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3 Real Estate Investment Rules You Dare Not Break
Almost anyone can make money in an appreciating market. The real skill is making money in a flat or down market. Here are three rules you need to know about making money with real estate in both good times and bad. Knowing these rules and abiding by them will allow you to sleep well at night while those around you lie awake with anxiety and fear.
The Secret Sauce to Finding Great Investment Properties
The key to success in multi-unit residential investing is determined before you even close on the property. What do I mean by that? At any given time, there are dozens of properties on the market. The key to success is finding the RIGHT property and then moving on it before anyone else does.
Loan Declined? What Options do You Have?
This step by step guide explores the reasons that can result in a decline and provides guidance on how to improve the chances that lenders say “Yes!” to financing your next real estate deal.
How to Find the Best Tenants for Your Rental Property
When you understand what your target market of tenants want to rent you’ll know what properties to buy, you’ll know why they like that area and that type of rental and as a result you’ll know what to say to your tenants to attract them to the property.
Maximize Property Value Through Rent Increases
Income properties are in essence a business, and as such, you are constantly trying to do two things; (1) increase income and (2) decrease expenses. One of the easiest ways for landlords to do the former, at no cost and little effort, is to ensure that they hand out their annual Rent Increase Notifications in a timely manner.
The Power of Compounding Most everyone is well versed with compound interest and the concept of watching your financial investments grow over time. The higher the rate of return, the more quickly your investment increases. But compounding is not only reserved for RRSPs and Stocks.
about BOOM Magazine BOOM Magazine is all about property investment. When this magazine was conceived, the market lacked some real content relating directly to property investment. It seemed like just about every realtor could contribute an article about selling your home, and it would be in blogs and magazines all over the place. BOOM Magazine was created for the property investor, by the property investor. Each month, you will see contributions from professionals in the market as they share their experience in the field. Within BOOM Magazine, you can expect the very best of our market - whether it relates to property investment, financing and leveraging or the different asset types, BOOM Magazine will be sure to have it as an editorial. Would you like to contribute to BOOM Magazine? Email editor@bestofourmarket.com and we’ll talk. Would you like to influence the direction of the magazine? Register to subscribe and vote on the polls on what type of articles you would like to see more of.
contributors Julie Broad Julie Broad has been investing in residential real estate for over a decade across Canada. She’s a featured keynote speaker and an award winning real estate blogger with a passion for helping others transform their financial future with real estate investing. Connect with her at: www.revnyou.com
Sylvia Sigurdson For over 14 years, Sylvia has been assisting people with their mortgage needs, originally as a licensed realtor and now as an Accredited Mortgage Professional (AMP) at Mortgage Depot in Victoria, BC since 2004. She has specialized in helping her clients acquire investment real estate as part of a wealth-building strategy and excels at structuring mortgages with the greatest tax advantage in mind. www.mortgagecanada.com
Julie Jones Julie Jones is an independent accredited mortgage professional (AMP), who’s focus is on providing the best mortgage option for clients financing needs. With a BA from Queens University, and extensive experience working in the real estate industry, she is able to offer the best options when it comes to your financing needs. Knowing that your time is of upmost importance, she only brings the best options forward. Customer service is top priority. www.bcmortgageinfo.com/julie
Dalia Barsoum Dalia Barsoum , MBA , FICB and Enza Venuto, AMP, CMP and are lending advisors with CENTUM Streetwise Mortgages #11789 and real estate investors with over 48 years of combined lending , financial and investment experience. The team provides advisory services and lending solutions tailored to Real Estate investors and different investment strategies www.streetwisemortgages.com
Paul M. Hecht Paul M. Hecht is an investor, speaker, award winning Real Estate agent, Best-Selling Author of EVERYDAY Real Estate MLILIONAIRES™ How Average People REALLY Do It and Canadian Real Estate Wealth Magazine’s “Ask the Expert” columnist. www.PaulMHecht.com
Paul Kondakos Paul Kondakos, BA, LL.B, MBA, has over a dozen years of experience in locating, financing and managing multi-unit residential apartment buildings within Canada. www.realityhub.ca
3 Real Estate In You Dare N
nvestment Rules Not Break Almost anyone can make money in an appreciating market. The real skill is making money in a flat or down market. Here are three rules you need to know about making money with real estate in both good times and bad. Knowing these rules and abiding by them will allow you to sleep well at night while those around you lie awake with anxiety and fear.
3 Real Estate Investment Rules You Dare Not Break By Paul M. Hecht Almost anyone can make money in an appreciating market. The real skill is making money in a flat or down market. Here are three rules you need to know about making money with real estate in both good times and bad. Knowing these rules and abiding by them will allow you to sleep well at night while those around you lie awake with anxiety and fear. Rule No. 1 – Invest, Don’t Speculate Perhaps the costliest mistake novice investors make is thinking that they are investing when what they are actually doing is speculating. Speculating is like driving a car with a blindfold on and expecting to arrive safely. Investing is knowing how to get to your destination before you get into the car, fueling up the night before, having a charged cell phone and first aid kit for emergencies. So, how can you tell if you are investing or speculating with real estate? Any time you are guessing or counting on unknown variables, you are speculating. Investing is based on concrete facts like mortgage pay down. The mortgage balance can be calculated to the penny five years from today. Rent and expenses can be established ahead of time. Price appreciation cannot. Price appreciation is an unknown variable. Yet, many people buy real estate with the sole intention of price appreciation as seen by the speculators who got caught with pre-construction condo flips. They were hoping that prices would continue upwards allowing them to cash out higher. They based their buying decision on an unknown variable. To avoid these speculative variables from the start, ask yourself how you are making money with the investment. If the investment is based solely on making money through variables such as price appreciation or simply guessing on any cost or ex-
pense without verification, then you are speculating, not investing. Rule No. 2 – Buy Real Estate Investments that Support Themselves Any investment that you purchase must be able to support itself on an ongoing basis and not be dependant upon your financial support, even if your accountant says it’s a good tax write off. For example, if you borrow money for the investment, then the investment must generate enough income to cover the loan payment. Consider what would happen if your situation changed and you were no longer able to support your investment. How would you continue to support it? Not only could you lose your investment, you could risk jeopardizing your own home as well as your entire financial future. Rule #2 is very simple. If there isn’t enough income from the investment to support itself then don’t buy it. You don’t want needy investments. Rule No. 3 – Buy on Facts, Not Emotions Keep your emotions in check. This is perhaps the trickiest of the three rules. Even seasoned investors get caught here. So how do you know if you are basing your investment decision on facts and not on emotion? Emotions are something that is felt which often makes it difficult to walk away. Facts don’t possess any emotion. They are neutral and allow you to objectively analyze any deal making it easy to decide whether an investment is worth your time, effort and money.
Falling in love with a property that you just have to have at any cost, fears of being left behind or dying broke or feeling that the deal in front of you might be the last deal on earth, are all emotions. Starting with facts such as mortgage pay down, market rents and associated costs on each property before you view a property doesn’t allow emotion to interfere. The investment decision is made before you look at the property. When you physically view the property you are prepared ahead of time and simply confirming your facts based on the actual physical condition and location of the property. If the numbers still make sense and the property is in good condition, now you are basing your investment decision on facts, not emotion. Before you sign on the dotted line, ensure that you are investing not speculating, that your investment will support itself and that your investment decision is based on facts, not emotion. If so, then commit to the deal and sleep like a baby.
The key to success in multi-unit residential investing is determined before you even close on the property. What do I mean by that? At any given time, there are dozens of properties on the market. The key to success is finding the RIGHT property and then moving on it before anyone else does.
The S Finding Gr
Secret Sauce to reat Investment Properties
The Secret Sauce to Finding Great Investment Properties By Paul Kondakos The key to success in multi-unit residential investing is determined before you even close on the property. What do I mean by that? At any given time, there are dozens of properties on the market. The key to success is finding the right property and then moving on it before anyone else does. In most cases this means literally looking at hundreds of properties to find the one diamond in the rough. To many this is a great enigma and is what scares away most prospective investors. I’ve been investing in multi-unit properties within Canada for more than a decade and have done very well following a simple formula. Before buying any investment property I ensure that as many metrics as possible are tilted in my favor, which helps to limit downside and significantly increase the potential upside. All the metrics that I focus on are steadfast numbers, which determine the profitability and cashflow of the property and have nothing to do with potential appreciation (this helps to significantly limit any downside when the market turns and any appreciation is as bonus). The Right Geographic Region You can find some incredible bargains out there, but if you can’t get tenants to fill your vacant units, you will be singing the blues. You need to ensure that the area/region that you are looking to buy in has its metrics moving in the right direction. By that I mean you have to do some research on the following which can influence your investment: • Unemployment • Population Growth • GDP Growth • Vacancy Rates • Rental Rates • New Projects
•
University in Town
Cap Rate This is usually the first metric people look at to determine whether the potential investment is appealing to them. Obviously the higher the cap rate the better, but in this period of low interest rates, cap rate compression has been taking place (Plain English: Cap rates are going down because interest rates are going down) making it much harder to find properties with high cap rates. Cities like Toronto and Vancouver now command a 5% cap and less. As such, I encourage investors to look to the outskirts such as towns in rural Alberta and B.C. or University towns such as Victoria, Edmonton, and Kelowna where you can still find cap rates of 7% and beyond if you look hard enough. Although interest rates are very low right now and may allow properties to cash flow, if you buy a property with a cap that is too low (anything below 6.5% is too low in my opinion, unless you are buying all cash), you may get hurt when you mortgage is due for renewal. Rents This is where I have made a significant amount of money in the past. Many investors tend to get complacent after years of owning a property and leave their rents significantly below what the market will bare. In this instance, if you buy the property at a good cap rate, you can score a home run if there is room to significantly increase the rents. Look for properties with rental rates below market (use websites such as CMHC and viewit.ca to determine the current going rates). On the flip side, ensure that the rental rates, which you see in an income statement are either at or below market,
because if they are above market, you will have a tough time keeping them rented at those inflated rates, which will lead to an increase in your vacancy rates. Expenses Finding efficiencies in inflated expenses is another way to help make your investment is more lucrative. This skill usually comes with time and experience in owning and operating an investment property as you get a feel of what the average water, gas, hydro, management and maintenance bills should be. Spotting inefficiencies can be a quick way to add value to a building. The point once again is to look for opportunities to either increase income or decrease expenses. Great properties are out there, and now that you are armed with the knowledge of what to look for, its time to put the theory into practise. Good hunting!
Loan Declined? What O
If your lender declines your application fo You found the investment opportunity you and you are eager to waive the financing c
Options do You Have?
or finance, what options do you have? u have been looking for. Your offer has now been accepted condition..
Loan Declined? What Options Do You Have? By Dalia Barsoum You found the investment opportunity you have been looking for. Your offer has now been accepted and you are eager to waive the financing condition. You have submitted a financing application through your lending advisor or directly to the lender and are anxiously waiting to hear back. Declined is the answer! Not what you were hoping to hear. What happened, how could you have avoided this and what should you do? This step by step guide explores the reasons that can result in a decline and provides guidance on how to improve the chances that lenders say “Yes!” to financing your next real estate deal. Common Reasons for a Loan Decline It is important to recognize that not all lenders are equal. Lenders differ in terms of: • The geographic focus of where they lend. Some lenders are not willing to lend in cities or towns where property value fluctuates or the local economic fundamentals are weak (i.e. lack of job growth, infrastructure expansion) • The property types they lend against. Some lenders shy away from lending towards student/ rooming houses or rental properties all together. • The number of rental properties one can own. Some lenders will finance a maximum of 2 rental properties per individual/entity. Others are willing to go with 5 while some may not have a limit. • The criteria they use to evaluate the strength of a particular application each lender has its own qualification ratios for evaluating applications. Some lenders accept higher investor debt load than others and some will consider the strength of the property over the applicant’s. • Product offering. Lenders differ in the client segments they focus on. For example, some have good products for the self employed or clients with
challenged credit while others don’t. They also differ in terms of the extent of support documentation required from the client to close the deal. • How they factor in rental income. Lenders differ in how they look at rental income and how much of it will be factored in the evaluation of your application. It would be nice to factor 100% of the rental income on your application. The reality is that lenders factor in only a percentage (typically between 50% - 80%). Some would consider it extra income, while others look at rental as a way to offset rental expenses. • The structure under which they finance the deal. Some lenders won’t finance deals that are setup under a corporate structure. Simply because they perceive it as a higher risk deal due to the effort/costs associated with dealing with multiple parties if a foreclosure has to take place. With the above understanding, you can see why it is so important to send the application to the RIGHT lender not just the one offering the lowest interest rate. The RIGHT lender is one who’s lending philosophy (encompassing all of the above factors) is in line with your specific situation and needs. Sending your application to the wrong lender will result in a decline. How can you improve your chances of approval? The worst thing you can do when it comes to financing is to follow what we call “ A trick or treat” approach to shopping for a loan. What we mean by that is knocking on various lenders’ doors by submitting your application to several simultaneously or one after the other if it gets declined. While shopping around is very important, doing it in the manner described above will not only hurt your credit if each of those lenders pull a credit report on you but will also waste time if you are not 100% sure that you are submitting to the right lender.
There are better ways to shop the deal and increase your chances of getting approved.
If you have been declined by the lender Ask for the reasons behind the decline and discuss any misunderstanding that may have occurred and contributed to the decline and if there is anything to do about it. It is worth it to take this step first before taking your application somewhere else.
Before you submit / resubmit your application Before you submit or resubmit your application after a decline to the next lender, you need to speak with a lending advisor that specializes in financing rental properties and who has access to multiple lenders in that area. Discuss your story with the advisor, including your financial situation, investment strategy and provide him/her with information about the deal at hand and the reasons your deal was declined ( if any). Your advisor will be able to package your deal and with her/ his understanding of the various lenders’ policies, areas of strength/weakness and your investment goals, he/ she will be able to submit your application to the right lender and increase your chances of approval.
Relationships Matter Do not underestimate the power of relationships to the success of your investment career. Selecting the right lending partner early in your investment plan is key to getting approved and continuing to get approved. Look for a track record and specialization in financing real estate portfolios as well as access to various lenders and/or products that are tailored to your specific situation and investment strategy. Take the time to educate your partner about your goals and investment plan from the get go and discuss with him/her the financing plan for any deals that come your way early on and before committing to an offer. Your lending partner acts as your sounding board, reduces the hassles associated with shopping around for a loan and can direct and educate you on how and what to do with your application. With their understanding of the various lending products out there, their lender relationships and market knowledge they will know what works / does not work early on in the process and before submitting your application. If you follow the above tips, you will only get the lenders to say “YES!!� to your next real estate deal.
How to Find the Best Tenants for Your Rental Property When you understand what your target market of tenants want to rent you’ll know what properties to buy, you’ll know why they like that area and that type of rental and as a result you’ll know what to say to your tenants to attract them to the property.
How to Find the Best Tenants for Your Rental Property By Julie A Broad Finding the best tenants for your property really comes down to marketing. Specifically, direct response marketing. When you understand what your target market of tenants want to rent you’ll know what properties to buy, you’ll know why they like that area and that type of rental and as a result you’ll know what to say to your tenants to attract them to the property. Finding the best tenants really is as simple as: - Understanding your target market before you buy. - Identifying the key features they want in a property and WHY they want that feature. - Creating advertising that promotes the features and the unique opportunity your rental property provides to meet their needs. Principle #1: It’s always about your target market This can be done once you own a property but ideally you’ve done this in advance so you already know who your target market is (and ensure there are a lot of prospects around!). Visit open houses in the area and chat with Realtors or call a few property managers in the city. Ask them about must-have features. Ask them about the people who are renting. Why are they choosing this location (is it a local school, easy access to transportation
or some other feature that is attracting them to the area)? Then walk around and chat with people in coffee shops and parks. Find out where they work, what they like about the area and other general information. Pay close attention to apartment buildings with no vacancy signs. What size are the units? Where are they located - perhaps near a subway or bus stop or across from a park? Do the units have any special amenities? Pretty soon it will become apparent what it is that tenants in the area are hungry for. You might learn that air conditioners are a critical feature for a rental, or maybe it’s two-bedroom units with dishwashers, or maybe it’s the three-bedroom homes near the high school that always rent out quickly. That’s the kind of property you want to buy. Principle #2: Identify the Key Advantage of the Area and Property You want to ensure that the property you’re buying has appeal to your ideal tenant. The more appealing it is to your target market, the higher the rent you can command and the easier it will be to sell at a great price in the future. For example, in some areas a home must have a garage to have the greatest appeal. In others you’ll need to have a great back yard. Get to
know what is a real competitive advantage in a property and either find a property that has that or that you can add that feature to relatively easily and affordably. Principle #3: Focus on benefits, not features When you write an ad to attract tenants to your property, base it on the key advantage you identified or you created - and include plenty of additional benefits that tenants will enjoy by living there. The typical ad - “Freshly painted 2-bedroom, 1 ½ bath apartment on Beach Street, dishwasher, washer/dryer, hardwood floors available September 1” - is all features. Instead, you want to focus on things like the spectacular view or the apartment’s easy access to award-winning schools or that it is steps from the trendy shopping district in the city. And emphasize the advantage point. It’s important to appeal to the positive emotions that might make someone want to buy your property. Remember, you aren’t trying to rent your property to just anyone. You have a target market with an ideal tenant in mind. Use that same emphasis when you write an ad to attract the best tenants at the highest price. Describe how convenient and comfortable your unit will be for your prospective tenant. Allow them to imagine themselves enjoying their life in their new home. Applying these marketing principles will help you pick easy to rent properties and making a lot more money from them along the way.
Maximize Prop Through Rent I
perty Value Increases
Income properties are in essence a business, and as such, you are constantly trying to do two things; (1) increase income and (2) decrease expenses. One of the easiest ways for landlords to do the former, at no cost and little effort, is to ensure that they hand out their annual Rent Increase Notifications in a timely manner.
Maximize Property Value Through Rent Increases By Paul Kondakos Income properties are in essence a business, and as such, you are constantly trying to do two things; (1) increase income and (2) decrease expenses. One of the easiest ways for landlords to do the former, at no cost and little effort, is to ensure that they hand out their annual Rent Increase Notifications in a timely manner. This will both strengthen your cash flow and in turn increase the market value of your property. In most cases, the rent for a unit can be increased if at least 12 months have passed since a tenant first moved in, or if at least 12 months have passed since the last rent increase.
Proper Notice
Will I Lose My Tenant?
Typically at least 90 days written notice is required. The governing provincial body provides forms to be used for rent increase notifications. In Ontario, the form is an N1 - Notice of Rent Increase. In B.C., the form is an RTB-7 - Notice of Rent Increase. Prudent landlords will have already issued their rent increase notifications for 2013. For those not-so-prudent landlords, if you act now and issue your rent increase notifications anytime before Nov. 1st, the rent increase will take effect starting Feb. 1st, 2013.
One of the most common reasons that landlords do not issue Rent Increase Notifications is that they fear they will lose good tenants. In all my years of handing out Notifications, I’ve never lost a tenant due to the increase (some have complained but never left. At the same time, if it does become a point of contention, you as the landlord have to explain to them that your operating costs are continually subject to inflation. This includes, property taxes, hydro, water, gas, waste removal, etc. Unfortunately inflation is a part of our lives and unless you as the landlord are issuing Rent Increase Notifications, you alone are absorbing the ever-increasing operating cost, which eats into your cash flow and thereby reducing the market value of your property.
Rent Increase Guideline The rent increase guideline applies to most private residential rental accommodations with certain exceptions. The guideline varies from province to province so make sure you check with your governing provincial body. In Ontario, the maximum allowable rent increase for 2013 is 2.5% (which also happens to be the maximum allowable under the recently imposed cap in Ontario). In British Columbia, the maximum allowable rent increase for 2013 is 3.8%. Small Increase = Big Effect Let’s look at increasing the rent of just one unit, which currently rents for $800/month. The allowable rent increase guideline in Ontario was 3.1% for 2012. As such, you could increase the rent of this unit to $824.80/month. (You may be tempted to round it to $820 or $824, but that would be a mistake as every penny counts.) You have now increased the income that this one unit generates by $24.80/month or $297.60 on an annualized basis. It doesn’t seem like much until you put the power of the multiple to work. $297.60 in annual income is worth $5,952.00 in market value based on a 5% cap rate. And that is just one unit. How about if you have 6 or 12 units that are due for a rent increase?
The Po Compo
Most everyone is well versed with com your financial investments grow over ti quickly your investment increases. But c and Stocks.
ower of ounding
mpound interest and the concept of watching ime. The higher the rate of return, the more compounding is not only reserved for RRSPs
The Power of C Most everyone is well versed with compound interest and the concept of watching your financial investments grow over time. The higher the rate of return, the more quickly your investment increases. But compounding is not only reserved for RRSPs and Stocks. It applies to real estate investing as well. The two significant instances where compounding relates to real estate are “Increase in Value” and “Increase in Rents.”
growth of real estate prices and here’s an example of how simple inflation can affect real estate values over 20 years:
1) Increase in Value and Inflation
That’s a $250,000 increase, or a 50% increase, and only half of the equation.
When considering real estate as an investment, longterm growth is only half of the consideration (cash flow being the other). If they’re not looking for cash flow, most investors want a property to at least carry itself so they don’t have to sustain a negative cash flow every month. If you’re going to invest in a rental property, Canada Revenue Agency (CRA) expects you to make a profit and are not that keen on you taking a loss every year, indefinitely, in order to reduce your personal income tax bill. So when an investor finds a property that can ‘break even’ each month, holding onto it allows them to take advantage of the equity increasing over time. Inflation is the main factor that drives the constant
$500,000 Current Value in 2012 2% Canada’s goal inflation rate (average has been over 3% over the last 100 years, so this is conservative, but in line with economic projections) $750,000 Projected Future Value in 20 Years
Here’s the second half: 2) Increase in Rent Using the same inflationary rate of 2%, here’s a look at what the rents would be: $2,500/month rents in 2012 (rents on the West Coast can be typically .5% of the property’s value) $3,725/month in 20 years Because the rents are increasing each year, if you put the increased rent (less inflationary increases in property taxes, maintenance and other costs) towards
Compounding the mortgage payment you could easily pay off the mortgage in 20 years. (In reality, the better approach would be to take the additional funds and pay off the mortgage against your principal residence, but the outcome is the same – you’d have one of the mortgages paid off much more rapidly than what the original amortization was scheduled to be. In 20 years from now, you could own a free and clear revenue property worth $750,000 and have it generating $3,725/month. Even after expenses, $3,000 additional net income could be flowing into your bank account, helping supplement your salary, or your retirement income. Like anything, the Power of Compounding is Time. A lot of your profit is earned when you first purchase a property. In other words, if the market is flat and you get a distressed situation with the vendor, or you buy a place that needs some cosmetic renos and that improves it enough to both increase its value and rentability, these are all important for building up equity right out of the gate. These are things that should be done any time you are purchasing property. But time is what creates the most long-term growth. Even in a slow market, where values are not on the
By Sylvia Sigurdson rise, the longer you wait to purchase, the longer it will take to pay off the mortgage. Using the same example as above, if you were to purchase a property today for $500,000 or wait 5 years and purchase the same property for $500,000, at the very least, you’d have paid down over $50,000 on the mortgage, and be five years closer to being mortgage free. But a much more significant concept is to consider that five years worth of mortgage payments would equal $150,000. Even though you’d be paying the mortgage over the same number of years, you’d be waiting until you’re five years older to put the rent cheques into your pocket instead of the bank’s. If you like the real estate investing game, the sooner you start paying down the mortgage, the sooner you’ll build up equity, and the sooner you’ll be in a position to leverage against it to purchase another one. Compounding and time are strong allies in the real estate investment realm.
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