Last weekend Brent and I attended one of the Real Estate Investment Networks’ ACRES weekends. It’s always a good refresher weekend and the people I meet there always amaze and inspire me.

We often take out a booth to share our listings and our services as REALTORS®. However, since Brent joined me this July, we’ve been quite busy on the multi-family side of the business.  To help promote a few listings I did up 20″x30″ posters of a couple apartment buildings which are available. There’s always lots of discussion on what information goes into a proforma (financial summary) for a property and what investors can/should plug into REIN’s Property Analyzer for cash flow analysis. Here’s some assumptions you should consider, and some you should be aware of.

Inflation – Remember, the Bank of Canada aims to have inflation running between 2-2.2%, so for any costs that change, that’s my baseline.

Purchase Price – you should know your local market (or work with a buyers’ agent who does) well enough to know what the value of a property is before you look at the list (asking) price. Getting a discount with respect to list price does nothing but feed your ego. Know what properties have sold for, and be able to explain that to the sellers, personally, through your agent or in a cover letter. For some areas in Edmonton, I know the ballpark, so for quick analysis I just take 1-2% off the list price because for properly listed prices, that’s what things sell for. Again, there’s no substute for good data on sold properties and an agent who knows the area and the history.

Repairs and Renovations – I always assume at least $2,000 will be spend in the first few months. That’s both spent tidying up little things they sellers just did a quick fix for and also for normalizing the properties or making tenants happy. I usually get asked what I mean by ‘normalizing’. Ideally, all my properties have the same faucets, appliances, flooring, locks/door knobs, light fixtures, etc. That makes it faster, easier and cheaper to repair things when they break.

Current Rent – If you’re buying something that already has tenants in it, either single family or multi-family then this number comes from the vendor and should be confirmed before going unconditional and buying the property. If it’s vacant then you need to know what it’ll rent for today. Again, market knowledge is king and part of the reason I’m a fan of buying several units in a complex which you already know. To help make things easier for Edmonton investors, I’ve surveyed several property managers and investors to create a rental market survey that you can download for free.

Projected Rent – The projected rent comes in two flavours. First, this is how much you can rent it for or raise the rent to when you are next raising the rent or filling a vacancy. The second is where rents will go in the next few years. CMHC publishes some information and limited projections. For example, spring 2011 has the average 2-bedroom at $1030, with a projected 2012 price at $1060, or a 3% increase. If nothing else, I use a 2-2.2% increase, which is the Bank of Canada’s mandated range of inflation.

Vacancy – CMHC publishes lots of stats, but I also use my own historical vacancy because I have better than average property management. For apartments I use 4% and for single-family I use 5%.

Utilities – For all my single family properties I have the tenants pay the utilities. If I’m on the hook I look for actual historical amounts from the vendors, while for multi-family that’ll be included in the financial information provided during the due diligence period.

Property Management – As a rule I use 10% for single family through to 4-plexes. For multi family I use ~6% up to 8 doors, and 4-5% beyond that.

Financing – I use prime plus 1%. That’ll put us somewhere between the VRM and fixed costs. I also use a 30 year amortization, since that’s what I look for myself.

Multi-Family Specific Assumptions

Expenses – CMHC will use ~$3,600/suite/year in their projections unless you can prove that the real costs are lower than that. It’s still a good ballpark. Costs will be higher on older buildings, higher on concrete/steel construction that wood frame, and higher on poorly maintained buildings.

CAP Rate - Capitalization rates are always tough to figure out and one of the reasons we pay for private sources of sold commercial data. Today (Fall 2011) in Edmonton sellers are asking 4.5-6%, while CMHC is financing a maximum of ~7%.

Ownership and Tax - For multi-family buildings in Edmonton I always assume that the property is held in a company and will be subject to the top tax rate, which in Alberta is 17%. I also assume that the goal of the investor is long term buy and hold unless we’ve discussed otherwise. That way we have a base to determine how to handle slightly more complex items like maximizing the use of terminal losses if you decide to tear the building down and rebuild after several years.

There’s a projection for everything, but be sure to use realistic numbers. Also, it’s always a good idea to do a 5-year cash-flow model to get an idea of the impact of time on your investment.

Related posts:

1. Buying Multi-Family – Sellers’ Market Tips It’s 2011 and Edmonton’s still a funny market when it...

Last year I helped Brent Davies (my Dad) start a series of tours for investors to help them get familiar with the Edmonton market and the different types of real estate which commonly make good investments. We also used it as a chance to get people out into some of the neighbourhoods that attract attention because they’re cheap, but also present serious risks to investors. (Like the Black Triangle of East Edmonton)

We’re kicking off 2011 with a new tour, covering some of the same topics but in new areas with new houses. We’ve switched to Sunday afternoons to fit people’s schedules a little better and to give us more time for analysis and when someone wants to write an offer.

We meet at a Tim Hortons’ near the properties we’re looking at, usually at 12 noon. Then we chat a bit, head off to look at 2-4 properties and head back for coffee and to look at the numbers. The tours are completely free, but pre-registration is required. You can pre-register by calling Chris (780-905-7562) or Brent (780-297-2810) or by using the contact form.

Here’s the schedule for the first few months of 2011:

• Feb 13 – Suited Properties
• Feb 27 – Single Family Homes
• Mar 13 – West Edmonton Townhomes
• Mar 27 – New Construction (Does it work for investment?)

We usually get 6-12 people out, so please give us a call as early as possible so we can make sure we’ve picked appropriate properties and we don’t get surprised by 30 people.

Picure Credit: Woody1778

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Knowing what a potential revenue property will rent for is the most important and most difficult part of establishing a rental portfolio that has positive cash-flow and creates serious passive income. To help out my clients, readers and all you investors, I’ve teamed up with several investors, Realtors and property managers to come up with some ballpark numbers which should help make your lives a little easier.

Here’s the basic info for you. A screenshot follows and you can download the whole report free of charge. You can signup to recieve future updates here.

There’s a significant variation between the different areas of Edmonton, and within the different property types. Here are the highlights.

• The survey receieved responses from companies and individuals managing 744 units, with specific data for properties rented out in the past 30 days. Some additional data has been gathered by conversations with property managers. There are still gaps, so if you can contribute to the next edition of this report, please feel free to contact me.
• The greatest variance is seen in 4-bedroom houses, from $1400-1800/month, likely owning to the wider variety of product quality.
• Apartments and Townhouses made up the largest classes of properties held by contributors.
• St Albert, the South, West and Millwoods seem to hold a $100-200 premium over comparable units in the North.

Thanks to Davies Management, Prestigious Properties, Avangarde Property Management, 911 Rent, Jason Scott at Urban Mortgage Edmonton, Rentex, Candema Property Management and Glenn Simon Inc..

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15 years learning by watching

4 years building relationships

2 years buying my own stuff

Which leads to the experience of getting an email, making two phone calls and calling the seller back within 30 minutes of their email to say, “we’ll take it!”

I don’t advocate buying property sight unseen, and after I gave the seller a verbal we still had a chance to do a full walkthrough, but I’ll explain why I felt fine with this one.

1. A wholesaler I trust. The email came through from a wholesaler who I trust and my parents have bought from before. I trust their numbers and the types of properties they offer. They emailed me a 4-bedroom townhouse they had an contract on and were looking to assign. With properties like this there’s almost no way you’ll be able to get a 1st mortgage, so you’re left with bridge financing or closing in cash, and you’ve gotta do it fast.
2. A condo complex, neighborhood and renovation plan I know. They happened to find a property in a development I already own one unit in and am very familiar with. I like the board, the construction and know quite a bit about the recent sales. I know exactly how much renovation will bring how much value. It made the purchase a 90% automatic yes.
3. A joint venture partner ready to close. Being able to pick up the phone and have an experienced JV partner who could come up with $200,000 cash lined up is huge. This isn’t a particularly rich deal for me, but being able to help put it together was a significant personal achievement.
4. Skilled eyes for the one and only walk-through you’re likely to get. Bringing in my Dad, who is a great Realtor, Property Manager and who happens to be a Certified Engineering Technologist and a Journeyman Carpenter is like having a walking home inspection service. Then to bring my Mom in, who has done a lot of renos and is an Accountant is icing on the cake. We could have a second look if we really wanted, but when it comes to great deals, I want to be the easiest person on the block to deal with, so I’m looking to say yes/no as soon as possible and be true to my word. When it comes to wholesale or pre-foreclosure deals, the homeowners are frequently a little skittish so you want to be very careful about how you treat them.
5. Multiple exit strategies. This one is planned to be a flip, and we know the neighborhood well enough to make sure our renos fit the types of sales we’re looking for. I also already have a potential purchaser lined up. I also did the numbers and know that it’ll cash-flow like crazy if we end up having to hold it for unforeseen circumstances.
6. An all-star renovation team and contractors. Knowing which contractors I can have, including some ballpark estimates from a few contractors thanks to my wholesalers means the budget is pretty solid. Concerns are few, risks are low, awesome is high. There’s sure to be things that pop-up unexpectedly, but it’s great to know we have a wicked team to handle it.

Now I’m just looking forward to the process of getting the renos done!

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1. Call some FSBO‘s.
2. Go look at properties for sale.
3. Call your mortgage broker about new financing.
4. Check the renewal dates on your mortgages.
5. Call a friend who could be a JV partner just to catch up. Don’t talk about real estate (yet).
6. Sit down with your Realtor and define exactly what types of properties you want. Know prices, bedrooms, bathrooms, neighborhoods, amenities and transportation down to a very narrow range.
7. Check your records to see which of your tenants pay late on a regular basis. Call them up and see how you can improve the situation. (Online rent payments? Post-dated cheques?
8. Write some offers. Use a good backup clause and just do it.
9. Look at the cash-flow analysis from when you bought it. Compare it to the actual monthly expenses. Use that information to improve your next cash-flow analysis projection. I use different assumptions for repairs and maintenance depending on what reno I have to do and the condition when I buy it.
10. Find out what new rents on similar properties in your area are. You want to be reasonable. Don’t be the cheapest on the block; you’ll attract scum. Don’t be the most expensive, you’ll never keep it full. Be reasonable.
11. Make sure you’re advertising your vacancies on the best rental websites.
12. Go fix something. We call it preventative maintenance.
13. Do your ‘annual’ inspection of a unit. Decide what renovations might payoff with your exit strategy.
14. Run the numbers on a 3-bedroom townhouse (my favorite property).
15. Run the numbers on a four-plex.
16. If you’ve done #14 and #15, return to #8.
17. Take the time to learn more about a topic like commercial real estate investing, RRSP Mortgages,  Joint Ventures, Renovations, Rent to Own or Condo Conversions.
18. Write a story about one of your experiences: tenants, deals, financing, friends, people you’ve helped. Post it on a place like myREINspace or offer it as a guest blog post.
19. Make sure you know your tenants’ birthdays. Send them a $10 Tim Hortons’ gift card on the big day.
20. Make a list of all your properties and rank them from best performing to worst.
21. Try listing the worst performing one for sale. See if you can unload one of your dogs and move on to something better.
22. Go take some good pictures of a property.
23. Learn more about internet marketing.
24. Have some fun. Figure out how much you’d make if prices suddenly went up 30%. What if rents went up 20%?
25. Ask an experienced real estate investor if you can buy them lunch and pick their brains.
26. If you’re an experienced investor, offer your time to some newbies.
27. Remind yourself why you’re going to all this trouble.

Picture Credit

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It’s easy to understand how you can make money when you buy real estate. You find undervalued properties, motivated sellers, sweat equity or tenants from hell.

The real money, as well as the potential to lose it all, comes from what you do in the years after you buy. You can find 300%+ returns if you manage it right, or end up putting money in every month and selling for less than you bought it.

What you can get from a well managed hold is more than just good cash-flow. It’s a good looking property that’ll be on the leading edge of a market increase, first to benefit from an area in transition, will bring you more properties to buy and help attract new potential investors.

Like a VW Bungalow

I bought a 4-year old VW Golf TDI because it’s still better made, nicer looking and more reliable than the new North American cars (and VW is less likely to go bankrupt). When you buy a revenue property, you want the C-class building in a B-class neighborhood. Then you want to carefully bring it up to be one of the best B-class buildings around. You don’t want to make it shiny beyond reason (unless you have a very specific exit strategy), but you do want it to stand out in a good way.

I also invest in older townhouses. They’re simple, reliable, easy to fix and easy to fill up with tenants. They also have more exit possibilities than other types of investment real estate. There’s always a buyer: first time homeowners when prices are high (because they’re affordable) and investors when prices are low because they make sense. They’re easy to rent because they’re a natural step up from a walk-up apartment building; great for professional couples or new families. They’re never going to shine like a well renovated detached house, but they’ll be a reliable old Volkswagen.

Pay Now or Pay More Later

Every investor draws up a little budget before they buy a property. So much for mortgage payments, condo fees, utilities, property management, vacancy allowance, insurance and repairs.

Why do 80% investors fail to use their repair budget proactively? It’s good to know you have money to replace the hot water tank. But I’ve seen lots of investors go through a 5 year streak with no serious costs, and one day they discover that things are shabby looking and falling apart. Suddenly everything needs repair, renovation or replacement.

At least once a year, or hopefully once a quarter, you should do a quick walk-through and fix something little. This means painting before things peel, replacing fixtures before they completely stop working and spending money. However you’ll be shocked at how a new light fixture and painting a door every few months will silence the complaints over a $200 rent increase.

It’s also about managing cash-flow effectively. It might look good on a statement for the first two years if there aren’t any major expenses, but there’s likely to be twice as many repairs in the third and fourth years. That’s not good management. Putting a little effort in now will save a lot of headaches later.

How Much Does $18,000 Weigh?

Just over 300 pounds. That’s what two adult tenants weigh, and $18,000 is what they’ll pay in rent at $1,500 per month. Particularly if you’re a new investor, get to know your tenants. It’ll help you in the future as you develop a profile of what your preferred tenant is like. There’s a good reason well run multi-family apartment buildings have a live-in caretaker who helps lease suites. It’s because they get really good at telling which people will fit in and be good tenants.

I have a two week break between jobs and I’m spending it doing some consulting for a property management firm, helping to train resident managers. It’s such a great way to help improve a business and I know it’ll have a real impact on owners.

Managing well will bring much higher returns than buying $20,000 under market. Failing to manage well could cost you the $20k and a whole lot more. Take the time to be a good landlord, improve your property and find good tenants.

Photo Credits:

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There’s a huge list of important variables and issues to consider when you’re looking at a piece of investment real estate. Even with all the due diligence a good investor does, there’s one big variable that’s harder than all the rest to judge…and we’re going to make it easier for some of you who are interested in investing in Edmonton.

In no particular order, some easy ones are:

• purchase price
• vendor motivation
• interest rates
• down payment
• title insurance
• real property report
• amortization period
• prevailing vacancy rate
• local economy
• political climate
• job growth
• zoning
• legal fees
• cost of labour, repairs and maintenance
• property management

But if you’re looking for an investment property, your ROI, yield, ability to hold and potential to buy more property hinges on one number that’s more difficult than any other to estimate and control…rent.

Estimating Rent

There’s quite a bit you can do when it comes to estimating rent, particularly if you’re an out of town investor. Sites like Rent-O-Meter can be useful. You can play the tenant, go and Google phrases like ‘apartments in edmonton’ and click on the first listing or two to check prices. What’s missing from that equation is a pair of experienced eyes on the ground.

What I’m proposing is this: leave a comment or fill out this form (which will keep things hidden) with some details about a property you’re considering, or that you already own.
Between Brent and I, we’ll drive by, take pictures, tell you some information about the neighborhood and give you a single hard number of what we’d try to rent it for. We’ll also give a range of rents; the real world can change, and we know that. What you get is a drive-by rental appraisal from a team of experts.

Why do I care what you think?

Having eyes on the ground means having a professional property manager and a Realtor let you know what the neighborhood is really like, where things are really going and can identify the real world risks that you can’t see through a computer in Toronto.

Brent is both a Realtor and a property manager, and has 25 years of experience in the property management field, taking care of single family homes, high rise apartment buildings and condos, institutional and government properties, as well as commercial buildings. I drew my first paycheque from our former property management company when I was 12. I worked in some capacity for Davies Management for the next 13 years. You might say we both have some experience in setting rents around the Edmonton area.

Each month (or more often if we have time), we’ll pick a property you suggest, drive by and post the results on www.chrisdavies.ca and/or www.brentdavies.com.

To be eligible, the property must be in the greater Edmonton Area. The information we need is: Name, Email, Phone Number, Subject Property Address, Comparable Property Address, and Planned Purchase Price. Leave a comment or fill out the form below, and we’ll get things rolling!

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The brother of a friend of mine heard that I invest in Edmonton real estate and started asking questions of my friend. He apparently looked around my blog, and asked “isn’t there a post on there that explains just what you do?”

I figured my About page explained that, but then I realized that it only makes sense those who know what phrase like positive cash flow mean.

I’m going to try to explain what I’m doing in simple terms.

First, we’ll take a page from Stephen Covey and start with the end in mind. Take a look at My Personal Belize. This was an exercise to visualize what I want my life to be like. I’m not in real estate to make millions of dollars; I’m doing this to create a life for my family which enables us to life the fullest lives possible, without having to try to make money at it. Consider Kevin Matwichuk who took his wife and four kids to the Caribbean where they lived on a sailboat for 7 months. That’s amazing and inspirational.

Second, why real estate? That’s fairly simple. All my life I’ve worked with my family managing other people’s properties through our work at Davies Management and Realty. My grandpa’s done very well with it, as have my parents. They helped me realize the power of leverage (you can buy a lot more real estate than you can stocks because you can borrow to buy it). We’ve also learned about cash flow, renovations and the need to fix things when they need to be fixed. A normal dinner table conversation with my family has around 150 years of real estate experience at it. (And it occasionally drives Megan nuts) I’m also a member of the Real Estate Investment Network, and I use their proven systems together with my experience buy the best properties in the best places.

So just exactly am I doing? I’m buying real estate. I buy it, rent it out and hold it for 5-8 years. After the 5-8 years I refinance or sell. (Refinancing is preferable)

Typically I like townhouses, but I’m open to condos, houses and multi-family buildings. The key is that each one must support itself: the rent must cover the mortgage, taxes, utilities, insurance, a maintenance and vacancy allowance and maintain a sizable reserve fund. If all that still leaves cash left over at the end of the month (most months) then I’ll buy it. I prefer to put 10-20% down, which keeps the amount of cash required manageable, cashflow decent, CMHC fees down and risk low.

How much money do I make? I bought a townhouse in October 2008 for $250k. Right now it’s routinely clearing $500-600 per month which is split between me and an investment partner who gets 50% of the cash flow and profits.

For a property like that, if I invested $50,000 at the start and property values increased by 5% a year, I’d get ~$120,000 in 5 years. That’s the simple & conservative number.

The only thing is it takes time, effort and some careful management. I’ve got a great team of realtors, property managers, accountants, bankers, mortgage brokers and lawyers. (And Edmonton’s stil the best place in Canada to invest.)

Let’s say that I meet my short-term goal of buying 15 properties. That’s $3,000-$4,500 a month in free cash flow that I don’t have to work for. That’s a full-time job worth of income, and a full time compliment of time that I can then give to my wife, my kids and my community.

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For me, and for all the REIN members like me, we’re buying or are preparing to buy. I have no doubt in my mind that the properties I buy today will have appreciated significantly in five years’ time. Why five years? Because that’s the minimum hold that my Joint Venture partners and I agree on. Real Estate is a long term game, and flipping is a good way to break you neck, but that’s another story.

The question right now is how do you continue to get the strong rents you need to keep the positive cash flow going. There’s more units on the market right now and tenants are getting a little choosier. Some are asking for discounts, and other are threatening to move. Yes, vacancy rates have increased slightly, but they’re still relatively low.

What you need to do is make sure that your business is operating flawlessly, that you’re doing the extra 10% and you’re working with a spirit of continuous improvement. That said, there are:

Eight common things you already do and you should have written procedures for

This helps you, helps your tenants, reassures your JV partners and reassures your banker.

1. Deposits – What ways you accept payment, where it goes, how/why/when you issue receipts, and how you track from whom and for what. 
2. NSF Cheques – How you get notified, how you notify the payor, make sure bills still get paid, get repayment, fees and tenant policies. (Chronic NSF cheques constitute substantial breach in Alberta, and that’s grounds for eviction)
3. Changes in the Prime Lending Rate – Reducing the payments on your variable rate mortgages can have a huge impact on cash flow and return on investment. 
4. Mortgage Renewal Tracking – You won’t believe what the banks will do to you if you miss a mortgage renewal. It’s your one penalty free chance to shop around and be proactive about the single largest expense your business has. 
5. Paying Bills (and getting mail) – How to know which bill is for which property, which account, which JV. Decide which bills to pay when, how, and which ones you should look at a little closer. ($2,600 for painting a one-bedroom?!?)
6. Tenant Screening – One of the most important parts of due-diligence, making sure you’ve got good tenants. A bad tenant can cost you thousands of dollars, so use the REIN landlording tips, learn from other people and add in some good old fashioned common sense. 
7. Rent Increases and Lease Renewals – You should already be using a calendar to track when the tenant moved in, when the last increase was, and you’re ready when it comes time for the next increase. In Alberta, you can increase once a year, with 3 months notice. This means you should have a calendar warning you at t-minus 4 months, then 3months, and then on the date of the increase. 
8. Tenants Vacating – It’s not the end of the world when someone moves out. Make sure you get the move-in paperwork together, get ready to show the suite, decide on market rents and your rental rate, and get advertising. 

And the bonus step, tenant move-ins. This should include all the steps from #6 above (tenant screening) the lease, security deposit, the application, keys, and the in-report. 

You’re running a business; treat it like one

Write what you do down. Show it to your JV prospects. Show it to other investors. Keep to the procedures you’ve laid out. I did it the other day when I got the mortgage rate change notice from TD. My procedure said pick up the phone and call the bank to ask them to lower my payments. Just that one phone call resulted in a 200% increase in cashflow and approval for a second mortgage.

I’m going to do a series of posts detailing what my procedures look like, as well as the how and why of their design. (I can tell you’re excited for the ‘paying bills’ procedure!)

And finally, REIN members! Remember, you’ve already received a bunch of procedures and due diligence checklists with your member binder, or if you attended a Live ACRES/Quickstart or got the homestudy system. That stuff is like gold.

Write it down. You’ll be glad you did.

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Here’s a list of the most popular posts thus far on my blog:

1. Edmonton Real Estate Prices Since 1962
   This post was the undisupted winner, grabbing ~800 views in the first couple days and links from several other sites. 
2. Six Steps to Finding Cashflow Creek
   This was one of my favorite posts to write because of the great feedback I got. I know of atleast two cases where people tried using this method to screen properties and ended up buying the properties they found. I also helped convert several people to firefox, which also makes me happy.  
3. Benjamin Tal on Canada’s Economy and Real Estate
   Originally with a video, now it’s just my notes on the presentation by Ben Tal at the July 2008 REIN Meeting. I love hearing Ben speak, and he’s as bang on as any economist can be.  
4. Top 10 Alberta Investment Towns
   REIN’s list of the Top 10 Towns to Invest In is always a popular topic, and this post was no different.  
5. More Fun with Stats- Monthly Edmonton Statistics
   This was the followup to my #1 post, and it’s got a sliding chart similar to what you may have seen on Google Finance.  
6. What to do with dead tenants (Also known as “Got Dead People?)
   I think the title says it all. What it dosen’t tell you is how many people have emailed me or come up to me at a REIN meeting to comment about it, or to ask advice with their own suicide/death/murder issue (as they said in Demolition Man, MDK-MurderDeathKill)  
7. What will Alberta be like in 2010 for Real Estate?
   This was a guest post from Thomas Beyer, and generated some good discussion. Maybe it’s time for some more predictions from Thomas… 
8. My Belize is in Italy
   The reason I invest in Real Estate, articulated as a fictional blog post from the future. I did this as an exercise at the February 2008 ACRE weekend in Vancouver.  
9. Where to Advertise your Properties (and some traffic tips)
   A resource for investors looking to advertise vacancies. I’ve updated it a couple times with more sites, and I put some traffic statistics too.  
10. The Black Triangle of East Edmonton Eats New Investors
    This was a guest post by Brent Davies, and I’ve heard from more than one investor they were saved from buying a hell-hole by reading it. Just like a ski hill, some areas are marked with a black diamond – experts only – and the Black Trangle is one of them.  

I startred tracking this blog somewhere around the 25th of January 2008, and it’s been gratifying to see how it’s grown. If you’ve got any ideas for new topics, questions or suggestions, please leave a comment or drop me an email. 

Thanks for reading!

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