2% to 5% of rent);
  • Strata or condo fees, if applicable (10% or more);
  • Vacancy coverage (2% to 5%), etc.

From our experience, if you keep your mortgage payment at a maximum of 65% of your rental income, you should be pretty close to having neutral or even positive income. In this example, that means you want to earn approx. $3,200 in rent to cover everything. Not very likely unless you are running a rooming house and if you’ve read about my two properties in Niagara Falls, you know how fun and lucrative rooming houses have been for me. 

Now, there are two advantages to using the CMHC program:

  1. No money down – you don’t need lots of cash to begin investing; and
  2. Potential for a GREAT return on investment (ROI) if the market is on the upswing;

So, it’s not the worst thing to use, but be very aware of what it will “cost” you in terms of potential negative monthly cashflow and negative equity. 

Now, what about other forms of 100% financing? Well, there are creative ways of obtaining 100% financing such as Vendor Take Back’s (the Seller holds the mortgage on the property); Obtaining a conventional mortgage (80% loan to value) thru a bank or lender and then obtaining a 2nd mortgage from either the Vendor or a private lender and registering it after you purchase the property (you must still have the 20% down payment upon closing); or using your line of credit for the 20% down payment. So, this is not to say that 100% financing doesn’t work or isn’t useful, it’s just quite costly to do it. Costly because not only your monthly debt (mortgage/line of credit) servicing is higher, but usually a 2nd mortgage or line of credit interest rate is substantially higher than a 1st mortgage rate.

I have done 100% financing once and 98% financing another time, and the only reason I was able to was because both sellers were very motivated to sell. Why were they so motivated? Because their properties were beat up and in bad areas. The rent vs. financing was strong in both cases, so I bought. I wouldn’t do it again. As the saying goes, “You get what you pay for”.

November 2008 Update – The 100% Financed, Zero Down Mortgage Has Been Taken Away in Canada

reader mailReader Mail:

“I agree with some of (the) article but remember how it (financing rental properties) was, 10% down and a 4.25% fee, my duplexes run about 200K thus the 7.25% is a 3% variance from old way. So since I usually try to amortize investment properties over 20 yrs and the 3% extra represents 6K (actually $6,850), another way to consider this is, you can keep your 20K in your pocket today at a cost of approx $300. per year ($6,000 divided by 20 years). Now if your investment planner can’t make you more than $300 off that 20K you need to find a new one. Even when I’m being extremely cautious I average 6-8% (CI seg funds are a favorite) so using 7% as average you have approx $1,100 ($20,000 times 7% less the $300) extra per year by going 0% down.”

From Dave:

Thanks for your great email Corey! It’s a pretty in-depth comment but I am going to give it a try.
Let’s look at the real numbers of 10% down vs. 0% down using mortgage insurance:
10% down
$200,000 price
$20,000 down
$180,000 mortgage
4.25% insurance fee = $7,650
$187,650 total borrowed
20 year amortization (using your example)
5.5% interest rate
$1,284 monthly payment
$120,572 total interest paid over 20 years @ 5.5% rate
0% down
$200,000 price
$0 down
$200,000 mortgage
7.25% insurance fee = $14,500
$214,500 total borrowed
20 year amortization (using your example)
5.5% interest rate
$1,468 monthly payment
$137,825 total interest paid over 20 years @ 5.5% rate
Difference in monthly payment: $184
Total difference in payments over 20 years: $44,160 
Difference in total interest paid: $17,253
He mentions keeping the $20,000 and investing it in seg funds with an average return of 7% (this would assume net return, after deducting management fees, usually 2-2.5% – so a 9%+ gross return).  This would produce approximately $1,400 annually in interest earnings. However, it is costing you $2,208 per year more in mortgage payments, so you’re now negative $808.**I’m also ignoring income tax here to try and keep this simpler.**
I don’t know of many properties that cost $200,000 yet bring in approximately $2,300 per month in rent. You would need approx. $2,300 to cover mortgage and expenses (mortgage payment of $1,468, plus roughly 35% of your rental income to go towards expenses). I am sure there are some properties out there that have this kind of return, but they are likely much higher risk. Buying an already high risk property using a high risk financing strategy is a very bad scenario, even in an upward market.
Finally, if the above wasn’t bad enough, you have negative equity in your property for at least the first 2.5 years of owning it.  If you buy that property today at 100% financing, there is a good chance it may even take longer to get into the positive again (due to the current state of the economy and housing market).  And that was the whole point of our article, 100% financing is a very risky scenario (and difficult too in terms of servicing the extra debt with higher payments). When you buy with 100% financing you are starting out $10,000, $15,000 or even $20,000 in the hole (the negative equity I refer to above).
One final final note, 100% insured financing for primary residence and rental properties has been abolished by the government by Oct.15th. Thus, some of this response doesn’t really matter come fall! But, I wanted to explain, again how 100% financing will cost you.
Thank you for the great e-mail. It really made me give my calculator a work out.
published January 5, 2008

Investing in Real Estate vs. Stocks


Investing in Real Estate or StocksIf you have an apple and I have an apple and we exchange these apples, then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.” – George Bernard Shaw

It’s hard not to get swept up in the chaos of the holiday season and forget that sometimes the simplest things are what make an experience special. That’s why we chose to open with the above quote this month. We share our ideas and experiences with you, and many of you have shared yours with us (THANK YOU!). We write Rev N You with Real Estate each month to, at the very least, entertain you for a few minutes, and hopefully help you to invest in real estate.

So…for this article, let’s take a look at what’s better: investing in real estate or investing in stocks? Diving into the math with some examples, we answer which vehicle has the better return on investment.

At the end of the day, your investment portfolio should be diversified. It’s not about holding just real estate or just stocks. But, most of you aren’t satisfied with that answer. You’ve asked for more analysis on which investment vehicle – Stocks or Real Estate – has the better Return on Investment (ROI)?

I won’t get into all of the qualitative reasons why I love real estate investing. If you’ve been reading our newsletter for awhile you know that “kicking the bricks” and having control over the outcomes are two of the main reasons I put more focus on my real estate portfolio that my stock portfolio. For today, I’ll stick to numbers.

Before we go into the numbers, I need to explain a few things. When I refer to real estate, I mean an investment property, not a home. Someone is paying rent. Also, I am going to use B.C. average values over the last 15 years. B.C. prices have surged in the past 5 years, but the 10 years prior to that were far from stellar. So, we are looking at averages.

On the other side, I look at the widely used S&P 500 as the stock average return. It’s often used as an indicator of the broader market and includes both growth companies and value companies along with NASDAQ and NYSE traded companies. And, for simplicity, I am assuming that the investment property garners enough rent to cover your mortgage, taxes, management, insurance and miscellaneous other costs but doesn’t put any extra in your pocket. Thus, it’s a “neutral” cashflow property.

Instead of giving you percentages to work with, I want to show you what your $50,000 investment would look like after 15 years in real estate or 15 years in a balanced portfolio reflective of what has been achieved by the S&P 500. Without getting into the math, $50,000 in real estate will become $358,000 after 15 years (this includes appreciation and principal paydown). This works out to an average annual return of 15.1%.

Conversely, the $50,000 invested in the S&P 500 would become $451,000 after 15 years at an average annual return of 15.8%. And, maybe even more importantly, the equity you have built up in S&P 500 stocks ONLY surpasses your real estate equity during the 11th year.Also note, in the Annual ROI including Principal Paydown column, your Real Estate ROI shrinks over time. But, because you are building so much equity, it would be wise to pull some of that money out and purchase another property to increase your returns again.

But,before you stop reading Rev N You and give up on real estate, remember that the average investor (according to Money Sense, November 2007 issue) only gets about 7% return on investment (BEFORE FEES). Which means that after 15 years your $50,000 would only be $137,000.

With real estate, to maximize your returns (using leverage) pull out equity as it accumulates and buy something else. This makes it a very powerful investment (don’t believe me? take a look again at how we bought eleven properties in five years). Real estate is a much stronger investment because of leverage. Your investment is usually a maximum of 25% of the property value and can be leveraged over time into substantially more equity, a renter is paying down your mortgage, and the value of the property over the long term, almost always goes up.

The story doesn’t end there. And, as I said at the start, it’s not about choosing one over the other every time. It goes back to your goals. And, although real estate is the clear winner in our view (and experience), the choice is up to you to include it in your portfolio. If you buy right (which isn’t that difficult if you do your research, much the same way you need to research when buying stocks or mutual funds), over the long-term you will build up a substantial amount of equity with real estate.

I have included a couple of good articles below which detail some of the pros and cons to both investment vehicles so please check them out. Choosing to own real estate as an investment, or even choosing to own your home can, and should, require some work. It’s not an “easy” game that you can simply jump into. But, if you determine your objectives, do your research, and save some money for your down payment (or find other’s who have it), you can go a long way with your dollar in the real estate sector.

Check out the following articles for a continued battle between real estate and stocks.CNN Money’s Article has a lot to do with why people don’t choose real estate. And as a counter article, you can see Ozzie Jurock’s article here.

Published December 17, 2007

25 Year vs. 40 Year Amortization

Financing your Real Estate Investment

I bet several of you didn’t even know there are 40 year amortization options available to you now. In the U.S. they have had extended amortizations for quite some time, but in Canada the 40 year was introduced recently.

There isn’t a simple answer when clients ask me whether extending their mortgage is right for them. It really depends…Here’s an example to illustrate:

* $250,000 mortgage at 5.80%
* Amortization is 25 years
* Payments are $1,569.92/month
* Total interest paid over 25 years = $220,974
* Amortization is 40 years
* Payments are $1,328.97/month
* Total interest paid over 40 years = $387,908.40 Year Amortization Mortgages

That is a difference of $166,934 over the life of your mortgage to potentially stretch yourself thinly over a property that is out of your affordability range. And it’s going to take you 15 more years to become mortgage free. You also have to realize that because you are paying the principal of the mortgage down slower, you will be building equity in the property at a decreased rate. In fact, for the first 10 years of the mortgage you will have only paid down about one-third as much as in the first 10 years of a 25 year mortgage.

But, before you turn away and decide that option is not for you, there are some advantages of signing up for a longer amortization that are worth considering:


  1. If your dream home is just out of your affordability range at 25 years, stretching it out to 40 years may make it affordable
  2. You can qualify for a larger mortgage because it lowers your payments
  3. If it’s a rental property, lower payments will help it produce positive cash flow until rents can be raised
  4. If flipping a property, this will reduce your carrying costs until you sell it (this is also a benefit when using interest only mortgages).

It’s great to have the flexibility if you need this. But, my caution to clients is that as soon as you can:

  • Change your monthly payments to bi-weekly – this will reduce your mortgage length by 3 – 4 years
  • Add $50, $100, or $200 to each payment and this will further reduce the length of your mortgage
  • Make lump sum payments every year with your tax refund (or other income). Putting that money towards your principal will reduce your amortization by up to 10 years (just check for the maximum allowed without penalty before you do this).

A 40 year amortization may not be for everyone, but as house prices continue to rise it may be an option more and more people will consider. If you arm yourself with the knowledge of how a longer amortization can effect you and you are diligent about paying down the mortgage as I have noted above, owning a home becomes possible for many would-be homeowners and remains a viable option for those wishing to keep their monthly payments smaller.


Money Pit Properties

Money Pit Properties Niagara


I was so excited to get out there and build up my positive cashflow from rental properties. Fresh from a real estate investing course from one of those late night gurus, I was motivated, armed and very dangerous. I bought a triplex (Money Pit!) in Niagara Falls, ON for $113,000. I got it cheap and I put down only 10% because the vendor was willing to give me a promissory note for a small loan (there weren’t 90% loan-to-value mortgages from lenders like there are now). They teach you at these courses to find the motivated sellers that will “hold paper” on the property, and I found one!

It was an older building with tenants on disability or other forms of government support. It looked a little rough, but it seemed to only need cosmetic touch ups. When I bought it, the numbers indicated that I would earn about $400/month after expenses and financing so I figured that I would be able to afford the odd repair.

As I set out painting, replacing carpets and putting in things like new doors, I uncovered some serious problems such as:

  • a leaky roof
  • electrical wiring was not safe
  • plumbing was old and falling apart
  • mould in the bathrooms
  • rotten wood.

On top of all of that, I received complaints regularly from a tenant that thought everything should be fixed overnight. Inside his unit I discovered a complete mess. He’d destroyed the walls, had cats that had urinated throughout his unit and destroyed all the window ledges. This tenant eventually called the city of Niagara Falls who then inspected the unit and ordered me to make a variety of repairs to his suite – most of which were directly caused by the tenant or his cats! Because the laws in Ontario do not allow landlords to collect a damage deposit, the only recourse is to use last month’s rent or take the tenant to Small Claims Court to recoup your costs. It’s just not worth the effort to take a tenant with no money to court.

After weighing my options (and my costs and time), I decided rather than spending several thousand dollars repairing the money pit, I would try to sell it “as is”. If you have ever seen “as is” in a sales listing, be careful. This often means there are conditions of the building that are less than stellar and require a thorough inspection and/or repair.

Because I had the orders from the city to repair the problems with the unit, and because I was stressed out dealing with the tenants, I sold the property for $104,000. Yes, that’s $9,000 less than I what I had paid 2 years earlier in an appreciating market and after spending about $10,000 in repairs. To throw even more money away, I had to pay legal fees and the sales commission to my realtor. All in all, I lost about $25,000 in 2 years! That’s why I called it the Anti Investment.

The good news?

* A good portion of the loss was a tax write-off;
* I will NEVER purchase a property like that again;
* Hopefully you will learn from my mistake and be very careful in your future purchases.

Although I lost a considerable amount of money, getting rid of the property at a loss (and as fast as possible) was the best thing to do because I got my life back. The stress of dealing with money pit properties (and problematic tenants) is so draining. l was ecstatic once it sold. I could breathe again – even if my wallet was a LOT lighter!

The Advantages of Real Estate

Rev N You with Real Estate
One Year Anniversary!

One year ago this week we launched our first edition of the Rev N You newsletter. Thank you to those who have been there from day one, and a big welcome to our new subscribers. To begin this edition, let’s look back at how we began our first newsletter last year:

Real estate is a great place to put your money (and one of the advantages of real estate is that you can make money while you sleep), but it is not without the pitfalls. In five short years and eleven purchases we have dealt with a property manager on trial for murder, tenants with knives, fire code inspections going all wrong and so much more.

It hasn’t been easy money for us, but we really didn’t know what we were in for when we started. Knowing what your goals are, your risk tolerance and what the pitfalls can be will help you prepare for the adventures in real estate investment. We hope to help you along the way.

Make Money while you Sleep:
The Advantages of Real Estate

It’s not all roses and rainbows, but there are many advantages to owning investment properties. It’s what the big stories are made of, and why we stick with it despite the many challenges we have told you about over the last year. Let’s look at several of the perks to being in the revenue property market.


  • The leveraging advantage;
  • Powerful Return on Investment (ROI);
  • Tax write-offs;
  • Tangible asset class;
  • Residual income/equity building; and
  • Limited land supply.

Real Estate Advantage: Leverage.

In a nutshell, this refers to the idea of using OPM (other people’s money) to help purchase property. In most cases, we obtain a mortgage from a bank for upwards of 85% of the value of the property. This allows us to use less of our own money to build wealth thru appreciation, positive cash flow, and rent covering principal and interest repayment. There are not too many investment options that allow us to invest in only 15-25% of the asset while obtaining 100% of the return.

Real Estate Advantage: ROI.

If you put down $25,000 on a $100,000 rental property, with 5% annual appreciation, approx. 2% principal payback, and 1% positive cashflow from your rent collected, that will earn you $5,000 + $2,000 + $1,000 = $8,000 in your first year. Divide this into your original down payment of $25,000, your annual ROI is 32%! Just imagine what your ROI would be if the property appreciated 10% in a year (if you guessed 52% you’d be right)!

Real Estate Advantage: Tax write-offs.

Of course, you should speak with your accountant before determining exactly what you can and can’t write-off, but there are plenty of expenses that you can write off when you own real estate. A few of these items include: interest paid on the mortgage, operating costs such as heat, hydro, insurance, property management, even some of your closing costs can be written off. In addition, your accountant may even advise you to depreciate your building which helps at tax time too!

Real Estate Advantage:Tangible asset class.

Owning a rental property is owning something tangible. You can kick it, smell it, touch it, and I suppose even taste it (not advisable but you could)! Buying 100 shares in a company is really just a paper-based asset. Financial trouble or internal turmoil are not immediately apparent to the shareholders. Did the CEO just sell all his shares? You don’t know until you read about it in the paper. Now, I am not saying not to put your money in the stock market. I proudly own shares in many different companies. I am simply saying that if you are wondering how your property is doing, go do a drive-by or ask a friend to. Order an appraisal to check it’s current market value. I love the idea that at any given time, I know what is going on in my property.

Real Estate Advantage: Making Money while you Sleep.

As the title of this article suggests, real estate allows you to build equity, and if you have positive monthly cashflow,make money even while you sleep! You don’t have to work at real estate everyday like a regular job. If you buy well and manage (or hire a property manager to manage) the property well, you will make money on it without working on it very often. Even if the market is depressed a property where the rent covers the costs still makes money even if the value has depreciated.

Real Estate Advantage: Limited land supply.

The amount of land we have on Earth is limited. It’s even more limited in all the world’s major cities. Yes, urban sprawl tends to push out cities boundaries, however, there is a limit to how far people want to live away from a city’s downtown core (or wherever the majority of workplaces are located). Because of this, land value will always increase over the long run. Supply and demand is a powerful theory especially when it comes to real estate. My parents used to live not far from where Julie and I live now. Thirty-five years ago, houses in this area were selling for a meager $20,000. Now, houses are selling for $500,000 to over $1 million! Imagine if you bought 3 houses putting $5,000 down on each 35 years ago. Your $15,000 would now be valued around $2,000,000!. How’s that for ROI!

Playing the Real Estate Insurance Game

You win when you get insurance and never use it


Fixer Upper HouseIf you have to go to a lender to finance your rental property, you have to go to an insurance company to get the property insured. Maybe this is why it’s hard to “win” at the real estate insurance game.

The whole point of any insurance, not just real estate insurance, is to get it and never use it. If you make a claim, you have to pay a deductible, and your future premiums will likely go up when you renew or switch carriers. If you don’t have insurance, besides the fact that you can’t get financing, should the unlikely catastrophe actually happen you will have a financial disaster as well. So, clearly you need it. But, needing it doesn’t always mean there are companies that will sell it to you.

Insurance is difficult to obtain (and often more costly) if you and your investment property has any of the following “red flags”:

  • You live more than 100km away from the property
  • The property has knob and tube wiring
  • The roof is older than 7 years
  • You have had a claim on any of your properties
  • The property is in poor condition
  • The plumbing has not been updated in the past 10 years or so.

If you have any of the above obstacles, you may have to search extensively to find an insurance company to cover you. In addition, you will pay a higher premium to be covered. So what can you do about it? It is not easy to deal with the above, but some of the things that have helped us include:

  • Fixing the electrical problems that were preventing the insurance companies from insuring it
  • Move in – living in your property makes it easier to get insurance
  • Insure your primary residence with the same company – this lowers your fees and reduces the obstacles to gaining insurance
  • Speak to local landlords and find out who they use for insurance
  • In BC, join ROMS (Rental Owners & Managers Society). Members can use their associations and get discounts on insurance, and there seems to be less restrictions on the property condition to get insured.
  • Keep trying – you will usually find an insurance company that will insure you but it won’t be cheap!

Insurance is a game that we have resolved ourselves to play with the idea that winning is getting a good rate on insurance for our properties and then never ever having to use it.

Published February 11, 2007

We were robbed by our Property Manager

girl pointing at robber

Reasons to find the best property manager money can buy

We were taken for a ride by a property manager we had in Toronto. His services were cheap (5% of the rent and no charge for new tenants except advertising costs). Well, cheap, if you don’t count the fact that he was stealing rent money from us!

Before hiring him to manage our tri-plex in Toronto, I researched him a bit and learned that he was a Mom & Pop-type shop, but I didn’t check references or dig much deeper than that. His scam? He collected $950/month from our tenants but only told us we were getting $890!

The extra $60 was likely hitting his back pocket. We are sure he was taking a cut from our other two units as well. However, we were never able to prove that. The only reason we caught onto his scam was because we moved into the house and the tenants started paying us the rent instead of him. Imagine our surprise when the cheque was for $950, and we were expecting $890!

Looking back, we could have easily protected ourselves. Now, we want to help you prevent it. Investigate your property manager before hiring him/her (as per article 2 above). After hiring the property manager, we suggest you do the following:

  • When ads are placed for your unit(s), get copies of the ads. Also, ask where the ads are being placed and check for the ads yourself (looking back, I had noticed an ad for our unit for $50 more than we had agreed to rent it for. I wrote him to change it, and he said he would, but now I think it was a red flag that I should have recognized).
  • Ask for copies of the signed leases.
  • Ask for proof of expenses incurred (always get receipts, but for larger repairs or purchases get pictures or visit the property yourself).

This may not save you completely, but had we been able to get copies of the leases or asked to see the ads, our property manager would have had a harder time stealing from us. We are getting ready to hire a new property manager for our Toronto property, and we can assure you that we won’t be just grabbing the cheapest man on the block, and we definitely will be keeping a much closer eye on the rent and the expenses.

Getting your hands dirty

by Dave Peniuk & Julie Broad

Are you ready to clean, make repairs, place ads in the paper, screen tenants and handle emergencies? If you aren’t, then we hope you have hired a competent property manager for your new investment property. If you decided to save the cash, then you should be prepared to do any (and all) of the following:

  • Clean the property of clutter and maintain the outdoor areas of the property while occupied. This includes snow removal in the winter and lawn maintenance in the summer. When vacant, you will likely have to get in there and clean it yourself (or hire someone) to make it more presentable.
  • Repairs and maintenance (from small things like changing a lightbulb or unclogging a toilet to bigger things like painting or electrical work).
  • Determine the market value of rent in order to advertise the units (check comparable houses/units in the area by checking online or local listings).
  • Determine best places to advertise and place the ads for your rental units (front lawn, local university, paper, online, etc.).
  • Show the property, take applications and screen potential tenants.
  • Collect rent, and deal with problem tenants (giving notices, working with the local government tenancy office, evicting).

There is a lot of work involved in managing a property. Often, the work involved (and any problems) are unexpected and happen at inconvenient times.

The Investor’s Saviour: A Good Property Manager

by Dave Peniuk

A good, reputable, hands on property manager really is what makes property investing enjoyable. We haven’t been so lucky with all of our property managers, but thankfully, in Nanaimo we have one. Lindsay Widsten is one of those property managers that makes investing almost painless. He keeps our tenants happy, provides us with monthly statements, only contacts us when necessary and has earned our trust completely. In fact, he is so good, that we often forget we even have the four properties in Nanaimo!

Before you choose your property manager, it’s a good idea to take some precautionary steps, including:

1. Check the Better Business Bureau;
2. Contact associations like ROMSBC, GTAA etc. and ask for a recommendation, or if they know the property manager you are considering;
3. Ask if s/he is licensed, and with who (get details);
4. Ask for 2 or 3 references from your property manager and give them a call;
5. Drive by a couple of the properties currently managed by the property manager;
6. Ask friends and family for recommendations.

Do your homework. Hiring the wrong property manager can cause you a lot of grief. But hiring a good one, can save you time, money, and stress!

Published December 17, 2006

Vendor Take Back Mortgage

Will you hold the mortgage?


A VTB or Vendor Take Back, is simply where the seller (Vendor) of a property is willing to provide some or all of the mortgage financing on that property. A VTB is generally a lot more common on commercial properties than it is on residential, however, residential VTB’s do exist. In fact, we have had VTB’s on 3 of the 11 properties we have purchased. In one case noted above (Nanaimo B), the seller gave my business partner and I an 80% loan to value mortgage at a 5.5% interest rate with a 3-year term! Not bad considering we didn’t even have to go to the bank! VTB’s usually are held because of one or any of the following reasons:

  • it’s a distressed property, and to make it more desirable the vendor offers a VTB to the potential purchaser;
  • the purchaser is unable to obtain standard financing from the bank;
  • the seller knows (and trusts) the purchaser and is willing to help them out on this purchase;
  • the purchaser can obtain some financing from the bank, but doesn’t have the capital to close – so the seller will hold a smaller 2nd mortgage on the property; and
  • the vendor may make considerably more money on the property by charging a higher than market value interest rate and collecting it back over time (sometimes there may be tax benefits for the vendor as well).

As there are many benefits to both parties, it never hurts to ask if a vendor is willing to hold a mortgage on the property. Even if it’s only a smaller 2nd mortgage that just allows you to not put in an extra $5000 or $10000. As long as you aren’t over-extending yourself too far, then using other people’s money is a great way to use leverage and enable you to buy other properties. Or, to have money left over to renovate, refurbish, or spend on marketing to rent your new purchase.

For you, as the purchaser, there are other potential benefits from obtaining a VTB:

  • generally no pre-payment penalty if you payoff the mortgage early as with bank financing;
  • vendor’s rarely ask for all the documentation (T4’s, Pay stub, Employee letter, etc.) that bank’s require; and
  • the mortgage, and it’s value, will not show up on your credit score as is now becoming more common with the big banks and credit unions.

Keep in mind, however, that a VTB is not always a great plan. Ensure your real estate lawyer thoroughly reviews all of your VTB documentation including the Purchase and Sale Agreement and the mortgage and it’s conditions. Also, make sure you speak with the vendor to determine if the term can be extended when it comes due.


It is Not All in the Numbers When Investing in Real Estate

 Just because the property has good numbers, does not mean it is a good buy


When the numbers on your potential real estate investment look good

After a weekend at the real estate investing course that I paid dearly to attend, I was newly equipped with the mission to find properties with a Gross Rent Multiplier of 7 or less. It took me some searching but I found one with a GRM of 3.47! What a great find, or so I thought.

The numbers:

* Asking price = $150,000
* Monthly rent = $3,600
* $150,000/($3,600 x 12) = 3.47.

What a pleasant surprise when the Vendor was also willing to hold a second position on the property. So, not only was I able to secure the low GRM property, but I was also able to get a vendor take back loan.

The trick was that this property was run down, had problem tenants, and always needed a lot of work. Do you remember the crack house story from a few months ago that put me in court and cost me nearly $25,000 in court ordered work and fines? If you do, then you know about my GRM property of 3.47. To be fair though, it is possible to do well with a property like this. To do so, however, you have to live close to it, have thick skin, and be available 24/7 to maintain it. Or, have a phenomenal property manager that does not cost you an arm and a leg!

When the numbers aren’t as good, but the property has a lot of potential

When you know what your goals are, you can easily identify properties that fit within your goals. We were looking for a property to purchase with potential appreciation, reasonable liquidity and limited hassle. With several other properties causing us grief, we really just wanted a good investment, even if we had to pay more for it relative to the rent we were bringing in.

The numbers:

* Asking price = $275,000
* Monthly rent = $1,575
* $275,000/($1,575 x 12) = 14.55.

The property had a GRM that was over double what the real estate investing course recommended we purchase, however it fit all of our other criteria, and because we used equity from another property to purchase it, we didn’t need any of our own money for the down payment. In the end, it costs us $200/month to keep it, but we have some tax write offs to offset that, and it has been a very low maintenance and stress free purchase so far. It’s also the one that Julie still has yet to see!

Knowing your goals gives you comfort and confidence in your purchases. Also, knowing what you are willing and able to endure financially and emotionally will take you a long way to finding properties that fit into your life.

published July 16, 2006


No Money Down Real Estate Deals

Manslaughter & a Crack House: No Money Down Real Estate Deals

No money down“, “100% Annual ROI”, and “Positive cashflow” are all catch phrases commonly used by real estate investment gurus. It’s hard not to get wrapped up in the hype. I certainly did. After participating in some investment seminars and reading several no money down books, I decided to go after my dream of quitting my job by age 35.

Find foreclosures in your area - Free TrialFrom what I learned, it seemed the only way to do this was to buy several positive cash flow properties with little or no money down. After some searching, I was able to find two of these “gems” in Las Vegas North; Niagara Falls, Ontario. I bought a total of nine units for about $5000 of my own cash.

I have now learned there is usually a reason that you can buy a property for no money down. It is because no one else wants it!

The first clue that these properties were not a real bargain should have been when the only one who would manage them was a shifty character I’ll call Bob. I became aware of Bob through the seller of the property.

To begin with there was an occasional fire code issue and frequent police presence on the property. And, of course, my tenants always paid in cash which made it easy for Bob to skim some extra for himself. These issues were small compared to what I would face though.

The real problems began when Bob killed a tenant in another property. In an altercation where the victim was harassing other tenants, Bob delivered what ultimately was a fatal punch to the head. The death of this person sent Bob into a drug induced pit of depression. He slowly turned one of my properties into a crack house, while letting everything run into the ground at the other.

All of the crack use and prostitution in the buildings attracted the attention of the fire department. Several substantial orders against each property were filed, and $25,000 later (including a $5000 court fine) I am finally in the clear with the violations.

No money down, doesn’t mean it won’t cost you!

Properties such as this can make you decent positive cashflow, but they are very stressful. You also need an outstanding hands-on property manager, and access to a lot of cash. Property issues often arise because of tenant abuse and property defects.

We both have very busy full time jobs and several other properties to oversee. Having a run down stressful building was not a good fit for our goals, even if there was sometimes positive cashflow.

We are no longer completely focused on cashflow, and let’s face it, 35 isn’t too far away. I am not going to be quitting work just yet.

We want the numbers to make sense, but that isn’t the only factor we consider in our purchases. We now look for properties in good or improving locations that have features that will make them easy to rent, easy to resell and that we can proudly say we own. These properties aren’t on every street, and it takes more money to buy them, but it is a property type we can handle.

Published:May 15, 2006

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