One of the questions that we get most often around the Rev N You office is “How do I find a great real estate investing deals?”
Often the question is followed by a lengthy explanation including comments like:
>> I’ve searched on MLS for hours and there is never anything that cash flows,
>> All the homes I’ve looked at seem to be overpriced,
>> I’ve been focusing on For Sale By Owner deals but everyone seems to think their house is made of gold,
>> I live in Toronto (or Vancouver) and there’s nothing here that I can afford.
My answer to every single person is usually the same … you aren’t going to find a great deal no matter where you are. You are going to have to create a deal. The first step to creating a great deal is to become a market area expert. You have to get off your computer and hit the streets to check things out, meet people, look at houses and find out what’s happening. That is the only way to truly become an expert.
Once you’ve got that part figured out (and yes, it takes work and it absolutely requires you to get out and put some miles on your car and your sneakers – there’s no getting around that if you’re serious about getting good deals done), the next step is to start looking for opportunities.
That’s what I’m talking about in today’s video – finding great real estate investing deals in any market:
Great real estate deals aren’t found – they are created. The key to finding great real estate investing deals, as discussed in the video, is to figure out what kind of solution you can offer that gets you a great deal and solves a problem for the seller.
Hopefully you caught the MASSIVE tip about how we saved $10,000 on a deal and all it cost us was about 30 minutes of our time.
By the way – isn’t the artwork behind me cool? It’s mostly done on a sewing machine with thread!! Janet Cameron on Salt Spring Island is the artist of all the pieces I’m standing in front of … very creative stuff.
Many of our readers, and yours truly, are constantly asking which is the better buy for an investor: single family homes (aka SFH) or multi-family homes (aka MFH)? Well, I am writing this to FINALLY put an end to the debate!
For the purposes of this article, we’ll consider either investment (SFH or MFH) to be a standard long-term buy and hold rental property (that means, not a reno, not a flip, not a Lease to Own, not wholesaling, short-selling, day-trading or any other real estate strategy out there!).
Now typically this discussion will take you down the road of buying Apartment Buildings versus Single Family Homes … but I am going to do this a little differently today. Sticking with where my experience has been which is in owning rental property varying in size from one unit to six units.
So for this article, a SFH is defined as a property (can be a detached house, condo, townhouse, rowhouse, etc.) that has only 1 unit and thus only 1 family living in it. A MFH, for the purposes of this article, is defined as any property that has more than 1 unit/family living in it. Thus, it could be a house with a basement suite (2 units), a duplex (2 units), a triplex (3 units), etc.
Advantages of Investing in Single Family Homes
Depending on the city/area, typically appreciate faster than MFH
Generally a broader range of potential buyers (when it’s time to sell)
Often worth more on a per unit basis (but this can be a disadvantage too as you pay more for it)
More liquid – SFH Can often sell quicker, even in a down market again due to a broader range of potential buyers
Only have to “deal” with 1 tenant, not many
Tenants don’t argue with other tenants because they are the only ones living there! There will be no issues around which tenant gets to use the bbq or front patio or even who puts out the garbage
Easier to get the tenants to pay for all of the utility bills again because they are the only ones using them
Some argue that you get a better “quality” of tenant in a SFH than in a multi-family, however, I do not necessarily agree with this. Will discuss why later.
The biggest disadvantage as an Investor is they rarely cashflow as well as a multi-family home
Can be “riskier” as there is only 1 tenant to pay the rent. If they vacate (and you can’t immediately place a new tenant), who pays the mortgage, bills, utilities, etc? You do! The MFH has more than 1 tenant so they at least continue to collect some rent to offset their costs.
Tend to have a smaller pool of renters because SFH tend to have higher rents than homes with multi-units. Thus, it may be more difficult to place a good tenant in a SFH because they tend to be more expensive.
No economies of scale with a SFH. If you or your PM are managing it, there is just the 1 house/unit/tenant. Most PM’s will offer discounts on a per unit basis if it’s a MFH, these discounts won’t apply on SFH. The same goes for doing repairs and maintenance, you may get a cheaper per unit rate if you are replacing all the windows or locks on a MFH than on, for example 3 SFH.
SFH are often slightly less conveniently located than MFH which again may hurt your chances to find tenants. Thus, SFH are usually slightly further away from main roads and public transportation, retail shops, offices, and other places that your tenant may want to be close to. This is because MFH are generally built in higher density areas. Higher density areas are built around shopping, stores, offices, etc.
Contrast these with the advantages and disadvantages of Multi-Family Homes as an Investment:
Advantages of Buying Multi-Family Homes
Potential to cashflow better because there are many more units purchased for a slightly lower price per unit – typically.
More than 1 rent to help cover your operating costs – if one unit is vacant there are other units bringing in revenue that will help you out.
Often a broader range of possible tenants to choose from as the per unit rental cost is usually less than a SFH
If 1 unit becomes vacant, you can work on it (paint, put in new floors, etc.) but still be collecting rent from your other units/tenants
Economies of scale: for instance, your PM will likely charge you less (as a percentage of the rent) on a 2 or 3 or more MFH than he/she will on a SFH. Furthermore, your utility costs will likely not be 3 times the amount (if it’s a 3 unit MFH) even though there are 3 tenants living there.
On a per unit basis are less expensive than SFH
Generally, your rent to price ratio is higher on MFH than on SFH (this can often equate to more cashflow)
Disadvantages of Buying Multi-Family Homes
Well, you can pretty much figure them out based on all of the above, but here’s a quick list anyways!
Maintenance tends to be higher as there often is more wear and tear because there can be more people living in the building, more appliances to service/replace, and often more tenant turnover.
Tenant placement costs tend to be higher as MFH’s often have more turnover than SFH. This is just my personal experience… I don’t have stats on this other than our own personal experience.
Tend to appreciate slightly slower than SFH
More limited buyer pool when it’s time to sell
May take a lot longer to sell because of the limited buyer pool
Two words: Tenant squabbles!
Financing can be more onerous.
From the advantages and disadvantages you can see there are plenty of reasons for and against both types so let’s give you a real life example of SFH vs. MFH and you can decide which is the better buy!
For this example, we are using 2 Single Family Homes purchased and compare them to 1 MFH (a side by side duplex). The reason we are comparing 2 SFH with 1 MFH is based on purchasing power. Basically, if you have X number of dollars to spend, you want to be able to compare based on that amount – rather than looking at for example $400,000 for a MFH vs. $300,000 for a SFH.
Here’s our real life case study on buying single family homes vs multifamily homes:
Bought 2 SFH properties: 1 – $74,500, rent was $720 per month 2 – $72,500, rent was $500 per month Total cost: $147,000, total rent was $1,220 per month Total expenses on these two was $1,200 per month Net cashflow of an exciting $20 per month!!
Today’s value: Total of $330,000 Total rent today: Total of $1,348 Total expenses: Total of $1,400 per month, currently a net loss of $52 per month
Bought 1 MFH (side by side Duplex) 1 – $152,900, rent was $1,600 per month Total expenses were $1,300 per month Net cashflow of $300 per month!!!
Today’s value: $350,000 Today’s rent: $2,450 Total expenses: $1,900 (after refinancing) Net cashflow of $550 per month!!
Which one do you think is the better investment?Well, in most cases I would think our savvy readers would think the MFH property is the better investment. And, for some of you it would be. There are a few reasons why I am not so sure the MFH is the clear winner. Let me explain why…
The 2 SFH’s are in a prime development area, thus the LAND value continues to go up and up and up! So, the opportunity for good appreciation is stronger in that area than where the MFH is located.
The 2 SFH’s are on freehold land vs. the MFH is in a strata community. Thus, there tend to be more restrictions on what you can and can’t do in a strata community than when you own the land on freehold title.
We have had a total of 4 different tenants across BOTH SFH’s in over 5 years! 1 of our tenants has not changed since we bought it and the other property has had 3 different families over 5 years. Meanwhile our MFH, while a pretty nice duplex, has had over 8 turnovers in the same timeframe. Higher turnover means higher placement costs, higher maintenance costs, and more stress!
So, the reason I share this example with you is to give you a taste that there often is NO CLEAR WINNER between SFH and MFH’s when it comes to real estate investing. What matters isn’t which is a better investment, it’s what is a better investment for YOUR time, energy and resources.
Before deciding multi family homes are the better investment because they have the potential for better cashflow, first ask yourself these questions:
Who will be responding to any potential tenant squabbles (me or a Professional Property Manager)?
Does the MFH have legal or illegal suites? If they’re illegal (which many are), just prepare yourself that if a noisy neighbour complains, that you may have to work with the City to either legalize the suite (can be costly) or decommission it. Either way, this may eat up a chunk of your time, energy, and money. So, be sure you don’t mind doing this.
Who’s going to be paying all the heat, hydro, and electricity bills? If each suite isn’t metered, you’ll want to determine if you can get your tenants to pay their portion or you’ll have to include it in the rent.
What about before deciding investing in single family homes is the way to go. Ask yourself:
Can I carry the costs (mortgage, electricity, taxes, insurance, etc.) when there are any vacancy’s?
Do I want to pay a Property Manager to manage just 1 tenant or can I handle the odd late night repair phone call and some minor maintenance issues?
Do I strive for more liquidity in my investments (the ability to sell faster)?
Do I want the potential for greater appreciation or just monthly cashflow?
By digging into what type of property suits you best is usually the best strategy you can have, rather than listening to all the “talkers” out there about which is the better investment. And yes, that even includes yours truly! So get out there and decide for yourself which is best….in all likelihood, whichever one you think fits your skills, personality, and aptitude, the better investment it will be for you. But, you’ll never know until you get started … so go ahead and get started!
Learn the secrets to becoming a millionaire real estate investor…in your spare time. Get the Rev N You with Real Estate Starter Tips Guide free when you sign up for our complimentary Rev N You with Real Estate e-zine.
We bought our very first investment property in a foreclosure deal. It was our first introduction to a motivated seller. The bank didn’t want to own residential real estate and was anxious to get rid of the property. We bought it under market value and it’s rental income and value has doubled in the last 7 years.
Our current home was just about to be listed because the owner got transferred from Vancouver to Victoria. She didn’t bother to price her home any higher than what she’d paid, as she just wanted out. We bought the property for under market value and avoided a bidding war by scooping it before it hit the market.
These are just two examples of good deals we have made by finding motivated sellers. On the other hand, we’ve also found that some of the most motivated sellers were motivated because they wanted to ditch their piece of garbage property! In the same vain that we always say “No money down doesn’t mean it won’t cost you” we also say that a “motivated seller may be motivated for the wrong reason“!!
We’ll call the type of motivated seller I’m talking about a “flipper”. A flipper is someone who bought the property, fixed it up and is now selling it…and wants to get rid of it quickly. When you find a flipper that is anxious to sell you often will find someone who has cut corners on the work just to get it done, and you may just find yourself spending a lot of unexpected money on repairs and surprise problems.
We made the mistake of buying from a flipper in Toronto. It was a land mine of a property full of shoddy work and the cheapest possible materials. The worst example of this was the telephone wiring that had been used instead of electrical wiring – and yes, it melted and started to spark because it wasn’t the right grade for the electrical currents. Thankfully the lights had stopped working, so it triggered us to get an electrician to start punching holes in the walls before any fires were started!
The property had all the signs of being a cheap fix up, but we weren’t really aware of what could go wrong at the time. We ignored the signs and bought the property from Mr. Flipper and he was so helpful that he even assisted with getting us financing.
In addition to spending $25,000 to completely rewire the house we had to redo the plumbing in the basement and totally renovate one of the three bathrooms. Shown to the left, the basement flooded thanks by tree roots dissolving the clay pipes and plugging things up. We had to dig up one of the bedrooms in the basement and the entire front yard (which we had just landscaped a month before) to get to the pipes. While the plumbing work was being completed we had to put our tenants up in a nearby hotel for $200/night each.
The first picture below shows the main floor bathroom we renovated because cracked tile and an awkward 5 inch “step up” to reach the sink and toilet were frustrating to deal with. We discovered lazy plumbing practices had created the 5 inch “step up” that the toilet and sink had been on… and the cracked tiles were as a result of tile being laid on top of tile! The next picture is of our front yard after they dug it up to get to the pipes.
The red flags were waving in our faces but we didn’t really recognize the signs and looked the other way. The property had so many good things going for it:
It was priced right,
It was located in a perfect area for a rental property near downtown Toronto and steps from the subway,
And, it had good rental income from it’s three units.
We were too new at the investing game to realize the trouble we were about to get in because this motivated seller was motivated to ditch his crappy property BEFORE he was responsible for cleaning up the mess.
When we tell this story so many people smugly say to us “Well, that is what you get for not having the property inspected by a professional”. The issue is: WE DID HAVE IT INSPECTED!
Wiring is BEHIND the walls. The wires aren’t visible unless you punch holes in the walls. Bad plumbing isn’t visible unless you get underneath the floors or send a camera down the pipes, and other things seemed minor on the surface but were serious once you tried to repair them.
That said, we were still at fault and could have avoided this big mess because there were warning signs and we ignored them.
So – Dave and I want you to avoid buying a disaster property from another Mr. Flipper so here’s some warning signs to be aware of:
An investor that wants to sell because they want to invest in something else. This is not a red flag; but it would prompt us to ask more questions. The reality is, many investors will hold onto a property forever if it’s making them money. So, if this property doesn’t fit in their portfolio anymore or isn’t making them money, try and figure out why. Is something in the area changing that you should know about? Is it a problem you can fix, like bad tenants or poor management? There are a lot of reasons why an investor might sell, and many of them are legitimate, but try and figure out if there is a reason that should concern you or if it’s an opportunity to solve a problem.
Someone who says they ‘have to sell’ but refuses any offers below what they paid or below what they think it’s worth.
Someone who bought the property, renovated it, and is anxious to sell it. There are a few reasons why this is a red flag, but the biggest one is that the reason this person bought it and renovated it, was to make a profit from the flip. This can mean they cut corners to save money and it definitely means they are going to be trying to get top dollar for the property. Trust your gut; ours was giving us warning signs on the Toronto property but we didn’t listen. We love that property, and we even lived there for a few years because its location is fantastic, but the property’s problems have cost us over $50,000 in five years. Even though it puts over $500 a month of positive cash flow in our pockets, it’s going to take us a LONG TIME before we ever make that money back. We’ve even put it on the market a couple of times to sell it, thinking that we should recover our costs, but we never ended up getting the offers we wanted so we still own it today. And, while it’s a good money maker, it still gives us problems.
We don’t have good electronic pictures of the electrical wiring that was discovered behind the walls but I think the pictures will say more about what we went through than I could ever describe!
Startled by the couple wandering around the yard, and looking in windows she decided to yell over to them and ask what they were doing. “Excuse me, are you looking for something?” she called as she watched the couple peak into the basement window. My parents replied, “Um, our daughter is considering buying this house, and she told us it was vacant and asked us to look around. She lives in Toronto, and needs to be sure this is a good investment”. Thankfully the neighbour believed my parents, and was kind enough to tell them more about the area, but it could have ended a little differently had the neighbour just called the police on my peeping parents!
Unable to find anything that met our goals in Toronto, we began searching for a property in Vancouver or Nanaimo to invest in.
Vancouver turned out to be a bigger financial committment than we were prepared to make at that time, so we eventually focused on Nanaimo. We found a place, put in an offer, negotiated the deal and closed on our purchase from Toronto. I did not see the property before we bought it. In fact, we have had it for almost a year, and I still have not seen the property.
How did we do this? First of all, Dave grew up in Nanaimo and knows it very well. This is the fourth property we have bought in Nanaimo (fifth if you count the one Dave bought with his mom many years ago), and we have a very reliable and trustworthy real estate agent and property manager, Lindsay Widsten. Dave kept in close contact with Lindsay, and kept his eye on MLS listings to spot opportunities.
Second, we both have family in and around Nanaimo. Dave’s Mom did the initial walk through with Lindsay when the opportunity arose. She sent us photos and described it to us in detail. My parents went over on a different day, and walked around the block and peaked in the windows.
There is not much you can’t do over fax, phone and email these days. All our negotiations were done via Lindsay over the fax and phone. We had our lawyer here notarize our signatures on the purchase, with another lawyer in BC acting on our behalf for the purchase. We used the same fantastic mortgage broker in BC, Cindy Faulkner, who has convinced many lenders to loan us money at great rates. Finally, we had Lindsay rent it out and manage it for us.
It helps to have the right resources, and to have some knowledge of an area to make a purchase. It definitely makes it more comfortable. And, if you don’t need to see your investment on a regular basis then it’s definitely worth looking in other locations to find your investments. It gives you more flexibility, and may diversify your risk of market crashes because those are often very geographically focused.
Last edition we talked about whetherinvesting in real estate is right for you. Assuming you’ve decided it is, then the next consideration is what are your real estate investing goals. When we bought our first two properties we were quitting our jobs to move to Toronto from BC. I was going to do my MBA and Dave was going to find a new job. My goal was to make my money work for me while I was in school.
Why is it so important to know what your real estate investing goals are? In order to figure out what type of property you are looking for you will need to know what exactly you want to get from real estate investing. Are you looking for monthly positive cashflow, longterm appreciation and equity building, or a combination? Are you interested in investing for the long term or the short term? How much time do you have and what is your risk tolerance?
Before you can determine your property type, it’s necessary to assess your current financial state and understand what you are trying to achieve and what is possible.
Your Five Year Plan – Goal Setting
This is a technique we use over and over. Sit down right now and write down:
Where you want to be financially in five years (be specific, for example do you want to be earning $100,000/year in your job, own two properties that are giving you $500/month in positive income, and have $20,000 in RRSPs)?
What can you do in the next 12 months to achieve each of the above items (once again, be specific and try and make the items measurable)?
What can you do in the next six months to move towards your 12 month goals?
What must you achieve this month to move towards your 6 and 12 month goals?
Review these goals regularly. We used to do it monthly, but now we just do it quarterly. Find what works for you, and stick with it.
We will leave how to achieve your goals aside for now, and just focus on finding a property type to help you move forward in your real estate goals. Some initial considerations before you begin a property search:
Will you live in one of the rental units or will you be an absentee landlord?
Do you have any savings to use for the purchase (or can you use your RRSP’s as part of the first time Home Buyer’s Plan)?
What size of mortgage can you qualify for?
What is your risk tolerance?
How much spare time do you have to devote to the property?
Do you have any construction/renovation knowledge (or know somebody that does)?
Will you manage the property yourself, or will you hire a property manager?
Can you afford to supplement the property monthly if necessary?
Think carefully about your answers, as each one has an impact on your choice of property. For now, let’s focus on the very first decision: Living in the building with your rental unit or being an absentee landlord.