How to Value Commercial Real Estate

One of the first questions you’ll ask yourself when you are looking at a new property to purchase is: What is this property worth? That is a different question then: How much can I pay? And it’s still different then: What can I get this property for? But all of those questions need answers before you put in an offer to purchase a new property.

If you’ve been following our real estate investing newsletter then you know we recently tried to buy a little mixed use commercial property. We are still hopeful that the deal is going to come back to us, so we won’t yet give away all the details on it, but the main issue we’ve had with the deal is the asking price relative to the income the property generates. The vendors are pricing it on future value, and of course, we can only pay on what it’s worth today. And, banks will only lend on today’s value and today’s income, not the potential of future value or future income.

But how do you value commercial real estateWe thought we’d walk you through the basics.

How an investor chooses to value a property can depend on the size of the property or the sophistication of the purchaser. We rely on the simple methods, both because we are new to commercial investing, and because we’re looking at small properties. But, simple doesn’t mean less reliable or less accurate when it comes to commercial valuation.

Essentially, there are three ways to value a commercial property:

  1. Direct Comparison Approach
  2. Cost Approach
  3. Income Approach (which includes the DCF method and the Capitalization Method).

The direct comparison approach uses the recent sale details of similar properties (similar in size, location and if possible, tenants) as comparables. This method is quite common, and is often used in combination with the Income Approach.

The cost approach, also called the replacement cost approach, is not as common. And it’s just what it sounds like, determining a value for what it would cost to replace the property.

The third, and most common way of valuing commercial real estate is using the income approach. There are two commonly used income approaches to value a property. The simpler way is the capitalization rate methodCapitalization Rate, more commonly called the “Cap Rate”, is a ratio, usually expressed in a percent, that is calculated by dividing the Net Operating Income into the Price of the Property. The cap rate method of valuing a property is where you determine what is a reasonable cap rate for the subject property (by looking at other property sales), then dividing that rate into the NOI for the property (NOI is The Net Operating Income. It’s equal to income minus vacancy minus operating expenses). Or, you could figure out the asking cap rate of the property by dividing the NOI by the asking price.

For example, if a property has leases in place that will bring in, after expenses (but not including financing) an NOI of $10,000 in the next year and comparable properties sell for cap rates of 6% then you can expect your property to be worth approximately $166,666 ($10,000/.06 = $166,666). Or, said another way, if the asking price of a property is $169,000, and it’s NOI is estimated at $10,000 for the next year, the asking cap rate is approximately 6%.

Where this gets tricky is when properties are vacant, or where the leases are set to expire in the upcoming year. This is often when you are forced to make some assumptions. (We’ll save how you deal with this for another day.)

Value a Commercial PropertyThe other income method is the DCF method, or the Discounted Cash Flow method. The DCF method is often used in valuing large properties like downtown office buildings or property portfolios. It’s not simple, and it’s a bit subjective. Multiple year cash flow projections, assumptions about lease rates and property improvements and expense projections are used to calculate what the property is worth today. Basically, you figure out all of the cash that will be paid out and all of the cash that will be brought in on a monthly basis over a specific period of time (usually the time you plan to hold the building for). Then you determine what those future cashflows are worth today. There are computer programs like Argus Software that help in these types of valuations because there are many variables and many calculations involved.

For the small investors, like us, using a combination of comparable property sales and income valuation using cap rates, will provide a reliable valuation. The real issue is convincing the seller that they should sell based on today’s income and today’s comparable properties. In the case of the mixed use commercial building we just tried to buy, the seller was pricing their property based on assumptions that leases will renew in the next 6 months at substantially higher rates and that the area of the property will continue to improve making the property more desirable. Unfortunately, we don’t buy properties hoping for appreciation. We buy properties today because the property will put more money in our pocket each month then it takes out, and the property fits within our investing goals.

Article Published on July 31, 2008

Other Articles You Might Like:

>> Why You Must Create Multiple Streams of Income

>> Simple Model for Buying Rental Properties

>> Two Factors to Consider When Choosing Your Investment Markets



7 Habits of Highly Effective Real Estate Investors

Recently my friend Mike wrote me and said “I reread the 7 Habits of Highly Effective People over the weekend. It won’t be the last time I read that book this year”. It’s pretty rare he comments on a book so I pulled it out and gave it another viewing. My 1989 copy is so old the pages are yellowing and the text is faded. I guess you could say it was like buried treasure in my book shelf.

As I flipped through it and soaked in some of the long forgotten golden nuggets the book contains, I pondered what the seven habits of a highly effective real estate investor would be. It occurs to me that none of the habits of a real estate investor are particularly extraordinary. In other words – anyone could be a highly effective real estate investor if they wanted to be. Of course, this is only my opinion, and without scientific study. But check out my thoughts and feel free to send me yours.

Habit One: Know Your Goals
If you do not change direction, you may end up where you are heading.” – Lao Tzu

Most of the real estate investors I know set out with a goal. One of my MBA alumni started off simply by selling his home to buy two lots side by side and built an 8 unit townhouse complex. He has turned that project into a company that sells and builds hundreds of homes in Toronto every year. Some goals are simple, but lead to big things. Other goals are big and have to be broken down into simpler shorter term goals.

Your goal does not have to be big (although I like to start with my five year goal and make smaller goals for each year to help me get to my five year goal). But I think that if you do not have any idea of what you want to achieve then your first step is going to be difficult to determine. And, you can’t just say I want to be rich. A goal by my definition has to be as specific as possible, measurable and with a time frame.

Habit Two: Make Your Money when you Buy
Price is what you pay. Value is what you get.” – Warren Buffett

It’s very risky to pay over market value for a property in the hopes that the rent will go up, the area will improve, and/or the property’s value will increase. This is an entire article unto itself, but essentially you want to buy a desirable property below market value, in an area with a lot of potential for future growth. Really, it’s not unlike beginning with the end in mind. Envision yourself trying to sell that property and what, if any, problems you may encounter when you try to sell (e.g., is it such a unique property you’ll have a limited buyer pool or is it in a “challenged” location that may never improve, which will severely impact your ability to sell). If there is something that concerns you when you’re buying it, then unless you can easily fix that problem, it’s something that will likely concern the next purchaser.

Habit Three: Hire Help
Unless you want to buy yourself a job when you buy a property, hire a property manager. Unless you are an accountant, hire one to help you with taxes and bookkeeping for your properties. And, in most cases, we also recommend you hire a real estate agent. Just take some time to find one that will work with you to achieve your goals.

I always tell Dave that we should only be doing the things that are the highest and best use of our time or the things we really enjoy. We should hire someone else to do everything else. Of course, when I say this I am also advocating we hire someone to paint or clean our own house. These are both things that I loathe doing and feel someone else can do better and for less cost than my time is worth. Dave takes a different stance on things – why pay someone else to do what we can do for free. But, as we find ourselves with less and less time he is starting to realize he can’t do everything and there are professionals out there that can do the job better and faster than he can. So, even “do-it-myself” Dave is finally paying the experts to do what they do best so he can focus on what he does best!

Habit Four: Use Just the Right Amount of Leverage
A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope

Every single money-making real estate investor that I have met has made money in real estate, in a big part, due to the ability to use leverage. Even the richest people will eventually run out of cash if they keep buying property. Leverage allows you to use a small portion of your own money to buy a property. The less money you put in the higher your potential return on investment. In really simple terms, if you put in $10,000 on a $100,000 property and earn $5,000 in a year your return on investment is 50%. If you had paid cash for that $100,000 property your return would only be 5%. Too much leverage equates to too much risk though, so find a balance. If you buy a $100,000 property and only put in $2,000 of your own money and the market value of that property drops to $90,000 you now owe more on that property than it’s worth.

Habit Five: Find Good Partners
Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.” – Mark Twain

I love the success stories where someone with nothing but big dreams and a lot of initiative ties up one or more properties with contracts. They had little to no money, so while they had the properties under contract, they went out and found people who did. I am not going to name names here, but maybe one day I will introduce our readers to at least one of the three guys I personally know of with a story like this. But the bottom line is that it’s tough to make your millions in real estate if you aren’t willing to partner with others. Your partner might be a family member, a friend, a colleague, a company or someone you haven’t met yet. Dave has partnered with friends, family, and myself to help us build a nice real estate portfolio in only a few short years.

Habit Six: Be persistent
Genius is one percent inspiration and ninety-nine percent perspiration.” -Thomas Edison

The other characteristic of the three guys I’ve mentioned above, and every other investor I have ever met is being persistent. You will hear “no” a lot. Get ready to face the objections and find creative solutions. In our experience we’ve been turned down by:

  • Potential partners not wanting to get involved in a deal we’ve invited them into,
  • The banks – on just about every deal we had trouble getting financing and had to deal with multiple lending issues,
  • Family – sometimes we try the bank of parents and we almost always get rejected but we still try because the interest rates are so favourable,
  • Insurance companies – so few companies want to deal with out of province landlords and it seems like we’ve been turned down by nearly every company in Ontario where some of our properties are located (we’re in B.C.),
  • Property Managers – sometimes the company you want to work for you doesn’t want to manage the property you own.

And even though we have been turned down by all of the above at one time or another, we keep pushing ahead to reach our goals. Don’t let the “naysayers” stop you.

Habit Seven: Research – Always be learning
I am always ready to learn although I do not always like being taught.” -Winston Churchill

The best investors are the ones that ask a lot of questions, keep their eyes open for new opportunities and do a lot of research. Many get right into the details of a city. They go to the municipal offices and pull the official plan. They get zoning details and applications. They talk to the city councilors about plans, they attend city council meetings and know everything that is happening in an area. Besides the above, many of the really successful investors will always be learning about:

  • Local transportation plans,
  • New economic forces that will impact their investment area,
  • Changes to political leaders that will impact the real estate values (if you don’t believe this is a critical one ask just about any investor in Toronto that owned land around the legislated Greenbelt),
  • House values,
  • Land values,
  • Listings to sales ratios for an area (shows sales pace and amount of supply in a market),
  • Latest demographic and economic trends for an area, and more.

Not every good investor I know possesses every one of these habits. And I know there are habits that many good investors have that I haven’t covered. But as I thought about the most effective and successful investors that I have met or read about, I realized that almost all of them did possess each of the above habits. And, that anyone could really do what they did if they set out to establish these habits and practices in their real estate investing.


If you’re like me, now you’re trying to remember Stephen Covey’s 7 Habits. Just in case you can’t remember Covey’s seven habits, here is a very brief summary to refresh your memory:

  1. Be Proactive: There are things we can control and things we cannot. Focus positively on the things you can control and worry less about the things you can’t.
  2. Begin with the End in Mind: Envision your funeral – what do you want people to say about you. Now, think about what you have to do to be that person. From there, develop a personal mission statement that encompasses your values and your vision of yourself.
  3. Put First Things First: Focus on the important tasks. Don’t spend time on not important and not urgent tasks; try to delegate urgent but not important tasks.
  4. Think win/win: It’s not your way or my way, it’s a better way. There is plenty out there for everybody – the abundance mentality versus the scarcity mentality.
  5. Seek first to understand, then to be understood: Seeking to understand takes consideration but seeking to be understood takes courage.
  6. Synergize : Finding that solution that is likely different than any other solution pursued because you’ve understood and been understood and you’ve sought out win/win scenarios. It’s the old saying of one plus one equals three.
  7. Sharpen the Saw: Practice in a balanced way. Covey talks about the four dimensions of renewal which are essentially physical well being, mental well being, emotional health, and spiritual strength. Maintaining balance in these areas keeps your saw sharp and ready to act and work on the other habits.

Published on June 18, 2008

Renting to Tenants – Preventing Tenant Turnover

Three months into owning two beautiful loft units at the Toy Factory Lofts in Toronto, we already were renting one of the units out for a second time. Despite being in one of Toronto’s most desirable neighbourhood for the under 40 downtown worker, and being awarded the highest rating and positive compliments from condo reviewer Christopher Hume, the building is still a construction zone. And it can be very tough renting to tenants when they have to deal with the developer’s workers fixing deficiencies and intruding on their space on a regular basis.

Preconstruction Property In an attempt to prevent tenant turnover, we made some concessions when renting to tenants. We offered rental concessions for the first six months to one tenant, and a lower first month rate to a second tenant.

But, for one unit, it wasn’t enough to prevent tenant turnover. After only 6 weeks the renter left, complaining of dust, noise, and deficiencies. We took special care renting to the the next tenant in the hopes that the next tenant would stay for much longer. One of the things we did differently was we wrote the Tenancy Agreement to ensure the tenant did not have an opportunity to plead ignorance to the construction issues and use that as an excuse to break the lease.

Some lessons for renting to tenants in new construction units (a big thanks to Lindsay Widsten, our Nanaimo-based Property Manager for suggesting some of these):

  • Ensure your prospective tenant visits the unit and building at least 2 times to experience the “construction zone”;
  • In your Tenancy Agreement note “the tenant is aware that the rental unit may be impacted by various construction issues including: noise, dust, and workers tending to deficiencies”;
  • Also note in your Agreement that the tenant agrees that they cannot break the Tenancy Agreement under grounds that they were unaware of such potential issues;
  • Clearly explain to your prospective tenant that there will be some challenges with the building and possibly their unit over the upcoming months; and
  • If necessary, make a deal with your tenant that you will reimburse them X dollars at the end of their lease to compensate them for no late rent payments and living thru the construction zone. Ideally don’t reduce their monthly rent, rather, reward them after a full lease term has been served.

The Tenancy Agreement is not something we’ve talked about much because it’s different in each province. Make sure you know the landlord tenant law in your province before you rent out your basement or buy a rental property. There are standard forms for tenancy agreements but they may not cover every situation (like renting out a new construction condo). Some things we have included in agreements for various reasons:

  • No-smoking policy,
  • No dogs or no cats,
  • No assignment or subletting of the unit without our prior and written consent,
  • No change of tenants without our prior and written consent (very important with student roommates – but that is a big story for another day),
  • Tenant’s obligations for things like snow removal, lawn care or other maintenance and care
  • Penalty for late payment of rent or penalty for cheques that bounce.

 PublishedJune 4, 2008

Six Year Housing Boom is Officially Over

It was the Financial Post’s recent headline that announced the “official” end to the crazy hot real estate market in Canada. The declaration was made a few weeks ago because the listings to sales ratio across Canada hit a nine year high and the year-over-year pricing increase was at it’s smallest gain in over six years. I guess it’s time to stop investing in real estate and move our money into stocks, bonds and GIC’s. The run is over. Nobody would buy real estate now, would they?Real Estate Market in Canada

Well, we would (and we will). We don’t buy real estate for the short term. We aren’t into flipping properties nor are we really trying to make a quick buck (not that we wouldn’t like to – we’ve just learned that slow and steady is much less stressful and much more achievable). We mostly buy and hold; only selling when we need to make adjustments to our portfolio or because we desperately need some cash.

If we find a property where the numbers make sense, that is in an area with a promising future and it’s a property type that meets our investment goals then we will buy it. If the value does go down over the next few years, that is ok because somebody else will be paying off our mortgage with their rent money and we’re not planning to sell it for at least 5 to 8 years (or longer), and by then we will be in a new real estate cycle.

Remember the media is always going to sell the extremes – things with the real estate market in Canada are almost never as bad or as good as the media makes it out to be. Even during the boom when prices were rising in double digits everywhere according to the media we still sold a property at a loss in Toronto after holding it for five years.

And while we’re on the subject, in a changing market you may find the services of a real estate agent even more valuable, as they will have up to the minute news on the market activity, be better able to negotiate with realtors representing sellers that still have the “sellers market” mentality, and can spot opportunities you might have missed because you aren’t in the streets everyday like they are.

Although we like owning real estate during a “boom”, we also don’t mind the “bust” because there are even more opportunities to buy! Start saving those nickels because the buyers market is around the corner!

Published May 1, 2008

May 3, 2008

On the subject of the media’s portrayal of real estate conditions, Rob Chipman, a Vancouver-based real estate agent and blogger, recently discussed a recent artcile in the Vancouver Sun where he was quoted. Simply stated Rob isn’t buying into the media hype that’s either trying to convince readers the Vancouver market is still hot, or that we’re doomed. He evaluates investment properties one by one with metrics, and recognizes that real estate does not always go up. You need to have goals, criteria for investment and make smart choices whether the market is going up or down. He also indicates that newspapers are not the place to get real estate market information. It’s a blog worth checking if you want to put your finger on the Vancouver real estate market pulse.

Five Ways to Protect Yourself from a Bad Property Manager

We’re not too proud to say we made gigantic mistakes when we hired property managers for our Toronto and Niagara Falls properties. Our biggest errors happened before we even bought the properties, but we continued to make them until one day Dave was reading his name in the paper, calling him “an absentee landlord of a local crack house”, and we were making the discovery that our other property manager was robbing rent money from us.

When we realized what had happened in both situations we really felt stupid. And, financially both situations were painful. In fact, five years later, we’re still dealing with problems that arose because of the bad Niagara Falls property manager.

Mistake Number One: Dave bought (I take no responsibility for what he did with the two Niagara Falls properties) without making sure he could hire a reputable management company. Living two hours away, it was impossible for him to manage the property and he had to hire the only person that would take it on.

Avoid this mistake: Before you buy a property, make sure you are able to hire a good property management firm. There are some properties that good property managers will not manage. And if they won’t manage them, there’s a good chance they are more work then they are worth.

Mistake Number Two: When we hired the property manager for our Toronto property, we focused our research on finding the best priced manager. We glanced at references, made sure the company was registered with the better business bureau and that was about it. We were just anxious to not have to deal with the tenants that were fighting and calling us 20 times a day.

Avoid this mistake: Research your potential property manager obsessively. When you’ve found a firm that you think you’d like to hire, get references and find out what other properties they manage. Drive by those properties and see how well they are maintained. Take a walk around and hope to bump into a tenant. See if the tenant is happy with the property management company. And definitely call a few of the owners of these properties the company manages and find out if they would recommend the company.

Mistake Number Three: Once we hired the property manager in Toronto, we washed our hands of it. Grateful not to be dealing with the tenants fighting, we happily stopped thinking about it.

Avoid this mistake: To start with, frequently contact your property management company. And, once in awhile check in with your tenants. Let the property manager know you are keeping in touch with the tenants and checking the property yourself on occasion. Ensuring the property manager knows you’re involved and that he’s accountable will keep him on his toes.

Mistake Number Four: Ignoring a unit that is always vacant. In Niagara Falls there was one unit we never collected rent for. When Dave checked on it, it seemed someone was living there. Turns out the property manager was letting a buddy crash there for free. This buddy attracted working girls and drugs to the building with a greater frequency than the other tenants. So not only was he freeloading, he was bringing the property down with him.

Avoid this mistake: If there is one unit that always seems to be vacant, check on it. Visit the unit or have someone else visit for you. Confirm that it is vacant. If someone is living there, you want to find out why you aren’t getting rent for it. And if it is really vacant, you need to see it yourself to find out why and fix the problem.

Mistake Number Five: While we never did prove it, we’re certain that the same manager that robbed rent money from us (See our story on what happened) also charged us for repairs to the property that never were done. Anything to scam a few extra bucks from the unsuspecting owners.

Avoid this mistake: If you are being charged for snow removal, check the weather history and make sure it actually snowed that day. If you are being charged for repairs, get receipts or photographs of the repairs. One tip that David Lindahl had in his book “Emerging Real Estate Markets” was to have the management company take a picture of the repair with the local newspaper next to it. This way he has proof of the date, and he can see what the repair actually was. It prevents being charged for the same repair twice.

We’ve learned a healthy dose of paranoia goes a long ways. So trust your instincts, but check them too. A few extra phone calls and a few extra steps here and there can save you thousands of dollars a year.

Published April 5, 2008

April 21st, 2008 UPDATE

After we published this article, we received an email from our Nanaimo property manager. He had a great suggestion regarding our advice to check in with your tenants to ensure your property manager is doing what you hired them to do:

I caution all new clients not to contact their tenants direct under any circumstances! I have many tales of woe on this and not one where there was a benefit. The few that disregarded my advice were quick to ask me how to get out of the problems contacting the tenants had created.

The property manager is the middleman and frequently the “no” man. If the tenant has the owner’s contact info they will not take no for an answer. (Then it becomes a “he said, she said” game.) It is amazing what a tenant or an owner thinks the other promised and I have no way to guess the real story which may be somewhere in between. Why open up that can of worms?

I suggest making an appointment to view the home with the three parties in attendance. You get to know each other and the property but keep your comments to the weather. The meeting is warm and fuzzy.

When we received LW’s email, all of the memories of a disgruntled tenant that found Dave’s phone number through information came rushing back to us. Being in B.C. and three hours behind Ontario’s time zone where the tenant lived, we found ourselves getting really unpleasant 5am wake up calls on many mornings. We really like LW’s suggestion, and believe that a meeting with all three parties in attendance would keep the property manager in the middle, where they should be, while providing an owner with the necessary reassurance that the property manager is doing the job they’ve been hired to do.

So thank you LW for your great feedback. Keep it coming!


10 Real Estate Words Every Investor Should Know

Real Estate Words to KnowThis article was almost about our latest purchase. Last weekend was filled with excitement as we almost purchased a tri-plex in Vancouver. It all happened so quickly: In the afternoon Dave received an email telling us the property was about to be listed on MLS. When we called, they were having a showing at 4pm that day. He took a look, ran some numbers, and we decided to put in an offer. After dinner we signed the contract, and before we went to sleep that night, we had an accepted offer. It was a sleepless night for both of us as we wrestled with the good aspects and challenges of this deal. We were both excited about the prospect of owning a good income property so close to two skytrain lines, and in a great rental area. The numbers were pretty good. But, we hadn’t done any research yet, and we weren’t sure we wanted to buy another residential property. As we started to line everything up to complete the due diligence a few red flags went up (for example, we were pushed to strike the inspection condition from our deal; we did it but said we would still do an inspection. We later found out there was another higher offer that had the inspection clause in the deal and that was why they had accepted ours). As the red flags went up and we started to walk away the seller was suddenly making concessions. Things really started to smell fishy.

So, we walked away from the deal. And, we both feel good about it because we listened to our gut. We’re realigning ourselves to our goals and have a plan of action for the next twelve months. But we also feel good because we tried. Don’t be afraid to stick your neck out and try. Putting in an offer on a property, as long as you put it in subject to financing or an inspection, still gives you time to complete due diligence and determine if it’s the right decision. And you can do it comfortably because you have the property tied up. Sometimes all of the lights will be green and you’ll fly through the process and get a great new property. Other times you’ll find some yellow lights, and you may wish to proceed with caution. Or, you may find a red light and stop there. With every offer you learn something. And while we didn’t acquire a property this month, we did gain a renewed focus on our goals and finances.

So instead today, we’re going to help you be prepared for your next deal by giving you some legal terms that are good to know.

10 Words to Know: Real Estate Investing Lingo

by Julie Broad

It’s fun to tell you all of the stories about our wins and losses in the real estate game, but sometimes we just have to give you good, solid practical information that you must know as a real estate investor (or even a home owner). So, I will keep it short and simple and give youten real estate words to know.

Types of Interest in Land

1.FREEHOLD: Owning a freehold property means you have the right to use the land for an indefinite period of time and, subject to any bylaws or restrictive covenants, may do what you wish with that land.

2.LEASEHOLD INTEREST: Owning a leasehold on a piece of land gives you the right to use the land for a certain period of time. The owner of the leasehold may sell the land, but the new land owner will be subject to the terms and conditions of the original lease.

Owning Property
3.JOINT TENANCY: Typically how you would own the home you live in with your spouse, as it has the right of survivorship which means if one of the owners dies the other immediately is given the other person’s share of the home. Interest is undivided but equal in this ownership type.

4.TENANTS IN COMMON: This is how we own most of our properties together as it allows us to specify the percentage amount of ownership, and it does not carry the automatic right of survivorship. For investment properties this makes a lot of sense because you may not want your partners to automatically get your share of the property if you pass away. For example, Dave and a partner M.M. have bought properties together as Tenants in Common. If Dave passed away, he’d likely want his share to pass on to me or his family, not necessarily to M.M.

If you are putting in unequal amounts of money into the investment you may want the ownership percentages to reflect this. For example, early on in our relationship, we bought property where Dave did 100% of the work on the deal and put up most of the money. We own this property together as Tenants in Common with him owning 60% of the property and me owning 40%. At tax time, he claims 60% of the income and expenses and I claim 40%.

Terms you will see in a Purchase and Sale Agreement
5 & 6.FIXTURES vs CHATTELS: If an item is built in or attached to the property in a permanent way, then it is considered a fixture and will be transferred with the property unless it’s otherwise stated in the purchase and sale agreement. A chattel, on the other hand, is something that is movable like a fridge or a washer and dryer. These are assumed to not be included unless otherwise stated in the agreement.

7. & 8.CONDITIONS and WARRANTIES: A condition is a fundamental part of the contract. We always make our contracts for purchase and sale subject to at least one condition for at least 5 business days. In the tri-plex we almost bought, we struck out the subject to inspection condition but had the deal subject to us being able to obtain satisfactory financing. A breach of a condition within the set time period stated in the contract allows you to get out of the contract. We were able to walk away from the contract without losing any money during that 5 day conditional period because of the financing clause. A warranty, on the other hand, is a promise but it is not fundamental to the contract. In a breach of warranty you may sue for damages but it does not allow you to neglect your contractual obligations. A warranty may apply to something like condominium fees. A seller may warrant that his/her fees are $300 a month. You may find out they are actually $400. This is not a fundamental breach of contract, but you could seek damages as it will cost you $100 more per month.

9.CONSIDERATION: In contractual terms consideration refers to something of value. When you buy a property, the price you pay is the consideration. This is not always a dollar amount, as it could be another property or a promise of value.

10.DAMAGES: Damages refer to financial losses that have arisen from failure to complete the deal as stated in the contract. You have to prove you have suffered financially as a result of the other parties actions, and then you can sue for those damages. For example, you could sue for the $100/month difference in condo fees if you could prove you’ve suffered financially by the sellers misrepresentation of the condo fees.

There’s a fantastic CANADIAN resource for all things real estate by Douglas Grey, which I used to check some of my definitions above. It’s called: Making Money in Real Estate: The Canadian Guide to Profitable Investment in Residential Property, Revised Edition. He covers everything including insurance, tax, legal information and provides additional resources. It’s a solid book to have in your library as a Canadian real estate investor.

Published March 25, 2008

Identifying Emerging Real Estate Markets


By Learning to Identify Emerging Markets

“Many investors make the mistake of investing in hot areas. These are the places you read about in popular magazines. Everyone is talking about them because they’ve performed great for several years”. – David Lindahl

While soaking up the sun on the beaches of Ambergris Caye in Belize this month, I picked up “Emerging Real Estate Markets: How to Find and Profit from Up-and-Coming Areas” by David Lindahl. I have to admit that I struggled a bit with his attitude (especially towards “burnt out landlords”), but if you are interested in Apartment investing, it’s a really good read.

Lessons in the Market Cycle and Investing in Emerging Markets from David Lindahl

Even in times where most markets are crashing, you’ll find a market that is just about to explode. Maybe that market is on the other side of the country, or maybe it’s just a small neighbourhood within the city you live in, but either way there are opportunities out there. You just have to find them.

Lindahl splits the market cycle into four phases:

  • Buyer’s Market Phase 1: A market that is oversupplied with properties
  • Buyer’s Market Phase 2: The market starts to absorb the oversupply, vacant units become occupied and abandoned properties get purchased.
  • Seller’s Market Phase 1: Demand has reached it’s highest point. There are plenty of investors that want to buy what you are selling.
  • Seller’s Market Phase 2: Job growth slows, properties take longer to sell, and the market is slowly getting oversupplied by new developments.

The ideal situation is to get in during Buyer’s Market Phase 1 with very little money of your own. Enjoy cash flow from that property as you ride into Phase 2, and then the early stages of Seller’s Market Phase 1. Then you sell, and find a new market that is in Buyer’s Market Phase 1. Simple concept – so how does he suggest you find the next emerging market?

Well, an emerging real estate market is one that has people moving into it, rather than packing up and moving out. It’s also an area where there is job creation. An interesting point he makes repeatedly in his book is that an emerging market has great leaders. “It takes aggressive and thoughtful leaders to analyze a city and determine what needs to be done. They then need to have the courage and strength to implement their vision in order to help the city achieve greatness” p.26. Learn about the leaders in a city, review the Master Plan, and check out the local news to find out what companies are coming to town.

Published February 25, 2008

The Truth About Goal Setting


I’ve never been one for New Year’s resolutions. To me, they are like a fad. Something that is all the rage for a short period of time, and then gone so fast it’s like they never existed at all. How many times have you heard or even given the half hearted declaration to lose weight, quit smoking or change jobs? That’s not goal setting, that’s wishing.

I believe the best time to make changes is today, no matter what day of the year that is. I don’t wait for tomorrow to start if I have decided to do something. And I certainly wouldn’t wait for a new year to begin goal setting. Once I set my goals, I review the goals on a regular basis, adjust them, adjust the plan and then keep moving forward. Things don’t always work out according to plan (one of my goals for 2007 was to buy one more property – which didn’t happen for many reasons), but I don’t stop making goals; I just adjust and move forward.

I have been reading a great blog by an individual who sets his goals in writing on his blog and checks in regularly with his readers to talk about how he is doing. He’s made some great comments in the last few months on how to set goals, celebrate success and re-evaluate the goals you aren’t achieving. Check it out at How to be an original.

Maybe you’re convinced and you want to get started on your goals, but you just don’t know how to start. To get your goal setting rolling:

  • Start with a fresh page, and write “Life Time Goals” at the top of the page. 
  • Under “Life Time Goals” I write the most important one or two health goals, wealth goals and “ME” goals. For the “ME” goals, I have things like “Become fluent in Spanish”.
  • Underneath the lifetime goals, write “Five Year Goals: Achieve by the end of 2012”. I look at where I am going overall in my life, and figure out what I have to do in the next five years to get there.
  • Finally, on the back of that sheet of paper or on page 2 in my document, I write “Goals for 2008”, and I write in fine detail with dates and measurements, what I am going to do in 2008 that will move me towards achieving my five year goals.

To give you an example, let me expand on my personal development goal of becoming fluent in Spanish. Under my 5 Year Goals, I want to spend at least one month in a Spanish speaking country studying Spanish. To move towards that in 2008, you might think that I plan to take a Spanish class, but I have found that I don’t learn languages well in a class. The best way for me to learn is immerse myself in it. I remember it better and enjoy it more. So, in 2008, I am working on building passive streams of income so that in a few years I can take time off from work and focus on my Spanish language skills. My exact goal is actually split up into the areas that I will earn passive “revenue” from, and how much. As I prefer to keep the exact details private, I will just make up an example. In 2008, I will be earning a minimum of $100/month after tax and expenses from my real estate investments, $100/month off of my cookbook website and cookbook sales, and $100/month off of interest from my bank account. Under each of the above, I have the things I am going to try or I am going to do to achieve those results. It’s only a page long but it gives me direction and I know what I need to do next.

Get the picture? So, if you haven’t already, take a few minutes, sit down and figure out what you want from your life. Then figure out what you will need to do in the next five years to get there. And most importantly,write down what you are going to do in 2008. Be sure to make your goal(s) specific and measurable so you can track your progress!

Here’s some quotes to get you in the mind set for your goal setting:

  • “If what you are doing is not moving you toward your goals, then it’s moving you away from your goals.” Anonymous
  • “If you do not change direction, you may end up where you are heading.” Lao Tzu
  • “Have you noticed that even the busiest people are never too busy to take time to tell you how busy they are?” Bob Talbert
  • “Many a false step was made by standing still.” Fortune Cookie
  • “Have a bias toward action — let’s see something happen now. You can break that big plan into small steps and take the first step right away.” Indira Gandhi.

Here’s to a wonderful and prosperous 2008.

 Published on February 21, 2008


Automatic Wealth

Wake Up Richer Everyday

It’s time to face the hard facts. If you haven’t committed to yourself that you are going to build your wealth, made a plan to do so and started working on that plan, then you are probably only building your wealth when you are awake and working. Isn’t it better to know that when you sit down to watch t.v. or you close your eyes at night you are still making money?

Passive wealth creation, or being able to wake up richer everyday, is one of the reasons we love investing in real estate. We talked a bit about this in our March issue this year. Of course, there are other reasons why real estate is one of the main ways we’ve pursued to build our wealth. We’ve never been as scared of investing in real estate as we have of stocks (we started right around the time that most of our friends and family lost buckets of money in the Nortel stock crash). And we’ve never found real estate as daunting or as time consuming as creating a business.

This month we’re investigating the advice on wealth creation found in Michael Masterson’s “Automatic Wealth: The 6 Steps to Financial Independence“.

 Michael Masterson’s “6 Steps to Financial Independence”


by Julie Broad

Recently, Dave and I attended a 4 day marketing bootcamp in Delray Beach, Florida put on by Early to Rise. We each went with different objectives, but we both came out incredibly impressed with Michael Masterson, the keynote speaker of the conference. I think he is best known for his copywriting expertise and affiliation with the American Writers and Artists Institute, but he started with little, held many jobs over the years, and has built his wealth through just about every kind of business imaginable. He’s owned businesses for things like pool installations, direct marketing, selling discount jewelry, and has been involved in half a dozen real estate development ventures. This book was a great mental tune up. Masterson offers sound advice in the book from someone who has been there and hasn’t lost touch with reality despite his profound wealth and success. He’s a guy who wakes up richer every day. I thought some of our readers would enjoy a snapshot of his 6 steps to financial independence.

The Nuts and Bolts of the 6 Steps:

  1. You will make you wealthy…and it won’t happen as easily as putting 10% of your income away each month,
  2. You have to plan to be wealthy – wishing won’t work,
  3. You must develop rich habits as the rich are different from ordinary people and it’s not just because they have more money,
  4. Increase your income radically. He isn’t talking about a 3% a year raise here, he is talking about boosting your income by 150% for starters,
  5. Get rich automatically – true wealth is built through the creation of equity,
  6. Retire early, if you want to.

After you have taken stock of your current financial situation, you must plan to become wealthy. As we have said in several issues, “What are your real estate investing goals?”. His approach to goal setting asks you to imagine your funeral. What do you want people to say about you? What are the words from your family or close friends? A coworker? A mentor? And someone you didn’t know? Based on that, determine your goals in the long term, and then dive in and figure out what the medium and short term looks like. Make them specific and measurable, and write them down.

Plan in hand, it’s time to develop wealthy habits. My favourite chapter of the book is “Step 3: Develop Wealthy Habits“. Masterson says “Budgeting is like dieting: It’s enormously sensible but almost never effective”. I have been a budgeter for over 10 years. I have a great understanding of where I spend my money, but I also have a lot of stress about spending money.

Instead of continuing to focus on where I spend my money, as I already have a deep understanding of where my money goes, I’m taking the Masterson approach of doing a personal balance sheet.

Create a spreadsheet that lists all of your assets and all of your debts. Conservatively estimate the value of all of your valuable assets (stocks, bonds, real estate, art) and how much you owe. Then, each time you check your balance sheet, promise yourself (And take the steps necessary to make it a reality) that next time you check you will be wealthier. Before you make a purchase or a decision to do something new, you will find yourself asking “Will this make me richer or poorer?”.

Let me skip ahead in his book now, as this is a newsletter about putting the “Rev N You with Real Estate”, not about general wealth accumulation and life goals. Step 5: Get Richer While you Sleep is all about investing in real estate, stock investing and investing in businesses to build your wealth. He gets right to the meat of real estate investing as a means to create wealth by saying “While you are building wealth, you should treat your rental real estate portfolio as an equity play. You will want to use leverage (by taking mortgages) to get the maximum appreciation on your cash…As your equity increases in each property, you should consider taking some of that money out of it and reinvesting it in other properties” pg.185.

This has been our strategy, and it’s worked very well, especially since the market has been so strong. It hasn’t put cash in our pockets (in fact it often feels like our properties take cash out of our pockets) but our balance sheet is better every time we look at it.

He goes into a lot of detail and examples to convince you to invest in real estate. But his bottom line, and we agree, is “If you haven’t already begun investing in real estate, start doing so today. If you are a budding real estate tycoon, resolve to add to your empire this year. You’ll find that actively investing in real estate can give you much-better-than-the-stock-market returns, and the comfort of knowing your investments can’t disappear” page 219. Couldn’t have said it better myself Michael! Pick up a copy and check it out for yourself.

PublishedNovember 18, 2007

Tax Write offs from Real Estate

Tax Write Offs from Real Estate


If you are paying taxes, it means you are making money.If you are paying a lot of taxes, then it stands to reason that you are making a lot of money. However much you make, it doesn’t make it any less painful to pass it along to the government though. Unfortunately I haven’t been faced with the problem of paying a big bundle of tax to the government (but I am hoping I have that problem really soon!!), but I have been through enough in the last seven years to give you a few pointers on some ways to minimize taxes surrounding residential real estate dispositions.

I know taxes might seem boring, but we know someone out there is interested in it because we are going down this long and dusty road at a reader’s request. There is so much to cover that this will be part one of a series. To roll it out, let’s start with the basics. As a real estate investor, you will pay tax on the rental income you earn on the property as well as on any capital gains when you sell. The amount of tax you pay on rental income can be reduced dramatically by expenses such as maintenance, property management, capital cost allowance (depreciation), interest on your mortgage (but not the principal pay down), and other money spent to run your property. In another edition we will come back to some of the elements above. For this edition, let’s focus in on the second major area you will pay tax on, and that is on Capital Gains when you sell your investment.

Capital Gain occurs when you sell your property for more than you paid for it. You do not realize your capital gains until you sell.

To calculate your capital gain take the:
Money from the sale of your property
Costs of disposition (real estate agent fees, lawyers etc.)
What you paid for the property.

You will owe tax on 50% of the amount from the above calculation if the resulting number is positive (a capital gain). This amount gets added (or subtracted if it’s a net loss) to your personal income and you are taxed accordingly.

If the property you are selling is your principal residence, then it is exempt from tax. According to Canada Revenue Agency, a property qualifies as your principal residence if in that year of filing:

  • you acquire only to get the right to inhabit
  • you own the property alone or jointly with another person
  • you, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year
  • and, you designate the property as your principal residence.

Now, what if you live in the home for a few years, and then move out and rent it out for a few years as I did with the condo that I owned in Toronto? In that situation, the answer for me was that the condo could still be considered my principal residence for four years after I changed it’s use. The catch is that I could not claim capital cost allowance on the condo, nor could I claim any other property as my principal residence at the same time. For me, this choice was easy because I moved into a property Dave and I already owned and had been treating as a rental property from the accounting sense of things. It was easier to keep the condo as my primary residence and continue to treat my new “home” as a rental property for accounting purposes. It’s important to note that you and your significant other (including common law or same sex partner) cannot own two principal residences at the same time for tax purposes. You must choose one during the over-lapping period.

It’s complicated and that is why both Dave and I have accountants that we consult with on a regular basis to get the best advice.

THE DISCLAIMER: Neither of us have any legal training, nor do either of us have extensive accounting training. We are not experts and we always consult with our accountants and legal counsel before we make decisions. We pay money to get quality advice when we need it and always advise our friends, family and readers to do the same.

House Prices: Too Expensive?

Rev N You Man

We skipped May – we really weren’t sure what to write about. When we began the newsletter 14 months ago we anticipated that by now we would have purchased at least one more property, probably two. We felt like we had only old stories to tell. We want to share the juicy lessons from the past, but we also wanted to be current and relevant.

The reality is that life has gotten in our way a bit. With Dave venturing into the world of mortgage brokering, Julie traveling at least a week of every month for her day job, and wedding plans commencing, it just doesn’t seem like there is enough time to properly dedicate to a purchase decision. And then, there is the fact that finding a property that makes financial sense is very hard right now (house prices are so much higher than a few years ago!). Does buying real estate make any sense right now?

Dave often likes to remind everyone that Canada’s house prices are still cheap relative to much of the rest of the developed world. And even though we haven’t expanded our real estate portfolio in the last 14 months we have not stopped learning so there are still lessons to share.

If you think a house in Toronto is expensive, Try Shopping for a House in Moscow

by Julie Broad
Moscow is the most unaffordable place to live in the world with London coming in a close second in the recent survey by Mercer Human Resource Consulting. The survey considered costs on everything from a loaf of bread and a litre of milk to the cost of a movie ticket to assess the living costs. So, when you think things are getting expensive in Toronto (ranked 82nd), Vancouver (ranked 89th) or Calgary (ranked 92nd) remember it could be much worse.

Canadians, and even Americans should be holding tight to their homes as we look internationally at the 2007 Demographia survey on international housing affordability. A home in Canada is one-half as expensive relative to incomes as in Australia, where housing is the most expensive (with New Zealand, Ireland and the U.K. following close behind).

Looking for the larger affordable housing markets in Canada, relative to income? Look no further than:

* Regina, Saskatchewan
* Quebec City, Quebec
* Winnipeg, Manitoba
* Saskatoon, Saskatchewan
* Ottawa, Ontario
* London, Ontario
* Oshawa, Ontario.

On the opposite end of affordable housing, Canada has two cities in the world’s 25 most unaffordable cities – Victoria and Vancouver, BC. And maybe I am biased, but I think the climate and scenic beauty of these two cities justifies their existence on the high end of the scale. It’s no accident that these two cities are up there with those in California, Hawaii, and Sydney, London, and Perth. They are places that people from all over the world desire to call home. I know that Winnipeg and Saskatoon have their own beauty as cities, but you have to have thick skin to get through the winter. As far as we are concerned, you can’t beat mountains, ocean and temperate climate while living in this great country we call home.

So, given the fact that some cities (e.g., Vancouver and Victoria) are getting too expensive to buy and hold revenue properties, how does this help the real estate investor? Read on and hopefully we’ll shed some light.

Where, what, and how to buy a house in a heated market

by Dave Peniuk

Where to buy? Right now may not be the best time to buy in markets that are (or have been) extremely hot such as Vancouver or Victoria. As Julie mentioned above, these markets have seen double digit growth in the last few years, as have many other markets in Canada (Edmonton, Saskatoon, Toronto etc.). As with the stock market, it is not always advisable to buy high. That being said, markets that have a lot going for them, (Oil and gas in Alberta, Economic Center of Canada in Toronto, Temperate Climate and scenic beauty on BC’s coast), may not give you huge returns, but they’re pretty safe bets over the long run because people will want to live there (for jobs and/or for lifestyle reasons).

So, where do you buy revenue properties? Well, you can look to the cities Julie mentioned above. Most of them are solid cities with good employment opportunities, have been growing, and are much more affordable than in Alberta or BC. But, if you are looking to those areas, or any area that you do not live, make sure you find a fantastic property manager in advance! They can advise you as to rental rates, good areas and also help rent out your new investment for a smoother transition. Also research the fundamentals of that city. There are good reasons why many cities remain affordable, and sometimes that reason may also be a reason not to invest in that city.

What to buy? As we have discussed previously, what you buy is really based on your objectives. Do you want cashflow? Do you want appreciation? Do you want a property that is fairly easy to unload (sell) if times get tough? Personally, I have been looking at middle income duplex’s and homes with nice basement suites in middle income areas. Why? Because nicer properties attract “generally” better tenants, will bring you higher rent, give you less headaches, and be easier to sell. Of course, nicer properties cost more too. This brings us to how to buy in a heated market.

How to buy? With Canada’s increasing housing costs, the government (and lenders too) have introduced programs and legislation to make purchases still possible for many buyers who may not have been able to afford a property even a few years ago.

1. The government passed legislation for only 20% down payment for conventional (uninsured) mortgages;
2. A third mortgage insurer has come to Canada, providing more competition;
3. Some lenders have introduced up to 90% loan-to-value financing for rental properties;
4. Some lenders are allowing up to 80% rental income to help qualify buyers;
5. Amortization can now be stretched to 35, and in some cases, 40 years.

Many of these new programs may help purchasers buy property, either owner-occupied and/or rental properties, but there are still techniques that may help you purchase in this market. For instance, using joint ventures, partnerships, and financing a little more than necessary to offset negative cashflow for the first few years may help you purchase that rental property that you couldn’t afford to buy (or carry) otherwise.

Making Money in Real Estate is Simple as 1-2-3

Canadian Money in Real Estate


Many of Canadian Business Top 100 Wealthiest Canadians made their money through investing or developing real estate. It seems like it was easy for them, so wouldn’t it be easy for anyone? Five years ago, with only a small amount of savings and RRSP’s and a loose plan, we set out to see if we could join the ranks of the rich.

13 properties into our real estate investing adventure, we have learned a lot the hard way. But despite $45,000 in surprise repairs, a property turning into a crack house ,and having a property manager rob rent money from us we are in the real estate market for life. Each year we have averaged returns on our investment of 63% despite some pretty big mistakes.

Of course, increasing property values over the past five years gave us shelter from the storms we created with our mistakes, but even in properties we own that didn’t appreciate much over the past five years, we still made money. That is because in real estate, there are several ways to build wealth.

You can make money through any or all of these ways:

  • Property appreciation
  • Cash flow
  • Other people’s money paying your mortgage.

Let’s look at a basic example of just how powerful each of these can be. Pretend you find a desirable property for $100,000, and you buy it for 25% down ($25,000).

1)Appreciation: Property goes up in value by 5% in year 1. It’s now worth $105,000. Return after one year is 5000/25000 = 20% on your $25,000 investment in the first year!

2)Cash flow: Rent each month is $1000. Your mortgage, insurance, taxes and miscellaneous expenses are $900/month. Income minus expenses = $100/month. 12 months x $100 = $1200/year income.

Add that to the appreciation and you have made 6200/25000 = 25% in the first year through appreciation and cash flow.

3)Other people’s money paying down your mortgage: Assuming you have a mortgage at a 5% fixed rate, at the end of the first year you will owe $73,440 on your $75,000 mortgage. You have now built an additional $1560 equity into the property ($75,000 – $73,440 = $1560).

Your return including appreciation, cash flow and reduced principal give you a first year return of 7760/25000 = 31%.

Of course, finding a property that gives you consistent monthly cashflow is difficult, especially in the heated markets we have seen recently. But, over the long term, you don’t need to have all three of the above to make money from your investments. That is the beautiful thing about real estate, there is more than one way to make money from it.

Learn The Insider Secrets to Building A Seven-Figure Real Estate Portfolio

– Right Now –

While So Many Properties Present Once-In-A-Lifetime Opportunities …

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How About Freedom 40 Retiring With Real Estate

Retiring with real estate is really appealing so we thought we would summarize some ideas from the Australian Property Investor Magazine on ways to achieve financial independence through investing in property.

One of their theories is that if you have five average- priced properties paid off completely, you should have the ability to replace your working income.

To apply that to Canada, the average priced home in Canada according to the Canadian Real Estate Association (CREA) in September 2006 was $277,470.

Hence, if you had 5 x $277,000 properties, this would equal $1,385,000 in equity. From this, the article debates the various ways you could earn income. They include:

1. Borrow some of the equity and live off that;
2. Sell some or all of the properties and invest the money in “safe” income producing stocks, bonds, and other liquid wealth products;
3. Live off the rent.

Any of these would work really. It really depends on, yes, you guessed it, your real estate investing goals!

Let’s look at living off the rent. For argument’s sake, let’s say you have a GRM (remember, your Gross Rent Multiplier we discussed a few issues back?) of 10 on all five of the properties. This would look like this:

* $277,000 divide by 10 (GRM) = $27,700 per year
* Times $27,700 by the 5 properties = $138,500 total income per year.

However, this does not include any expenses associated with renting the property. As we have discussed before, we average approximately 40% expenses on our properties (taxes, insurance, property management, maintenance, heat and hydro – where applicable). So, taking that into account, you are left with:
$138,500 in total annual income minus 40% ($55,400 in expenses) = $83,100 annual income.
Of course, the taxman has to take some of that and then you can finally start paying for your personal expenses of food, housing, entertainment etc. But, it provides you with an idea of what can be done with some forethought into your objectives, savy purchasing, and dedicated debt reduction! In future editions, we’ll discuss more about the idea of retiring using investment properties.

Published November 16, 2006

Sweating the Small Stuff in Real Estate Investing

Australia Real Estate Lesson

“Currently there’s a tremendous shortage of properties for sale, incredible demand, and the prospect of fabulous economic conditions for the next 25 years if you subscribe to the long wave boom theory.” Sounds like Northern Alberta doesn’t it? It’s actually an article from Australian Property Investor Magazine referring to the boom in Perth. Perth has seen such an incredible boom that house prices have increased upwards of 30% in the first half of 2006, and a total of 147% since 2000! In real estate investing, that is like beautiful music is to the ears.

Much of the boom is mineral and resource driven (still sounding familiar?). However, experts say that cashflow positive properties no longer exist within Perth. They say the capital gains and cashflow opportunities are going to be in outlying communities where infrastruture is improving.

We have Australia on the brain after two weeks down under, but we thought the parallels between the Canadian and Australian markets and ideas for investment we read about would be fascinating to share. So, this month we’ve highlighted Australian thoughts on achieving financial freedom as a property investor.

Do sweat the small stuff when real estate investing – it’s in the details

A man walks into a condo sales office and buys four units within a condo building. It sounds like a joke without a punchline, but there was a punch for this Irish investor buying in Sydney. One of the units doubled in value by closing time, two units had a small increase, and the fourth actually decreased in value. As I sell my condo in North York (Toronto), and sniff and sob over the lowly 6% appreciation it’s had over 5 years, I can relate to the Irishman and the punch in the story.

What happened? Didn’t Toronto have a big boom in the last five years? Not everyone has profited from that boom, as I can now say with first hand experience (after 45 days on the market, I finally have an accepted offer but it’s $9,000 less than asking and a paultry sum more than I paid for it five years ago).

The Irish investor explained that the unit that doubled in value was ground floor, with a lovely courtyard, a great view and sunshine in the evening. The two that had marginal increases were on higher floors of the building and street-facing, while the unit that didn’t increase was above the entrance to the building. His lesson was that it was not just the location or quality of the building, it was the details of each unit that mattered a lot in the resale.

My condo story is similar. It’s in a rock solid 6-year old building right across from a subway stop. It’s minutes from the 401 highway and located conveniently by all the essential amenities including grocery stores, restaurants, gyms, community centres, and schools. So what went wrong? Well, here are the major issues:

* The area has ballooned with over 2,000 new units in the past 5 years;
* Most of those units are similar in size to mine;
* My unit is 1 of only 2 units in the building without a balcony; and
* My unit is above the main lobby entrance.

Virtually all of the prospective buyers noted they wanted a balcony and would prefer to wait for a unit with one. We lived in this condo for several years and did not miss the balcony – especially because BBQ’s were not allowed on balconies. It’s a quiet, warm and welcoming unit. However, until you live there, you wouldn’t realize this. Similar units in the building have sold for up to $15,000 more – but they have a balcony and are not above the entrance.

How can you learn from my mistake?

1. Trust your instincts – if there is something that makes you hesitate when buying the unit (and you can’t fix it), don’t buy it!

2. Watch for details like:

* Lack of sunlight;
* Close to elevators and entrances;
* Limited or no views;
* Lack of street parking; and/or
* Many new developments in the area that are similar to the one you are looking at.

If you find that a unit has some or all of these details, you may miss out on some great potential capital growth if you buy it!

Published: November 16, 2006

Fitting into the Bank Box with your Real Estate Purchase

Who do you think would be the ideal candidate for a mortgage? Would it be the small business entrepreneur with a flourishing business, the single income family, or the dual income family with multiple rental properties? The answer is none of them. Dealing with banks to get mortgages is probably the most frustrating and difficult part of buying rental properties.

It’s not even qualifying for a loan with their tight little box of requirements that really drives you mad, it is trying to actually get the process done quickly. Just having the bank tell you exactly what documents you need to pull together to prove you are worthy is a whole obstacle course in itself.

So, what do you do? You probably can’t buy real estate without a mortgage from someone…

Conventional Mortgage vs. High Ratio Mortgage

by Julie Broad

Before we dive too far into the financing talk, let’s clear up a few definitions. In Canada, banks consider a conventional mortgage to be anything where the mortgagee is putting 25% or more down. If it less than 25% it is considered a high ratio mortgage.

Financing is generally much easier to find if you are getting a conventional mortgage. It is also cheaper. If you are not putting at least 25% down, then you will be put in a situation where you have to get insurance for your high ratio mortgage. Canada Mortgage and Housing Corporation (CMHC) is probably the most common insurance company for mortgages, but there are others such as GE that will also offer insurance.

Avoiding the Stress of It All: Using a Mortgage Broker

By Dave Peniuk

Banks, our wonderful billion dollar Canadian financial institutions. Ever wonder how they get rich? It’s not from lending their money to “risky” property investors. Banks, in particular the big five in Canada (Bank of Montreal, Royal Bank of Canada, Bank of Nova Scotia, CIBC and TD Canada Trust) have a very strict and specific set of criteria that one must meet to qualify for a mortgage. Then, you really have to be “perfect” to get their best rate.

Many of the real estate guru’s out there recommend building a good relationship with one bank. They tell you to sit down with the banker, explain what you are doing with your investments, and sell yourself and your plan. Well, in our experience, the banker who is going to take time to talk to you, has no authority to lend to you outside of the same criteria as if you went online and applied. Even if it does work once or twice, bankers get promoted, relocated, or just leave the bank and your efforts to build that relationship are gone. Relying on one person within a bank to determine your financial future doesn’t give me comfort. And, it just hasn’t worked for us.

We’ve bought 12 properties in five years, so you know we have had to get financing. We didn’t do it through a bank very often. Instead, we have relied on a mortgage broker.

Benefits of a mortgage broker:

* Banks pay the fees, so their service is no cost to you
* Neutral opinions on your financing options
* Find the best rate for you from a long list of lenders
* Will perform one credit check, and this one credit check will be submitted to any lenders they seek financing from on your behalf (this prevents multiple checks, which can decrease your credit rating)
* Typically can obtain financing for you no matter where you live (so if you move or your broker moves, you can maintain that relationship)
* Will prepare your portfolio for you (this is especially helpful and time saving for you if you own many properties as the banks require a package of property summaries and analysis)
* High volume brokers will get even lower mortgage rates from certain institutions, providing the opportunity for you to benefit from their volumes.

Our last few purchases and refinances have been challenging. Without the hard work of our mortgage broker, we don’t believe we would have been able to obtain financing in time to remove conditions (and thus, keep the property).

Finding a mortgage broker

Ask potential brokers questions to find a good fit with your personality and your objectives. Some questions to ask your potential mortgage broker include:

  • Do you typically work with property investors?
  • Have you done many deals with investors?
  • Do you have preferred rates with particular lenders?
  • How long have you been working as a mortgage broker?
  • How many deals do you typically do a month?
  • Do you have any investment properties yourself?

In our opinion you should work with a mortgage broker who has their own investment properties and has substantial experience working with real estate investors.

Want to learn more about financing real estate investments? Listen to our five part interview with our own Mortgage Broker.

Published September 25, 2006

For the Love of Money with Real Estate

If you’ve been reading our newsletters you know about the manslaughter case, our crack house and you know we have had many problem tenants. You probably wonder why we love real estate investing and keep doing it? Well, if we stopped today, and did nothing else relating to real estate, in 20 years we would have over $2,000,000 in assets (in 2006 dollars) and almost $8,000 per month in income coming in after expenses. After only an average investment of 4 hours per week over the last five years that thought makes us giddy.

It’s also the same thought that makes us want to share our stories. Our investments have not all been good ones, and it has not been easy, but much of our pain could have been reduced just by knowing more about the pitfalls and traps. We want to help you, and others, succeed while avoiding some of the mistakes we made.

On One Condition: Putting in an offer

You have found your potential purchase, and you did the analysis. You think that this is a good buy and it meets your goals (remember those?). You are ready to put in an offer to get a little closer to the deal… so, now what?

Our caveat: Our methodology does not apply to the hot market conditions that areas like High Park, the Danforth or downtown Vancouver have seen in the last couple of years. We avoid bidding wars and always put at least one condition on our offers in case we need to back out.

Determine your price:

In the evaluation of your property we discussed last month, you should have reached a conclusion of what you feel you can pay for this property based on it’s income and your goals. You also should have an understanding of where it is relative to the market. Now you have to solidify that, and get ready to pick a price. You can:

* Ask your realtor what he/she thinks you could get it for and ask for recent sales in the area that compare to that property,
* Review MLS.ca and see what other properties are listed for on that street or in that area,
* Know the maximum you can pay for it based on your goals, your financing options and the rent and expenses of the property.

On One Condition!

Get a few extra days to think and research your investment, while ensuring you’ve got the deal if you want it. You do this by putting in an offer with conditions in it. We always do this so we have a way out in case our financing doesn’t work out well, the inspection turns up big problems or we find a better opportunity.

To give yourself a few extra days of thinking room, while ensuring you have the property if you want it, put in an offer “subject to” financing or an inspection. This will usually give you 5 – 10 extra days (identify in the offer that they are business days) to get everything in order. A deposit of $1,000 should hold the property in the meantime. If you decide to walk away in that 5 – 10 day timeframe then you get your money back, and the property goes back on the market.

We often find there is significant pressure to put down a larger deposit. Agents will say that this shows you are serious. A larger amount down can be challenging if you are doing a deal like we often do that requires, for example, refinancing one property to get the downpayment for the second, getting a Vendor Take Back mortgage to help reduce the required down payment, or if you are pulling your down payment out of RRSP’s or somewhere else.

We have found that a way to work with this request is to say you will pay a $1,000 deposit conditional upon acceptance of the offer by the vendor. Then, pay an additional $5,000 deposit or more, upon the removal of conditions. Once the conditions are removed, the deal is very hard to walk away from and you have had another week or two to pull together a little bit extra money to solidify the deal.

It’s important to remember that putting in an offer shouldn’t be stressful as long as you have a condition that allows you to back out. The more important consideration is whether your offered price works within your goals. Now, get out there and start making some offers! Practice makes perfect!

Published August 15, 2006

The Starbucks Area

A little extra on location


In our most recent purchase, which is to be our new home in Burnaby, I told Dave I wanted a home in an area with a Starbucks factor. I don’t go to Starbucks everyday. In fact, I don’t even drink regular coffee. But, I do walk our dog everyday and I like to have places to walk to.

Starbucks AreaI have watched Starbucks pop up all over Calgary and Toronto, and they always choose the areas I would live in. It seems they pick the emerging or emerged trendy spots. Typically it’s a street with plenty of foot traffic, good shops and nice restaurants. All things I look for in a neighbourhood right now. (Recently, the Globe and Mail read my thoughts, and featured the Starbucks factor and how a new Starbucks impacts house prices in an area).

Starbucks area may not be what you are looking for in an investment property, but think about who your most likely or most desired renter is and think about what they would want in an area. If you are renting to young professionals like Dave and I, you may want to find the Starbucks area. If you are renting to families, look for close proximity to schools and grocery stores. If you are renting to students, being close to public transportation, entertainment and university/college would be beneficial. More on these considerations next month when we talk about evaluating your potential purchase.

Evaluating Your Real Estate Investment

How many properties can you afford if each one costs you $400/month?

To buy, or not to buy that real estate investment?

You have found your perfectly located property and are convinced it meets your goals. How do you know whether you should buy it? What if the rent is not enough to cover all of the expenses?

Many of the get rich quick books like Robert Allen’s Multiple Streams of Income or Russ Whitney’s no money down real estate courses are quick to focus on monthly cashflow. They preach that you must buy properties where the rent is high enough to cover mortgage, expenses and profit. We don’t disagree, but just as we have in the last three editions, we want to take you back to your goals before you rule out the ones that don’t have good cash flow.

When we moved to Toronto almost five years ago we bought a small condo in North York. Rents were higher than a mortgage, and we thought we would live there for awhile and rent it out. That is exactly what we did, but it costs us almost $400/month because the rent doesn’t cover the maintenance fees. Why haven’t we sold it? Right now, it still works for our goals.

In an ideal world you would find a real estate investment in a location that is right for you (as discussed last month) that will give you:

  1. Positive cash flow each month (you are taking in more money from rent than you are paying out in mortgage and expenses)
  2. High potential for appreciation over a five to ten year term (or sooner!)
  3. High level of liquidity (in other words, everything about the property is desirable and it wouldn’t be hard to sell in a hot or cold market).

Unfortunately, we don’t live in an ideal world and you will likely have to prioritize which ones you want based on what your short and long term goals are.*

Cash Flow

One of the most common methods of evaluating a purchase in commercial and residential real estate investment is cash flow. In commercial real estate you will often here everyone talk about the cap rates. In residential real estate a common one is the gross rent multiplier (GRM). To calculate GRM:

* Estimated (or known) rent x 12 months = Annual Rent
* Asking price (or what you plan to pay for it)
* GRM = Asking Price / Annual Rent.

For example, if your monthly rent is $1,000, and the asking price is $100,000 your GRM is:

$100,000 / $12,000 = 8.33.

The basic rule of thumb is that you need a GRM of 10 or less to have decent cashflow. This is based on the assumption that your operating expenses are less than 40% of your monthly rent. Operating expenses include your property manager, taxes, insurance, and maintenance and repairs. It also assumes that your financing costs do not exceed 60% of your monthly rental income.

Just to give you an idea of expenses, our properties average about 37% of our rental income each month for operating expenses.

Once you narrow down your list of potential investment properties, contact the listing realtor and obtain an income and expense sheet for the property or ask for actual receipts to determine the true expenses and possible rent of each property. Now, you will be more informed whether to continue looking at this property on a cashflow basis or you should move on.

If your goal is to find properties that will provide you monthly income, then you will need to focus on this method of evaluation. The two other considerations (appreciation and liquidity) should be less of a concern. If you are holding properties for the long term, and looking for ones that are less likely to cause you problems with tenants or repairs, then you are likely also going to be factoring in the other two evaluation criteria.

Potential Appreciation

It is difficult to evaluate appreciation potential as it is based on what happens in the future. There are ways to feel more confident in the potential of your property increasing in value though. For example, consider:

* Are more people moving into the area than out of the area?
* Are there new developments around? What about schools, stores and other services?
* Is there a shortage of land to build new homes?
* Are new roads being constructed? Is the economy in the area diverse and growing?
* Is it a Starbucks area? (from last month’s edition)
* Are people renovating and spending money on nice landscaping?

None of the above guarantees appreciation of a property, but if appreciation is a primary concern, you need to be mindful of these elements.

Liquidity of a Property

Many of the same factors that may help to identify properties that will appreciate are the same ones that will help you evaluate it’s potential liquidity. The objective here is to determine whether you could sell the property in a hot or cold market at a good price.

For us, liquidity is important, but comes in third because we make all our purchases with the intent of holding them for 5 – 10 years or more. In a long term hold situation, liquidity is less of an issue because you do not need to sell it in the short term, and can hold on to it in bad market conditions and wait for the cycle to return to one of strength.

How do you evaluate liquidity? Current market conditions will help you in the short term (how many listings there are on MLS relative to sales is one), but when trying to figure out liquidity in the future, you can consider:

  • Single family, detached homes are always more in demand than any other product, especially ones that are well taken care of,
  • Safe locations near parks, schools and shopping are in demand no matter what the market is doing,
  • Properties that are without extras that people do not need and will not pay for in hard times (pools, 3 car garages, large acreage).

Essentially, you want your property to appeal to the masses in order to ensure liquidity. If it is too unique or too specialized then your market is smaller, and therefore it will be much harder to sell in a market downturn.

Maybe you are tired of hearing it, but it all depends on your real estate investing goals what criteria are most important in your decision. If you only want one investment property and you want the most appreciation potential and least hassles, putting $400/month into it is not a bad thing. Especially if you are in a higher income tax bracket. You can write-off the mortgage interest as well as most of your investment property expenses (speak to your accountant). Furthermore, if your mortgage interest rate is reasonable (less than 6%), your tenant will be paying down a portion of the principal, helping you to build equity (which is our situation with the condo in North York). If you can’t afford to put a dime into the property each month, then you must find one that has good cashflow regardless of the other criteria.

July 16, 2006

Archives: Evaluating a Real Estate Investment

Evaluating a Real Estate Investment Articles

Considerations & Questions to Ask Before You Buy a Condo

Knowing When to Walk Away From a Deal 

Find, Screen and Select Joint Venture Partners

What’s Your Return on Time?

Where the heck is easy street for my investments?

The Challenge with Investing in Condos

Home Inspections 101

Real Estate Market Research

Are Rent to Own Real Estate Deals a Cash Cow?

How to Analyze Risk in Real Estate Deals

Multifamily vs Single Family Real Estate Investing

Tax Advantages of Real Estate (for U.S. residents)

Four Ways to Check Reality Before Buying a Rental Property

Rental Property Location Research: Where to Buy

How to Evaluate a Property in 60 Seconds

Is Now a Good Time to Buy Real Estate?

5 Ways to Know You’ve Found a Great Investment Property

5 Questions to Ask Before you Buy a House

How to Value Commercial Real Estate

Why it’s Ok to Sell your Property at a Loss

The Truth about goal setting

Sweating the small stuff

It’s Not All in the Numbers When Investing in Real Estate

Evaluating your Property Purchase

The Starbucks Area

Real Estate Investing Goals

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Real Estate Investing Is Still About Location, Location, Location

Think location doesn’t matter in real estate investing? Location impacts the rents you can get, the tenants you attract, and the problems you can encounter. It also impacts the appreciation of your property and the opportunities you may have in the future.

Ozzie Jurock tells his readers to Forget about Location, Location, Location that it’s actually about value, value, value. Other experts have said to buy the worst house on a block regardless of where that block is located. We think it’s best to combine the search for value with the search for a location that will help you achieve your goals.

It’s still about location, location, location! Finding the location that is right for you and your goals

would rather own a well built home that requires little to no work in a slightly rougher area, then the worst built home in a good neighbourhood. That doesn’t mean location isn’t important, it just means location isn’t everything in a purchase.

Last month we went over why knowing your real estate investing goals is a key step before choosing and locating your property type, and this month those same goals will come into play as you consider location for your investment.

If your goal is to “flip” a property (buy it cheap, renovate it, and resell) then you really do want to find that beat up house in a great neighbourhood. If your goal is to have a lower maintenance property that will attract good tenants, appreciate over the years, and you aren’t as worried about the amount you have to invest today, then you are looking for a great location and a good house. If you want good cashflow without putting much money down, you are likely going to have to look in the lower demand areas to find the motivated sellers.

You see how goals are important in your choice of location? Your personality and risk tolerance also come into play. If you need to see your real estate investment on a regular basis then you will want to look in your neighbourhood. If you prefer not to be involved at all, then you may want something further away from you.

If you aren’t sure where to look to find the properties that meet your goals, it’s time to begin your research. If there is one thing I know, it is researching real estate. Another day we can talk about my addiction to the Multiple Listing Service (Realtor.com and Realtor.ca), but for nowhere is how I find properties to buy:

  1. Go to open houses (usually 2 – 4pm on Saturday and/or Sunday)
  2. Look at local listings in your newspaper and at MLS or CLS (for more than four units)
  3. Drive by your desired areas regularily, or better, go for walks along the streets you want to buy on
  4. Speak to neighbours (walk by on a sunny day and people will be in their yards) or ask questions of the agents at the open houses.

Once you determine what properties are selling for and if they are within your price range and goal objectives, your next task is to figure out rents. To do this I usually:

  1. Browse online classifieds offered by newspapers across the country
  2. Review Viewit.ca on a regular basis as they take photos of each listing as part of their service
  3. Read CMHC published information
  4. Speak to the real estate agents at open houses and ask them what they think their listing would get in rent, and ask about other properties in the area.

Quickly you will identify areas where you can buy something and rent it out at prices that meet your goals. And, if you have done your research well, you will be able to act quickly and confidently on opportunities when they do arise. You also may be able to grab them before they get on the market, like we did in our most recent purchase in Vancouver. We have to save some stories though, so I will tell you more about that another month.

Now, you have found your location, and maybe you have even been lucky enough to find a property that meets your goals. Are you sure it is the right one?

June 15, 2006

Worth Checking out for a Canadian Perspective:


Is Making Money in Real Estate Right for You

Home auctions in Calgary, overnight line-ups for condos in Vancouver, and bidding wars in Toronto – it seems everyone is after real estate these days!

Real estate investing is a great way to make money, 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.

You might have noticed the large number of wealthy Canadians in the Canadian Business Top 100 that made their money through real estate development or investment, and you likely have wondered if it is right for you (especially if your RRSP’s have been doing poorly!).

Real Estate over the long term, has always been a sound way to build wealth. But, it is not for everyone. Take our short quiz to find out if you are ready to invest in a rental property, or if it just might be too much to handle right now:

  • Do you enjoy looking at houses (either online, on walks, in magazines or newspapers, on drives, or in real estate office windows)?
  • Do you have any spare time during the work day to handle the odd real estate issue?
  • Do you have a strong and supportive relationship with your partner/spouse (if applicable)?
  • Do you have extra money at the end of the month after all expenses are paid?
  • Do you know anything about mortgages, tenant and landlord legislation, or home repairs?

If you answered no to all of the aboveFind foreclosures in your area - Free Trialquestions, then real estate may not be the place for you to invest in right now. If you answered yes to more than two of the above, then real estate may be a good option for you to grow your wealth.

Over the coming months we will share stories of how we were fined thousands of dollars, how we evicted a tenant, how one of our property manager’s stole money from us, and the strain these situations have put on our relationship, financial resources and time. In those stories we will also tell you where we have made money, and continue to succeed, as we want to share the things that have worked as much as those that have not.

Published April 17, 2006


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