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Rental Property Portfolio ABCs

ABC of Rental Property PortfoliosEver sit down and look at what you own in your rental property portfolio today? Even if you only have two properties and one of them is your own home. Do you ever sit down and think about what you’ve got and whether those assets are moving you closer or further from your goals?

Dave does this on a regular basis. I call it ‘dances with spreadsheets’ as he reviews the cash flow and the values on each of the properties we own. I do it in a less formal way but I still look at what we own and think about whether each asset is properly performing it’s role in our greater plan.

It was during one of my informal reviews that I realized one the properties we’ve held for five years is not doing it’s job. It’s not generating positive cash flow and it’s not part of a greater plan to redevelop. It’s just making us money through the mortgage pay down and it’s slightly increased value.

We bought it by refinancing another property so we have been more forgiving of it. I mean, it didn’t cost us any money out of our own pocket and it’s still building our wealth at a steady pace so it hasn’t been a bad purchase.

BUT this particular property hovers around neutral cash flow on a monthly basis which really means it is costing us money each year because any additional repairs (like the painting we will have to do when the tenants move out or the fence we have to repair because it’s falling apart) come out of our pocket.

Spending a bit of money here and there on this place didn’t bother me in the past because I had a great paying job. The repairs were a tax write off, and the tenants were paying down my mortgage so I was still ahead. This property hadn’t cost us a single penny to buy and we’ve probably only put $5,000 into the property over the five years we’ve owned it, so we’re still making a great profit on this property. And, it’s in a great area that makes it easy to rent out. I was holding it for the long term so I didn’t really worry about it too much as long as it was rented. But, times have changed and we live off the money we make from our rental properties so cash flow is far more important to me today.
Julie at MOMAR thinking About rental property portfoliosAnd refining our portfolio to squeeze out the maximum amount of cash flow and wealth creation possible is my full time job … so I want to do better with every property. This was my focus when I was doing the informal portfolio review. (By the way … I call it an informal review because I usually think hard about things like this while running or walking the dog. When I am done thinking about it I discuss it with Dave who can back up or counter my thoughts with the real numbers and together we’ll make the final decision).

My latest informal review of our portfolio made me think of the advice my friend John Marsh shared with me recently. He said:

Take a look at your portfolio and label each property as either A, B or C. Figure out a way to turn your B’s to A’s and then sell your C’s.”

And when I thought about it in this way, it was clear to me that this property is a solid B.

The home is conveniently located to shopping and good schools. It’s very central to everything in this city. There are always tenants that want to live in the property and the area is stable economically. House prices went down a bit in late 2008 and early 2009, but they’ve recovered and are on their way up again. It creates more wealth for us than it costs us money but overall it’s not putting any cash in our pocket today. It’s not a money pit but it’s also not a cash cow which is why I would call it a solid B property.

John is a real estate investor and businessman in Alabama. He has a restoration company called Historic Possibilities where he specializes in moving and restoring historic buildings to the beautiful state they once were in. He’s really revitalizing his town one house at a time, and he loves what he’s doing! I hear it in his voice every time we speak. And with years and years of real estate investing experience under his belt and some fabulous mentors helping along the way, John has some fabulous stories and wisdom to share.

So John’s advice was running through my mind as I was thinking about our portfolio. I realized that we only have a couple of C’s but we’re keeping those for now as we plan to redevelop the land they are on at some point in the future. Beyond that I would classify all our other properties as A’s except this one.

Turning The B Property into an A+

As of Tuesday that all changed. We have turned our solid B into an A+.

Smiling Rental Property PortfolioOn Tuesday Dave deposited a bank draft for $10,000 and starting in July we’ll begin collecting so much rent from this property that we’ll be banking $700 in cash flow profit each and every month.

So what did we do? Well, basically we decided to turn this property into a rent to own! And we were totally overwhelmed with the response. Like I said, this property is in a great location. It’s a very high demand area. We actually had a wait list of qualified applicants without even showing the property to a single person! We were blown away.

What we uncovered by simply trying to find a way to turn our B property into an A was a crowd of starving people desperate to get into a rent to own program for a home in this specific area. Many of the folks we’ve talked to already rent nearby, work close by and have kids in the schools that are walking distance from this home. They want to live in this area but can’t get financing from a bank to buy. Some of the folks anxiously waiting for a home in this area include:

  • A young couple with a 4 year old son with good jobs but one person in the couple has horrible credit because they cosigned for a loan for a family member and the family member defaulted on the loan;
  • A family from Nigeria that has only been in Canada 9 months and hasn’t established their credit yet;
  • A couple going through divorces with assets tangled up in the divorce and very little cash for a down payment;
  • A single mom with credit issues coming from her divorce.

Now with our B property safely positioned as an A, we can focus on buying more properties in this area! And, while we’re doing that we’ll be carefully reviewing our portfolio every couple of months to make sure the A’s are still A’s.

If you have rental properties today … take a look at your portfolio and figure out where you can improve your holdings. If you’re holding B’s figure out a way to turn them into A’s. If you can’t turn them into A’s you should consider selling them. And if you’re holding C’s consider selling them so you can buy A’s instead.

It’s as simple as ABC … 🙂

ABC Image Credit: ©Limbi007 |Dreamstime.com

Smiling Face Image Credit: ©Kuzmichevdmitry |Dreamstime.com

Published May 27, 2010

Investing in Mobile Homes

Why I Enjoy Mobile Home Investing

by Rachel Hernandez

Investing in Mobile HomesWhen most folks hear the word “mobile home,” images from the film “8 Mile” and negative stereotypes of mobile home dwellers enter their minds. These images can be misleading – it’s not always the case.

Just like there are different types of neighborhoods in real estate, there are different types of neighborhoods in the mobile home world. Even with the title of this article, you’re probably wondering how the word “mobile home” can even be in the same sentence as the word “enjoy?”

Hi, I’m Rachel (aka “Mobile Home Gurl“). I specialize in mobile home investing. I’m here to tell you about how I came across this small little niche of investing and why I enjoy it so much.

When I first started my real estate investing career, I thought my path to financial freedom would be by building wealth through single family homes and apartment buildings. As a landlord, I found out the hard way that I was going down a path that led me further and further away from my dream of achieving total financial freedom. How could this be?

As a property owner, I felt that I had a job. Every month, there would always be issues with tenants. And, every year it seemed like my expenses would go up (i.e. maintenance costs, property taxes, etc). Even worse, every time I added a new property to my portfolio it seemed like it would make things worse by causing more work. To me, it was just a new property to manage.

Now, most people would be ecstatic to add new properties to their portfolios. Though, I did not see it that way.

I saw it as another hassle to deal with.

It was the management of these properties that really made things difficult. Even when I got fed up with all the management hassles, I brought in property management companies. I thought they could help make things go away – I was wrong.

It only got worse because I still had a job –I still had to manage the property managers.I had to teach and direct people what I already knew. Every time my phone would ring, I would cringe as I knew there was another problem.

Don’t get me wrong, it’s nice to own properties and derive income from it. But, for me the key to achieving total financial freedom was through passive income. And, I just felt the income that I was receiving as a landlord was not passive – I still had to work for it.

There was no way I could go on vacation and leave the business – it just was not possible. I remember taking a trip one time, my phone constantly ringing as my property managers were dealing with maintenance issues. And, I was in another country. Not fun at all.

It wasn’t until I stumbled upon Lonnie Scruggs (many times referred to as the “Godfather of Mobile Home Investing”) and his book, “Deal on Wheels,”  that I truly understood the meaning of financial freedom through passive income.

You see, what I’ve learned from Lonnie is that the real key to financial freedom lies in the concept of financing – not through ownership. Now, I truly understand the saying “The rich control while the middle class own.

In a nut shell, the concept of financing through mobile home investing involves buying a mobile home at wholesale value and selling it retail through financing by offering terms. It all boils down to creating an easy way for folks to buy a home with a small down payment and small monthly payments charged with interest over a period of time.

If you think about it, this concept can be applied to anything – not just mobile homes. As consumers, we buy a lot of big ticket items on credit including cars, boats, houses, etc. This is nothing new – this has been done for centuries by banks. What Lonnie did was take this concept and apply it to mobile homes. Therefore, creating a niche – mobile home investing.

I have come to realize that it’s much better to be the bank. As a prior landlord, I know now who always gets paid – the bank. When expenses go up, who still gets paid? The bank. When vacancies arise, who still gets paid? The bank. When evictions occur, who still gets paid? The bank. Is it better to be a property owner or the bank? I’ll let you decide.

For me, I made the decision years ago that it was better to be the bank. And, that decision has paid off. Now, I can enjoy true passive income through mobile home investing. And, I can honestly say – this has been my chosen path to financial freedom.

The concept of mobile home investing is very simple. It also allows investors to get in with a very small amount of money compared to other forms of real estate investing such as single family homes and apartment buildings.

My First Mobile Home Deal

To give you an idea on the mechanics of a mobile home deal, here’s an example of my most important deal – my first deal. It was a 1984, 2 bedroom 1 bath mobile home in a family style mobile home park. I bought the home for $3600 and sold it with owner financing on terms for $10,000. The buyers paid $1000 down with payments of $250 per month for 4.5 years.

Since I received $1000 (the buyers down payment)  plus $3000 ($250 per month multiply by 12 months) to equal a total of $4000 in my first year, I received 100% of my investment in the first year. Plus, I had no maintenance issues to deal with since I sold the home on owner financing.

Not only did I receive a great return on my investment, but the payments I receive are truly passive. No longer am I the one responsible for taking care of the home. No longer do I have to deal with the constant issues of being a landlord. As the bank, my job is merely to collect payments and get paid. If you think about it, when was the last time you called your bank when the toilet went out? Never.

So, you see the reason why I enjoy mobile home investing is because it’s a vehicle for me to truly create passive income. And, that is why it  has been my chosen path to financial freedom.

If you’re interested in the concept of passive income in achieving financial freedom, you might just want to give mobile home investing a look. For those who are just getting started, I highly recommend checking out Lonnie Scruggs’ book, “Deals on Wheels” – it’s been the best investment I’ve ever made.Rachel Hernandez Investing in Mobile Homes

Happy investing!

Rachel Hernandez was a prior landlord for several years before taking the leap to specialize in mobile home investing. She writes regularly about her stories and adventures investing in mobile homes at: http://www.adventuresinmobilehomes.com.

Published on May 18th, 2010


Easy Street Investments

Where the Heck is Easy Street?

On the Business News Network (BNN) the other day I heard a stat that made me stop dead in my tracks for a moment.

BNN surveyed their viewers about their retirement investments and asked them what the returns were on their investment portfolio and only 43% had any idea at all!

Easy Street InvestmentsArguably their audience is more investment savvy than the viewers of say, the Outdoor Life Network, so I was shocked! Only 43% could even mumble out an answer which means probably less than half of those 43% probably really knew!!

I was horrified yet it shouldn’t surprise me. As we speak to family and friends about investing in real estate and putting their RRSP’s into real estate mortgages we find that very few people really know the kind of return they are getting. And often when they actually go and check they find out its a lot worse than they thought it was!

Even some people I know from MBA school don’t have any idea what their money is doing for them. The husband of someone I know from school said to Dave “Honestly I have no idea what our return is but if you asked my wife she wouldn’t even know how much we have in the account so I am better than that at least.” Dave has heard many other horrifying stories about what is happening to our friends, families, JV Partners, and associates investments. He continues to be shocked by what these people are telling him. Have a watch of his video blog as he explains what you can and should… no NEED to do, about your investments.

 

These people work hard – I am talking 70 hours a week hard – and then they just hand their money over to an adviser and never look at it what it’s doing.

Why would you work SO HARD to make a ton of money and then not care what happens to that money?!

That doesn’t mean you have to always be the active investor … When you’re busy with work, kids, family and having a life, then it’s not easy to spend a bunch of time investing your money.

So you don’t have to take on a part time job to invest your money, you can find great financial advisers to help you, or you can find investors like Dave and me who will do all the work and invest your money in a great real estate investment, or you can find some other business to invest in. But whatever you do, please do not hand somebody your money and then never check on it.

If something happens and you lose money you have nobody to blame but yourself. There is no such place as easy street.

Before you give your money to anyone I would ask:

  • What are you investing in and why?
  • Can I speak to other people who have invested with you?
  • What are the estimated returns?
  • If things are not going well do you have alternative plans for this investment?
  • Do you earn fees even if I don’t? That is, if the market goes down, do you still make money from managing my money?

And if you’re specifically looking at partnering on a real estate deal I would also ask for:

  • Credit report (and possibly a criminal report),
  • Proof of ownership of any properties they say they own,
  • What a good deal looks like to them.

And then, once I have decided to turn my money over to them, I would check on it every 3 months or so, and ask how things are going. Ask for proof of what they say and if things aren’t going the way you expected, dig into it to understand why and what is being done about it.

There is no easy street when it comes to loving and caring for your money. Even when somebody else is taking care of the details for you, you still have to be proactive. Always remember that NOBODY loves your money as much as you do. And if you don’t love your money, then you shouldn’t be so surprised if it doesn’t all return to you at the end of an investment.

Published on April 29th, 2010

Image Credit: ©Simon Moore |Dreamstime.com

Hope is NOT a Real Estate Investment Strategy

Sitting across the table from our friend and real estate investing partner of nearly a decade I nearly choked on the won ton I was eating when he said “I’m going to buy a property in California to use as a vacation property and hope it goes up in value.”

This guy is smart and it won’t be his first property. He’s bought several with us, a couple on his own and at least one with his relatives. And he’s been successful with his investments – especially the ones he made with us. 😉

So I was absolutely shocked when he told me that hope was in fact his strategy for his next investment. And not to worry, I gave him a good lecture over lunch about why it wasn’t the way to go about making a real estate purchase.

I told him: HOPE IS NOT A STRATEGY.

Real Estate Investing Strategy Not Hope

Yes, I think properties in many markets in the US are undervalued. And I definitely believe there are opportunities for the smart buyer to make some big profits in real estate in just about every market if they buy in good areas and can hold on for at least 5 years.

The last I heard the place he was trying to buy sounded gorgeous, undervalued and likely to rebound quickly. And for him, I think this property is more of a lifestyle choice than an investment – he wants a fun vacation home and a place he can potentially retire to.

I think our friend is going to do ok in the long term with his purchase in California. As long as he can afford to hold onto that property for awhile, his hopes and dreams of making a great profit on that property are pretty darn likely to come true. And I know he’ll have a lot of fun owning it in the meantime. And as long as he remembers that this purchase is a lifestyle choice, and with that choice will come greater costs, then that’s okay. But it should never be considered just an investment – especially based on hope!

And most of us can’t afford to use HOPE as a strategy.

Buying undervalued properties and waiting for them to rebound in price, or appreciate to new highs is a scary and high risk strategy. I think it was in the book Rich Dad Poor Dad where the question was asked “How many houses can you afford to buy if they are all costing you $100 per month?”.

The answer for some is probably quite a few … as long as you have your job!

But we have structured our entire lives around creating freedom. And freedom for us means that we don’t want to buy investments that enslave us to our jobs or put us in dire need to make money. We want our investments to free us not trap us.

For that reason alone we’re not VALUE investors. We’re CASHFLOW investors.

Buying properties in anticipation of value increases is how so many people got burned in the past 5 years. They bought properties with little regard for their cashflow … believing that the value increase would happen so swiftly their monthly revenue losses would be more than made up for. And besides, losing money every month is ok because it’s a tax write off, right?!

I can’t tell you how many times I have heard that piece of flawed logic. And you know why it’s flawed? Because your mortgage principal pay down expense each month … the biggest expense you have as a real estate investor … is NOT A TAX WRITE OFF. Only the interest you pay on that mortgage is. So… sadly … even though you are paying $300 a month out of your pocket to subsidize that property filled with hope … the government actually thinks you’re making money so you’ll get to pay tax on the income you generated even if it never hit your own jeans!!

Sucks doesn’t it?! So wouldn’t it be better to actually BE making money from that property while you ‘hope’ it goes up in value?

That way, if something happens and the market shifts downwards, you are still making money from that property and you can afford to hang onto it for years and years to come. And you’ll be making money from it even if it’s worth less because you have positive cash flow AND your mortgage is being paid down by your tenant therefore building your wealth.

For that reason we don’t buy properties with the anticipation that the value will increase. We buy properties that:

  • Are in areas that will attract agood pool of quality tenants,
  • Put money in our pockets each and every month,
  • Have more than one exit strategy,
  • Are in market areas that have really strong fundamentals for growth and stability,
  • Primarily have risks we can control.

This is more work. It takes market research, it takes patience and it takes a lot of effort to find the properties that will actually generate a positive cash flow. But it’s also the only strategy we’d advise any real estate investor use.

If you’re not sure how to figure out if a property will generate a positive cashflow here’s a few resources and tools you can use:

Published on April 12th, 2010

Image Credit ©Gerald Bernard |Dreamstime.com 

Rental Property Portfolio

rental property portfolioSometimes the size of what I’ve got makes me feel a little insecure. Ok I said it. And now that it’s out in the open I want to talk about this for a minute because I have a feeling that I am not the only one feeling this way.

The thing is that whenever I get in a group of real estate investors the question everyone always seems to ask is “How big is yours?” They just expect me to drop it out there for everyone to see and evaluate. Perhaps even more unsettling is they are going to judge it based on the size alone when they should realize size doesn’t actually matter.

This is a cheeky way of saying that the size of your real estate portfolio isn’t that important. And too many real estate investors get WAY too hung up on it.

As someone who mingles and networks with some of the smartest real estate investors in North America, I often feel self conscious with the number of properties we own. And when I met someone recently who’d only been investing for 4 years and owned over 50 properties I took her to coffee to learn about her business.

Turns out in her second year as a real estate investor, she rounded up enough partners and enough deals to purchase over 30 properties!!

I was impressed.

But, as I dug deeper I learned that year happened to be 2007 … the absolute peak of the housing market in the area she was buying in. I also learned that most of the properties she bought are now worth 80-85% of what she paid for them AND most of them are costing her and her partners money every month NOT generating positive cash flow.

She told me that there is one property in her portfolio with about $50,000 in equity that she is trying to sell because she needs that money to pay for keeping the other properties this year.

As I listened to her story I was suddenly very pleased with our portfolio, and with what we teach you, our valued Rev N You readers. I also realized very clearly that the size of your portfolio doesn’t matter at all. It’s the size of your cashflow!

I would much rather own 10 properties that generate between $500 – $1,000 per month positive cashflow than 50 properties that aren’t covering their costs!! I would much rather have $1,000,000 in equity with a small number of properties than have less than $100,000 in equity across 50 properties.

So … the next time somebody asks how big yours is, respond with “The size doesn’t matter, it’s what it’s doing for me!”

OlympicsAnd what ours is doing for us is generating money that gives us the freedom to live our lives the way we want.

We are making sacrifices these days because we’re working hard to grow our portfolio. We believe strongly that now is the time to begin the aggressive pursuit of new investments so we’re doing that. It takes cash and it takes time to pursue the deals the way we are right now. And as a result we aren’t meeting our friends in Vegas in early April for a 4 day party, our African Safari plans are delayed for a year or two and our plan to buy a vacation home in Whistler is probably not going to happen this year. But we are able to take our nieces out for a fun afternoon when they get out of school early on Friday’s, we can immerse ourselves in the Olympics for 4 days without worrying about running out of vacation time, and most importantly, there is no guilt when we curl up for an afternoon nap for three days after the Olympics as we recover!

We have freedom… and while we haven’t achieved our big goals and big plans in life just yet we have a portfolio to be proud of. We have a portfolio that has freed us from the need to have 9 – 5 jobs and we are helping other people do the same thing!

One of our Real Estate Millionaire Students, Vanessa, has just purchased 5 units while taking the program and she wrote us to say the lessons on finding tenants and managing your properties were very timely as she used the lessons to help her fill the vacant units she had. Another student, Arlene, leaned on us for help when she was getting her first rental property financed and saved thousands thanks to our advice on financing!! We can help you too… and with our Real Estate Millionaire E-Program you learn everything you need to know to go from beginner to proud property owner making positive cash flow with an hour a week over the next 52 weeks!! And you’ve got us there to help you every step of the way.

Published on March 10th, 2010

Succeed as a Landlord

succeed as a landlordIt’s not much of a secret that I am not a fan of managing my own properties. I tried it, learned a lot and then decided to leave it to the professionals. I wouldn’t say I failed miserably but I would say that I discovered that it’s not something I enjoy.

There are few things I love more than accomplishing my objectives.

When I plan my day and it goes as planned then it’s an awesome day for me. When you’re dealing with tenants you can forget about that plan! And you better believe the tenants won’t care about your final exam, your child’s soccer game or your family dinner. If their toilet is overflowing or the pilot light on the furnace went out in the freezing cold of winter then you must deal with that over everything else in your life.

That’s where I failed miserably. I wasn’t prepared for such calls and I certainly struggled with being flexible with my schedule.

Today we look for landlords like me. The tired and cranky landlord presents an enormous opportunity for a real estate investor. If you are prepared to handle the potential problems a property can have and you can spot someone who can’t then you’re quite likely to be able to pick up properties at a discount and be saving someone from an early trip to the grave.

But if you’re going to be taking over other people’s problems, and fixing them then you need to know how to succeed where the other landlord has been failing. You need to be prepared. You need to be relaxed and ready to roll with what is thrown at you.

The top five things you need to do to succeed as a landlord:

Property Repairs - Fixing a Tap1.Be Prepared: Your tenants will call you with toilet troubles, furnace issues and other maintenance requests. Unless you want to be rushing out to the property to handle every little issue it’s a good idea to find a good handyman that you can rely on. We found a great guy that lived just around the corner from the Toronto triplex I tried to manage myself. He was able to pop over in the evenings or on the weekends and check out the little issues. One time the shower was spraying everywhere. Another time the door was sticking. For a small fee he would go over and check it out, and he was almost always able to fix the problem right then and there. Without him I truly would have lost my mind. First of all, at the time the only problems I could deal with were related to toilets. I grew up in a motel and would follow Dad around as he repaired and dealt with toilet troubles in the motel rooms. But beyond basic toilet troubles, I could barely change a lightbulb at the time. Second of all, sometimes I wasn’t even in Toronto when the tenants would call so having someone nearby that could handle the call for me was critical.

If you aren’t sure how to find a good handyman, ask your neighbours. Go to the local real estate investors club meetings and ask them. Or fire up your computer and check online. We found our handyman by asking around. One of my classmates at the time had a handyman cousin the area … and that is who we ended up using.

Succeed As a Landlord2. Remember – your customer is your tenant. It’s so easy to forget that your tenant is your customer when they are calling you on Saturday night in the middle of a romantic dinner with your spouse requesting you to fix the pilot light on the furnace (this happened!).

If you owned a restaurant and someone complained about your service, if you care about your business at all, you’d listen carefully to their concerns and try to fix the issue. As a landlord you should treat your tenants with the same courtesy. Remember they probably have options and can move somewhere else. If you always remember that the tenant is your customer and that it’s your tenant paying your bills then I think that everything will be a lot easier to handle as a landlord.

3. The keys to success are in the systems you implement. Find simple systems for managing the emails, voicemails, paperwork and even the keys to the properties. A simple system for the regular things you handle as a landlord will save you time, money and stress.

Let’s take keys for example. The keys to enter each property need to be labeled and stored in an easy to use way.

I can’t take credit for this idea (I got it from Robert Elder ofQuick Start Landlord), but I can tell you that even with just a handful of properties you are going to want to pay close attention to this little trick. It will save you time and  money. The trick is to label every key with some sort of code that allows you to identify the address as well as to indicate the date.

Why? As someone who has a key to my aunt’s place, my home, my parking garage, and a friend’s place I can tell you that I already forget which key is which. If I also had to figure out which key opened which rental property I would be standing in front of a house for an hour trying to find the right key. When you add to that the fact that you’ll find yourself changing the locks on the home every few years, you could end up with dozens of keys that don’t even open any doors anymore!

And, while you’re at it, why don’t you go to your local hardware store and buy a little container that is normally used for organizing nails and screws and use it to store the keys for each of your properties? Ahhhh simplicity.

Canadian Real Estate Magazine4. Master the art of marketing. I’ve written about this over and over. In fact, in the February 2010 issue ofCanadian Real Estate Magazineyou’ll find an article I wrote on “Attracting the Best Tenants”. That article is all about marketing secrets to make your business successful at finding tenants to rent to. The bottom line is that you need to understand what the tenants in your area want. What are the features and what are the benefits of your property as they relate to the wants and needs of your tenants? This is often things like proximity to a good school, ease of access to public transportation or market specific needs like air conditioning or covered parking with plug ins for vehicles. When you understand what your tenants want you will have no problem composing compelling advertising that fills your inbox and voicemail with messages from prospective tenants.

5. Do whatever you can to reduce tenant turnover– it’s your biggest ongoing expense! Cutting corners will eventually cut your profits. If you try to show a unit without first getting it ready to be viewed, you’ll struggle to attract good tenants. In the end you’ll end up with lower rent rates and a more troublesome tenant renting from you. But the biggest thing you’ll find hurting you in the long run is tenant turnover. It’s almost always better to charge slightly lower than market rent to keep a tenant in there longer than it is to squeeze every dollar of possible rent out of the property but have tenants leaving annually. It’s also better to address tenant requests and concerns as quickly as possible. Keeping your tenants happy in their home and comfortable with you can result in loyal residents. Plus, we’ve found, our tenants are often the best source of other high quality renters. Because they are happy renting from us they tell their friends and we often get emails asking if we have any places available for rent because our current or former tenants have recommended us as landlords.

Many worn-out landlords look at their tenants as a pain in the butt. They weren’t prepared for the calls. They forget that their tenants are in fact the ones paying their bills and should be treated like the valuable customers that they are. They also don’t realize that simple systems like the one I mentioned for keys will make all the difference in streamlining and simplifying your business to make it easy. And finally, inexperienced or tired landlords probably have never taken the time to master the art of marketing to attract new tenants nor have they taken the time to try and keep the good tenants happy in their home.

If you tackle these five success secrets I am confident you’ll find yourself succeeding where other landlords have failed.

Published on February 10th, 2010

10 Reasons Real Estate Investors Underperform

Confessions of a Real Estate EntrepreneurAlright, I confess, this wasn’t my original idea. I actually stole the idea from one of my real estate mentors, Jim Randel. Jim is author of one of the best real estate books out there Confessions of a Real Estate Entrepreneur. He is also writer and creator of the Skinny On series of books. These books can be read in less than 2 hours and are full of fun stick people sketches and easy to understand concepts but they pack a punch full of information.

I read Jim’s weekly newsletters and a recent one was about “10 Reasons (Some) Entrepreneurs Underperform”. It got me thinking about the reasons real estate investors underperform.

Now, this is not a scientific study. I did not go out and survey 5,000 real estate investors and determine who were successful and who were not and then look at the characteristics that shape their success (or lack thereof). This is based on years of investing ourselves and what we have learned from other successful real estate investors.

If you lack these traits (or characteristics), there is a good chance you will underperform as a real estate investor. You don’t have to have ALL of these, but the more you have, the more likely you will be highly successful.

So, without further adieu, here are my 10 + 1 Reasons Why (some) REI’s Underperform.

1.Passion – I feel strongly that if you have passion, real passion about real estate (and investing in it), you will perform better than if you don’t. We know quite a few investors that are not passionate about real estate that have been successful but they feel worn out and want to leave the business. The only reason they don’t leave is because it’s making them money … but they aren’t having fun and they aren’t making as much money as they would (I think) if they were passionate about it. Besides, why spend so much time, energy, focus, and money on something you don’t love? Life is too short!

Real estate investors need mental strength2.Mental strength– There are so many times where you may want to just give up because you’re doing so much heavy lifting mentally. Challenges like insurance issues, and property financing troubles, and tenant challenges are part of the business of real estate investing – be strong and you’ll do well. And by the way – the more physically fit you are – the better you’ll perform mentally. That’s a fact that has been proven by scientific study.

 

3.Belief– No one, and I mean no one will (or should) believe in you as much as you do. If you don’t really believe that you can be a successful real estate investor, then you may as well stop trying. There will be times when it seems like you are the only one that believes in what you’re trying to do so you have to be there for yourself! You should also surround yourself with folks that believe in and support you … but that’s a different point.

4.Guts– You have to be willing to go the opposite direction from the rest of the people you know. You have to be able to make your own decisions and have the guts to take action on them. This is not an easy thing to do especially when you first start out. And, to continue and advance as an investor you will still need guts to try new real estate strategies and techniques. In fact, we are working on several creative techniques right now and believe me, my guts are rumbling and churning as I push myself to get’r done. The more guts you have, likely the better you’ll perform.

5.Integrity– Sadly, I have met many folks who have become successful without integrity but I believe that their success is likely only financial. I am confident they don’t have the relationships nor the personal satisfaction that comes with doing business with integrity.  Doing business in a way that treats everyone with respect in turn makes you easier to respect and like … and makes it easier to attract the folks that will help you grow your business.

6.Focus– This is probably the most underrated trait or action for becoming successful. If you lack focus, it is still possible to become successful. Heck, over the years I have had trouble staying focused but I have still performed fairly well in the REI game. But, my lack of focus has certainly played an important role in keeping me from reaching my full potential. And, the best part about focus, along with most of these other traits is you can learn it/them! In fact, Julie’s been helping me to re-train myself to become (and stay) more focused! I am getting better all the time (at being focused) and our achievements are moving in sync with our focus.

Communication is a key to success as a real estate investor7.Communication– If you dislike talking to people, emailing, or just all around don’t communicate well with others, good luck performing and being successful with real estate. You have to communicate constantly with realtors, mortgage brokers, banks, accountants, lawyers, vendors, buyers, tenants, appraisers, inspectors, contractors, the list goes on and on. If you aren’t at least somewhat effective at not only getting your point across but also being a good listener and understanding others, forget about being in the REI game.

 

8.Hustle– Lining up your joint venture partners, obtaining financing, managing all the appraisers, inspectors, realtors, placing and showing tenants the property all require a large amount of hustle. Sure, you don’t need to hustle 365 days a year to perform well, but you sure better be able to hustle every time a deal starts to come together!

9.Commitment– Are you committed? Really committed to being an amazing investor? Are you making it a priority everyday that you do something that will move you towards your goal of being a real estate millionaire? Now, you don’t have to do something everyday, but your level of commitment is directly related to becoming better, stronger, faster, smarter, and wealthier. No commitment = Little to no payoff.

MOMAR Adventure Race - Persistence pays off10.Persistent– In my humble opinion, this is absolutely the most critical reason why some real estate investors underperform. If you want to succeed in this business, you HAVE to be persistent. You will find the best deals by continuously following up on opportunities. You will secure the best financing by continuously trying to find a better option. If your partner backs out at the last minute you have to pick up that phone again and again until you find a new partner. Keep trying, keep pushing, keep being persistent. Do not give up.

Support/Network– this is my +1 (of the 10 + 1) reason or trait that is why some real estate investors underperform. I call it +1 because it’s not necessarily within you….it’s those around you. All of the 10 traits I mentioned are part of who you are or who you need to be, but this is those around you. I have yet to find 1 successful real estate investor that doesn’t have a good support group or network around them. This goes beyond your realtors, brokers, insurance agents, accountants, etc. This is the someone or some people who are there when you need them most. They give you that “push” or helping hand when your persistence, hustle, and guts are on empty. This could be a spouse, friend, investing partner, business partner, parent, child, or even mentor. This is one of the reasons we always suggest investors join real estate investing clubs or start investing with a like-minded individual. You will not only learn a great deal from that support person, but you can also look to them for help or guidance when you struggle.

Sure, there are likely several more traits that you need to have to rise to the top of the real estate investing pile, but if you have most (or all) of the above, you should become a successful real estate investor.

“So what do we do? Anything. Something. So long as we just don’t sit there. If we screw it up, start over. Try something else. If we wait until we’ve satisfied all the uncertainties, it may be too late.”

~ Lee Iacocca

Published on January 31st, 2010

Real Estate Investing – Warren Buffett Style

Stock investing has some fundamental principles that are similar to real estate investing. Research is critical. Bad management can ruin a business just like it can ruin a property. And, the best money is made in the long term 99% of the time.

And when you think of successful stock investing I don’t think there’s a person in North America that wouldn’t immediately think of Warren Buffett. So it shouldn’t surprise you that Buffett strategy and Buffett investing fundamentals are just as applicable to real estate as they are to stock investing. Take my favourite seven quotes as examples and lessons for you:

  1. “No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month just by getting nine women pregnant.”Warren Buffet QuotesIt’s the same thing with wealth creation. You can make money fairly quickly in real estate, but cash is not the same thing as wealth.Real wealth creation in real estate does take some time. It doesn’t take a lifetime but it’s not overnight. And when you’re just starting out it takes time to even make cash.I know there are so many programs that promise quick cash, but it just doesn’t happen that way. Take our recent direct mail campaign. We sent out 4,000 letters and we’ve yet to close on one deal from them. We’re working on a few deals now … but it’s taken time.

    Somebody sending 500 letters would likely face the same time frame. In other words, a massive effort today doesn’t make it happen that much faster… just like getting 9 women pregnant doesn’t produce a baby in a month. But a massive effort today could produce 9 babies in 9 months.

    It will probably be 6 months before our time, effort and money invested in the process so far pays us anything. And we really won’t feel the benefits for up to a year, but that is ok because we know it takes time. But when you’re starting out you have to be prepared for that. Yes you can make $50,000 in one month but it just won’t be your first month.

  2. “The smartest side to take in a bidding war is the losing side.”

When the price is going higher and higher you are losing your return. That is why you don’t want to win in a bidding war. Usually when bidding wars end the winner has overpaid. The winner is the last fool standing. Nobody gets rich paying too much for an asset.

You’re much better off, as a real estate investor, to find the assets that aren’t as desirable today and find a way to create value and make them desirable. This makes more sense than buying the hot products at hot prices and hoping they continue to be the hottest ones.

  • “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”You don’t need an MBA to invest in real estate. I have an MBA in real estate and finance … and if anything it made real estate investing more difficult for me for awhile. MBA school teaches you to assess risk in every possible way. It also teaches you how to analyze all the variables in every single situation.You absolutely must consider the risks in a deal. And in fact, I shot a little video a few months ago showing you a simple tool to use to assess risk quicklyAnd you do need to analyze your options, but there comes a point where too much risk analysis paralyzes you and you really can become afraid of your own shadow ruining your deal. The best thing you can do is focus on each deal …focus on making sure the economic fundamentals of an area are strong and the property is in demand. And then factor in the biggest risks you can’t control to make sure you’re compensated for any real risks you’re taking… and then roll with what comes your way.

    Keep it simple. And then you’ll keep moving forward!

  • “A public opinion poll is no substitute for thought.”public opions are like sheepIn fact, I would go so far as to suggest that if you do use public opinion for anything at all you use it to judge where the herd is going so you can go the opposite direction.Typically the best real estate deals are found when nobody is buying and the media can’t stop talking about the housing crisis and the poor economic situation of the housing market. And typically when there is talk of everybody and their dog buying real estate for investments that is the time to sell your property or take a vacation while the rest of the world shops for property.No matter what – do your own market research. The confidence and clarity that comes with doing your own research is invaluable even if you do end up heading the same direction as the herd at least you will understand why you did, and be able to recognize and make adjustments if the climate changes.
  • “I don’t try to jump over seven-foot bars; I look around for one-foot bars that I can step over.”


Many new real estate investors think they have to find properties for 60% of their market value to be successful. Deals like that do come around, but they aren’t that common (at least they certainly aren’t that common in the areas in Canada where we invest!).

Quite frankly, if you wait for deals like that you could be sitting around trying to be a real estate investor for years. Instead, focus on finding a good area to invest in and then find a good solid property that will be easy to attract tenants to. Over time you will find that you make a lot of money from cash flow, mortgage pay down and property appreciation from that one simple deal. And if you keep doing that… finding one foot bars to step over instead of waiting until you find a seven foot bar you can leap over, you’ll build your wealth steadily and successfully over time.

  • “It’s easier to stay out of trouble than it is to get out of trouble.”Oh Warren I wish I didn’t know how true it was. It only takes a dozen or so hours to buy a property where the property manager you hire turns it into a crackhouse and gets you fined for fire code violations amongst other hassles but it can take you years to sell or fix that problem.Sound like a lesson we wish we didn’t learn the hard way?You’re right.

    Spend a day or two doing solid due diligence on every single property BEFORE you buy. Those hours could save you years of stress, thousands and thousands of dollars and even making the news as a the absentee landlord being fined in local crackhouse!

  • “I made my first investment at age eleven. I was wasting my life up until then.”
    Warren Buffet Quotes I was wasting my life up until thenTime is passing by – whether you’re investing or not. And given that it takes time to build your wealth there is only one thing you should be doing right now… focusing on how you’re going to make yourself wealthier tomorrow by doing something today.

Warren Buffett may not be a real estate investor but he is one of the smartest investors in the world. And his message to me is quite simple … focus, be consistent, follow simple rules, find one good deal at a time and take small steps every day. These are some of the simple things that have brought him enormous success in the stock market and I believe if you follow them they will also bring you enormous success in the real estate market too.

Published on January 20th, 2010

Real Estate Investing is Not Easy

Real Estate Investing is Simple but not EasyAs I watched Dave race up one of the many hills in St. John’s en route to Ryan Mansion where we were staying I wished I had our Flip camera handy. It felt like we were on our very own episode of Amazing Race: The Real Estate Investing version.

After months of research, property tours, and more research we had uncovered two real estate gems. One is a duplex and the other a single family home. Neither property was distressed but they were both very solid deals.

So… we decided to buy them both. Everything was going along just fine until we encountered a little glitch with our partner.

No problem – we’ll just find a couple of new partners. Except the people we were contacting had less than 48 hours to make their decision. When you’re asking people for $50,000 they generally want more than 48 hours to think about it… even when the deals are compelling – which they were!

We worked the phones for two solid days determined to find people to join us on these two deals. And… with only a few days to spare before we had to remove any conditions we found two new partners!

Now we had to start arranging financing.

With a family doctor on one deal and a very successful veterinarian on the other you’d think financing would be easy – but it wasn’t! In fact, we were flat out rejected by bank after bank!

We have said it before – and I will say it again:

Real estate investing is simple but it’s NOT easy.

I continue to shake my head in frustration at program after program that declares you’ll be a millionaire in minutes and that it’s “all done for you”. I do not understand how they can make such bold claims.

We still spend a lot of money educating ourselves, but we no longer run around signing up for every course on the market that promises us fast riches. We are now very careful and selective about the real estate programs and conferences that we attend. We only take courses or attend conferences that are moving us closer to our goals. And thankfully there are many fantastic real estate programs out there … you just have to look beyond late night television and pushy radio ads trying to convince you to attend a free seminar at a hotel meeting room near you.

But, let me get back to my story about our two deals … Dave was running up the hill in a race against the clock. You see, after we finally found two new partners to join with us on the deals, we then began our ‘vacation’ with the problem that these two people didn’t qualify for financing on either property! We had to extend one of the deals by 4 days and frantically set to work calling all our friends, family and colleagues once again … this time in search of financing!

All About Rent to Own Real Estate Deals

In recent years, especially in Western Canada where we live, a lot of real estate investors have found it tough to make the ‘numbers work’ on buy and hold deals. The biggest challenge is finding a deal that you can buy for a price low enough that you can cover all the costs with the rent it will generate.

While home prices sky rocketed over the last 8 years (up to 2008 anyways), rental rates took a slow and steady path upwards.

One of the ways we’ve been able to continue investing in Western Canada and still make money from our investments is to buy properties and then find tenant buyers for the properties. That is, we’ve done a rent to own real estate deal.

rent to own real estate deal in kelownaThe most recent example is from a single family home we purchased in Kelowna, BC.

For our readers that are unfamiliar with how the Rent to Own (RTO) strategy works, here’s a brief summary.

The rent to own strategy is just like how it sounds, a tenant rents your property with the intention (and option) to buy the property at some point in the future (and at a pre-determined price).

To help your tenant prepare for the purchase you charge them a rental rate over and above the market rate with a portion of their rent building up as a rent credit.

For example, if a single family home (3 beds, 2 baths, 2 storeys, good neighbourhood) rents for approx. $1,300 per month as a standard rental unit, in a RTO, the tenant may pay $1,700 per month and $400 of that $1,700 goes towards the purchase of the property (when and if they buy).

Thus, if the renter (known as a Tenant-Buyer) elects to purchase the property after 1 year, they will have $4,800 ($400 times 12 months) towards the purchase of the property. This, coupled with an Option Fee (similar to a down payment) which the Tenant-Buyer (TB) pays to the Landlord at the beginning of the rental period, goes towards the purchase price.

Here’s a quick look:

 Purchase Price for Tenant-Buyer: $350,000
 Option Fee from the TB: $10,000
 Monthly Rental Credits from the TB: $4,800
 Net Cost to TB when they Purchase: $335,200

In essence, the TB no longer has to come up with $350,000 when they buy the property, they now have to come up with only $335,200 (plus standard closing costs). And, if the Tenant-Buyer is able to obtain good financing, they may only need to put down a few more thousand to make-up the difference between the purchase price and the mortgage amount. This effectively helps the Tenant-Buyer to get into a home and start building equity right away (it’s like forced savings) instead of having to put aside $500, $600, $700 per month into a crappy (low interest) savings account.

So, why would a renter choose to do this option rather than just saving and buying later or even buying now? Several reasons:

1 – They may not have a large enough down payment today to qualify for the mortgage

2 – Their credit may be damaged and so they need some time to correct it to ensure they can get the best rates and terms available (why pay 10% interest with bad credit today when you can build up down payment credits in a RTO, improve your credit and obtain 5% interest tomorrow?)

3 – They want to get into the home ownership market today because they think houses will be too expensive for them a year or two from now but again, they may not quite have the down payment, credit, or even income to obtain ideal financing today

4 – They may want to “test” being a homeowner. Perhaps the renter has never bought their own home and doesn’t know how much work/costs/time being a homeowner can consume versus being a renter. The RTO strategy gives them a feel for being a homeowner, without having to come up with a ton of cash (for the down payment and closing costs) to buy today.

Now, why would you, the real estate investor choose to use the rent to own strategy?

1 – Helps create positive cashflow on single family homes because you can charge higher than market rents

2 – Essentially locks-in your return should the Tenant-Buyer exercise their option to buy

3 – Little property management required as your TB effectively is the homeowner

4 – Few extra expenses as your TB pays for regular maintenance costs and any upgrades they choose to add to the home

5 – If the TB purchases the home within 1, 2, or 3 years (the standard option to buy term length), you get your capital back and can turn around and invest in something else

6 – Get all the perks of a standard rental property (tax write-offs, principal paydown by your tenants, cashflow) but you also get a built-in appreciation factor (something a standard rental does not have)

7 – If the TB chooses not (or is unable) to buy the property, you retain all the rent credits and their Option fee (they are non-refundable) and your return on investment essentially doubles. You can then turn around and do another RTO with a new TB

8 – Get an immediate return on your cash through obtaining the Option Fee which can often be as much as 50% of the cash you put in

9 – Potential less worry about what the tenants are “doing” to your property as your TB are essentially the homeowners

10 – If you buy smart, little to no work is required to shape-up the house…it’s already in great condition

11 – Feels good to help individuals “get into” the homeownership market

A Look at Real Numbers: Why we chose the rent to own strategy on the home we recently purchased in Kelowna.

Purchase Price: $351,500
Appraised Value: $355,000
2 Year Option Agreement Price: $383,000
Option Fee from the Tenant Buyer: $7,500
Monthly Rent: $2,000
Monthly Expenses: $1,350 (this includes P&I, taxes, and insurance)
Positive Cashflow: $650 per month

So, over the 2 year period, we’ll have earned $23,100 from the Option Fee and the monthly cashflow. In simple numbers, this is a 26% return on our down payment AND it doesn’t include the appreciation built in nor any principal paydown.

Not a bad investment at all, especially considering there will be little we have to do along the way.

One of the things people always say is “What if the tenant doesn’t buy it?”.

It’s a risk (and you should always be analyzing the risk in your real estate deals). But, it’s worth noting that it’s not really a bad thing if the tenant buyer decides not to buy after the 2 year period. At that point we will probably have a bit of maintenance to do on the property and then we will do another rent to own deal on the property. We will get a new deposit, set the new purchase price based on a new appraised value, and we’ll continue paying the principal down on the property with the rent. At that point our return will jump up considerably.

Now, what are the reasons NOT to choose a RTO strategy?

The opportunity to make single family homes cash flow makes this strategy very appealing but it is not for everyone. There are some reasons that a rent to own strategy might not work for you and your goals. Here’s some reasons why:

1 – Smaller population of Tenant-Buyers than regular renters so it may be more challenging to place good, quality TB’s than in a regular rental unit

2 – It doesn’t make much financial sense to pay a property manager to over see a rent to own property given the limited amount of work involved. However, that choice means that it will involved more of YOUR time

3 – If your target market area is in high demand from competitive owner-occupied buyers, you may have more trouble buying good, high quality properties (because there is so much competition)

4 – You have to remember that someone that makes a good renter is not necessarily the same person you’re looking for as a tenant buyer. Your market includes people with bad credit. It also includes people that have gone through some financial challenges because of divorce, job loss or just bad money management. These are people you might not rent to under normal circumstances but you will be considering them as a tenant buyer. Your main concern here is their ability to make the monthly payments. You aren’t as worried about their credit. You want someone that is going to be likely to take good care of the property and can potentially buy it in a few years. You aren’t looking for the perfect candidate that could buy it right now!

5 – If the TB exercises their option to purchase at the pre-set price and property values have skyrocketed since you agreed on that pre-set price, you won’t obtain that large appreciation

6 – It’s still a rental property and somewhat illiquid (compared to stocks, bonds, and other investments).

The Rent To Own strategy is just another tool for your tool belt. It’s not for everyone, but it does make it possible to generate strong cash flow from properties that would otherwise never stand a chance of covering their costs and putting money in your pocket each month.

And the good news is that Rent to Own is really not that different than a standard buy and hold deal.

The tools required to find, buy, place, and manage a rent to own property are similar to a standard Buy and Hold(and so you can apply the principals from one technique to the other quite easily), but this strategy can also give you that “feel good” emotion that comes with helping a prospective homeowner get into the market (and you can profit from that too!).

Published on October 16, 2009

Real Estate Partners – The Profits and Pitfalls

real estate partnersMarriage and real estate partnerships aren’t that different. There’s a courting period, there are things that each person has to bring to the table to make it work, and there are as many problems as there are possibilities for success.

In real estate investing, just as in a marriage, there are many ways that a partnership can fail. If you rush into a relationship without dating or doing your due diligence you may find that you’re not as compatible as you once thought. You may find that you and your partner end up having different objectives for the relationship. One of you may oversell what you’re bringing to the relationship. Or, maybe things change, and one of you just decides it’s time to move on.

There’s plenty of ways a partnership and a marriage can go wrong. It can get messy and it definitely can be stressful and emotional. And it can happen when you least expect it. And it can feel like there was no warning.

We’re no strangers to turmoil in our real estate partnerships. While the majority of deals we’ve done have been with partners, and they’ve gone very well, there are always new lessons to be learned.

So, if there’s potential for so much turmoil with partners why bother? Why not do all of your deals solo?

Well, just like the right partner in your life can make you happier, more fulfilled and even more successful, the right partner in your real estate deals can allow you to do bigger and better deals with reduced risk.

In fact, the right partner can bring any one or more of these positive things to a joint venture:

  • Skills and Expertise:For example, if we decided to get into flipping properties we’d be interested in partnering with someone that has experiencing working in the trades or working as a contractor. Someone that has never invested in real estate before may wish to work with someone with experience on their first deal.
  • Money:Most of our deals involve us bringing our expertise and experience to the deal and doing all the work in exchange for a partner putting up most of the initial capital required.
  • Financing Options:On a recent deal we were unable to secure the kind of financing we wanted so we brought in a partner who could. Sometimes the best way to look good to a bank is to bring in people that fit into their tiny little box of lending requirements.
  • Risk reduction:Having additional parties involved in a deal allow everyone to carry a lesser share of the risk on a deal. It reduces each persons exposure and downside should something go wrong.
  • Network:In the past we partnered with someone that had a gigantic network of high net worth individuals. This guy knows someone in just about any field and could get them on the phone pretty quickly.

Julie’s parents aren’t willing to take on partners, and they acknowledge that this has slowed down their wealth creation. They made the choice consciously but they’ve missed out on great deals because they weren’t willing to work with a partner on the deal.

On the other hand, we’ve expanded our wealth rapidly thanks to great partnerships but we’ve also experienced a lot more stress, surprises and drama than we would have without partners.

People like to make partnerships more complicated than they need to be. If you keep things simple it will be easier for everyone. There are also a few other things you can do to minimize  the potential pitfalls of partnerships:

1. Before you get involved communicate a lot… and just when you think you’ve communicated too much … communicate some more! And a big part of communicating is listening. Listen carefully to your prospective partner. Ask questions. Understand their objectives and their needs. Make sure you’re going to be able to meet their needs. Focus on what you’re bringing to the table. Make sure it’s at least equal to what they are bringing to the table … preferably greater than what they are bringing to the table so they feel confident that they are getting a great deal.

2. Always be accountable.Recently we almost lost two really great rental property deals because our partner had less money to contribute than we had expected. We felt we had two choices … be bitter and lose the deals or be productive and save them. It literally took 100+ hours and it pretty much consumed our summer vacation but we saved the deals. And we are fixing the leaks in our process and learning from what went wrong.

We aren’t victims of anyone’s actions. And when you don’t accept the victim role you can keep control of the situation. And that is what we did. We accepted the fact that we had not done a good job of communicating, realized that we contributed to the disaster, and took the yucky tasting medicine.

If you are always accountable for what goes wrong in a partnership, you will be able to handle just about any of the pitfalls.

3. Have a clear and fair joint venture agreement created by a lawyer: And of course, follow up that accountability with a solid and fair joint venture agreement that lays everything out clearly for all parties involved. There’s nothing wrong with covering your butt!

Published on September 18, 2009

Real Estate Investing Starts With Cash Flow

“Doing what needs to be done may not make you happy but it will make you great”~ George Bernard Shaw

by Monica Mutuma

Real Estate Investing in AfricaCash flow. Cash flow. Despite the fact that I wholeheartedly embraced the Real Estate Millionaire: The Essential Starter Course and could not wait to begin, I became apprehensive when I was confronted with this topic.

I am not a big fan of numbers and calculations.

During my school days I always hovered between average and poor in mathematics. As a result I viewed it with a mixture of dislike and trepidation and never really developed confidence with numbers. Unfortunately one cannot get away from figures as they are a part of our everyday lives.

So I took a deep breath and started to do my personal cash flow assessments, hesitantly in the first week but more confident and diligent by the third week (thank you Excel). In one of the lessons students are advised to get their personal finances in order before buying a property – this includes doing proper cash flows.

To digress a bit, with the other major topic of goal setting I want to believe I have fared fairly well. Although I’m still a bit fuzzy on some of it, I’ve got a clear idea of what I want to do, when and how. Apart from real estate investing goals I have other things going on as well but real estate investing will be the key area of focus until I purchase the first property.

Back to finances. Dave advises that the importance of doing cash flows is that one is able to see where one is spending their money and how much they are spending.

I then had to take a long and hard look at my finances. I’ve never looked at my cash flow before. This doesn’t mean to say I was a run away spender. Actually I was careful with money, never wanting to be in debt and saving for other projects. BUT I was not doing cash flows. Every month I would make all the important payments like rent, water, electricity, school/college fees, telephones, investments and savings, etc. Afterwards what I did, or rather did not do, is where I now realize I need to seriously work on if I am to make progress towards reaching my goals.

After paying bills I would relax. In the absence of cash flows (or a budget) I most likely lost money through non-critical purchases, which money could have been used to boost my savings.

So now I do my cash flows. I started on the first of August. I am using the templates which Dave thankfully provided. Since I feel I have a lot to discover about how I handle money, I have amended the cash flow calculator by adding “weekly columns” as opposed to having only one total for the month. This means I can track my expenditure on a weekly basis and I intend to study the weekly trend over a few months.

On the summary sheet I have added a column “average monthly expenditure” to help me to see average monthly trends over the next few years. These could one day help me to make investing decisions possibly with regard to timings.

I need to track my cash flows for a while before drawing a conclusion about how I’ve progressed.

The most important adjustment I have had to make in order to purposefully move towards achieving my goals has been to change the way I do things. While setting my goals it clearly occurred to me that in order to achieve success I had to change some of my habits regarding finances. I had to make sure that I saved more each month and did not lose money unnecessarily.

One of my real estate goals is to buy a property in the next 12 months. To this end I have started saving for a down payment and this has necessitated that I live below my means in order to free as much money towards the savings as I can. I do not intend to reduce myself to poverty but I will eliminate certain luxuries, gradually, so that I can make progressive steps towards my goal.

Just to share with fellow students, when in the supermarket I now avoid impulse purchases and will strictly stick to my shopping list. The supermarket is one place where some destructive behaviours take place and there are certain areas which I now avoid. This can be agony but I have to keep telling myself to keep my eyes on my goal but sometimes I feel my strength failing me!

Prioritizing purchases and tracking cash flows is not easy to do if one has habitually been allowing oneself some deviations. High levels of self discipline are required. In my first full month of behavior change I’ve sometimes felt brutalized, by myself of course, and have suffered withdrawal symptoms (emotional ones) from luxuries. The symptoms range between mild and severe. Surprisingly when I look and see that amounts saved every week are gradually increasing, I congratulate myself even for the narrowest saving, knowing that it could have been another purchase but will now move me towards my goal.

Cheers for now.

Monica

For Part One of Monica’s Post Please Visit:

What you Can Learn from a Zimbabwe Real Estate Investor

Published on September 10, 2009

Real Estate Investing Questions Teleseminar

On September 3rd, 2009 we held a Q&A session for Rev N You readers. Listen as we answer the following real estate investing questions:

  1. For a beginner with no funds and low credit score where is the best place to start in today’s market?
  2. As an individual with no money to spare and sketchy credit, who do I turn to for money and how do I make them as confident as I am that I can make money for all involved?
  3. How do you structure a JV partnership?  Does the JV partner get registered as a mortgagee?  How does the bank view this?
  4. Do the items taught / discussed in your Real Estate Millionaire: The Essential Starter Course program apply to real estate practices in both Canada & the U.S.?
  5. I want to purchase a rental property with a self-directed IRA plan. I do not have enough money to purchase without a mortgage. Very difficult to finance. How can I do it? This property is a single family in the Tampa Fla area with a good positive cash flow. Hard money is an option; but the interest rates are too high and would wipe out cash flow. I want to purchase and hold for cash flow. Any suggestions?Should I take the hit and move the money out of my IRA and pay a penaltyor wait till I am 59.5 in October 2010.

Published on September 5, 2009

Multi-family vs Single Family Real Estate Investing

multi family vs single familyMany 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.
  • Financing your investment property is often simpler and easier to get.

Disadvantages of Investing in Single Family Homes

  • 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.

multifamily vs single familyHere’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…

  1. 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.
  2. 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.
  3. 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:

  1. Who will be responding to any potential tenant squabbles (me or a Professional Property Manager)?
  2. 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.
  3. 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:

  1. Can I carry the costs (mortgage, electricity, taxes, insurance, etc.) when there are any vacancy’s?
  2. 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?
  3. Do I strive for more liquidity in my investments (the ability to sell faster)?
  4. 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.

 

Is Private Money the Right Solution for Your Real Estate Deals?

private money lending agreementIf you’ve been finding that money for your real estate deals is hard to come by -private money just might be the answer. In today’s article private money broker Shannon Quickfall gives you a good understanding of what a private lender will look at, and what you, as a borrower, should know.

I was scrolling through Twitter posts the other day and one of the people I follow had posted this joke:

A man walks into the bank and says to the bank manager “I’d like to talk to you about a loan”. The bank manager says “Great! How much can you lend us?”

I laughed because Dave and I had gone into the bank earlier in the week to make some large cash withdrawals. We owed my brothers a bit of money for their help with our rental property renovation  in June, and we had to juggle money around to a few different accounts for property taxes and other upcoming bills. When we started giving the bank teller the sums of money we were going to withdraw, she started to panic saying that we should have called the bank ahead of time to let them know that we were going to be taking out more than a few thousand dollars in cash.

“But – you’re the bank! If you don’t have money, who does?” I was thinking.

Of course we smiled and apologized and eventually they were able to round up enough cash to meet our requests.

We had to laugh though – if you can’t go to the bank to get money where can you go?!

Of course, you might feel the same way when it comes to finding money for your real estate deals! The lenders have added so many restrictions that people all over North America are finding it darn near impossible to find financing for rental properties. In Canada, in particular, the regulations have changed so much in the past few months that people with multiple properties (like us!) are faced with a mountain of paperwork and a whole lot more trouble than ever before.

But, as we’ve said over and over, we don’t focus on the obstacles we’re facing. Instead, we place our attention on the ways we can get around those obstacles.One way to get money for your deals is to turn to a private lender.

Previously, we had a great article on private money and a fabulous video from Patrick Riddle of MustKnowInvesting.Com on the subject … this week we’re pleased to present a private money expert from our own backyard in Burnaby, BC to help you learn a little bit more about private money.

Regards,

Julie Broad (& Dave Peniuk)

p.s. You can follow Julie on Twitter at:http://twitter.com/revnyou

An Alternative to the Traditional Lenders
Private Money: An Introduction For Borrowers

by Shannon Quickfall

How many of us have found a great deal but, for various reasons, just couldprivate money for real estate dealsnot secure sufficient financing to make it work? Or how many of us have been in a deal where we needed refinancing but could not get it on the terms that we wanted? When that happens, we end up watching that opportunity pass us by – and in some cases there was a solution! There was a way you could have secured the financing you needed to close that deal.

Private lending is often an overlooked solution to financing problems. misconceptions, myths and mystery surround private lending.

There are a variety of lenders that could be called private lenders, for which the fees and costs of financing vary substantially. The focus of this article is to discuss private individual lenders, not institutions or investment corporations. The private individual lender can be difficult to access and so many borrowers end up with private institutional lending which can be more costly when fees are added in. Some of the benefits to using a private individual lender is that, in many situations, there are more opportunities to customize the mortgage that the borrower needs and, in many deals, fees can be lower than other institutional private sources.

How does private individual lending work?

A mortgage broker who specializes in private financing can help a borrower find an individual who will lend ‘privately’ (i.e., not through a bank or institution but directly on their personal behalf) on a property. An individual lender seeks a better return than bonds and does not want the risk of the stock market; instead, an individual lender wants to make money off of real estate without directly owning it.

A private mortgage is generally short term in nature (typically 12 months), is secured by real property, and the return is the interest that the borrower pays with, possibly, a lender fee.

The lender will make an offer on the mortgage stating the terms that they require to lend the mortgage. There can be a negotiation and private lending offers opportunity to tailor mortgage requirements more so than an institution who only offers certain mortgage products that may or may not be open and may or may not have other requirements. When an agreement is reached, a lawyer or notary will prepare the necessary documents and a charge will be registered against the property just like any other mortgage. Private financing does cost more that conventional financing, and private money is a market like any other which is moved by supply and demand; the price of which fluctuates accordingly.
The following are some of the situations where private financing offers significant benefit:

1. A private lender, may lend more on the basis and merits of the property so if a borrower has less than perfect credit or lack of credit or has a difficult time proving income but the property itself holds good value, the latter can make the deal work for a private lender whereas a conventional lender will decline it.

2. Private borrowing can also work for properties which are held in a trust, even a foreign one. Most banks won’t lend to a trust because they require a personal guarantee.

3. Private lending is also a good solution for temporary needs, such as when a borrower feels that in a short time their credit may be good enough to get conventional financing or if they are waiting for another deal to close in order to release funds to use for the new deal. This works well with private money because most private mortgages are for relatively short terms, 12 months or 24 months.

4. Private mortgages can even be negotiated to be ‘prepaid’ mortgages, such as when the borrower doesn’t want to make monthly payments; this way the borrower simply pays the whole amount (including the capitalized interest amount) back at the end of the term. This especially makes sense for someone who is selling their property and knows they will have the funds to payout the mortgage within a year.

5. Private lending is also a potential solution if the location of your property is outside of where a conventional lender is willing to lend.

A private lender has the same rights as a bank when it comes to being paid. If the mortgagor is behind on payments the private lender has the right to pursue foreclosure just like a bank would in accordance with provincial or state laws. As well, if payments are late, it is typical for a charge to be added which would be defined in the mortgage agreement. Some private mortgages may require the borrower to have life insurance but it is not necessarily a standard clause. What is important to remember is that for the extra cost of financing the borrower has the opportunity to negotiate what terms are important to them to make the deal work and a private mortgage broker can help with this as a mediator between the borrower and the private lender.

Private lending might be the right solution for you, but it’s worth nothing that it is not a solution to buy property with no money down. Realistically, in the current market, most private lenders will not lend above 80% of the property value, so you need to have at least 20% equity (and commercial properties need even more). Private mortgages can be in first or second position, and possibly a third depending on the amount of equity. They can be used for residential, commercial and even in construction financing.

 

Written by Shannon Quickfall, BBA

Shannon has a background in finance with a BBA from Simon Fraser University and currently a CFA candidate. She works with borrowers and private lenders to create mortgages that meet the needs of both parties.

Shannon can be contacted at:
http://www.custommortgages.ca
Toll Free            1.877.294.9330
Toll Free Fax: 1.888.241.5767

Posted on July 14th, 2009

Real Estate Investing Questions Answered

real estate investing questionThis is the final question in a 3 part series answering a few of our newsletter subscribers biggest real estate investing questions.

Two of the previous questions and answers can be found here:

This week’s email is from Scott in Toronto, Canada:

Hey Julie and Dave,

I purchased a property in downtown Toronto [Julie edited out the location and a few other details] nearly two years ago for $329K (putting 25%
down) which will rent out furnished for approx. $2500 (below the1% rule and just above .7% – loved that article by the way).

I have occupied this property since the purchase, but am looking to make this rental property #1. It is fully managed, with a maintenance cost (which keeps rising!) and has since appreciated to approx $345K.

Here’s the tough part, I prefer to have the property management here
take care of finding a tenant (it is my first one and all) but they want to
charge a month’s rent in order to do so. This is standard, but unfortunately, it puts my monthly cash flow in the negative by about $35 a month ($420 total).

Alternatively, I can try and place it on my own and eliminate that fee
which would provide me with a positive monthly CF of either ~$175 or
$85 if I have to still give a realtor half of the month for bringing me
the tenant. Either way, my mortgage is a ridiculous rate of prime -0.85%
(1.4%) variable open until March 2013, but can be switched to a fixed
mortgage at any time without fees (and if done, could actually lower my
mortgage payment depending on the amortization used).

Do you think it makes sense to operate at a negative cash
flow while the financing is so advantageous?
 I realize this banks on
property appreciation predominantly, but even if the value stays
stable (now that we are theoretically at the bottom ; ) you have
somebody else creating equity for you and that’s not a bad thing.

Cheers,
Scott

And Here’s Our Response to this reader’s Biggest Real Estate Question!

Thanks for the GREAT question(s) Scott!

And, since we know you’ve been reading Rev N You for awhile you probably know that we’re going to say the answer really depends on your goals. 🙂

Let’s start with renting your place out. Whether you should pay a management company a full month’s rent to find, screen and place the tenant or do it yourself is a great question. It’s something we recently struggled with on our Triplex in Toronto. Our friends that were living there and looking after it for us moved out so we turned it over to a management company.

One month of rent is a serious kick to the cashflow pants. Personally, we chose to place the tenant ourselves because there are a lot of other things we’d rather put that $1,700 (1 month’s rent) towards. Being so far away this was tricky but our friends helped us out with the showings.

If you are planning to do a furnished rental there are plenty of other considerations that you should factor in. The biggest is that typically furnished rentals are shorter term. This means you will be dealing with more turnover. Turnover always costs money even if you are renting it out yourself. We recently did a furnished rental and will write an article about the advantages, disadvantages and considerations involved in a furnished rental in August.

It really comes down to how much time you have and whether you want to deal with your tenants at all. If you want a little challenge you could always try it once (renting it out yourself). In Toronto in particular we love the Viewit.ca and Craigslist.org listing combination. It hasn’t failed us yet. Check out our article on the 5 steps to rent out your propertyfor more details.

As for operating at negative cashflow… we did it for awhile with a
condo we had in North Toronto. When you consider the principle paydown
and tax write offs you’ll USUALLY find that you’re still coming out ahead by a
few thousand dollars every year even when you’re in a negative cashflow
situation without appreciation. That said, I always remember something I read (in I believe, Rich Dad Poor Dad) which said “How many houses can you own if
they all cost you $100/month?”

In other words, it really does come back to your goals. It will be tough to build a giant portfolio of negative cashflow properties. But if you are starting out slow and your goal is to use as little of your own time and energy as possible to begin building your portfolio then you may be best suited to find stable easy to manage neutral or slightly negative cashflow properties. But, if your goal is to begin making money from your properties and build a large portfolio then I’d consider approaching this from a more hands-on perspective to maximize your profit and your learning.

Our Nanaimo property manager once said to us “when you’re making good money in a job it does you no good to make a bunch of money on your properties – the government just takes it anyway“.

So, there are plenty of perspectives on this. You’ll have to figure out what works for you.

Real Estate Investing Lessons TeleseminarThe call we recently had with William Lederer was a great one for learning to find, screen and select tenants and he had a 59 page e-book that went with the call. It might be worth checking the call out or his Ultimate Property Management book. While not Canadian, it’s really an excellent resource for landlords and property owners.

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As for the financing – go back to your goals once again but that financing is sweet and prime minus anything has gone the way of the dinosaur. For the most part I think you’re better off to keep that sweet mortgage and just pay down the principle on your mortgage while you can. If you fall on hard times or find you need to lengthen your amortization period to improve the cashflow then you’ve got that option.

That said, the experts we follow are calling for rates to continue to increase. So … take a look at the possible scenarios and determine what risks you are and aren’t willing to take.

I will make a few final notes on your situation only because I happen to be very familiar with the building you live in. I do have a few concerns with that area because of the glut of other very similar units that are also rentals, the poor access to the Subway, and the maintenance fees which, which last time I looked at them, were substantially higher than most other buildings in the downtown area.

Given these concerns I would try to do whatever you can to make this a positive cashflowing property from the start because you may find it’s tough to keep renters in there at times and rent rate increases could happen very slowly over time due to the continued growth of similar units all around it. It’s just something to be aware of as you’re weighing the risks and the rewards.

Phew!! I do hope this helps you a little bit Scott. You’ve definitely given us a really big case study to share with our students. We’d love to know what you end up doing and how it works out for you.

Best regards,
Julie

Posted on July 6th, 2009

Emotions and Real Estate Decisions

made an offer on the house who will water my flowersReal Estate Millionaire students, we’ll call them Sherry and Curtis, are making great progress with the course. When we had a coaching call with them, they were all fired up to turn their home into a rental property and buy a new place with a basement suite. The strategy (turning your home into a rental property when you move to a new place) can often be a very good one.

We were excited for them, but when we spoke to them, we were a little concerned that they were getting too emotional about things. Sherry was afraid of turning her home into a rental property. She had put a lot of time and effort into creating a beautiful and comfortable home over the years and was really worried it would deteriorate without her. Who will water the flowers she asked? Curtis was excited to get into the real estate investing game and couldn’t wait to move into a home with a yard.

They were planning to meet with a realtor the next day to get an idea of what their current home was worth, and then they were going to look at some listed properties in the potential new area on the weekend.

When we hung up the phone with them we sent a follow up email with some pieces of advice … the biggest point from Julie was:

Take a deep breath – I sense a lot of emotions (fear, excitement, nervousness) and that is NOT GOOD. Emotions are bad when it comes to investments. DO NOT LIST YOUR HOUSE IN A PANIC. DO NOT BUY A NEW HOUSE BECAUSE IT LOOKS GOOD. DO NOT DO ANYTHING THIS WEEKEND. Give yourselves time to think in a relaxed state. There is no urgency to your situation and that gives you power (and control). You always want to have power when it comes to real estate.”

That was Friday. Sunday morning we received an email saying “Don’t be mad, but we just put in an offer on a house“.

We are not about to get mad. We want our students to take action – and there is NOTHING WRONG WITH MAKING OFFERS. And, as long as you make them “subject to” an inspection or financing, it gives yourself a way to back out if your research turns up areas of concern. However, when you do make an offer, especially in this buyer’s market, make sure you keep control of the situation.

In our students case, we think they lost control for the following reasons:

  • They’d only looked at a handful of homes in this area (which is pretty light market research),
  • They were still very emotional about everything,
  • The realtor had only given them 4 business days to remove their subject to inspection clause,
  • Closing was only 30 days later (when they’d specficially stated they needed time to sort out whether they were in fact going to turn their home into a rental or sell it),
  • And, the realtor coached them to go in with a strong price to show they were serious. They only offered about 4% less than asking!

The good news was that the realtor had been unable to present the offer to the sellers, so there was still time to change the offer. We suggested that they contact their realtor and find out why, in a buyers market without competing bids on this property, she was pushing them to be so aggressive. And, we also suggested STRONGLY that they change their offer before it was presented so that they had a lot more time to conduct their due dilligence and ensure they were comfortable with their decisions (of buying, of renting or selling their place, etc.).

They ended up pulling their offer … and guess what … 3 weeks later the house is still on the market. If they want to, they can now go back in, more relaxed, offer a lower price, give themselves more time for the details, and get a much better deal. But that is because they’ve now had 3 weeks to slow down, take the emotion out, revisit their goals, and look at more properties. They still like this one … but they know that there are other potential deals out there now too.

The 3 Biggest Lessons to Learn from their experience are:

  1. SHOP AROUND! Be patient as you look for the deal that is right for you. When you find the perfect place – act quickly and decisively, but be sure it’s the right deal. This house may be a great deal but the only way they can know that with certainty is to look at a lot of other houses in that area. This means looking at 20 – 50+ online listings, viewing dozens of houses through open houses or appointments, and becoming an area expert.
  2. Always remember the motivations behind the people you’re working with. NOBODY will love your money as much as you do. Realtors get paid when the deal is done. That doesn’t make them bad people but it does mean that some realtors will push for terms and conditions that get the deal done … not necessarily that get YOU the absolute best deal for you. Great realtors know the market inside and out, understand deal making, and are able to work hard to find you the deals that meet your goals. Not every realtor is created equal. There’s nothing wrong with parting ways with your realtor if it’s not working out – just be honest and up front about it.
  3. You must take fear, excitement and any other emotion out of the equation. If you are emotional then you will not make good decisions. Things can go wrong, and little things probably will go wrong. That is just life …  if you’ve been following our renovation adventures on our blog, we’ve had plenty of little set backs. It’s cost us more money than we expected and added a week to the project but we never once thought “we never should have done this”. Think about what could wrong, and then think about what you would do if that actually happens. Write it down so that you can actually see your fears in front of you. Most of the time the fear is irrational, unlikely or manageable. (That said, next week we’ll share a response we had to a reader about the risks in real estate, and when to know when the risk is too great to proceed). If you are too excited, then just take a step back. Don’t do anything for 24 hours and then see how you feel.

We’re really proud of Sherry and Curtis – they are making fabulous progress towards their goals. And they are incredibly smart and hard working people. They are taking time to educate themselves and they are reaching out for help to avoid the pitfalls that often trap new investors. They will be successful in their real estate ventures and in their life.

We don’t think they were making a life destroying mistake with the deal they were creating, but we do believe that they weren’t getting the best deal they could– especially in the buyer’s market we’re in right now. We knew they were emotional about the whole thing, so we know they didn’t think it through. It can happen to ALL OF US (believe us, we know)!

Some Words of Wisdom:

  • Those who have never made a mistake are doomed to work for those who have.” – unknown
  • The reason you are in negotiations are to do better than your alternatives.” –Keith J. Cunningham
  • Aim for success, not perfection. Never give up your right to be wrong, because then you will lose the ability to learn new things and move forward with your life.” – Dr. David M. Burns
  • 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

Posted on June 6th, 2009

Four Ways to Check Reality Before Buying a Rental Property

Checking Reality and Making Money with Rental Property I almost missed out on making $120,000 – o.k. it’s actually $60,000 because we bought the property with a partner … but, it’s still a lot of money!

You see, my husband Dave took me to see this rental property he wanted to buy, and even though we could buy it without spending a penny of our own money, I didn’t really want it. You’ve likely read some of our horror rental property stories by now … I didn’t want to buy another pain in the butt property.

The property looked more like a tool shed than a house. I had visions of constant repairs and never ending tenant troubles. Why would I want to own this? But, Dave told me to do a reality check – there were a lot of reasons to like this deal.
Four years later, that property has more than doubled in value, the rent has covered all of the costs so we’ve yet to put a single dime into it and we own a large chunk of land in an emerging area.
When it comes to making money buying rental properties it’s easy to get thrown off by the appearance of a property, your emotions or what the media is saying. Here are 4 ways to check reality:
Reality Check One: Who is Your Target Market?
I couldn’t imagine myself living in that little shack – but I was not the target market for that rental. The tenant that lives in that house loves the large yard. He doesn’t mind the exterior appearance because it’s cozy inside and the rent is cheap for the privacy and space he gets. If the property is a good fit for the target market don’t worry about whether you would live there or not.
Reality Check Two: Are You Emotionally Involved?
Emotions weren’t involved in this purchase, but at any point if you feel like you aren’t able to walk away from the deal, you need to take a step back and review everything! Once your emotions get involved you can’t be rational and make sound decisions.
Reality Check Three: Are the Numbers Really What They Say They Are?
In this deal, the numbers were what sold me. The rent covered all of the expenses and left a small cushion for surprises. Make sure the numbers are what the sellers say they are though! Always get copies of the leases to verify rents. Check market rent rates for that area to make sure the current tenants aren’t just paying higher rates because they are related to the seller. Also, make sure you obtain copies of bills you’ll be responsible for (taxes, utilities, insurance, etc.).
Reality Check Four: Are You Judging the Book by its Cover?
Many opportunities are missed because of a negative first impression. The best deals are often the properties that look rough, but can be easily brought back to beauty. Granted, our little shack needs to be rebuilt to become beautiful. Had Dave allowed me to judge property based on its looks, I would have missed a deal that grew our net worth by $120,000 and has great future development potential.
Reality is what you’ll be left with after you buy a property. Use these reality checks to ensure you aren’t missing great deals!

Posted on May 1st, 2009

 

Flipping Real Estate: A Rev N You Reader’s Tale

Rev N You Man

Susan* and her two partners hit the streets in Toronto earlier in 2007 to find a payday by flipping real estate. Their mission: to find a really beat up house in an up and coming Toronto neighbourhood, fix it up and sell it within 5 months.

The three of them wanted to gut the property and renovate just about everything in the house. They expected to do all the big jobs from ripping out walls, redoing the plumbing and wiring, to putting on the finishing touches! Unfortunately, Susan tells us the “planning” was A LOT easier than the “doing”.

Flipping Real Estate Sounds Easier Than It Is

This wasn’t their first reno project. Susan and her two partners had undertook a smaller project in early ’06. With that experience under their belt, they decided to take it up a notch with this project. The house they found was in need of a large scale renovation. They purchased it using some cash and an Open Variable 5 year mortgage (the rate and payment floats with the Prime rate and there is no penalty for paying the mortgage out within the 5 year term). They anticipated it would take approximately 4 months to complete the work and a few weeks on the market to sell – it was going to be a masterpiece!

Well Murphy’s Law was busy during this project. The basement flooded due to shoddy, unlicensed “plumbers” cutting the water main line inside the house. The dumpster bin outside the house was being filled by neighbours while the walls were ripped out over a painfully slow 3 weeks (and the neighbours didn’t help pay for the extra costs of the garbage). And the best part, during the delays and stress, the workers were playing the partners against each other! One would say “Jack said it was okay that we do this with the wiring”, while Susan was trying to say “this is not how we agreed to do this”! And when they finally were done most of the work, and were almost 2 months past their planned completion date, the building inspector went on vacation leaving them to wait a couple of more weeks for his return.

Six months after they started work on the house, they were finally ready to sell the property. But, thanks to delays, the sale landed smack in the middle of summer which is just about the worst time to try and sell a house. Every day the house remained unsold meant additional carrying costs (financing, hydro, heat, taxes, insurance, etc.), so waiting for the fall market to hit was financially not an option. As for the neighbour who agreed to split the cost of a beautiful new fence that separated the two properties? Let’s just say Susan and her partners are still trying to recoup the neighbours half of the fence. Unfortunately, our “word” no longer is good enough. Get it in writing folks!

It was stressful, time intensive and a lot of work. So, why bother with doing a flip? Well, Susan says they did make a decent profit (about a 10% return on investment in about 8 months). And, she enjoyed the opportunity to be creative and handy! Susan said she loves interior decorating and seeing the fruits of her labour. Turning an ugly duckling into a shimmering Swan is a thing of beauty. It also gave her ideas as to what she would like to do with her own home. And, for those who like shopping – be it for doors, windows, faucets, door knobs or curtains – it’s a great excuse to check out all the latest trends at Home Depot, Ikea, or Rona!

Susan gave us 4 Do’s and Don’ts of Flipping Real Estate:

Do’s

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  • Have a detailed, set budget with a healthy contingency;
  • Get 3 or more quotes on all jobs;
  • Get permits for all work to be completed; and
  • Have a detailed partnership agreement from the beginning.

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Don’ts
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  • Don’t sell in the Summer or launch on a long weekend;
  • Never assume that a carpenter can do drywall taping or plumbing;
  • Do not let the trades people pit the owners against one another; and
  • Don’t get greedy when selling…often the first offer is the best!

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It wasn’t a bomb, but it was a bigger challenge with a lower pay out than she expected. Will Susan complete another Flip project?

She has every intention to, although it may be a few months or a year until she is ready to jump back into it. Besides her great advice above, she said it is very, VERY important to hire the right people. Just because General Contractor X is cheaper than General Contractor Y doesn’t mean you will profit more in the end because you “saved” some cash. The old phrase exists for the housing industry just like anywhere else – you get what you pay for!

9 Tips for Success with Flipping Real Estate

by Julie Broad

    1. If we are going to go to all the work to renovate a place, we want to reap the benefits for years to come. When we renovate we do it with renters in mind, not future home owners. But, if we were going to pursue a hobby or business in flipping here are some things we would consider when looking at a house:
    2. My requirement for a home to live in, and a good rental property would probably hold true in this case too: Find the Starbucks area
    3. Find the ugly house on a street of well maintained homes.
    4. Know your prospective buyer – are you fixing the house up to suit a young family, an urban couple, or someone whose kids have left the nest? Figure out who is most likely to move into that area, and renovate to suit their needs.
    5. Where is your biggest place to add value? If you can easily enlarge the kitchen or make it more functional then you can add a lot of value to the home quickly. You can also consider adding a bathroom or creating more storage as ways to add value.
    6. Inspect the house carefully. Have there been renovations done on the property? You will often pay a premium for previous renovations, and in so many cases you will end up having to redo what was done before so it costs you more for the house, and to do the work.
    7. Determine your budget, and then add an additional 30 – 40%. Things always cost more and take longer than you expect.
    8. Find a real estate agent that has flipped houses themselves, or that has a few clients that have done it. And, ask for references. A good agent will go a long way to helping you understand the needs of your prospective buyers, and in getting the price you want for your house.
    9. Talk to a mortgage broker about your financing options. There are plenty of financing options to suit a flipper purchase.

*Not her real name. She has asked to remain anonymous, but will answer questions through us if you are interested in learning more.

The Secret to Getting Deals Financed in Today’s Market

by Patrick Riddle of Must Know Investing 

Deals Financed with Private MoneyAre you having trouble getting the cash you need for your real estate deals? Have you ever lost a great deal because you didn’t have funds to close it? Is a lack of financing killing your real estate investing dreams?

If you answered “yes,” to any of the questions above, then private money may be THE solution for you.

“Patrick, what do you mean by private money?”

Private money is investment capital from an individual. There is a limitless supply of private money lenders to finance your deals. All you have to do is educate people about your investment program and help them understand why becoming a private lender is a good alternative to traditional investments like stocks, bonds, mutual funds, and CDs.

7 “Must Know” Tips to Getting Private Money for Your Deals

1)    It’s All About Personal Relationships

Investors approach me all the time and say something like, “I’ve got this great deal under contract, and I need some private money to get it financed. What would your private investors charge to finance my deal?”

What people don’t seem to understand is that getting private money is all about personal relationships . . . relationships that YOU build with your private money prospects.

2)    3 Types of People Most Likely to Invest with You

The first type is people who know and trust you. This could be a family member, long time friend, neighbor, someone from church or school . . . really anyone that you’ve built a long term relationship with could be a good source for private money.

The second is people who know a good deal when they see one. Anyone who works in a field related to the real estate industry could fit in this category. Examples would be real estate agents, mortgage brokers, bankers, appraisers, home inspectors, attorneys, accountants, etc.

The last type of people most likely to invest with you is the best source of all . . . people that know someone who has invested in a property of yours. Or, in other words, referrals! Once you get your private investor base established, ask them who they know that would also like to make a good solid rate of return backed by real estate.

3)    Plant Seeds Voraciously

By “plant seeds,” I mean “get the word out about your investment program.” You can plant a seed by telling someone about it, handing someone a business card with details, directing traffic to a website, or any other strategy to introduce the idea that you finance deals using funds from private investors.

I found that when getting started with private money, it took between four to six months on average to get someone to invest with me after presenting my investment program to them. Sooooooo, get started planting seeds immediately!

4)    Less is More

When you are first telling someone about your investment program, less is more! All you want to do is pique their curiously and get them into a formal appointment.

Do this by saying something like, “We buy houses and use cash from investors, just everyday people like you and me, to finance our deals. Our investors are typically tired of the volatility of the stock market and frustrated with meager returns from CDs and mutual funds. Our main service is to provide good returns to investors backed by real estate. Is that something that you would like to learn more about?”

Keep in mind that the goal here is to . . .

5)    Get the Formal Appointment

This is where you will present your investment program to the private money prospect. I’ve provided a link in my bio below where you can download a free customizable PowerPoint presentation to use when meeting with prospects.

Make sure that all decision makers are present when you have your appointment.  Good meeting places would be an office (if you have one), a coffee shop, or the prospect’s home.

6)    Present Your Investment Program . . . Not a Specific Deal

It’s much easier for someone to object to a characteristic of a specific deal than to an ongoing investment program.

If you present a deal, your prospect may not have the required funds, may not like the area or the property.

Once you sell someone on your investment program and you find out exactly what range of funds they have, timeframe available, and how they would like to receive their interest payments, you would only present deals that make sense to them.

7)    Following Up is THE Key to Building Your Investor Base

The reason that I’ve been as successful as I have with getting private money is because I followed up with people that I presented to until they invested with me or told me to get lost.

I would add people’s names to my follow up list every time I had a formal appointment. Then, I followed up with them every time I had a deal that met their needs and goals.
There are three slides in the PowerPoint presentation that are titled, “Investor Evaluation.” Make sure to write down the information that you elicit from asking the questions on these slides. That’s how you will match up deals that you have on your plate with private investor prospects that you’ve met with.

Patrick Riddle has been a full time real estate investor for over six years, has done well over 100 deals, and has recruited over $6,000,000 in cash from private investors. He shares his knowledge and experience on his creative real estate investing blog. To get your free copy of the “How to Recruit Private Money Millions” eBook and PowerPoint presentation, go to http://www.mustknowinvesting.com/freestuff.html

Published March 12th, 2009

Rental Property Location Research Checklist

 

Where to buy your rental propertyHere’s the really good news… when you know the signs to look for you’ll find that picking a good location for real estate investing is fairly simple. It takes a bit of leg work to research the locations and find one that meets all of the criteria on the checklist, but when you do, you will also find an enormous opportunity for wealth creation!

In an interview for Canadian Real Estate Magazine, real estate developer, investor and co-owner of Boston Pizza Jim Treliving said of real estate investing “The most important thing is to do your homework…You have to read a lot, find out about the areas you want to go into, where the emerging markets are. It’s often not the biggest ones necessarily; it’s a matter of where you see growth, go and find out, go into the markets yourself.”

The goal of the checklist is to have a barometer to use when locating a good area to invest in. Essentially you are trying to find out if the market is staying the same or is about to make a turn for the better or the worse.

The main elements in our checklist are:

Familiar Area,
Population Growth
Good Employment
Good Transportation
Healthy Housing Economy
Appealing Opportunities.

 

For some of the above items you want to see trends and where they are heading over a longer period of time for an overall market – like population growth for example. But, you will also want to find out what factors may impact that trend. In Vancouver, we are looking forward to the 2010 Winter Olympics. This has had a significant positive impact on employment opportunities and has likely contributed to a growth in the population in the last 24 months, but if you only looked at the employment or population trends you wouldn’t know that this trend could reverse or slow significantly after 2010. So, you need to take a look at the trend and then figure out why it is the way it is and what is likely to happen in the future.

Starting with an area you already know reduces your learning curve when you are starting out. Often this is not where we are currently living, but it’s somewhere we have lived or somewhere we visit on a regular basis. We do this to make it easier on ourselves. If we buy somewhere we don’t know anything about, it means we have way more research to do, and we have to start from scratch in building a network for that area. Then, we have to make an extra effort to stay on top of that market once we own a property in it. It’s possible, but it’s more work!

Ozzie Jurock, a Vancouver real estate celebrity, wrote a book called Forget about Location, Location, Location. In the book, Ozzie says:

In my view, it is always better to buy locally, because you can do your due diligence easily and deal with a local realtor. If you live in Toronto and want to buy in Phoenix, however, get in touch with a Phoenix realtor, particularly if someone in Canada is trying to sell you a packaged deal. The local realtor has the property perspective.

He also says, of buying from a distance:

Go there, look at it, kick the tires. Once you get there, you might find an entirely different property that will be a much better investment. Also, you have to bear in mind that if you’re investing outside your area, the people who are presenting you with properties are going to show you only what they have in their wagon. They’re not going to go out of their way for a stranger unless they’re assured a piece of the deal.

As you research all of the elements on the checklist, think about prospective tenants. Where will they work? How will they get to work? Where else would they live, if not in the area you are looking at? And, of course, think about an exit strategy. Julie wrote an article for the popular online e-zine Early to Rise called The Biggest House Buying Tip Ever about buying any property with the end in mind. It doesn’t matter if you plan to live in the property or rent it out … before you buy, envision yourself selling it.

You are making an investment only if there is a reasonable probability that you will make money on it while you own it and that you will be able to make money when you sell. Good location research BEFORE you buy the property will increase the likelihood of making A LOT of money from the property!

Published February 19th, 2009

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