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...

The last few months have been just about as crazy as they get. Periods of insanity, followed by complete boredom. There’s three exciting things happening before the New Year (beside the birth of my first child) and I wanted to remind y’all that there’s a mailing list separate from this blog where I’ll be sharing them first.

You can sign up for the email newsletter here.

REALTOR® News

As you might have seen, I’ve just finished all the courses and exams to become a REALTOR®, and I’ve been interviewing real estate brokerages. I’ll be making a decision very soon and getting started helping people sell their properties and find new homes or investments. The lucky people on the email list will get to hear about it first (exciting, I know…) and also hear a little bit about the process (the things I’m reluctant to post on my blog for all to see).

Internet Marketing Workshops

Back by popular demand (i.e. people lovingly nagging me) will be my one day Internet Marketing Workshops. The date is yet to be set, since I’m trying to dodge Christmas Parties, but it’l be in early December. This will also be a very intimate session, limited to no more than 8 participants and it’ll be the last time I offer the course for $247 before I completely re-write the curriculum and the price goes up. This course is great for real estate investors, Realtors and small business owners.

Affiliate Webinars

And after a bit of a delay, the REIN affiliate program is going to get things going with a big December sale. Here’s part of an email I recieved from REIN’s Member Support Manger

Last year we decided to do a year-end clearance sale of a number of popular REIN™ products, and since it was so well received, we’ve decided to repeat that promotion again this year. So, get ready for the REIN ™ December Blow-out Sale for 2010 – we will be discounting nearly our entire line-up of programs, kits and some e-based products as well!

This year we are also going to give our Affiliates a piece of the action… You can publish those links or banners on your website, or use the text in an email or newsletter that you send out to your group. These promotional pieces are being designed now, and will not be available in your Affiliate dashboard until Dec. 1, so you may want to think about the timing of your next communication to your group…can you publish something to your database on, or just after Dec 1, and will that fit with your overall communication schedule?

As you promote our Sale to your contact database, every one of your people who clicks on the link embedded in the Sale banner or text copy that you post and then gets transferred to our shopping page will qualify you for a commission if they purchase a Sale item. They don’t even need to purchase an item on that visit – our system will also track future visits and purchases from that same user, and will credit you with a commission for a purchase even days later.

To help people get up and runing on the affiliate program, I’ll be doing a free webinar to help teach you the basics. We’ll get that rolling sometime the last week of November, but it’s only available through my email newsletter so sign up now!

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I always get a million questions about buying and making money from real estate investments. There were a number of thoughtful, curious questions from commentors earlier in the week who honestly wanted to understand what, how and why I’m doing what I’m doing and why I’m such a big fan of real estate over other investment vehicles.

I’m going to write a series of posts about what I consider to be the basics of real estate investing. Lots of this material is going to be drawn from my own experiences investing, working in property management and from the training that the Real Estate Investment Network offers.

I want to make sure I’m not missing any topics (and make sure you don’t think I’m dodging hard questions about the risks involved in real estate), so here’s my thoughts on 11 topics I want to cover. Let me know if I’ve missed something you’d like to read more about.

REI 101 Topics:

1. Leverage
2. National and Macro Economic Indicators
3. Property and Local Market Evaluation (the Property Goldmine Scorecard)
4. Real Estate Cycles
5. Cash Flow Analysis
6. Negotiating and Buying Properties
7. Financing your Investment Properties
8. Filling Vacancies
9. Hiring and Managing a Property Manager
10. Raising Investment Capital and Joint Ventures
11. Taxes and Exit Strategies

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I’m heading off to cow-town later this morning for the Calgary REIN meeting tonight and then the Advanced Landlording and Investing Fundamentals Expo on Saturday and Sunday. I’ll actually be heading back to Edmonton on Saturday night since I have to go jump of a ski lift for Ski Patrol training.

Brent Davies Real Estate will have a booth there, and I’ll be helping to staff it. Stop by and say hi. If you ask nicely, I’ll show you the other pics from the bowling ball house.

And finally, here’s your song of the week. It’s called the Spectrum Song, and was originally done by Disney as part of a 1961 NBC show called The Wonderful World of Colour. (The Wikipedia article on it is really quite good.) I first heard it when I was playing with Ben Nevis Pipe Band, and a friend was addicted to it, so it might get stuck in your head.

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For those of you who live in Edmonton, Don Campbell from the Real Estate Investment Network will be speaking to the Edmonton Apartment Association this coming Wednesday. If you’re a multi family owner, or want to be become one you should also look at joining the EAA. (Disclaimer, my Dad is on the Board). They sell pre-printed forms that I use for my tenants (move in/out, evictions, rental increases etc).

From the EAA website:

Don is an entertaining and informative speaker who can speak in detail on any market in the country and is not afraid to tell the truth about where the market is headed. EAA members and guests will have an opportunity to hear what Don has to say on the Edmonton Investment Market.

Date: WEDNESDAY, OCTOBER 13, 2010

Time: 11:30 am to 1:00 pm

Location: Edmonton Petroleum Club, 11110 108 Street, Edmonton

Guest Speaker: DON CAMPBELL, Real Estate Investment Network
(REIN GROUP)

Cost: Members $25.00 per person
Non-Members $30.00 per person

Call me for tickets (780-905-7562) or you can get them from the EAA here.

**I have a limited number of seats at my table, available for the member’s rate, or possibly less if you’re nice to me.

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There comes a point in every landlord’s life where you have a tenant who:

• Doesn’t pay on time
• Damages their own unit
• Damages the common property
• Fights with other tenants
• Does something illegal on the property
• Threatens or attacks you
• Is paying old and very low rents
• Doesn’t play well with others
• Hasn’t paid in several months

Often it’s when you’ve just taken over a new property. If you’ve just bought a multi-family property then it can be even more frustrating, because you’ve inherited 10-200 tenants all at once.

Brent’s going to be talking about this topic at the upcoming October Edmonton and Calgary REIN workshops, and he’ll also be on a panel at the Advanced Landlording and Investing Fundamentals Expo in Calgary October 16th and 17th. (I’ll be there for the Friday and Saturday I think.) If you’re at either meeting, you’ll hear him and Don talking about some strategies to kick out the deadbeats, and how we approached the reality of handling well over a thousand tenants.

To help him get ready and cover the common and interesting situations we’ve encountered in many, many years of dealing with other people’s properties, Brent and I sat down and ran through the types of situations where you’ll need to deal with a payment issue, a legal issue or just want to change the tenant demographic. One of the things we figured out is that for the tenants we’ve put into buildings that we’ve managed for a while, we have start disciplinary proceedings on less than 2% of them. For buildings we take over with poor management by the owners it’s closer to 10% and sometimes as high as 20%. (Note I said poor management by the owners, because in our experience it’s almost never the property managers’ fault, but that’s another topic.)

I’ll cover a bunch of what we discovered in a post after the ALIFE weekend, but I want your input before we finalize things.

• What was your most frustrating tenant issue?
• How have you successfully changed the tenant profile in a building?
• What are the most important parts of your tenant screening system?

Photo Credit: “Woodfall’s Law of Landlord and Tenant” by umjanedoan, on Flickr

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There’s four great things going on over the next couple months, three of which are free!

1. Tonight is the first of Brent’s Edmonton Investment Real Estate Discovery Tours. He’s doing free no-obligation tours of investment properties in Edmonton to help investors understand the different opportunities and landmines that go along with different types of properties. It’s happening the next several Thursday nights, and they’re doing multi-family this week. I’ll try to make some of the other ones in the future, but I’m helping a friend reno his house tonight .
2. I ended up with a pass for two people to come to a REIN monthly meeting (usually members only or $150 each for a guest pass). The next regular meeting is September 15th (calendar here) so let me know if you’re interested.
3. There’s a REIN fieldtrip on August 27th which is mostly members only, although there may be some space for guests. Then on the Saturday and Sunday is a multi-family real estate investing workshop, which looks absolutely brilliant. I’m going to miss the Saturday due to a wedding but I might try and make the Sunday. I know there’s a lot of people flying in from out of town and it’s already getting full.
   The Courtyard Marriott Hotel is offering to our participants a discounted rate of $119 per night per person (via email from REIN).

   These special rates, plus applicable taxes, are available to you during your training dates. Make sure you take advantage of this offer and book your reservations early as the booking deadline is August 1, 2010. All participants will be responsible for arranging and confirming their own reservations, which you will be able to do through the Courtyard Marriott Hotel Reservation Department. All reservations will be made individually through the hotel’s reservation Department. You must share that you are with THE REAL ESTATE INVESTMENT NETWORK in order to receive the reduced room rate.

   Hotel’s Website: Courtyard Marriott Hotel
   Toll Free Reservation #: 1-866-441-7591
   Local Telephone #: 780-423-9999
   Check In/Out Times: 3:00 pm / 12:00 pm

   Important Note: The reservation cutoff date is Sunday August 1, 2010. Please make sure to book your rooms prior to this date as we have only a limited number of rooms on hold. Reservations made after this date are subject to availability and may not qualify for special event pricing.

4. And finally, I had a great time at the Edmonton Revenue Property Investors Assocation last Tuesday. They meet the second Tuesday of the month, so go check them out!

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When you start buying properties with the assistance of Joint Venture partners, you end up putting a lot of trust in the hands of someone you might not know very well. Particularly if they’re the money partner, they can get cold feet at the last minute and leave you standing at the altar with no way to close on the deal.

Neil sent me an interesting email on this exact topic.

Hi Chris,

Hope all is well and you had a nice long weekend.

I have an interesting situation/dilemma with a few potential JV partners that I wanted to share and ask you about:

Before spending time and putting effort into looking for a new property for you and your JV partner, how do you make sure they will not walk away last minute (either before closing or before releasing the conditions) and you just wasted a lot of energy and time finding a good property?

I am considering having them sign some document, perhaps an intention to purchase with me or something similar to what RE agents use(?) not sure though especially since some of them are kind of friends. Do you have your partners sign something before you start working on a new purchase? does it help?

Thanks,
Neil

So here’s what I wrote back:

Hi Neil,

I do have several levels of paper-based commitment, all out of the REIN JV Secrets package (there’s also a new e-book that’s like JV Secrets-Lite and is only $37), talking to other investors and my own experience. Not every partner has to jump through every step, but everyone gets at least a written JV agreement and usually a letter of intent (which is what you’re looking for). It seems like a lot of steps, and it will reduce the number of people who make it through to the other side but you’ll reduce your risk substantially and end up with better JV partners. This is what works for me, and if nothing else, the first three steps will take care of 90% of the problem people you’re likely to find.

The full funnel for Joint Venture partners that I use on people who are less-well known to me has 9 or 10 steps and goes like this.

1. Interest Questionnaire – who you are, where you work, what you have, etc. Weeding out the tire-kickers.
2. Letter of Intent – Ballpark numbers and general agreement. E.g. JV Partner A brings $100k and JV Partner B does all the management. Acquire a 4 bedroom townhouse on a long term buy and hold, split 50/50.
3. Cash Deposit – $1,000-5,000, best if it accompanies the Letter of Intent.
4. Draft Joint Venture Agreement – in tandem with the search for a property, your lawyer will be able to take the letter of intent and draw up a JV agreement. Here’s where your JV has to take the draft and get their independent legal council.
5. Property Acquisition Begins. Find it, write an offer and once your offer is accepted move to #6. Now’s also a good time to make sure you have the rest of the cash (before you remove conditions).
6. Full Joint Venture Agreement Prepared – You’ve got almost all the particulars of the property, so you can finalize the JV agreement document.
7. Property Closes - Real money moves, title gets transferred and the real work begins.
8. JV Agreement Signed – Make sure everything is locked and loaded.
9. Caveat Registered – If you’re registering the JV agreement via caveat, you’ll want to do this. As a rule, I like to wait at least 6 months so as not to spook the bank if they happen to pull title. If it’s not an issue for the JV partner I don’t bother registering a caveat.
10. And don’t forget to plan for the exit. You’ll dispose of the property and have to send out a statement and a pair of cheques. Make sure to refer back to the original JV agreement to make sure you’re doing what you said you’d do. I know of a couple people who changed policies half way through and nailed their JV with fees they’d never agreed too.

It looks like a lot of steps, but it’s worthwhile. Yes, you’ll lose some people, but they’re people who will cost you more in the long run. Someone who promises $60,000 and then backs out after you’ve removed conditions can potentially cost you more than $300,000. Finding the right person with $60,000 can make you both another $60,000.

N.B. This isn’t intended to be legal or professional advice. It’s just what I do.

Photo by hans.gerwitz

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I wanted to post this sooner, but NBC is stupid and removed the original video which managed several million views in just a few days. It’s really worth going to YouTube and watching it in HD.

Enjoy your weekend, and feel proud to be Canadian. I’m planning on writing offers on some properties this coming week, and I’ll be at REIN’s ACRE weekend in Edmonton on March 12-14th. If you see me come say hi.

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Robert Kiyosaki, Darren Weeks and a bunch of other idiots are about to get a smacking they deserve.

Marketplace is doing a spot tonight on their look at the Canadian Rich Dad Seminars. There’s an accompanying article on the CBC website here about why they’re calling Rich Dad Seminars ‘deceptive’.

I’ve made myself pretty clear in the past that I think Rich Dad’s workshops are useless, overpriced and nothing more than a non-stop sales pitch. They’re the lowest form of real estate investment education.

There’s a lot of people around REIN who have made the mistake of doing Rich Dad stuff before they found REIN. The consensus of every one of them I’ve talked to is that REIN is in a completely different arena and the RD stuff is worthless. My own experience is limited by the fact that I couldn’t stomach more than an hour of their weeknight sales pitch.

The Canadian Rich Dad stuff has been run by Darren Weeks, and I know of more than a few people who were burned by investments he pitched or was a part of. I only know one person who was willing to talk with me about experiences actually making money with Darren.

I’ll be interested to watch if I can, and I hope people realize that there is quality real estate investment education out there. Yes, it costs you money, but it shouldn’t cost you $40,000.

Interestingly, I also ran across this PBS special about credit card companies and their underhanded tactics. Check it out. (Hat tip to Canadian Capitalist for that one)

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