Thursday, January 31, 2019

A Landlord Toilet Story with Numbers

When a tenant calls, I expect an issue

It's been almost five years since we acquired our first rental property. Still, every time a tenant calls, I hesitate before picking up the phone. I know that they wouldn't call me if everything was going smoothly. 


Tenants only call for two reasons:

1) They can't pay the rent on time
2) There is a repair or maintenance issue

Either way it's not a happy call. So I dread picking up the phone. I look at the phone display with the tenant's name. I count down in my mind.

Five, four, three, two, one. Then, I pick up the phone.

My skin is getting thicker.

After five years, I know that whether I pick up the phone now or listen to the voice message a bit later, the issue will need to be addressed. I also know that the sooner I resolve it, the least costly it will be. Rarely, I see issues resolving themselves. Unfortunately, most of the issues not only stick around but also worsen rapidly whenever I procrastinate.

However, I also learned that there are always different ways to resolve an issue. The easiest way is often the most costly.

Let me give you an example.

What's the Issue? 



O-oh! Hard water, ruined tap
A couple of weeks ago, my tenant called and let me know that they have a few problems: the shower tap is broken, kitchen and laundry room faucet leak.
I scheduled a local plumbing company. They visited and gave me a quote....

I always expect the worst. So I wasn't even in complete shock. But still... this specific quote made me nauseous.

It's January - the first month of the new year - and the cost of this repair basically wipes out most of my profit for the entire year. 


Any future maintenance issues at this place would eat away cash flow from other properties.

How is this possible? All it takes is a broken tap and two leaking faucets?

I reviewed the quote:

Service Charge   $49.99
Kitchen Faucet   $599.45
Laundry Faucet  $368.31
Shower Valve Remodeling Plate $192.33
Handle Wall Mount Tub & Shower w/ Valve $911.50
Become an Advantage Plan Member $99.99 and get 15% off
Member Discount ($248.60)
Tax $256.49

Grand Total: $2,229.46


We thought we could
handle the easy stuff 
That was the worst case. The best case quote was for $1,420.13. Better, but still bad.

The quote seemed high. I just got my own new bathroom faucet for $47 off Amazon. $599.45 for a new kitchen faucet seemed absurd in comparison!

I checked with my property manager. Does the price seem reasonable? He'd quote around $1,200 for the worst case. I called a different local plumbing company. They quoted $1,500 for the worst case.

My husband and I went to our favourite store. You guessed it right - The Home Depot.

We decided that we'd at least be able to get the easy stuff done on our own. Then, call the plumber for the hard stuff and save that way.

We showed the tap picture to a Home Depot staff member.


How do we go about it? 


In the best case, they told us, we'd be able to buy the parts and replace what's been broken. We just had to know exactly the brand and type of the faucet and taps.

In the worst case, we'd have to call a licensed plumber. They didn't recommend that we'd attempt to cut the tile on our own. We didn't look handy enough...

This time we were lucky!


My husband was able to replace just the broken parts. We decided not to worry about the laundry faucet for now as the issue seemed to be very minor when we examined it up close. So my husband fixed the kitchen faucet and the shower tap.

Actual Costs

Aaawwww....
My husband fixes our tenants faucet

Manor faucet    $79.98
HANDLE         $13.49
FLANGE          $5.92
FLANGE          $5.92
WASHERS       $3.94
CARTRIDGE   $9.56

Tax: $15.45

Grand-total: $134.26





Problem Solved!

All I can say is: Tenants are happy! We are happy! 


Forced Appreciation for Noobs

You know those customers at Home Depot, who point their finger and call everything "Thing" or "Thingy" when seeking advice. 

They have no idea what any of the tools are called in English. They just show up and trust the Home Depot staff will understand their mumbling and point out a way to resolve the issue.


Well. That's me. And trust me - the approach works!

Ever since I started 50Doors, I mostly point my finger, gesture, mumble and draw the best I can whenever it comes to building, renovating, and fixing things and thingies.

And people around me not only understand me but also gladly help me out!

To my big relief, I realized that not knowing can be advantageous.

Through lack of knowledge and skills, I learned how to trust people who know better, how to tell experts from talkers, and how to create real value from simple ideas.

Here is an example.

I had an idea of renting a property, which was never rented out before, but I was unsure because cash flow wouldn't be good enough. I talked my idea over with a friend who is a lot more experienced. He suggested that I renovate, split the place into two units and double my cash flow. My gross annual rent will increase by $14,400 and result in positive cash flow.

I loved the suggestions, but I was unsure that I could split the unit into two apartments. I talked it over with my husband who is a lot handier. My husband thought the concept was feasible and explained to me how the unit could be split. Together we made these drawings:




I loved our discussion and the drawings, but I wasn't sure how this could actually be accomplished and what it would take.

So I sent our drawings to my friend, who runs an on-demand property management company. Within a week, I had several quotes and a start-to-finish renovation project plan. I now knew that a $25,000 investment will be required. The work could be finished within about three weeks.

Wow! That's a 57.5% return on investment!

ROI is $14,400 / $25,000 = 57.5%


It's been almost three weeks since the start. The work is nearly complete. Two separate units are now a reality.

I am starting to look for tenants! It seems surreal that the ideas came to life so fast and soon there will be two families moving into their new homes and starting to build their memories.

Simple ideas turned into real value, which will positively affect the lives of many people for many years to come.

I am extremely grateful to the amazing property management company that actually got the job done!

Fortune Property Management 

converted my mumbling into 

two beautiful apartments 

within a couple of weeks.


Thank you!









When You Thought You Could Fly and Then... Got Stuck

When you thought you could fly
but then got stuck
and are really afraid!
Sometimes, the moment you think that you've figured out how to become financially free, the situation changes and you have to adjust your plan.


Approaching the Financing Wall


In the past five years, my strategy was to get a new property using expensive private money, renovate it, get a great tenant, then re-finance with more affordable money.

The refinance step is critical. It improves my cash flow. In addition, after the refinance, equity starts to build up within the asset because my mortgage is interest-plus-principal-paydown, rather than interest-only.

Without refinancing, holding on to the property is pointless. The property doesn't bring much positive cash flow. It doesn't accumulate equity over time either. The downpayment money is getting lazy. It's stuck inside of the property, not doing much.

This strategy worked for me five times.

With five different properties, I got a private interest-only loan to acquire a vacant asset. Renovated. Advertised. Got a great tenant. Enjoyed my skinny cash flow for a few months. Then, qualified for a traditional mortgage at a better rate. Refinanced.

Voila! Much better cash flow and principal paid down by my tenants. How nice!

The process worked like a clock. Over and over again. Until it failed.


Slammed Against The Financing Wall


At the end of 2017, I acquired three properties with private money. My plan was to replace the expensive interest-only loan with a more affordable conventional loan in a few months. Like previously, this would lead to improved cash flow and principal paid down by tenants.

Except, this time I couldn't qualify for a conventional mortgage!

The problem was that I no longer met the bank's underwriting criteria. In simple language, the lenders concluded that it was too much risk to give me another mortgage.

In the past, I had a job. My salary looked great from a lender standpoint.

Today, I am self-employed. My rental income is considered risky. Even though it is supported by 17 families working at 17 different jobs, lenders believe it's riskier than relying on my old one-woman paycheque.

In the past, I had one property. It looked great from a lender standpoint, as having a mortgage was so typical.

Today, I have a bunch of assets. Yet, most lenders don't approve more than five mortgages. They consider it risky because a borrower with more than five assets doesn't match their typical good borrower profile. Having more than five mortgages is not typical.

Investors call it the Financing Wall.

When you just gained the momentum, then slam - no more money for you!

Through and Beyond The Financing Wall


Long story short, let me jump to the conclusion of the story:

Don't give up when you don't qualify for a mortgage four times in a row. 
Don't give up when your credit score went from Excellent to Good to Fair. 
Don't give up when your situation doesn't fit a conventional good borrower profile.
Don't give up when your credit card payments give you creeps.

Instead:


  • Make sure your mortgage broker is as awesome as mine! See their contact info below
  • Eliminate liabilities! read through my prior blog post on how eliminating liabilities can decrease the burden of expenses and expedite your financial freedom
  • Make sure you have Plan A, Plan B, and Plan C and you do just fine with or without better financing
  • If your profile doesn't match the characteristics of a good borrower, learn what those characteristics look like and tweak your profile to change your financial future, so you can qualify down the road. Here is a link to an Excel template that I use to help me stay as organized as possible and make a very good impression on potential lenders
  • Keep learning, so you can adjust your strategy or start using new strategies! There are infinite number of different ways to accomplish a goal.
  • Ask! What I didn't realize far too long is that no matter what your situation is, chances are someone has been there and will gladly help you find a way out. Email me at ask@50doors.com


Here's the info for my broker, who has helped me with financing many-many times when I doubted there was a path forward. In fact, he shared this quotes with me when we broke through the Financial Wall after a few unsuccessful attempts:

"Never give in. Never, never, never, never--in nothing, great or small, large or petty--never give in, except to convictions of honour and good sense." 
-- Winston Churchill
If you need a mortgage in GTA, check out these guys








PS Did you know that a $300,000 mortgage with 3% rate will cost upwards of $575,000.00 and you could save 10 years and $90,000 of interest if you were to pay just $200 more per month? Here's an Excel tool that I use to do all my numbers when it comes to planning accelerated mortgage pay down and tracking my results



How to Become 22% Financially Free

Most of my girlfriends think that
living with my parents is
a horrific idea :)
Over the Christmas break, my family made a very big decision. We all finally agreed that it's time to eliminate one of our biggest liabilities - our home! 


We decided to join efforts cross generations and consolidate two residences: my family moved in with my parents.

This is not only because we love each other to pieces, but also because we saw a great opportunity to optimize our spending. This is a step towards our financial freedom goal and a part of the following chain reaction:


  • Spending goes hand in hand with saving.
  • Saving goes hand in hand with investing. 
  • Investing goes hand in hand with multiple streams of income.
  • Multiple streams of income go hand in hand with financial freedom.


I understand if you think it's a crazy move. Even my nine-year-old jokes:

My son: Mom, how do you feel about living with your Mom when you are almost 40?
Leaving 16 years of memories behind
Me: I like it
My son: Why? [Pauses] Free food?!?
Then, he bursts into laughing loudly at his own black humour.

All joking aside, this is a big change for our family. Kids had to change schools, karate dojo, pack
and move all of their stuff, and try to make new friends. My husband and I packed 16 years of life into boxes and garbage bags and piled it in my parents' basement. My parents now have to observe our semi-chaotic living in their previously idyllically quiet home.

Why? Because this change takes us closer to achieving our financial freedom goal. Now, our upcoming year-long Sailing Trip in a couple of years is more real than we've ever imagined.


Myth: Home is an Asset


Most people consider the home that they live in to be an asset.

There is a lot of evidence all around us in favour of this myth. For example, real estate agents will tell us that home is the most expensive asset we will purchase in our lifetime.

A creditor will ask us to put the market value of our principal residence at the top of the Assets column on their credit application.

Our personal financial advisor will ask about the value of our home and enter it on the first line of the assets section of our Personal Financial Information form.

Let's be pragmatic about facts:

A real estate agent will get paid a commission based on the purchase price you pay for your home. 

A creditor will collect thousands of dollars of interest payments when you borrow from them and secure a loan against your home.

A financial planner will help you in many ways:
a mortgage, insurance, a secured loan, an investment portfolio, and a repeating annual financial plan update, all of which is based on the market value of your home; all of which comes with a price tag.

Please keep in mind that I am a grateful customer to a few amazing real estate brokers, mortgage brokers, and financial planners. Knowledgeable advisors help me tremendously on my way to financial freedom! The value of the products and services they provide to me greatly outweigh the associated costs and propel me forward. In fact, I wouldn't be able to achieve what I've done so far without their help. If you are reading this - Thank you!

The trick to appreciating the value of these services is to know exactly what you are after.

The advisors, especially great ones, will give you the advice that you'd like to hear. This is because a huge part of their job is to help you achieve your dreams. They will cater services to your tastes and help you make the decisions to achieve your desires.

Therefore, if you go with conventional definitions and believe your home to be an asset, you will inevitably purchase an expensive home and spend a lot of money on it! Your advisors will help you do it to the maximum.

Your Decisions are Yours to Sponsor

Since my goal is financial freedom, I make it my highest priority to fully understand the costs of each of my liabilities, including my home.

I am fully and solely responsible for all the associated home expenses such as:
Mortgage Interest and principal 
Mortgage insurance 
Life and disability insurance premiums 
Property taxes 
Property insurance 
Maintenance and repair costs 
Snow and grass care costs 
Cable 
Internet 
Phone line 
Security alarm system 
Furnace lease 
Water tank lease 
Utilities 
Interest on the furniture bought on credit card 
Interest on the car as fancy as my neighbour's
Netflix
Amazon Prime 
Cleaning lady (I notice that the trend is more bathrooms than people in a house!)
A second car if the house is far from work 

Given my personal goal, I choose to disagree with the conventional definitions and concur with Robert Kiyosaki, who insists that we put our home on the liabilities side of the equation.

In order for me to balance my personal budget, I have to face the harsh reality and be ready to pay the bills that I signed up for. There's definitely a lot of bills to pay when it comes to home ownership!

Consequently, my advisors strive to help me find the best bang for the buck, save every penny possible, and use my personal home to the fullest.


Abundant Opportunities


Homeownership combined with the home being classified as a liability (as opposed to being an asset) gives you tremendous opportunities.

First and foremost, I bet you can save two to three hundred dollars a month, if you carefully revisit all of your regular expenses, decide which of them you no longer need, and stop paying for them.

Keep in mind that small savings add up.

For example, over the past couple of months I shaved off the following on little things:

- Replaced mortgage and loan protector insurance with whole life and disability insurance +$100
- Stopped paying for a home thermostat rental +$15
- Cancelled Netflix +$12

Sub-Total: $127 per month = $1,524 per year = $1,836 before tax.

After moving to my parents, I've also added the following savings:
- Cancelled internet +$65
- Cancelled home insurance +$40
- Cut utilities and property taxes in half +$500

Sub-Total: $605 per month = $7,260 per year = $8,746 before tax.

Adding $656 monthly saving I shared last month, grand total becomes:

$127 + $605 + 656 = $1,388 per month = $16,656 per year.

At 17% tax rate, that is $20,067 of pre-tax salary.

An average family with 73.7K annual household income has to work for over eleven weeks to earn enough money to cover these expenses.

Given the recurring nature of these expenses, it's not just a one-time eleven-week long work project. You'd have to work for eleven weeks every year to pay for all these obligations.

For me personally, getting rid of these liabilities means that my husband can be on vacation for 11 weeks out of 52 every year. 

This alone makes us 


22% FINANCIALLY FREE



Sailing Trip Awaits!
Not bad, eh?

PS Saving and being frugal around your home-related expenses is just one side of the coin. Being a homeowner can open many investment opportunities and become the basis of your future wealth and financial freedom. Email me at ask@50doors.com if you'd like to learn more

Saturday, December 29, 2018

Tax Saving on Steroids: Better than RRSP

Two years ago, I had a great job. I loved it. In fact, I loved my job too much.

I'd wake up at two or three am in the morning a few times a week to get some work done, while it was still relatively quiet and almost nobody else was working. I'd work through the day, and then put in a few more hours right before bed time, usually late at night, after my kids and my husband fell asleep.

I loved the job. It felt like a game. Loved solving puzzles and moving up to the next level. I was addicted. 

I was a conscientious super star at work and a dedicated WORKAHOLIC


Once, I even managed to impress the CEO and the CFO. I doubled an important business metric while holding an interim job for a quarter, in addition to my own regular job. I got a performance bonus! Hooraaah! That felt amazing!

Extremely shocked was I when only half of the bonus got deposited to my checking account. How could that be?

The answer was simple: Taxes.


Blinded by Success


Blinded by Success
That was the first time I actually noticed the impact taxes made on my net pay.

That same year happened to be the year of the highest earnings I ever achieved being a full time employee. I was really proud to be in a high marginal tax bracket.

Taxes didn't hurt. On the contrary, I was certain that it was a good problem to have:

The amount shown in Box 22, Income Tax Deducted, Line 437 of my T4 slip felt as a badge of honor.

I felt successful.

That year I finally saw the benefit of contributing to RRSP. At the very last minute just before RRSP contribution deadline,it occurred to me that for whatever contribution I can make, I'd get almost half of the money back as a tax refund.

For every RRSP dollar that'd be deducted out of my earnings, I would put 50 cents of tax refund back into my pocket


Wow. I got cash advances on several credit cards and took some money out of my TFSA and made my first ever RRSP contribution, which ironically became my last RRSP contribution as well.

Bingo! A couple of months later, taxes were filed and almost half of my contribution came back. I paid back the cash advances. "Wow! I rock," - I thought looking at my RRSP savings.

Unbearable Tax Burden


Stressed. Depressed. Overworked


Some time has gone by. It became obvious that I couldn't keep working 16 hours a day. I was exhausted. Tired. Depressed. Rock bottom was approaching fast.

I remember the day when I gave up.

I was driving to work in the morning. This was the forth 20-hour day in a row. Tears were running down my face.

Why am I even doing it to myself?

Is it worth it?

The recent performance bonus felt like a mean prank now.

I felt like a failure. I knew that this was the end of my career. I didn't make it to the top.

I thought again about my performance bonus slashed in half by tax and many thousands of dollars of tax I paid that year to CRA.

I thought about 50 cents deducted from every dollar. 


50 cents from every dollar that I made during those horrific 20-hour long days and short four hour nights when my dreams were a continuation of the previous day's train of incoming emails, never-ending meetings, and insurmountable workload.

Every minute my brain kept persistently telling me "Why are you doing this to yourself? Stop! It's not worth it"

Finally I heard my own subconscious scream for help. I knew I wouldn't last until retirement at this pace. I'd just collapse. This wouldn't be the first time when I'd have a break down and have to take a stress leave to recuperate.

Enough! I am not going to drive myself into the ground. I gave my notice and quit working.


The Best of The Two Worlds: High Income, Little Tax


The irony is that if I worked smart, rather than hard, I would have had time to learn that there were ways to minimize tax. 

I could have had the best of the two worlds: high paycheque and little tax.


Alas, I missed my chance.  I am sharing my knowledge with you, a successful high income earning employee, who works smart at a fun interesting job and wants to find a way to pay less tax.


The Best of The Two Worlds: High Income, Little Tax


This is all legal. This is all risky. You should do your own research, due diligence, etc. and check with your accountant. 

The steps are simple in this Tax-Optimization Strategy:

  1. Work smart, earn a LOT and get into high (or preferably highest) marginal tax bracket
  2. Invest in a flow-though fund that's eligible for up to 100% tax deduction and get a tax refund, which basically reduces your capital at risk by 50%
  3. Convert your income into more tax favourably taxed capital gains, essentially reducing tax by 50%.

A sample calculator and a detailed example of how flow-through fund works can be found at Maple Leaf Short Duration Flow-Through fund website here

I am a big proponent of tax saving strategies. I was thrilled when I learned about this flow-through tax optimization and investing strategy a few weeks ago. 

Certain alternative energy projects
are qualified to issue flow-through shares

Keep in mind that the window to invest in flow-through shares is very short: late fall to early December.

If you'd like to discuss or learn more about this topic, please send me an email or post below. All questions, feedback, ideas are welcome. 




Friday, December 28, 2018

When Frugality Fails

Being a landlord can feel EXTREME
Earlier this month, I started feeling as if

someone somehow 
made 
the God of Appliances 
MAD


Every time I picked up the phone, I heard one of my tenants deliver the bad news.

It started on Sunday morning.

Ring-ring. My fridge stopped working.

Monday morning. Ring-ring. My dryer stopped working.

Monday evening. Ring-ring. The washing machine doesn't drain.

At that point, I made a strategic decision of letting the phone ring and go to voice mail, while I was sorting out all these appliances issues.

Luckily, this was it for the time being!

Extreme Efforts Being Frugal


Most properties I get, come with appliances and in most cases they are pretty old. Hence, I expect at least some of the appliances would break fairly soon after the purchase.

In the past, I always looked for a used appliance to replace the broken one. I thought this was the most cost effective approach.

For two to three hundred dollars, I could find a decent used washer, dryer, stove or whatever needed. A new appliance would be about $500, almost twice more expensive.

With a used appliance, I also had to figure out a way to deliver it to the tenant, get it installed, and get rid of the old broken one.

Luckily, my husband is quite handy and could help with most of this.

This is How We Did It


I'd find the most affordable decent used appliance and negotiate the price.

Then, coordinate child sitting, so we can free up either a Saturday or a Sunday.

Our weekends are packed with our youngest son's Russian lessons, music, hockey, and occasional birthday parties.

Our youngest son is nine and the oldest is almost 19. My parents and my-in-laws have 6 grand kids each. They used to be eager and excited to babysit the oldest couple of grand kids.

Let's be honest, after 19 years on grand-parents duty, I can't say any of the grand-parents are thrilled when I ask them to spend a day driving grand son #6 back and forth, trying to bribe him with just the right amount of doughnuts, chocolate milk, and chips as he goes through a back to back list of all sorts of developmental activities and sports.

Having said that, more often than not, our parents still agree to help us out.

Childcare arranged - Yay!

Next, we'd borrow our friends' mini-van. Our friends have three kids of their own. So this is a hassle for them as well. They have to move car seats, strollers, and downsize their life for the day every time we need to borrow their car.

I'm grateful every time they help us out! To thank them we always bring back their car with a tank-full of gas.

Transportation Arranged - Yay!

The following step is to make an appointment with the tenants, at least 24-hours ahead. This is usually the easy part since the tenants look forward to getting a working appliance.

It has to be on the weekend, though! Because my husband has a day job. All this investing jazz is happening after hours and on weekends.

Tenants on Standby - Yay!

On the day of, usually a Sunday


1) Wake up early in the morning, seven-ish

2) Get Starbucks, it's going to be a long day!

3) Pack and drop off the child

4) Give extremely-detailed-instructions to the grand-parents about all the activities they have to tackle including a back up plan in case the child is in a whiny mood

5) Get the mini-van from our friends

6) Pack all tools and hardware

7) Remember to take the key, in case tenants aren't home

8) Go and get the appliance from the seller, typically someone I found on Kijiji

9) Drive to the tenant, either to Barrie or Guelph

10) Attempt to install the appliance

11) Find out that something doesn't work or is missing - pipes, outlets, drains, narrow doorway. It's guaranteed that something is going to be messed up or in our way.

12) Go to the hardware store for the parts and tools, minimum twice

13) Finish appliance installation super-late in the evening

14) Roll out the old appliance to the curb. Comply with local city and safety rules (ex., if it's a fridge, take off the door!)

15) Get fast food. We are super hungry and done with all the snacks by this time

16) Drive back to Toronto. No traffic on the way back - Yaaay!

17) Fill up the tank and return the mini-van

18) Pick-up the child from the parents

19) Go to bed at two or three am

20) Wake up four hours later

The job is done! Yay!

How Much Money-Wise?


With do-it-yourself approach, we'd pay about $300 for the used appliance, $50 for gas, $80 for a full tank of gas as a Thank You to our friends, get coffee, fast food and realize one out of every four new used appliances would break within several months after purchase and we'd have to fix it.

In summary, used appliance would cost about $600, while a new one would be about $800.

   Used Appliance      New Appliance   
Appliance$300.00 $500.00
Delivery$- $100.00
Installation$- $200.00
Starbucks for Two$12.00 $-
Fast Food for Two$20.00 $-
Gas & gas re-fill$130.00 $-
Fix New Used Appliance$132.50 $-
Total $ Cost$594.50 $800.00


How Much Effort-Wise?


In addition to dollar cost, we'd need to collaborate with and inconvenience a whole bunch of family and friends to coordinate appliance re-placement.

Collectively, we'd spend over 150 hours either putting in heroic efforts AND/OR sacrificing our weekend.

The result would be subpar. After all this time invested, our old new appliance will likely break soon or stay functional for just a couple more years. So we'd need to re-group and fix it again!


People InvolvedDo It Yourself Delivery /InstallProfessional Delivery/Install
Grandparents @ 12-14 hours20
Child @ 12-14 hours10
Friends @ 12-14 hours50
Husband @ 12-14 hours10
Self @ 2-4 hours admin work11
Self @ 14-18 hours inspiring my husband to put in heroic efforts over the weekend10
Handyman @ 2-3 hours01
Tenants @ 3-6 hours22
Total # Participants:134
Total Time Needed from everyone involved128 to 156 hours8 to 16 hours




With PROFESSIONAL help,
being a Landlord feels smooth

Landlord Job gets Easier with Professional Help

As my portfolio grows, appliances issue come up more and more frequently.

Sometimes, as often as three times a day!

My friends and family will NOT want me to hijack all their weekends, so that I can save $200 on an appliance.

I will never see my son again, if spend all my time trying to get and install cheap used appliances.


Also, my husband would very likely ask for a divorce if I queue up appliance deliveries and other handyman work for the next three-four-five weekends in a row...

Lately, I always go for NEW appliances and pay for PROFESSIONAL delivery and installation. 

This is the ONLY way I can scale to 50 doors.

Thursday, December 27, 2018

Vacancy: Landlord's Worst Nightmare

Vacancies Keep me Awake at Night!
A few days ago we filled our last vacancy.

What a Relief!

The search took about three weeks. Our property manager began advertising the unit on November 19th. 

We started with $1,650 asking price, which was higher than the average for similar units in the area. There were barely any inquiries at that price. 

December and January are typically slow months for tenant search. People are busy with holiday prep and after holidays they go into hibernation-mode for the remainder of the winter. I was worried that we'd have a vacancy until Spring.

Vacancies Keep Me Awake at Night

The reason I am so afraid of vacancies is because they are very costly. Every month of vacancy, I'd have to come up with money to pay the mortgage, property taxes, utilities and, in case of this specific property, property management and condo fees as well.

Ouch!

Typically, they recommend that you include 2-5% vacancy fee in your cash flow calculations.

Given 5% vacancy, my annual cash flow would be $1,280. Or $100 a month.

In reality 5% only works if you manage to go without vacancies for a while. Actual losses are a lot higher!

For example, my annual loss for a year with one month of vacancy is about ($1,660). That's because:

I will not get a month of rent of $1,600
Pay about $300 for the utilities during that month
Pay about $2000 for tenant search and making the unit ready - fresh paint, minor fixes, etc. add up
Pay all regular expenses of $16,960...

If my property is vacant for two months, the loss will be ($3,560).

With three months of vacancy, I'd lose ($5,460).

Once I do find a tenant, it will take a l-o-o-o-o-o-o-o-o-o-o-o-o-ng time to catch up.

I'd need the tenant to stay for almost 2 years, to catch up after one month of vacancy.
The tenant will have to stick for over 3.5 years to catch up after two months of vacancy.
Lastly, the tenant will have to stay for almost 6 years, to fully catch up after three months of vacancy.

My math is simplified, of course. I don't take rent increases into account at all, for instance. Still, you get the idea why I hate vacancies. Vacancy losses are horrific.

The danger is on the flip side as well. If you rush and get a BAD tenant, you can end up with thousands and thousands in losses... See my blog post here for details - My $30,000 Mistake.

Here is a chart with the numbers in my examples above:






Projected:
5% Vacancy
   Actual:
   1 month
   Vacant   
   Actual: 
   2 months 
   Vacant   
   Actual: 
   3 months 
   Vacant   
Gross Rent$19,200$19,200$19,200$19,200
Less Vacancy($960)($3,900)($5,800)($7,700)
Rent Income$18,240$15,300$13,400$11,500
Expenses
Financing Cost$6,860$6,860$6,860$6,860
Condo Fee$5,304$5,304$5,304$5,304
Property Taxes$1,961$1,961$1,961$1,961
Other$1,200$1,200$1,200$1,200
Property Management$1,094$1,094$1,094$1,094
Insurance$540$540$540$540
Total Expenses$16,960$16,960$16,960$16,960
Net Profit (Loss):$1,280($1,660)($3,560)($5,460)



Success! Got a Great Tenant

Needless to day, the pressure was on.

We lowered the price by $50 to $1,600. Luckily, the interest picked up! 

The ad generated over 230 views, 15 inquiries, three viewings, and a great application on December 9th. 

Our property manager uses Naborly for tenant screening. I've never seen a Naborly report before and was quite impressed. The multi-page document covered most of the information that I typically review for a candidate and gave some additional insights. Here is what the report covered:
  • General info about all occupants
  • Previous addresses and address verification
  • Equifax credit summary and score
  • Debt summary including monthly debt payments
  • Rental history
  • Financial information
  • Employment history
  • Analytics showing the likelihood of key tenancy risks (late payments, eviction, property damage) 
  • Analytics showing the likelihood of a successful tenancy during the entire term.
Our property manager also collected a photo ID, a full credit report, and a letter from the employer. They conducted a face-to-face interview and verified employment and personal references. My property manager summarized their findings including possible risks.

I reviewed all the information as well and did my own due diligence. I typically research every piece of factual information and make sure all facts align and make sense. The way I do it is very simple: research every name, every address, every company name, every email, and every phone number that the candidate provided; look in Google and on all social media platforms; contact all references and chat with them; verify income.

In this case, all checks were successful. I accepted the application and to my delight, the tenant confirmed that they'd like to go forward as well.

No Vacancies!!!!!
Overwhelmed with JOY and
will definitely sleep like a baby :)
The property manager impressed me very much! This was the first time when they found a tenant for me and I loved how smooth the tenant on-boarding process was. 

As soon as this last vacancy was filled, I started sleeping like a baby again!