Friday, July 29, 2011

Increasing Income in Rental Properties (Part 3 of 3)

Hello Friends!  Thus far in the first two segments, we discussed potential opportunities to reduce expenses, which translates into increased income.  Now let's look at the flipside...increasing revenue.  I will discuss multi-family rental  properties first and explain using examples, how to increase cash flow and equity from a layman's perspective and then an interesting twist to single family home rentals and a method of increasing income there as well.

You're looking for an income property to buy and you've screened for artificially low rents.  
There are a couple of reasons owners don't raise rent:  because they're afraid the tenants will leave, or they will ask them to make repairs.  I used to have those same two reasons for not raising rents until I learned otherwise.  I was afraid that my "good" tenants would leave mostly because it wasn't "easy" to find them!, but here's what I learned:  Those reasons were not at the top of tenants' beefs.  The number one reason tenants leave is not rising rents but rather poor response to repair requests.

If your building is 100% occupied, you are not charging enough for rent.  It's time to raise rents if this occurs.  In fact whenever your property is anywhere from about 95% and up in occupancy, it's time to raise rents.  Train your tenants to expect some kind of modest rent increase each year, it could be $10, $20, $25 per month (within legal limits of course).  This is a small enough increase that it won't be the driving factor to have someone move out.  Now let's look at a measly $15 per month increase for a 100 unit apartment building.  That works out to about 50 cents per day increase or another way of looking at it is, it's about 1/3 the price of a cheap coffee.  

$15 per month x 100 units = $1,500 in added revenue per month.  Now we multiply that by 12 months and we get $18,000 per year in added cash flow.

Revenue has increased by $18,000 now per year and using a 10% CAP (let's recall that CAP rate  (%) = Net Operating Income (NOI) / VALUE of the property).  If we re-arrange this simple formula, we get VALUE = NOI / CAP, so in our case, VALUE = increase in property value.

We get:  VALUE (increase) = $18,000 / 10% = $180,000

What have we done by this small $15/month increase?  We've increased the value of our 100 unit apartment complex by $180,000 conservatively speaking.  This is the multiplying effect of the quantity of units a building has.  The more units, the more property value increase you will get for the same rent increase.  Nice huh?  With the stroke of a pen, we've increased our equity by $180,000.  This is real life, and remember, that the value of your commercial property is determined by the income it generates relative to expenses because of the income approach to valuation.

There are other ways to increase rents on takeover which are more involved but that is for another time....

If you haven't raised rents in some time in your existing property, and you do have high occupancy 95% +, then you need to start raising rents, even marginally as we've discussed.  Use the excuse that taxes are up, utilities are up if you have to.  They most likely are!'s not like you're making up a story.  From then on, you need to do this every year, and when leases become due, bring the rent up to market where possible.  You need to do physical surveys of your competition's buildings in the area to ensure that you are on a level playing field in terms of pluses and minuses in your property and theirs.  You could offer your tenant an accent wall, or a free carpet cleaning in return for signing a lease extension.  These offers won't cost you much in return for a longer term commitment.  Will some tenants leave?  Yes some probably will, but tenants leave for many reasons.

We've talked about multi-family properties, but what about if you aren't in that business and have a single family home?You're looking to make more money but not sure how.  Let's look at the following scenario.  This is not for everyone, but then again, nothing really is, is it?  I'm offering this information because it's not really common knowledge similarly compared to the above discussion about valuation increases in multi-family properties.  Unless you're in the business, these examples aren't common knowledge.  Back to the single family rental example....nothing comes for free, but if you do this work, you will increase your income but it requires added labor on your part and perhaps some cost.

Let's say that you live in your house and you've been renting a basement apartment.  You're happy with the tenant, and they've been paying you with little problem.  Let's say it's a 3 bedroom basement apartment and you're receiving $850 / month for it.  Now your tenant decides to leave and you need to re-rent it.  You have some choices.  You could rent it out again, or you may decide to rent rooms instead.  Now, you could rent 3 separate rooms which could fetch you $400+ per month for each room, depending on where you are located.  Now you've done a few things by doing this.  You've increased your income by almost 50% from $850 to $1,200.  You've increased your gross income in this example by $350 per month x 12 = $4,200 per year.  You've reduced your financial risk if one of the tenants doesn't pay.  If your single tenant before didn't pay you, you were completely out of pocket, but now if one doesn't pay, you still have 2 that are paying.  This type of arrangement will require more work from you in management but if you live there and monitor the property, it's really not that much more work.  Ideally, if you're located on a bus route, or near a school, your target market could be students or working people without a car or if you have adequate parking, then it doesn't matter except that they have a steady source of income to be able to pay you and that they are an acceptable tenant.

Now, for some of you, this idea just doesn't work.  That's OK.  Like I said before, this isn't for everybody out there.  You need to ensure that your town ordinances allow boarders and you have to be within those legal limitations.  You will have to tell your property insurance company about this as well so there may be an insurance hike.  Investigate this before doing it to make sure that it still makes financial sense.  You will have to put door locks on their rooms (you can pick them up at Wal-Mart for a few bucks each), deal with the occasional noise, or complaint about someone taking their food from the fridge.  You will need to make sure that your tenants have adequate escape routes in case of fire and that this meets your town's by-laws etc.  Yes, it requires some checking into, but again...I did say you don't get anything for free!  How do I know this stuff?  I used to manage multiple rooming houses but I didn't live in them.  These were harder to manage because of the fact that I didn't live there and keep an eye out.  Remember, for some of these types of tenants, "when the cat's away, the mice will play".  For the time that I had them, they were very profitable, but when you have many of them, it can be very busy dealing with issues that happen occasionally.  It takes a strong personality to run this kind of show as some tenants (most won't if you're firm but fair with them) will try to walk all over you by delaying paying rent sometimes, or whining about this or that, but if you're screening well before hand and make sure that you lay down the rules, you will have little trouble.  Just make sure that you are clear on what they can and can't do by making sure they sign a rental agreement spelling out the do's and don'ts.  This is somewhat of an unconventional approach to increasing revenue for the single family homeowner, but it's entirely workable and from experience, they can be profitable as well.  You just need to make sure you're organized and understand what you're getting into before doing it and most importantly up front know that the numbers make sense first.  

By the way, if you're considering doing the above, the best way to test this first is to put an ad in your local paper.  You could even put in free ads using Craiglist, Kijiji etc.  Look at other ads for rooms for rent and see what other people are charging in your area.  Then use a similar figure in your ad.  It should be short and to the point, something like:

"Clean room for rent available Sept.1, non-smoker, $400/month 1st/last, bus route, quiet persons only, call 555-555-5555."

Run this test ad and see how many calls you get and keep a record.  You may want to run this ad for two consecutive weeks to see what happens.  Run the ad starting the middle of the month for the 1st of the following month.  When you get calls, you can show them the room and take a rental application or you can simply tell them that the room is rented if you're just doing a survey but of course don't tell the prospective tenant you're just doing a survey.  Just be polite and advise them that the room is taken.

Hope this helps some of you.  The latter discussion is again somewhat unconventional but it applies multi-family property principles to a single family home!

If a single family homeowner is looking for more income, this could be a great way for you to get it.  It will take some work up front, you need to be prepared to deal with some hassles, but it does work well once you've got the right people renting from you.  In one of my previous properties, I had many long term tenants with a couple of them with me for more than 6 years.  In others, there was more turnover, but the income justified the means as opposed to simply buying a single family home and renting it to one family.

If anyone has any questions please reply and I will respond promptly.  I hope you have some value that can help you with your properties.  

If you are interested in higher yield, 14%+ returns secured by multi-family real estate, please see our website:  

Thanks for reading folks and be well until next time.  

Monday, July 25, 2011

Increasing Income in Rental Properties (Part 2 of 3)

In our previous segment, we looked at investigating government grants and rebates.  After making a concerted effort to check to see "ALL" of the possible grants and rebates that we can find, we move onto looking at our expenses.  Look at your trending report or for the smaller property investors, look at your monthly expenses, and find out if any particular month is not making sense.  If it's winter, then obviously in those months, your expenses will be higher for heating, electricity and mostly likely water as well because tenants will tend to want to take longer, warmer showers or baths.  But, is there something that stands out?  If something doesn't make sense, you need to investigate it.  For instance, if you're continually seeing higher water bills over a period of months, compared with the same periods the year before, you may have a water leak in your plumbing.  It makes sense to be proactive about this before hand by having an inspection of plumbing fixtures done periodically.  This can be done by having someone do a quick walk through of the property, looking for dripping faucets, or over-flowing toilets.  How do you think I know this?  See that scar....right...there!

In one of my properties, when the tenants would flush the toilet, the flap inside one of the tanks would lift up and not drop down as it should.  Water would just ooze out.  It apparently did this for months before I found out about it, just because I didn't have a quick periodic inspection done.  This is money literally going "down the toilet".  This was only one unit.  Imagine what happens when you have 100 or 200 units and you have leaks in many of them?  Your tenants probably won't bother telling you because if they're not paying the bill, then they probably will turn a blind eye.  Other culprits include leaking faucets, dripping bathtubs, leaking pools, or exterior water lines that were left on and forgotten.  Just keep in mind that when someone doesn't pay for something, they won't treat it the same way as you would.  Remember how your teenage kid takes a 60 minute shower?  I know you parents remember that! LOL!

Now how about your heating controls?  Are they working properly?  What is your temperature set point?  If you pay the heating bill, you need to ensure that you meet minimum government standards.  That's it.  You don't have to offer tropical heat in the middle of January just because your tenants like that.  If the government standard is 70 deg. F., then set your thermostat for 70 deg. F.  A digital thermostat that is tamper-proof is what you need in such a case.  You can use a cheaper old-type mercury thermostat, but it's not as accurate.  You can purchase tamper-resistant plastic boxes to house your thermostat if you have individual controls in each unit.  They are inexpensive and can pay for themselves in a matter weeks.  While we're on the topic of heating, you should before the start of the heating season have your heating equipment serviced by a reliable heating technician and who has a good reputation so that it's in optimum performance.  A furnace that is not maintained and serviced properly won't operate at peak efficiency.  You should also ensure that the furnace filter is replaced periodically for the same reason.  Talk to your heating contractor or consult your heating equipment guide for replacement frequency.  A clogged filter will make your system work harder, which translates into higher costs for you.

What kind of heating are you using?  Natural Gas, Oil, Propane, wood?  Depending on where you are located, determine which fuel is the lowest cost per unit of energy and factor in equipment costs.  Right now, natural gas is by far the lowest cost fuel in a time of very high fuel costs.  If you can switch to natural gas and it makes sense, then do it.  With one of my properties, the oil furnace was about 20 years old on acquisition, and I found out that the natural gas line was just outside along the highway.  The cost to get the gas line installed was a mind boggling $35.  Yes, that's right..just $35.  From there, I had to buy a new furnace (it needed a new one anyway because it was 20 years old), and then remove the old one and install the new one.  By being frugal and using my contractor background, I bought a new furnace for wholesale and paid for labor and parts, saving about $2,500 on the installation by arranging piece work.  If you want to know how that's done, reply to the blog below and I will reply back promptly.  Remember, that this type of upgrade sometimes can be done with a government grant to help with your costs so do spend some time looking into different options.

We've addressed water and heating, now let's talk about electricity.  Let's face it, this utility has become very expensive over the past few years.  You can shop it around in most cases with different retailers and see what the best reliable deal you can get.  Make sure you are dealing with a reputable company when doing so, and don't get tied down to a long term contract unless it makes absolute sense to do so.  Only you can be the judge of that.  Now, the exterior of the property.  Replace all exterior bulbs with compact fluorescent type bulbs where possible.  They cost more up front but the savings can be very significant over time.  Make sure that you use a timer with a light sensor for each set of exterior lights that you have.  If you don't have a light sensor on that light circuit, an electrician can install them for low cost.  Remember, you can use one sensor for each circuit, you don't need a sensor on every light.  This way, the lights go off in the morning with the sunrise and go on at dusk, with the times adjusted automatically throughout the year as daylight increases and decreases depending on what time of year we have; this maximizing savings.  

Interior lights should also be compact fluorescents for the same reasons in common areas.  If your tenants pay for power, then you don't have to worry about their units but you could distribute a flyer suggesting they do make these changes to save them money.  They will appreciate the thought.  If you pay however, you do need to ensure that the bulbs are changed to compact fluorescent, the seal on the refrigerator and oven is in tact, and that you put a simple sign on the inside of the main entry door that says, "Before leaving, please turn off all lights and tv's".  Your tenants may not do it, but it helps to have a reminder.  If your management company (or you) is doing the job right, keeping your tenants happy, you will probably get more cooperation than you may think.  It only costs a piece of paper, but it will pay for itself immediately if you have a good tenant / management relationship going.  

By the way, you should also have a clause in your rental / lease agreements that prohibits window air conditioners and extra electric heaters.  If your heating system is working properly, there will be no need for extra heaters.  Of course, putting these clauses in applies if you pay the electric bill and when addressing window air conditioners it could be a matter of aesthetics if you do or don't pay the electric bill.  It's all a matter of how you run your property, but remember that you may want to put those clauses in your rental agreement anyway.

So far in our first two segments, we've discussed how to reduce costs using some techniques.  In our last segment, we will discuss how to raise income, the professional way, and we all would like to make more money from our rental properties.  I'll discuss some ways we can do this next time.  Until then, thanks for reading and be well.

If you are interested in higher yield, 14%+ returns secured by real estate, please see our website:  

Saturday, July 23, 2011

Increasing Income in Rental Properties (Part 1 of 3)

If you own a rental property of any kind, you are looking for ways to increase your income, right?  Are you always looking at the right options in doing so?  How about re-focusing your attention on your expenses, things that you can change rather than complaining about government interference, can't increase rents enough, etc.  We need to focus on what we can readily change, and not waste energy on things that we can't.

Expenses are to a rental property, the antithesis of what we want, yet sometimes as investors and landlords, we forget that if we reduce our expenses, we are doing the same as increasing revenues to our bottom line.

What Can We Do?

Whether you manage the property yourself or have a property manager looking after your asset, you should carefully review your monthly expenses and look for things that are out of the ordinary compared to previous months.  If it's a property you just purchased, owned for any period of time or are about to purchase, it's important that you understand the age of your heating equipment, the condition of your window and door seals, and the level of insulation (R-Value) in your ceiling, among other things.  

Poor door seals, old windows and old heating equipment in particular can be a high drain on your expenses.  Older furnaces (more than 10-12 years old) are likely not as efficient as newer models, and deteriorate over time regardless of how efficient they were when they were new.  Remember that just like your car, your furnace becomes less efficient as it gets older regardless of regular maintenence, causing more of your money to burn up "the stack".  The same holds true with older windows that are single pane glass and/or poor seals.  Older homes and buildings may not have adequate ceiling insulation which can be corrected relatively inexpensively.

Understanding these issues before you acquire a property is important but if you already own a property and know that you have possible issues, you should consider addressing them, by first, finding out the specifics of what you need or could get done.  The first step is to see if there are any government grants / rebates available for the upgrades that you may need.  Just do a web search first and then call your local government office and ask if there are any rental property grants or rebates available to owners.  If they tell you "no", then ask this question: "Well, if you were offering grants or rebates, who would I speak to in your office?"  Once you move onto the next person, you may get a no answer again, so ask exactly the same question again.  Keep doing so until you find the person you need to talk to.  Start with your local municipal government, then move up to the state or provincial government and then finally the federal government.  The little bit of time you invest may make the difference for you to not only reduce costs but get free money from the government that is there for the taking.




A short aside.....If you're a US property owner, there are also local grants available if you have lead paint (houses built before approx. 1978) that needs to be dealt with.  These are called "Lead Abatement Grants".  Check with your local government to see if they have grants and/or rebates available for this type of work.  Sometimes, you have to dig a little just by asking the same questions posed above regarding rebates and grants, until you find the right person to talk to.  It can be expensive to take care of this problem, and if you can get some government money to help, then go ahead and apply to get it if it makes sense for your situation.  I'm not aware of such grants in Canada and if anyone does know of any, please feel free to reply to this post with your input.

The next step, depending on what the government program is to follow their requirements.  This sometimes involves an energy audit, and sometimes, it involves a combination of that and a government site visit.  Regardless, you will need to follow the rules to get your rebates and grants.  Once you know what you are eligible for, then it's a simple matter of economics to see if it's worth it for you.

Then you simply do the following arithmetic:

Upgrade cost before grants - grant $ = Actual cost of improvements

You should have some idea what your savings should be by asking the contractors who gave you quotes for the work that they want to do.  Have them give you approximate savings in writing before you give them the go ahead to work.  If they are good, they will give you these numbers because they can do simple heat transfer calculations.  If they don't know what they're doing, they will tell you that they don't offer calculations.  You may want to think twice about dealing with such individuals.

Then it's a matter of a simple break-even analysis to determine how long before you get your money back and after that, it's pure money in your pocket.


Upgrade to 95% efficient natural gas furnace, replacing 15 year old (80% mid efficiency furnace).  Note that your "old" furnace was 80% efficient when new, and now, it's likely in the 60-70% efficiency range or even less.  So, let's call it 60% efficient as an estimate.

Your 95% efficient new furnace will burn approximately 1/3 less gas, so you would expect your heating bill to be reduced by about 1/3.  Just use the following simple formula:

60 (current furnace eff approx.) - 95 (new furnace eff) = - 0.368 

= -36.8% (reduction in heating cost)

Using the above example, take your current heating bill and multiply your annual heating bill by 36.8% and you'll get your approximate annual savings by going with a new furnace.

Now take your new furnace cost divided by your annual savings from the above calculation and you'll get the approximate number of years it will take to get your investment back.  Is it less than 5 years?  More?  Depending on the time it takes to recover your cost, this is a decision that you will need to decide on whether a particular change like this is worth it.  Factors such as how long you want to keep the property and your current free reserves to pay for these upgrades come into play.  Everyone's situation will be different.

You can do the same type of calculation for each item that could be changed to improve your property's energy efficiency.

It may seem like a pain, tedious, not worth it, but you will be surprised at how much money you could save by making a few simple changes.  Spend a little bit of time to take care of your property's costs because it will save you money in the long run, which will make your property more energy efficient, more environmentally green friendly, and put money in your pocket that you thought you wouldn't get.

Remember!  It's your money, and your property, and there is nobody else out there who will care more about it than YOU.

The above article concentrates on rental properties, but these methods are completely applicable for homeowners wishing to cut their expenses and leave more hard earned money in their pockets.

Have a great day!  

If you are interested in higher yield, 14%+ returns secured by real estate, please see our website:  

Tuesday, July 19, 2011

Do Real Estate Values Always Go UP?

I would normally address multi-family real estate, but I think it's a good time to discuss single family homes and how they are affected by the market as are all other investment types.  Let's get to the details!

It's interesting when you talk to different people how you can get "opinions" on just about anything.  I prefer to live my life with facts after listening to opinions and then making an intelligent choice.  As some of you may already know, I have an engineering background, so I'm a numbers guy.  I like numbers and I like charts.  When you have real, correct information, charts don't lie.  They tell you exactly what happened and when applied to real life, they can help you determine what may happen in the future.  This isn't 100% accurate, but it sure can give you clues to what may happen.  Take a look at the charts below showing average home prices for Toronto, ON from 1980 - 2010 (not inflation adjusted), and one showing same for the USA as a whole (courtesy of Toronto Real Estate Board and

You will notice there are long periods of price appreciation in both.  In Toronto, prices were flat from about 1981 to 1985 and then started climbing steeply. I like to visualize things, so let's picture a hill, and you're driving up the hill with a bike. As the hill gets steeper, prices act the same way as gravity pulling on your bike in our example.  The steeper the hill gets, the harder you have to pedal, and eventually, you reach the top, "you're now tired", and then you start going downhill.  Prices behave the same way and that's exactly what happened in 1989 with Toronto home sales average selling prices.  Notice that prices fell like a rock and the average sales price fell from about $275,000 in 1989 to roughly $200,000 nearly 7 years later!  Since then, prices have been appreciating again, and notice that the most recent push upwards is much steeper from 2009-2010 than it was years earlier.  What is this telling us?  It tells us that at the moment prices will likely continue to rise, however we need to be careful when entering such a market.  It doesn't mean we shouldn't, it just means we need to be careful depending on what our financial goals are for the future.   Low interest rates attract buyers, however should interest rates climb (which nearly every major bank that I know of is stating is on the short term radar), then those monthly payments that people find affordable now, will become less affordable with higher rates.  This upward trend in interest rates would put pressure on a reduction in prices.  This is not to say altogether that one shouldn't buy in the Toronto market, just to say, "watch out and be careful with your decisions".

Now let's look at the USA market.  A similar trend occurs except only a slight pullback around 1989 and then the crash starting around mid-2006 with some stabilization since 2009.  It is not clear whether prices will continue to fall further before rebounding, however they are approaching a 30 year inflation adjusted low.  Notice the red line which is inflation adjusted.  This line shows us that the average home price in the USA was around $150,000 in 1980 and 30 years later it is $162,000.  If one bought a house in 1980 we would have only seen a marginal increase in our investment when inflation was taken into account.  If you factor in mortgage payments, property taxes, utilities, there is a net loss in equity over that time period.  Please remember that these are only averages we are looking at, but they do paint a picture quite well.  Which market looks like it may be a better "buy" right now?  A house in the USA or one in Toronto?  USA average home prices are near 30 year lows now.  Again, the choice is yours and clearly every local market has it's own pluses and minuses, so there is more involved than just looking at a couple of charts, but do you see how this can help you in determining where you are in the market cycle depending on your community? 

We've shown that real estate does not always go up.  Prices are affected by the market and the market is driven by emotion, perceived value and supply & demand.  If someone is willing to pay you a certain amount, you'll get it; if they're not, you won't.  That's the beauty of the market and it can also be like falling on a knife when it works against you.

So here's the deal:  Real Estate behaves exactly like the stock market or any market for that matter.  It goes up and it goes down because of various and sometimes differing market forces.  The difference is that the periods of up and down price movement is over a much longer period of time typically for real estate compared to the stock market.  We have zero control over the market.  So what's the key?  Well, it's buy low and sell high of course, however it's not as simple as just buying with the "hope" that your property will be worth more next year.  This is a gambler's approach.  Let's look a little further now and see how real estate mimics the stock market as well.   

Look at the price chart for the S&P 500 (courtesy of below (Black chart).  Flat pricing from about 1963 to 1980 and then value took off and kept rising until about 2000 (dot com bubble), and then lost value for three years.  Value rose again until we see the same highs reached from 2000 in 2007 and then the recession took hold, reducing values again to the lows seen in 2002.  

Now, we are in a short term bull market again with values rising and approaching all time highs we saw in 2000 and again in 2007.  What do you think might be a good idea should values rise again to all time record values?  Only you can decide that but I know that I would be very wary of buying "at the top" and expecting a long term gain.

So what have we learned?  We can use our wits and make intelligent choices of when to buy and sell rather than just jumping in and following the herd.  When the media say buy, buy, buy, you may want to decide to look further into the numbers and perhaps do the opposite.  Educate yourself and then make intelligent choices.  Buy and hold works for anything including real estate, but you have to be on the right side of the market to make money.  Remember, this is buy low and sell high (or in stocks it could be both buy low/sell high or sell high/buy low with the latter called "shorting").  Unfortunately, we can't short real estate like we can stocks!  Blindly following others is not a good way to invest your hard earned money.  Listening to gurus and so called experts can also get you into trouble if you blindly do what they say.  For those of you considering buying or selling real estate of any kind, bear those ideas in mind before making your next buying and/or selling decision.

I hope you enjoyed this article and that what you have read here will help you in your future investment choices, whether that's real estate or whatever else that may be.

If you are interested in higher yield, 14%+ returns secured by real estate, please see our website:

Friday, July 8, 2011

Rental Properties - Avoid Certain Repairs

You're scouting the area and you've found a property that you want to buy to rent out!  Exciting!  Hold on.......Remember depending on the area you are looking at, you need to understand the "comps" if your rental property is a single family home or has just a few units up to approximately a 5-plex.  In other words, comparable property sales in the general area of where you are intending to buy.  Once you get this information online, or your real estate agent, you then need to determine what if any repairs you are going to have to do on the property to get it up to the standards necessary for rentals in the area.  For larger multi-plexes, other factors come into consideration when determining whether you are getting a good deal or not.  Get estimates on what those repairs are going to cost and then determine whether you are going to consider asking for a "repair allowance" as a result of those.  You are not going to ask for a reduction in price, but you are asking for a repair allowance.  More on that later....  Remember that necessary repairs and "I want to do just because" repairs are not the same thing.

You are not moving into the property, so don't use "your standards" to determine what needs to be done.  You want to make it comfortable, clean and competitive with your competition.  Just because you want Moen taps and Kohler toilets in your house, doesn't mean you need to do that in your rental.  I think you know what I mean.

Almost all cosmetic repairs increase the value of one's property, however there are many structural and environmental repairs that add zero value, yet are very expensive.  These are to avoid....Check the area that your potential home is in and ask if there are any concerns about the property, such as a gas station or factory that is nearby or used to be in the area.  Ask your agent, and speak with the neighbors nearby.  Ask questions about the neighborhood, potential crime, and any other questions that may come up about the property.  Now is the time to get those questions answered, before you put an offer on it.  It costs nothing to ask questions and all you have to do is be friendly and ask away.  In the long run, you can save yourself thousands of dollars and many hours of work just by being inquisitive.

If everything works out well and you are satisfied with your property inspection (I recommend using either a qualified building inspector or engineering company to perform the inspection), then submit the offer  Note that engineering inspection companies carry liability insurance so if they miss something major, you most likely will be covered (check their policies and terms and conditions). A building inspector will typically have a multitude of waivers to prevent you from going after them in court if something arises after their inspection.  They are trying and usually do a pretty good job, but there are no guarantees and once you see the legal document you are asked to sign when you contract a building inspector, you'll understand that any problems that happen after the fact are going to be yours and yours only, so be careful on who you hire to inspect your home.  

You should not make the mistake of just reducing the offer price by the amount of your repair costs because you will still need to come up with that money after closing to do the repairs.  You should ask for a repair allowance for this amount on closing, so your financing will effectively fund the repairs.  Certain banks have limits on how much repairs allowance they will allow but you should be able to figure all of this out prior to submitting the offer.  The seller may agree or they may tell you where to go.  If it's the latter, then simply walk away.  There are plenty of opportunities out there and if you walk away, the seller just may want you back.  If not, don't sweat it, and move onto the next opportunity.

Hope this offers some guidelines that will help you.

Until next time, be well!

Friday, July 1, 2011

Multi-Family Real Estate Investing 101

There are millions of people around the world who took the advice of their family and friends for investing and took heavy losses as a result of that advice.  Some people even trusted their financial advisors who for the most part give good advice in a bull market economy.  However, what goes up doesn't always continue to go up and in some cases goes down hard.  The stock market during the most recent recession as well as the housing market in the United States in particular are good examples of how a good thing can turn sour in a relatively short period of time.  Before I write about multi-family real estate investing, let me first discuss the basis of the financial industry as a whole and what is peddled to the general public for their investment dollar.

Financial Advisors - The Truth 

Financial Advisors are for the most part good people who are trying to make a living just like all of us.  The key thing to understand is that they are sales people.  They make a commission by selling financial products, just like any typical salesperson.  When you buy a mutual fund through them, they make a commission.  When you buy an insurance policy from them, they again, make a commission.  How about buying stocks or bonds?  Yes, you are right....they make a commission.  So for the most part, they are concerned with your well being but their first concern is self- interest.  Yes, they want you to make money in your investments so that you will buy more, but what happens when things go south?  Will you invest more?  Probably not.  Is there a long term investment plan?  Maybe....Now please don't misconstrue what I am writing here.  Financial Advisor sales people have good intentions predominantly, however who is going to be the person most concerned with your money?........of course, it's YOU!

When you buy financial instruments of any kind, there are zero guarantees, unless of course you purchase a fixed rate, low interest bearing instrument like a CD (certificate of deposit), or GIC (Guaranteed Investment Certificate) or a bank deposit that is insured.  Once you put your investments into other areas, you had better have a clear and thorough understanding of the risks involved.  Don't just rely on your Advisor giving you prompts.  Take the time to learn and understand what you are doing with your money and then make an informed, educated decision on what you do with it.

Multi-Family Real Estate Investing

I've been buying, renovating, managing, and selling multi-family properties for nearly ten years.  Creative financing, bank financing, even on some properties, more than 100% financing where I actually got paid to buy the property with cash back at closing.  How is this done?  Well, if you specialize in an area, you eventually learn the pitfalls, the positives, the great results, the good the bad and the ugly.  It's not all a bowl of cherries, but it certainly has its rewards.  

Now....Real Estate is not a new phenomenon.  People have needed a place to live since the first humans came into being.  Mark Twain said, "Buy land; they're not making any more of it."  This is a good basis, however it's not always good to buy just any land.  I believe it's better to buy a building that sits on land that is giving you a nice monthly cash flow.  This involves some investigation into various ways of doing this.  You can do it yourself and buy a single family house and rent it out and make a few dollars.  A major drawback with this type of investing philosophy is that if your tenant doesn't pay you, you are out of pocket to pay the mortgage, property tax, utilities (if you include them in your rent payment), and maintenance etc.

I've owned this type of property before and let me tell matter how well you screen, you will eventually have a non-paying tenant.  How you deal with it is then entirely up to you to figure out.  In some cases they may not pay for months while you try to evict them.  When you finally succeed, you're out a substantial amount of money and you're scratching your head wondering why you bothered doing this business.  I developed an excellent approach on dealing with this type of situation even though it rarely occurred but unless you know what you're doing, there is only one way to learn, and that's doing it the hard way.  

Why do that when you can hire experts?  You could hire a property manager, but for a single family home that eats a big portion of your income.  Yes it's true that your numbers may accommodate a property manager, but in the long run, single family homes offer only a small amount of appreciation and cash flow at best on an annual basis and you can't increase the value of the property by simply doing some techniques that work well with multi-family properties.  This type of property value is directly and only related to emotional buying.  When it's time to sell, you will only get what the market will pay you and that is emotionally driven.  You could have a house that you couldn't rebuild for $500,000, yet you could only sell it for $400,000 or lower even.  Does this make sense?  No, but single family homes are primarily sold on emotion and that is reality.

Now we come to multi-family properties.  These properties have one roof, but house many families beneath them.  Examples are multi-plexes, and apartment buildings.  These types of investments are much better than single family because if you have a tenant or two that doesn't pay, you still have cash flowing from the other paying tenants.  You probably won't come out of pocket to cover those mortgage payments, taxes etc. while the problem tenant is being dealt with.  You must hire a property management company that has specific experience with not only the type of property you have but also has specific experience in the area you own your property.  They have to do their job in managing the property and when it's time to increase rents, they will do that for you because that's their job.  You don't get phone calls at 2 am telling you that the toilet is plugged.  Your manager takes that call.  Pretty nifty!  You could manage it yourself but you're probably burn out within 2 years.  If you're superman, you may last for 3 years before dealing with the tenants and the issues become so annoying that you decide that you have to sell, rather than want to sell (There is a big difference).

The Beauty of Multi-Family Investing

Given a choice of where to put your money, this is a great way of getting a great return with low risk compared to many other investments out there.  By screening for artificially low rents in buildings that require a little cosmetic fix-up, or maybe were run by a property owner who didn't use a management company and was afraid to increase rents because "tenants might leave", then you can quickly make your property worth more.  By understanding when leases become due and your local market laws, this is an ideal way of increasing the value of your property by a few strokes of the pen.  You can't do that with a single family but you certainly can do this with multi-families, and the amounts can be astounding.

Example:  You have a 100 unit apartment building and they're all 2 bedroom units renting for $900 per month.  You slap a legal "nuisance" increase of 2% which is $18/month.  Now we say "nuisance" because the typical tenant will accept this type of increase as part of life and won't move out because of it.  What have you just done by doing this?  $18/month x 100 units = $1,800/month extra cash flow x 12 months/yr =  $21,600 extra per year in cash.

The typical investor would like to see say a 10% return on their money, so at a 10% CAP rate which satisfies this, you've just increased your building's value by $21,600 / 10% = $216,000.

With a nuisance rent increase you now have a building worth almost a quarter of a million dollars more than before you put this measly little increase in.  This is the power of multi-family investing.

These are real numbers and another great aspect of this business is that we buy buildings with verifiable income by looking at P&L statements from the owners for the previous three years as well as looking at their portion of tax return for that same period to help ensure that what they are telling us is in fact the truth.  Understanding rent rolls and when leases are due for renewal are other aspects that are considered when buying a multi-family property and are placed in the long term business plan.

For more information on how you too can earn a really good monthly cash flow and see cash on cash returns of 10% - 25%, get in touch with me directly and let's have a relaxed chat on what your goals and needs are.

Be well until next time.

Carpe Diem