Five tips to fast-track your first (or fiftieth) investment purchase
Several hundred investors, from complete novices to people with hundreds of doors, attended REIN’s most recent ACRE Live event in Toronto last weekend. That always leads to a flurry of phone calls and emails, even when we don’t actually attend the event. I’ve noticed some lack of focus among people lately (not just REIN members).
To save everyone some time, here’s a couple thoughts on how you can shorten the timeline between today and your next successful investment purchase.
- Decide on what type of assets you’re considering
There’s a bewildering array of choices out there for investors, even just in single family – duplexes, single family, suited single family, townhouses, carriage homes and apartment condos. There are advantages to each type and those can vary by city and area. You either need to wrap your head around what you’d like to focus on (and the rest of this post should help with that), or you sit down with a Realtor who has walked the Final 30 Feet. Good agents should be able to show you a handful of samples (think 4-6 total) that give you an idea of the different properties/areas. You will be more successful if you focus and become the expert on an area.
- Understand what type of people you’re likely to attract
A huge part of people’s problems with real estate investing centre around the tenant from hell. Nothing can prevent this. You can have the best screening and tenant supervision programs ever but you’ll get a con-artist eventually. My point here is that you’re going to see different people attracted by different areas and property types.One of the basic REIN properties they teach people to analyze is a suited house with a double garage. These can be great, but you’ve got to work a little harder to make sure they’re legal and comply with building codes and city rules. The upstairs tenants are usually great and stay for a couple years. The people who rent the garage are either the upstairs tenant or someone who wants to store a car/boat/RV. The storage people are great, but I think it can be best to go for someone who actively uses their vehicle – they’re more likely to appreciate the property and use it appropriately.
Take a look at the tenants around the area – do a drive by of the area you’re considering. Visit the local grocery store at 9-10pm to see if there’s less desirable people out. The real asset in real estate is the people. They pay your bills and make sure you can hold the property for years to come and benefit from mortgage pay down, cash-flow and appreciation.
- Know your numbers
You’ve got to develop some sort of budget that you can work around and that you can easily adapt to different properties. A condo townhouse won’t cost you as much in maintenance as a free-hold half duplex. That’s because the condo corporation is responsible for the structure, siding, roofing, windows and parking lot – all costs that (should be) part of your condo fees.I plan for:
Vacancy: 3-5% (refer to CMHC’s published vacancy numbers)
Repairs and Maintence: 5-8% (less for condos, more for single family)
Condo Fees: Prepare for the increase. For my typical $180-250k townhouse in Edmonton I expect fees to be $250-300. I put that on the projected side of the pro forma or cash-flow analyzer.
Property Management: 5-12% The high end is what you’re likely to pay for management on a suited house in Edmonton (if you can get management at all). I plan for 10% on single family through to townhouses and maybe 8% on a 4-plex. If I’m self-managing for myself I will go with 5% on the current numbers and up to 8-10% on the projected.
Insurance: For my townhouses (between $200-250k) I currently pay $250/year/unit. For a single family house, budgeting $1000 would be lots.
Taxes: check the city website and plan for next year’s projected numbers to go up by 5%
Utilities: In all my properties the tenants pay the utilities. If it’s a suited property then plan for something like a 40/60 split between the upstairs and downstairs tenants, or just charge them slightly more than last years’ average. The latter plan has the benefit of reducing fights between tenants.
Debt service: Given today’s sub 3% interest rates, I do my planning based on 3.5-4.0% and a 25 year amortization, then play with 30 years. You want to be prepared for the future but you don’t want to exclude otherwise solid properties because you’re being too paranoid.
Purchase Costs: Lawyer $1,500, Inspection $600, Reserve Fund $3,000-5,000, Immediate renovations $2,000+.
- Realize your limits and goals
Once you take a quick flip through the available options you should get a feel for what sorts of returns and cash-flow are possible in today’s market. Don’t call me expecting $1,000/month out of a $300,000 property or 40% on a simple purchase and rent formula. Anywhere between 10-25% ROI is doable. I also personally look for $20-40/month in cash-flow per $100,000 of purchase price (from a budgeted perspective). I’m happy with a $175,000 townhouse that cash flows $50-75 on paper.Decide what your goals are for ROI and cash-flow – both the ideal and the minimum.
When you find a decent looking property that meets the minimum you’ve defined above – write an offer and buy it. Don’t waste your agent’s time by saying things like “higher is better” or picking some random number out of a book. You’ need to be grounded in reality, clear in your goals and ready to move when you find a property that meets the rules you’ve laid down.
Knowing the playing field will help make sure you take more shots and score more goals. If you’re unsure what’s on the field, give us a shout. Brent and I would be happy to help you1