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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.

  1. 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.
  2. 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.

  3. 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+.
  4. 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.
  5. Jump
    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

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Two Secret Weapons for Investors

Every real estate investor should own one of these. It’s a portable pump, an extension cord and a garden hose.

I’m spending part of my Tuesday morning at a client’s house. The buyers did their inspection and noticed the sump pump wasn’t working, leaving the water levels in the sump only 4-6″ from the top. Since we’re right in the middle of spring melt, this could be a big problem.

Fortunately they let me know, I grabbed the trusty pump (which was in Brent’s garage – it’s nice to have good friends) and now the sump is nearly empty. We’ll be back every day or two until the new one gets installed (est $300-400) but it’s worth it to keep the basement from flooding. That’d make my clients angry and make it a little tougher to make sure we get their house sold.

The lesson here comes in two parts.

First, pay attention to the drainage around your properties. This obviously includes sump pumps. You or your tenants should check the sumps twice a year (I like early spring and fall). Remember, not all properties have sump pumps, so the other drainage issues should be considered too. That means lot grading/drainage, where you pile snow and the eaves/downspouts and their extensions. Make sure you know where the snow will go when it melts. The City of Edmonton has a great little brochure on sump pumps (PDF).

Second, have the right tools handy. If you’re self-managing even 2-3, one of these small portable pumps is a great investment. You should also consider a good box fan and know where to rent an industrial strength fan. Chances are you’ll have water in the basement in one of your properties eventually. You need to find out the source, remove the water and peel back the carpet/underlay to get it nice and dry. If you’ve got a sewage backup or drywall damage that can get more complex, but hopefully your tenants are like mine and let you know asap when issues involving water occur.

Two little tips that I’ve learned from experience will save you some time and cleaning. First, I tend to put the hose into the bath tub, since it’s large and you’re less likely to get water all over the place. Make sure you rinse it out since you’ve likely sucked up some sand and it can stain your tub. The second tip is to secure the end of the hose like I have here. It’s no fun when you plug in the pump and the water makes the end of the hose whip out of the tub, spraying water all over your vanity and floor.

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Highest and best use is an interesting phrase when it comes to apartment buildings. The idea that you should be maximizing the use of the land and structure makes sense for a lot of things but there’s limited stuff you can do with multi-family structure short of turning it into a condominium, and I’m not a fan of that idea.

So what can you do to increase the income and reduce the expenses through change of use?

1. Change storage or offices to more suites.
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There’s lots of properties out there with so-called illegal suites. Often they’re a store room or the caretakers office turned to a bachelor or one bedroom unit. You can usually identify them by checking the building and development permits to see if the number of units they applied for is what you’re seeing today. The cheaters’ way is to count the number of electrical meters – there should be one for every unit and one or two for the house power (common areas and external lights).

While you own the building, income is income. It’s best if you look at making a legal unit, complete to development permits, parking, wiring etc. That’s not feasible for many owners, so you need to make sure you’re renting a safe place to live that does it’s best to comply with fire, building and safe housing standards. If someone dies during a fire in your building you’ll have bigger problems to deal with than just some smoke damage.

They’re a bit of a liability when selling – if you have 14 doors plus one illegal suite, don’t expect to get 15 doors worth of value. The rent for that suite probably won’t be counted against the income by lenders. Just be happy with the extra cash-flow while you own it!

2. Change main floor residential units or 4-plex units to commercial space.

The City of Edmonton is a big fan of mixed residential-commercial developments right now so I get a lot of questions about the idea. There’s benefits to commercial (office or retail) units compared to residential. At $15/sq ft on a net lease you can get $12,000 for an 800 sq ft unit, PLUS operating costs of (for example) $5-10/sq ft which are the actual/budgeted costs for utilities, condo fees, management fees, property tax etc. You end up taking $1000/month and the tenants cover the costs so you end up farer ahead. The down side is you’re potentially looking at rezoning, allowing your tenants to get a business license, more traffic through your property and more demands for parking, cleaning and upkeep.

I’ve seen at least one 4-plex on the market this year that’s been completely turned over to commercial space. Then again, I’ve seen a couple downtown office towers converted to loft space.

3. Add a floor!

The idea of adding floors just makes my head spin. I’ve seen one person do this with a single family home this year and i recently walked through a 3 story apartment building that had a 4th floor added. There’s a lot to consider here – engineering costs are not insignificant, you’ll have to pull the old roof and re-roof, built the floor and then put a new roof on. You might end up going from a flat membrane or tar and gravel roof to a sloped roof with asphalt shingles or metal.

Compared to building new, when adding a floor to an apartment building can save on digging a foundation, concrete, buying land and drafting up full plans. All you’re really doing is copy and paste. It’s also a slightly smaller project (in terms of total construction), you might be able to do the work with tenants in place so you don’t loose cash-flow, and you can make improvements like adding insulation to the roof and walls.

4. Add a Garage!

I’d love to own a piece of land with nothing but garages on it. (I suppose that’d be called a self storage facility…which I should probably look at.) If you’re lucky enough to own a building with a big chunk of land, consider paving or putting down gravel to make some of it parking and rent that out. Or, you could take the next step and build a garage. There might not be much demand for surface parking at your building but there’s always demand for a good garage. I’m a sailor and I know a lot of guys who would be interested in having a place to store their boats in the winter.

Building a double garage costs between $15,000-30,000. Even if we go towards the high end of $25 for a double garage and get $300/month that’ll still pay for itself in 7 years and there are essentially no operating costs to a garage.

5. Demo and build!

And finally, I think it’s high time we get back on the bandwagon of building apartment buildings. The cost of construction has improved and you can make money at this again. The issue is the cost of land can make this a bit tougher. If you already own a building, particularly if you’ve had it for a while, this is right up your alley.

Two reasons I think this can work well for existing owners. First, you don’t have to be a builder – I have several builders who joint venture with owners to take care of the demolition, all of the build and at the end of the day you both own a great looking property with better tenants and resale prospects than before. The second is the seldom understood concept of a terminal loss.

Pretend the value of your property today is $1,500,000 – we’ll allocate $1,000,000 to the land and $500,000 to the building. If you tear down the building today, you’ve just destroyed $500,000 and that’s a tax loss you can carry forward for 5 years. So if you go and build a building, then sell it for a $500,000 profit (or make $500,000 profit by renting it out), then you don’t get taxed on any of that $500k because you have a loss from the old building you tore down.

See, there’s lots of interesting things we can do with apartment buildings!

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Awesome, Epic and Attractive Mortgages

Ok, over the top headline, but something caught my eye on twitter this past week. Erwin from Hamilton tweeted a question I’m hearing more and more often.

I love buildings that I can keep forever, or almost forever. My family owns a couple that Grandpa bought 40 years ago. In the context of a 40 year investment, 10 year mortgages are great. Considering the long term average interest rate is 8.8%, I think that 3.85% is brilliant. Don Campbell seems to agree with me, if it’s the right type of asset and fits your goals and vision/strategy.

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Real Estate Anniversaries Make Me Think

Every fall I have to renew my real estate associate’s license with the Real Estate Council of Alberta. It’s a funny coincidence that it’s the same time of year when I made the move from doing full-time SEO for Enquiro/Mediative to doing full time real estate. Now I’m two years into being fully licensed and busy as can be. I’m happy that I’ve got Brent (aka Dad) as a partner and we’re well on our way towards the goal of being Edmonton’s #1 Multi-Family REALTORS®. We’ve got a part time accountant on staff and recently brought aboard another part-time virtual assistant from the Phillipines named Judd.

Things seem to be ticking along like clockwork and that’s usually a good time to step back and think about things.

  1. Everyone’s a marketerSeth Godin was right, we’re all marketers now. As a real estate agent or as a professional investor, it’s all marketing. Along those lines you’ve also gotta realize that it’s hard to market crap. Do a good job on a few projects, rather than try to chase thousands. Don Campbell gave a great talk at REIN’s Capital Raising Conference about ‘building your list’. His crucial point was that your list should only be 2-3 people – the right people. That leads me to my next profound thought.
  2. It’s all list building. Networking, finding JV partners, choosing contractors, vacation planning – whatever you’re on about, you’ve gotta keep track of who you’re meeting. Social media has been great for that since it’s easy to add people to Facebook, LinkedIn or Twitter.  There’s also some great software out there for keeping track of people and your business such as HighRise from 37 Signals. Even if you’re just rocking the rolodex, make sure you’re keeping track of people so you can remember them.  Two things I learned just this year are tiny little tips. First, from James Knull, when you’re at a conference or trade show and people are giving you their cards, turn it over and on the back write what their biggest need is and their most recognizable physical characteristic is. The second is from my own office and is head-smackingly simple. We get a printout every week of all the messages we’ve had paged out to us, such as when a buyer calls the number on our signs. I went an awfully long time just throwing them out and discarding buyers who I though weren’t interested. Each phone call costs money to get – money for signs, listings and ads. Each contact should be carefully screened and evaluated before you decide to keep them or toss them.
  3. Fire more people. Now that you’ve gotten the list-building part of things down-pat, it’s time to fire people! I’m a big believer of the 80/20 rule; 80% of your business comes from 20% of the people. Few things in our business made our lives simpler and more profitable than deciding that we’re not going to chase people, jump and run for prospective clients, nor drive all over the place for meetings without commitment on both parts. I know of at least one deal which I missed out on double ending because I wouldn’t meet a caller at 7pm when she called at 4:30pm. That’s just fine. We choose the people we work with and Brent and I are not afraid to say when we don’t think we’re the right match.  We recently printed out our 1100-person client list with the goal of firing 20-30% of them, together with picking the best 10%. I’m a believer in Dunbar’s number and every time we bump into it we’ll find a way to grow or shrink to ensure the quality of our relationships.
  4. People loose money. I’ve had to tell three people they’re going to loose $20,000-50,000 on real estate if they sell now, or even if they do nothing. And that was just on Monday. We’re about 5-years out from the peak of the market, mortgages are at renewal, JV partnerships are nearing their theoretical maturity dates and there’s still a lot of people who are underwater. Real estate is only a sure bet as far as you have a quality product and the benefit of time. Be very, very careful what you buy. Pick quality and area with break even cashflow over sketchy crap with theoretical huge cashflow.
  5. Profitability comes slowly. We just met with our accountant last week and for 2012 to the end of August we’re running at a 52% operating expense ratio. I consider that not bad since we’re working very hard to reinvest in systems, grow our multi-family database, listings and focus on the long term. It’s also a bit of a step to share financial metrics like that. I can’t think of another real estate agent or company which does, but I want to be transparent, let people know what’s going on and see how we share in their success or failure. It’s one of the best things I learned from the tough growth times at Enquiro – when we were trying to make tough changes or money was tight Gord would have people put the whole companies financials on whiteboard graphs in our morning huddle area. It’s shocking, inspiring, empowering and encouraging to be trusted with the knowledge, share the load and celebrate the success together.

Here’s to many more very exciting years.

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I’m New Here! (6 pics)

I’ve shared a lot of stuff on this blog over the years and I’m thrilled to be able to share that Megan and I welcomed our second son into the world last Friday evening. Sam showed up just a hare under 8 lbs, happy and hungry. We’ve received lots of great calls, comments, tweets, emails, texts and snail mail from friends, family and clients. Y’all are just awesome.

Here’s some more cute pics of our two boys – we’ll get on to an exciting real estate investing topic next week – multi family due diligence!

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Our Sam on the left with his cousin Page on the right and Great-Grandma in the middle!

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Debt Limit – A Guide to US Debt

I stumbled on this short film thanks to David Sandbrand on Facebook. It’s hilarious, honest, and very insightful. Sure, countries aren’t people but this puts the US budget deficit and debt numbers in to a very understandable place. It’s a big part of the reason I don’t advocate buying US real estate. Enjoy!

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