Real Estate Income Property - Case Study #1

This post is a case study of one of our rental income properties from its initial acquisition to date.

Hope you find it helpful!

Rental Income Property

This freehold town house is located in a nice family-friendly neighbourhood of Barrie, ON. 

At purchase, the house was about 35 years old. Previous owner had it for over 20 years. She lived in it during the first 10-12 years, and then rented it out. 

We were happy that the property came with tenants and had positive cash flow. We realized that the house would need to be updated eventually once the original tenant would move out.

Key features: 

• Freehold town home
• Built in 1982
• 3 bedrooms, 1+1 bathrooms
• Finished basement
• 1 car garage
• Electric heating
• Washer, Dryer, Dishwasher, Water Tank
• No AC

Purchase

We got this house privately without a real estate agent. Click to read the full story at Our second rental income property

• Asking price: 189K
• Purchase price: 185K
• Found on: Kijiji, private sale
• Rent: $1,200/month
• Expenses:
• Utilities: Paid by tenant
• Taxes: ~ $200/month
• Insurance: ~ $100 / month
• Financing: 80 LTV, 30 year amortization, 5-year term, variable 2.5% interest

Total Investment

This property required a 55.5K investment.

A major renovation had to be completed in 2015 after tenant's Christmas party went really wrong. Renovation cost is listed as capital improvements in the investment summary below. Read full story about this renovation in Our House Was on TV blog post.

Investment Summary

Investment	Amount
Downpayment	$37,000
Closing Costs	$3,196
Capital Improvements	$15,450
Total	$55,646

Cashflow and ROI 

• Total return on investment (ROI) is 34%, or 8.5% annually
• During the first two years, cash flow was negative
• Cash flow was positive in Years 3 and 4
• 2016: $217 / month
• 2017: $598 / month.
• Net profit has been positive every year
• Annually, on average, the property runs with:
• ROI of 8.5% 
• Cash on Cash return of 3%
• Cash Flow of 1.5K 
• Net profit of 4.7K

	Year 2014	Year 2015	Year 2016	Year 2017	TOTAL All Years	Average Annualized
Income
Rents (@100%)	7,200	14,400	17,700	17,700	57,000	14,250
Vacancy		4,250	1,400	0	5,650	1,413
Total Gross Income	7,200	10,150	16,300	17,700	51,350	12,838
Expenses
Taxes	3,815	2,475	2,381	2,464	11,136	2,784
Insurance	323	730	1,412	1,018	3,483	871
Repairs/Maintenance	93	1,456	3,184	42	4,775	1,194
Utilities	495	832	0	49	1,376	344
Admin/Advertising	0	0	47	0	47	12
Total Expenses	4,726	5,493	7,024	3,573	20,816	5,204
NOI	2,474	4,657	9,276	14,127	30,534	7,633
Mortgage - Interest Payment	1,832	3,350	3,131	3,330	11,643	2,911
Mortgage - Principal Paydown	1,972	3,446	3,530	3,615	12,563	3,141
Cash Flow	-1,330	-2,139	2,615	7,182	6,328	1,582
Net Profit (Loss)	642	1,307	6,145	10,797	18,891	4,723
Cash on Cash Return	-2.39%	-3.84%	4.70%	12.91%	11.37%	2.84%
ROI	1.15%	2.35%	11.04%	19.40%	33.95%	8.49%

Appreciation / Equity

Market prices in Barrie increased dramatically between 2014 and 2017. Many believe that there may be a bubble, price adjustment, etc. Because of these concerns, I will use MPAC numbers for value calculations and not current market prices. MPAC approach is more conservative.

Based on MPAC assessments, the value of the property increased by 42K during the last four years. Once we include the equity gain in ROI calculations, return on investment becomes 27% per year:

• Total gain including appreciation: $18,891 + $42,000 = $60,891
• Total ROI including appreciation: 109% overall and 27% annually.

History

2017

• Great tenant renews lease. Hurray!
• Bank of Canada increased interest rate. Mortgage payment went up. 

2016

•  Plumbing issues cost about 3K
• Change of tenant - new great tenants moved in.

2015

• Major renovation from January to June.
• Great tenants moved in July 1st

2014

• Purchased in May - Our second rental income property
• Christmas - Shooting at the house 

How to Be a Successful Real Estate Investor in 2018

Yesterday, I attended REIN's (Real Estate Investment Network) first meeting of 2018 in Toronto. I was invited as a guest of one of the long time REIN members and am very grateful to her for bringing me there.

The event was very informative. I learned a lot. There were many great and like-minded investors in the room. We chatted and shared our latest achievements and new goals.

"Open your eyes and let the future in. But be sure to look forward and up - because that's where the future lives" Richard Dolan

Presentation topics included:

• GTA housing market - detailed update on GTA housing and rental market by Dana Senagama of CMHC

• What's Behind the Curtain - current view of economic fundamentals by Don R. Campbell
  

• REIN Vest - how to be prepared for an emergency. I found advice and the toolkit presented by Richard Dolan priceless

• The personal performance playbook - a guide on how to plan, prepare and perform in 2018. This was a wake up call for me, as I realized how much more I can do to stay on top of my own goals and make things happen this year as planned.

Presentations were very informative and included a lot of data and insights. In this post, I'd like to share only some key takeaways that struck me the most.

1) GTA Housing Market is Investment Ready

Overall, GTA housing market was super hot in 2017 and is projected to stay relatively hot in 2018. The primary contributing factors include:

• Price overheating - medium
• Price acceleration - medium
• Overvaluation - high
• Over building - low 

CHMC data supports high demand and insufficient supply, which pushed prices up. Even with recent policy changes, they estimate that price increase will continue. CHMC projects a slow down in growth to the level comparable with the rate of inflation of about 2%.

Rental demand is high and is projected to continue to stay high. This is because millennials are starting to rent, baby boomers continue to downsize and rent, and immigrants continue to flow in and rent.

On supply side, market is still short on purpose built rentals. Over 30% of condos are being rented out. Builders are focusing on small units, which may cause a shortage of bigger units in 5-10 years when millennials will start their families and will look for bigger units.

2017 Vacancy rate was at all time low of 1.1% and even lower for condos. It is projected that vacancy rates will remain low.

What amazed me the most was that average age of a first time home buyer in GTA is 37 years old. 

I can't believe that it may be possible that my kids will not buy a place of their own until they are 40!!!

2) Economic Fundamentals: Good Time to Become Real Estate Investor

"Thinking is the hardest work there is", Don quoted Henry Ford's famous saying at the beginning of his presentation. 

Don's key advice to all investors is to carefully consider which market they are in and what position they take before they analyze events and policy changes. Thankfully, groups such as REIN, do a lot of thinking for us and provide a recap in plain English.

The way I understood the recap:

From rental market and landlord perspective, things are looking up. Recent policy changes will push rents up, high demand and supply will continue to play in landlord's favour as well. It is essential to study markets and current economic influences and understand which real estate investment strategy will work best in the next 2-7 years.

The great news is that

"Housing was the world's best investment over the last 150 years" per Dan Kopf Quartz, Yahoo Finance, Jan. 2018 and it still is per Don R. Campbell. 

The time is right for us to hop on and catch up to this success.

Here's a link to Don's book on Amazon. Chapters 5 and 6 explain where we are at today:

Secrets of the Canadian Real Estate Cycle: An Investor's Guide

3) Be Prepared for an Emergency

For me the most thought provoking part of the presentation was about being prepared for a personal emergency in life.

Many of us, investors or not, have families, friends, and valuables.

What happens if, God forbid, my house is on fire and I have only a couple of seconds to decide what to take with me and what should be left behind. Kids and the cat are a given of course. But what else should I grab?

During the presentation it was sadly explained that in New Orleans emergency situation people suffered more than they should've because many came back to their houses for expendables, such as flat screen TV's.

What happens if life throws in an accident, disability or death at me sooner than I expect? After all, the average life expectancy is exactly that - the average, meaning that some live more and some live less. I might end up on either side of the mid point.

The reality is that there are many-many details that go into being prepared. And these details may help you in a small or big emergency.

REIN provides a toolkit for its members to fill out and follow. In a nut shell, you have to be prepared and store all necessary items in a single fire/water proof box that you can always grab or open when needed.

Make sure your family knows that they should look for this box, if you are not around to help them.

Here are some items that should be placed in your emergency box:

• Emergency contacts
• Insurance info - Personal, property, casualty
• Legal info - Wills, power of attorney, trusts, etc
• Money info - investments, annuities, pensions
• Benefits
• Banking info
• Medical info
• Assets
• Liabilities
• Passwords
• Keys
• Valuables
• Miscellaneous

Having this emergency box set up will give you and your family piece of mind. I think it's a must have for every household.

4) How to Plan, Prepare and Perform in 2018 - Your Personal Performance Playbook

"Setting goals is the first step in turning the invisible into the visible" Tony Robbins

No matter what your target is and which performance system you are using to get yourself there, setting goals is always the first step.

At the meeting, we reviewed a 10-step personal performance playbook. The playbook resonated a lot with me because it brought up several aspects that I realize and agree with on the subconscious level, but have not been consciously paying attention to lately.

Here's what I'd like to do personally for myself next:

I. Review my target and Focus on It - 50 Doors

II. Set My Goals:

1) Debt repayment and re-consolidation plan by April 2018
2) Acquire New Properties by August 2018
3) Re-Finance Short Term Interest Only Loans by December 2018

III. Plan My Actions

1) Morning - top 3, Afternoon - top 3, Evening - top 3

2) Week's Top 3

3) 30-day Top 3

4) 60-day Top 3

5) 90-day Top 3

IV. Lead Myself To Completion

1) Choose my ways of being and be that way
2) Set up my environment appropriately
3) Journalize my time

V. Review My Own Performance and GET REAL.

So, my main take away from REIN meet up yesterday is to stay focused on my target and pull my stuff together. I have to be a lot more organized and determined to achieve my goal.

The note that I posted a few weeks ago right in front of my face says:

"Get ACTIVE
Stay ACTIVE
Be PERSISTENT
MAKE a COMMITMENT".

All I have to do now is do it. Hope you've set some goals for yourself as well and are on target so far!

Here's another book I think you might like: Unshakeable: Your Financial Freedom Playbook

Hey, good luck in 2018!

Is Now The Right Time to Invest?

The short answer is Yes!

If you are asking this question, then you are probably wondering how you can get richer, have more time, protect your family from unexpected down turns, or build a safety net for yourself.

What I am starting to realize is that investing is VERY similar to growing crops.

Investing = Farming

I Love Growing Tomatoes!

You plan what you'll grow.

You wait for the Spring.

You work the land.

You plant the seeds.

You carefully water them and protect from birds, diseases, etc.

When the fall comes, you harvest.

If You are Like me, You are Not a Farmer 

If I became a farmer today and had to feed my family off my land, I know we'd starve because I don't know much about farming.

But over years, I know I'd learn and get better. A lot of my success would depend on the land, the seeds, the weather, the birds, and my knowledge, experience, skills and tools.

Find a Pro to Get a Good Seedling From

Two years ago, I got a tomato plant from Home Depot. I got some soil and planted the tomato in the flower bed in the backyard. You wouldn't believe it!

With minimal care, the plant grew all over the flower bed and gave us so many tomatoes that we had boxes and boxes of them. It was amazing! I think the result was so good because I got a very strong seedling and was lucky weather-wise.

Last year, I planted some sun flower seeds. The seeds had been in my kitchen drawer for over 5 years. I had doubts about them to begin with. But my son really wanted to try.

We planted the seeds. We watered them. And waited. Watered. Waited.

Nothing. Not a single sprout came up. So much hassle and zero result.

Spring is Coming! Are You Ready?

Can't Wait for the Spring!

Well.

This Spring, I will find better sun flower seeds and try it again.

I will also go for another tomato plant.

That was fun and I look forward to repeating my previous success and learning more about tomatoes.

If you'd like to invest in your future, you have to educate yourself, prepare, and plant the seeds or bulbs or seedlings.

Spring is on the way! Start now!

Five Ways of Making Money in Real Estate

Cheers to All of 2017 Successes!

Yesterday, I attended the first meet-up of 2018. I really enjoyed it.

My favourite part was when everyone in the room took a turn to share some of their 2017 wins.

It is truly inspiring to hear so many success stories. Collectively, the group probably bought and sold a couple of hundred of properties last year.

There were some over-achievers among us. For example, one gentleman completed 11 flips, 4 wholesales and 2 buy-and-holds. That is a lot!!! Bravo

I'd like to share what I learned about five ways of making money in real estate. When I was starting with my 50 doors plan, I only understood one of these money making techniques - the cash flow part. But it is important to be aware of and take advantage of all other components.

1) Cash Flow

Cash flow is the money that you make every month when you buy and hold real estate:

Cash flow = Income - Expenses - Financing Costs

Usually, cash flow is fairly skinny. My goal with each of the new properties is to have a cash flow of $200 per month. However, in some cases, I start out with cash flow being as low as $50 / month. Over time cash flow will grow, if you manage your property well and find ways to increase income and optimize expenses.  

Let's suppose you make about $200 / month in cash flow. Over five years, this adds up to

$200 x 12 x 5 = 12K

2) Appreciation

Appreciation is the bonus that market gives you. It is important to do through market analysis and understand what, where, when and why makes the most sense to invest in when you purchase a property. This helps ensure that you catch a rising wave, not a avalanche down.

Appreciation = Price of your Property Now - Price that you Paid for it

If you purchase a property at a fair market price and a fairly stable location and your plan is to hold it long term, then it is pretty safe to assume that appreciation will be on average 2%. Let's suppose you purchase a property for 200K and hold it for 5 years. Appreciation will be 200 x 2% x 5 = 20K.

Let's suppose that you decide to keep the property. In that case, you can refinance and pull out 65-80% of appreciation. This means that at refinance you will get

20K * 65% = 13K

3) Principal Pay Down

If you have a traditional mortgage on your property (not interest only financing), then every month a portion of your mortgage payment goes towards principal pay down and the rest is the interest that the lender collects.

Principal Pay Down = Current Mortgage Balance - Initial Mortgage Balance

Let's say that you purchase a property for $200K, with 20% down payment and a 3.5% interest mortgage for the remaining 160K for a 5-year term and with 30-year amortization. At the end of the term, your mortgage balance will be about 143.5K.

This means that at refinancing, you can get

(160 - 143.5) x 65% = 10.7K

4) Forced Appreciation

Forced appreciation includes cash flow and value increase due to the improvements that you make to the property. Suppose, you invest an additional 5K after you purchased the property and got a better tenant at a higher rent. The tenant pays an additional $50 / month.

Also, let's assume market cap rate is 5%.

Forced Appreciation = Increased Cash Flow + Increase in Value - Investment

In this case, your annualized cash flow increases by another $50 x 12 = $600, or 3K over 5 years. The value of the property increases as well by $600 / 5% = 12K. Forced appreciation is

3K + 12K - 5K = 10K

5) Annuity

There are various ways how you can turn your property into an annuity and be getting a lump sum every month for the rest of your life. It would be wise to consult with an accountant or financial adviser to find the option with minimal tax implications.

Annuity = Get a Payment Every Month For the Rest of Your Life

TOTAL RETURN IN 5 YEARS

An investment of 45K gives you 43.7K in 5 years. This is over 100% overall and 20% per year.

• Cash flow 12K + 
• Appreciation 13K + 
• Principal Pay Down 10.7K + 
• Forced Appreciation 10K
• TOTAL: 43.7K 
• ROI: 20% per year

Not bad! I believe more champagne is in order! Wouldn't you agree?