The most fundamental attributes of Real Estate, beyond the fact that it’s, well, real, is that is can be borrowed against. The action of borrowing money, much like a lever for moving physical things, has the effect of amplifying things. A small push on the right lever can move a large object.

This amplification has several effects on real estate and other financial instruments. Leverage amplifies returns (profits), as well as risks and loss. Much like a sensitive electric guitar plugged into a big amp, small changes have a much larger impact.

So here’s the basics of leverage for real estate investing.

First, leverage can be calculated by dividing the purchase price (i.e. asset value) by the cash required to purchase it. For most purchases, for most people, this is 1.

So when you buy a $100,000 house for all cash, your leverage ratio is 1.00.

However, with Real Estate it’s normal to borrow part of the purchase price with a Mortgage. This amplifies the numbers, leading to a leverage ratio of 10.

What this does is amplify the return (or loss) on investment. Return on Investment (R.O.I.) is calculated with the following formula:

So assuming we buy a $100,000 home and it appreciates (or otherwise generates a return of $10,000), we get a return of 10%

If, however, we’ve only put down $10,000, as above, we get the 10x leverage as above, creating a return on investment of 100%.

The principle of leverage is one thing that separates real estate from other investments, and has made home ownership possible for millions of people over the past several hundred years.

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Stuart Lomas told an intersting story this week. He has four properties in Edmonton, two of which were vacant (one up in Hermatige and one in Millwoods) .

They were doing well with their advertising. Lots of inquiries, and plenty of prospective tenants to come and look at the places.  The rents were appropriate, and the suites were nice. Stuart was doing all the things he should, and after each showing he gave them an application form.

Six showings: zero applications

So Stuart made a simple feature sheet to give out. It had three important sections to it:

1. Address and a list of features
2. Four nice, bright, simple pictures
3. Strong call to action with easy instructions to submit the application.

Then he made a point of handing the feature sheet out with the applications when showing the units. The results?

Three showings: three applications

That’s pretty compelling math, and you’re likely using similar sheets for other  marketing efforts. I suspect that it took about an hour of his time to make the two of them. At $50/hour, that’s $100 to make the sheets. If he wasted six hours on the unsuccessful showings at an hour each, that’s a 600% ROI!

You can download the two feature sheets (PDF) here and here. And here’s what they say. Go make your own!

Welcome to #xxx Habitat Crescent

Clean, quiet and comfortable, your new home features:

• 3 cozy bedrooms upstairs, facing east and west
• Full bathroom upstairs, half bath on the main floor
• Full open basement with laundry facilties and fridge, suitable for activity or storage
• Fenced and grassed yard with a deck, patio, outdoor table, and flower beds
• Bright kitchen with newer appliances
• Two private parking spaces right at your front door
• Walking distance to shopping, dining, and schools, and right beside the park
• 5 minutes bus to the LRT, then direct to Downtown and the University

Please call (780) 555-1212 with any questions or to book a viewing.
To make this YOUR HOME, fax your completed application to (780) 555-1213,
or drop it in the mail box at the property and call (780) 555-1212 to let us know!

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Real estate investment requires all sorts of marketing, from simple word of mouth to wide-scale marketing on the internet to fill vacancies. Measuring the effectiveness is important, because paying for advertising that doesn’t work is expensive. There are two important types of measurements we’ll focus on, but first, a word about tracking.

There are a couple types of tracking you’ll need to do.

First, have a channel-level tracking profile. This means that you’re going to want to know how each site/or channel is performing. Ask your own questions like:

• How long until my ad is on page 2….or page 10
• How many clicks, emails or phone calls do I get?
• How many views does my ad get?
• How often do the leads I get from a certain ad turn into real tenants.

Second, you’re going to want a lead-specific (individual person) profile. When someone actually comes to view a property or fills out a rental application you should have a record of how they first contacted you. This means there’ll be a line in your tenant records saying ‘email from craigslist’ or something similar. Every few months, go through your tenants and see where they came from. Most importantly, use this information to start defining what your prefect tenant looks like. If you only deal with furnished executive rentals, you might eventually find that while one site doesn’t refer many applications, when you do get a tenant they stay for 5-7 years and never miss a rent payment. Armed with that knowledge you can make much smarter decisions about where to spend your advertising dollars, and how long you can afford to let a suite sit vacant.

The most important metrics we’re going to track are conversion rate and return on investment (ROI).

Conversion Rate = # of times viewed/# of responses

The responses can be whatever you want, and it’s likely best to consider a few. Not all conversions are created equal: phone calls are usually better leads than emails (more likely to become tenants). Measure several conversions and understand which ones really matter to your business. It doesn’t matter what the email conversion rate is when every person who emails becomes a great tenant.

Return on investment is an easy formula, but sometimes difficult to measure completely.

ROI(%) = {Return (Profit) / Investment} X 100

The investment is the easy side of the equation to measure. The return is the more complex part. I’ve had tenants live in the same suite for nearly 20 years, likely generating tens of thousands of dollars in profits. To make things manageable, start by assigning some arbitrary numbers by following these steps.

1. Assume a tenant stays for a year on average and the monthly cash flow is $100 per month. The value (return) of leasing that unit is $1,200.
2. Assume you have to show the unit 6 times before you get the right tenant and they take the unit. The value of showing a unit is then $200.
3. Assume that you get 20 phone calls and emails (new leads) to find those six showings. The value of a phone call or email is $10.

Now that we know the real value ($1,200) of the average tenant, we can figure out what our ROI is. It’s easy to spend $100 on advertising when renting a unit. If you spend $100, your ROI on your advertising spend is 1,200%. If you can manage to cut out the advertising that dosen’t work and only spend $20, now your ROI is 6,000%. Spending less to get more is just smart.

One final thought about ROI: determining your return can be complex, particurlay if you’re new to real estate investing. Don’t be afraid to pick arbitrary numbers. If you have existing data, gather it in one place and use it. Find out how long your average tenant stays and what the cash flow from that unit is. Start tracking activities, collecting data and using it to make your business more efficient.

The best tool you’ll have for tracking all of this is a simple notebook. Write everything down as it happens each day.

Then it’ll be a simple, if time consuming, task to gather information like how many calls you had on a particular property. But you’ll be well on your way to marketing smarter.

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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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