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! 

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 Involved	Do It Yourself Delivery /Install	Professional Delivery/Install
Grandparents @ 12-14 hours	2	0
Child @ 12-14 hours	1	0
Friends @ 12-14 hours	5	0
Husband @ 12-14 hours	1	0
Self @ 2-4 hours admin work	1	1
Self @ 14-18 hours inspiring my husband to put in heroic efforts over the weekend	1	0
Handyman @ 2-3 hours	0	1
Tenants @ 3-6 hours	2	2
Total # Participants:	13	4
Total Time Needed from everyone involved	128 to 156 hours	8 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.

The Beauty of A La Carte Property Management

Loving A La Carte Property Management

A friend of mine runs an amazing property management company – they offer on demand white glove property management services. I call it a la carte property management.

I think this service is amazing. In fact, it’s just perfect. I tried it last month on one of my rentals and absolutely LOVED it.

To start, let me share my view on traditional property management and some challenges that I've come across.

This will help me explain why I am so excited about a la carte property management!

The Pains of Traditional Property Management

Traditionally, property managers charge a percentage of gross rent per month. Usually, somewhere between 5% and 8.5% of your gross rent. For example, if you rent a unit for $1,500, you’d be paying around $100 a month to the property manager. You pay based on proforma, not actual, i.e whether or not your tenant pays rent, you still pay your property manager.

Given a skinny average cash flow of $200 per unit, property management could easily take away half of your cash flow. So instead of getting $200 a month in your pocket and self-managing the unit, you’d be getting $100 a month from the unit when you outsource property management.

The biggest benefit of hiring a property management company is that your property manager becomes the point of contact for your tenants, instead of you. You never see, communicate with or hear from your tenants. Your tenants contact your property manager with all their questions and issues. The property manager coordinates issue resolution, gets your approval on costly items, and sends you an invoice at the end of the month. This invoice includes:

• Property management fee of 5 – 8.5% 
• Cost of labour to resolve issues
• Cost of materials to resolve issues

Traditional Property Management can get Ugly

Here are some examples of what is not included in the property management fee and will be added as an extra line item on your invoice:

Painting / cleaning / making unit ready for a new tenant, plumbing issues, snow/grass care, new tenant search, sending an eviction notice to a non-paying tenant, representing you at the landlord and tenant board, fixing a broken screen on a window, etc. 

Basically, everything is extra with the exception of:

• rent collection 
• the contact phone / email that your tenants get to call when they need help
• in some cases, annual rent increases. In my case, I have to remind my property manager about these.

In theory, this model works great for hands-off investors. You pay someone else to take care of your property and your tenants. You pay the invoice to cover all associated costs. You trust your property manager to do a great job and believe they will act in your best interests. You sleep great at night and can spend your time doing something more exciting than answering your tenants’ calls.

However, in my experience so far, the model seems to fail frequently. 

Some property managers that I’ve run into would let your unit stay vacant for many months. They wouldn’t put in any effort into collecting rent. 

They’d procrastinate for many-many months keeping issues that are important from owner stand-point in their waiting queue, and decide that it's not necessary to address these issues at all. 

They’d find a gazillion excuses and explanations of why some issues cannot be addressed or addressed timely. 

In the meantime, your have zero interaction with your tenant and practically no insight into what is actually going on at your property - you are at the mercy of your property manager. 

While you are becoming more and more frustrated with how things are going, the property manager still collects the monthly fee.

And the issues that are bothering you and costing you time and money still remain open, adding up to hundreds and sometimes thousands of dollars.

The Beauty of A La Carte Property Management

The way on demand property management works is very simple.

You run your property the way you like. You keep in touch with your tenants. When you need an extra set of hands or an expert to do a certain property management or tenant management task, you pay for the service.

There is no monthly fee. You pay as you go.

In my case, I have a triplex in Guelph. My monthly gross rent is $3,126. I have long term tenants in two units. They are great tenants and rarely have issues or requests. They keep an eye on the property and bring up issues that need my attention. We have a great relationship. There is really no need to hire a property manager to manage these two tenants.

The third unit has higher turnover. My last tenant was a young professional. He bought his own place and moved out. I needed to find a new tenant. 

The property is about an hour away from my place. I have so much going on that I really had no time to clean, freshen up the unit, market it, screen applicants, etc.

In addition, I recently re-financed the property and pulled out most of the equity. As a result, my cash flow is barely positive. Every penny counts. There is no room for an ongoing property management cost.

Hiring a traditional property management company doesn’t feel right and, frankly speaking, isn’t cost effective.

A la carte property management, on the other hand, is just perfect.

What I needed was:

• Great team to freshen up the unit and get some work done - mainly cleaning plus repair a couple of minor things
• Expert marketing and advertising - respond to numerous requests timely
• Run an open house for all interested applicants and show the unit
• Complete applicant screening, reference / background checks, etc.
• Help me choose a great new tenant.

This was exactly what I got! It took them under a week. I got a great price. 

I loved the experience and the result:

Feeling Happy!

Zero vacancy.
Perfect new tenant.
No ongoing cost.
Got exactly the services I needed when I needed them.

Would you like to try a la carte property management? 

Ping me in comments below, if you’d like a referral to my friend’s firm. They are based in Toronto and serve a pretty wide radius. 

A la carte property management also works great for 2nd homes and cottages. For example, you can outsource your Spring / Fall routine to a professional property manager. 

Plumbing 911!

Oh-oh! Plumbing 911!

Over the past couple of weeks, I had to deal with a few plumbing issues. Just wanted to share some pictures, so that you can see how simple or extensive a plumbing problem can get!

Urgent yet Easy Plumbing Issue

Our tenant called on Friday evening. Their basement was flooded. Every time they used a toilet, the water would back up in the basement. Urgent help, please! - tenant really needed help. It's unpleasant when you can't use the bathroom.

We called a few plumbing companies and were placed in their priority queue. We called and called! Trying to expedite the resolution. However, no one was available and most companies didn’t even return our calls. Thankfully, our tenant was quite understanding. We did our best to get help as fast as it was possible, but no luck until the end of the weekend.

It helps when you have good local connections in the area! 

This is one of the reasons why I’m working towards gradually shifting from self-managing all units towards partnering with a property manager.

Finally, we got an appointment scheduled for Monday morning.

Fortunately, it turned out that the issue itself was easy to fix.

The plumber cabled approximately 45 feet to clear blockage, finding it approximately 32’ in the drain line at the front of house. When he retrieved the cable, we found roots on the line.

Roots Blocked a Pipe

Non-Urgent yet Difficult Plumbing Issue

We recently acquired a duplex (the one we've split up into two units). During pre-purchase inspections, we identified two problems that needed to be solved:

1) Sewer stack rusted and needed to be replaced
2) After each rain, rain water mixed with sewage backed up into the basement.

The two issues were not urgent and didn't create too much inconvenience for the tenant - he knew we'd find a good solution and was not rushing us.

Our tenant recommended an outstanding local plumbing company! 

Two technicians visited us and did a lot within just a few hours:

• replaced the old stack with new ABS plumbing
• cleared sewer lines, removing calcium build-up and roots
• fixed broken plumbing under the utility tub in the basement
• replaced P-traps and some old sections of the lines
• cleaned floor drain and put a back trap on it
• there was only one section of the lines (6-7 feet) that could not be snaked and inspected with a camera.

Now, the first issue was resolved.

Next, we had to wait until it rained, to find out if the basement would flood.

Flooded! Not Again...

There was a big storm over night! Unfortunately, the basement still got flooded.

The plumbing company let me know that most likely the problem comes from the city lines.

However, we had to inspect the last section of our pipes, to make sure everything is in order on our end. Without this, the city would never start looking into the problem.

The plumbing team came prepared to inspect the last bit of hidden lines. Take a look at the pictures below to see what it took!

Now, we know that all of the plumbing under our house and up to the City line is in good shape.We'll wait for a rainy day to find out if the basement would still get flooded. Fingers crossed...

Getting ready to dig!

Where does this pipe go?

Holly, molly!

New Pipes!

No More Flooding (Hopefully!!)

Cleaning Up!

In The Landlord Paradise

I love flowers on the side of the house!

In the last post, I shared that I've been tolerating an eight-month long vacancy because of fear, which wasn't even my fear to begin with, but it still paralyzed me.

Now, determined to fix the issue, I set out to find a great tenant ASAP.

Determining Price

To determine the price, I analyzed all for-rent ads on Kijiji. There were 39 of them.

Out of 39, only eight were listed under “House Rental” and the rest were in “Apartments and Condos”.

Even though my unit is an apartment in a duplex, it comes with a basement and a backyard, and takes up a larger part of a two-story house. I decided to put my ad under “House Rental”. It seems to be fair and puts my ad into a bucket with less competition.

Out of 39, the majority of 21 ads were two-bedroom places like mine.

In some cases, prices included all utilities, some covered only some of the services, and some were with tenants paying for everything in addition to the rent. In my case, utilities must be included because meters are not separate.

During my analysis, I made the following big assumptions about the monthly cost of utilities:

• ·         Water = $100
• ·         Hydro = $200
• ·         Water + Hydro = $300

I used these assumptions to calculate all inclusive price for all ads.

Next, I looked at two bedroom units by price and saw that out of 21,

·         6 were below $900

·         4 were between $900 and $1,000

·         6 were between $1,000 and $1,100

·         3 were between $1,100 and $1,200

·         2 were over $1,200.

Aiming to be in the middle and also making sure cash flow would be positive, I decided to price my unit at $1,150.

Placing the Ad

Kitchen Looks Great!

I placed the following ad:

Big 2 Bedroom Duplex for rent $1,150 all inclusive

$1,150.00 URGENT

Looking for responsible tenant(s) for this Spacious Move-In ready Duplex!

INCLUDES:

- Lots of Parking

- Large Patio & Backyard

HOME:

- Bright living and dining rooms

- Great functional kitchen

- 2 bedrooms with large built-in closets

- You'll love the spacious Bathroom (pls see pics)!

OTHER:

- Lots of storage space

- Central AC

- Appliances: Fridge, Stove, Dishwasher, Washer / Dryer

UTILITIES: all inclusive

Please text/call or email Anna at MY_PHONE / MY_EMAIL to book your viewing.

We'll be showing the unit this week on THURSDAY, FRIDAY and SATURDAY.

Please reach out to me now to book your viewing: MY_PHONE

Unreal Number of Inquiries

Living + Dining Remind me of Spain Villas - lots of white tile

I got a gazillion responses, mainly through texts!

I booked 31 viewings over four blocks of time: Thursday afternoon, Friday morning, Friday evening, and Saturday morning. Only two people are scheduled for Saturday morning.

So far, as of the end of Thursday, 20 people showed up out of 29.

Landlord Paradise

Since the level of interest turned out to be super high, I started to wonder if I’ve set the price too low.

I asked a few applicants how my unit and its price compare to other apartments they’ve seen. Most said that they are comparable; and only a couple of people said that I could charge a bit more. I checked with my property manager and he thought the price was right as well. It’s what people in the area can actually afford to pay for this size and type of a place.

It appears that the market is very landlord friendly. Lots of demand, and lack of units. Landlords get to choose from a large pool of applicants.

It’ll be a long time, before I forgive myself for an 8-month long vacancy in this landlord paradise type of market. Unreal. I’m such a la-la.

$300 Duplex Conversion

Over the past year, I’ve been meeting a lot of investors whose strategy is duplex conversions.

Here is how it works, in a nutshell:

1. Buy a home 
2. Get permits to add a legal unit to it. For example, create a legal basement apartment; Or get a permit to split the unit vertically creating a quasi semi-detached home.
3. Hire and oversee contractors & trades to get the work done
4. Re-finance to get your money back
5. Rent both units
6. Live happily ever after (or until you get another one of these duplex conversions).

Based on meet-up presentations I’ve seen, my understanding is that the cost to add a legal unit nowadays averages at about $90K in GTA. Perhaps, you’d see numbers between $75-110K, depending on how optimistic the presenter is.

Here’s how our “Duplex Conversion” Happened

My husband and I got a duplex. It turned out that the two units are connected by a door. Initially, there was not even a lock on the door, which wasn’t an issue since one of the units was vacant at the time.

As we were getting ready to find a new tenant, we had to replace the door with a wall and properly separate the units.

In Our Case, Duplex Conversion Was a Lot Less Elaborate

Step 1. Take measurements & get some two-by-fours and other hardware

Step 2. Measure & cut.

Step 3. Put a back wall up & add insulation

Step 4. Finish up with the fancy front wall. Voilà!

Now we have a proper two-unit house. Can't wait to find a great tenant to move in!

Cash and Other Benefits of Refinancing

Refinance - a way to convert Real Estate equity to cash

I can't believe it's already June and half of 2018 has zoomed by! May was a productive month. One of the big accomplishments was re-financing two of our properties.

Real Estate isn't very liquid type of investment. This means that you can't easily convert the value of your real estate properties into cash and go buy some groceries. This value is called equity.

Equity equals to current market price of your property minus the mortgage / loan balance that you have against the property.

As you hold a property, equity grows as market prices go up and as your mortgage principal is paid down by your tenants. If market drops, equity drops as well.

There are several conversion mechanisms to convert equity to cash. Re-financing is one of them. Another method is selling the property.

When you re-finance a property, you are basically starting over with a new mortgage.

As a result, your monthly mortgage payment will change. In my case, it went up considerably because interest rate has gone up from 2.95% to 4.39% and also because the size of the new mortgage is a lot higher than previous mortgage balance.

It might seem on first glance that re-financing and getting a higher monthly mortgage may be a very bad thing. If you think about it, your level of debt goes up. Your interest costs go up. Your cash flow from the property goes down. There are also various costs associated with the refinance transaction including mortgage broker fees, lender fees, and lawyer fees. Why would you do it?!?

Here are the reasons why this worked for me:

1) Getting Your Money Back 

Several years ago, when I originally purchased the property, I put in some money as a down payment. After purchase, I invested some additional money to renovate the place.

Refinancing helps me get all of my money back.

Once you have your money back, you can use it however you please. You can put it as a down payment for another asset, for instance. Or maybe you are nearing retirement age and would like to spend the money on your day-to-day expenses. Or perhaps, you have higher interest debt and you could use the money to pay off the lenders.

2) Maximizing Return on Investment

Let's take a look at an example. Suppose you buy a property for $100,000 with $20,000 down payment and suppose the market goes up by 2% every year.  Let's also say that principal pay down is negligible, for simplicity of calculations.

Then, after the first year, the property will appreciate to $102,000 and you would've gained $2,000.

Return on Investment (ROI) = $2,000 / $100,000 = 10%.

In this example, the market went up by 2%, but you made 10%.

This is because even though you provided only 1/5th of the money (20% down payment), you benefited from the growth of the entire house - and you got all of the gain.

What if you re-finance and pull all of your investment money out? In that case, you no longer have any of your money in the property, yet again you benefit from the appreciation of the entire house. This is when you get maximum returns:

Return on Investment (ROI) = $2,000 / almost nothing  = Infinity!

3) Doubling # of Assets That Work for You

Suppose, you buy another asset using the money that you pulled out at refinance.

Now, you have two assets working for you. Together, the gain from appreciation is $2,000 + $2,000 = $4,000.


Here are sample numbers for a refinance transaction:

The numbers above show you key numbers behind a refinance transaction. In this example;

New lender approved a loan of 255K. Out of this loan, previous mortgage of 135.5K was paid. Almost 7K was paid in fees.

Investors got all of their money back.

There was 63.7K of cash pulled out of equity. This is ~ 115% return on investment since the start of the project. Or, 29% annualized ROI.

Note: mortgage debt increased from 135.5K to 255K.

If you have any questions or would like more info, please comment below or contact me.

PS It might be tricky to figure out how much equity you've got in your property. Here's an Excel tool that I use to do all my numbers when it comes to planning mortgage pay down and future refinance transactions to extract equity.

Real Estate Investing Tax Traps

I was at a great seminar last week. One of the speakers, a super knowledgeable tax guru and ex-CRA-auditor, shared several tips about potential tax traps real estate investors can fall into.

Taxes can get pretty fat, so it's always great to learn some ways to keep them skinny. Posting my notes here just in case you'll find them helpful.

Tax Trap #1 - House Flipping

Suppose, the following flip scenario: we buy at 400K, renovate for 100K and sell for 650K. This results in 150K capital gain, half of which is taxable.

Let's say our tax rate is 50%. We'd then pay 37.5K in taxes and pocket 112.5K of after tax profit.

DANGER: Flip with incorrect Tax on Capital Gain calculation -
larger profit than in reality

Except!

Most people don't realize that per Canadian Income Tax Act, there are two distinct categories of property:

1) Inventory, which creates business income or loss

2) Capital, which creates capital gain or loss.

The distinction is based on whether or not a property is acquired and used on account of income or capital.

Taxes Payable - Personal Name

It turns out that, when you purchase a property with the intention to renovate and flip, you put yourself into a business income situation.

Capital gain is not applicable since you have a clear intention of selling the property. In this case, your property is your inventory. So sales proceeds are your income. You have to pay tax on 100% of your income. You cannot take advantage of the 50% capital gain tax inclusion rule.

In the scenario above, if you purchased the property in your personal name (not under a corporation), your taxable income is 150K, tax is 75K and your actual after tax profit is 75K (not 112K).

If you are not aware of this tax trap, there is a HUGE risk of spending 112K profit and then being stuck with a large tax debt of 37K.

REALITY: Flip with Tax on Income - much lower profit

Please note that purchasing in corporate name can save you a lot of taxes. So this example and tax trap would not be applicable, if you manage your corporate taxes well.

Tax Trap # 2 - Condo Flip

On condo flips, investors can fall into an even deeper tax trap.

First, as in the previous example, all of earned income is 100% taxable since condo is considered to be inventory.

In addition, investor must repay GST, if he/she had received it when purchasing the condo from the builder. Even though GST repay is just a return of the money recently received, the danger is that one would have already spent it by the time they'd need to pay it back.

The next catch is that HST is applicable on new properties. Investor would have to pay 13% HST.

Lastly, as per the linked article, CRA is on top of improper tax payments (ie. capital income vs. business income issue) and would apply a penalty up to 50% of tax payable for tax avoidance to anyone who reports tax incorrectly on their new condo flip.

All in all, a condo flip may end up being a loss rather than a profitable deal, once all these adjustments are applied.

For example, if we purchase a new condo for 400K (including tax rebate) and sell it for 500K. Applying capital gain tax only, you might erroneously think that you'd only pay tax on 50% of 100K capital gain, which would result in 75K profit.

DANGER: New Condo Flip with Incorrect Tax Calculation
- looks like a profitable deal

In reality, after we apply all the adjustments that an investor might have missed, we end up with a loss of 12K.

REALITY: Loss on a New Condo Flip due to Taxation Error

Bottom Line

The bottom line is that many new investors might not know about these potential tax traps and might lose money. 

The only way to avoid these tax traps is to keep educating yourself and find a way to get advice from knowledgeable accountants and tax advisors, who have applicable experience and know exactly how to navigate around these and other potential tax traps.

Hope you find this post helpful. Please share, like or forward to your friends and fellow newbie investors if you did!!!

Cheers! 

Me vs The Door. I win!

Old Patio Door - Brrrr! cold

Hurray! The door issue is finally resolved. I was VERY frustrated with it! Here's the story.

Mid November, a tenant notified us that they had very severe draft coming from under the front door and also from under the patio door at the back of the living room.

Within a day or so, we  had our contractor come out to the house to look into it. It turned out that there was an easy fix for the front door, but the patio door was too old to be repaired. It had to be replaced. The wind was hauling through and around every inch of the door surface.

Tenant is Freezing! Let's Replace The Patio Door

The contractor called and reported his findings. He had an estimate prepared and went over it with me over the phone. I roughly knew how much it would be to replace the door since we completed a similar project several months ago at another property. The estimate sounded reasonable and within what I expected. We agreed to go ahead with a new patio door!

The contractor ordered a new door at the local hardware store. The new door was supposed to be delivered to his shop within the next couple of days. He called and explained new door specs to me in a lot of detail! He was super excited that the new door was 3-panel and talked extensively about how warm the house would be, once the new beautiful door is installed.

And at the end of the call, he also asked for a payment. I often pay for materials up front and labour upon completion. So this wasn't a surprise.

I thought I knew the contractor well. He finished a couple of jobs for me before. All of them went great - work done quickly and well. Tenants were happy with the quality.

So, without thinking too much into this, I sent the payment for the new door and asked the contractor to schedule work dates directly with the tenant as soon as possible.

Mistake #1 - I have no idea what I bought...

I paid money for a phantom door without doing ANY due diligence to check that there was actually a door purchased on my behalf. I paid simply because I thought the contractor was a good guy based on  the two times he worked for me before.

Instead I should have:

• Asked for a receipt
• Asked for a picture of the door that I was buying
• Checked patio door prices on HomeDepot.ca

Now, when the door issue is behind me, I have to admit that I paid $1,275.77 for a new patio door. If you check at Home Depot, patio doors start at $565 + HST. There are 30 different doors that are cheaper than $1,275.77 and another 170 doors that are more expensive.

So, to this day, I don't know if I paid more than I should've... Was the door too fancy for my needs? Did I pay too much? Did I get a great door that will now last another 50 years? I will never know because I have no idea what I actually bought.

Mistake # 2 - Winter is NOT a good time to replace patio doors

No door - bad idea during Canadian Winter

Now, we had to wait for the weather to cooperate. This winter was brutal, especially in December and January. It was very cold and snowy. Contractor advised that we couldn't take out the door and keep the house open for a day or two when it was -30C outside.

In addition, the selected dates had to work both for the contractor who was always super busy and our tenant, who insisted on being present at all times personally. The tenant wouldn't agree that I come by and oversee the contractor instead, if they can't be home.

Eventually, after 3-4 weeks, everything got aligned: the weather, a couple of open days on the contractor schedule, and our tenant’s schedule.

Series of Unfortunate Events

Unfortunately, our contractor had a mild heart attack just a couple of days before the scheduled date. Obviously, health and life take precedence before the draft under any doors. Tenant was understanding of the situation. Luckily, our contractor recovered and got back on his feet over a few weeks.

Winter weather was still nasty! Once health issue was behind us, we all started watching the forecast waiting for a couple of warmer days. Finally, we scheduled the work. Yay!

On the day of the appointment our tenant had something urgent come up. They couldn't be home and asked to reschedule.

We now waited and watched the weather for the third time in a row... Finally, all good again: decent weather, tenant at home, and contractor is in good health and available. The new dates were scheduled! We set 3 days aside to make sure there is ample time to get the job done.

Mistake #3 - Don't Assign More Work When Previous Load isn't Done

Just  a couple of days before the appointment, the tenant got in touch. They asked us to take a look at several new items at the house:

• A few outlets had no power on the main floor
• Shower tap got broken and tenant (including their kids) had to use pliers to turn the shower on and off
• A pipe leaked in the basement when they were using the washer

Since the contractor would be at the house anyway, I asked him to scope out these issues and let me know a quote.

The contractor called me back and explained that broken power outlets were a SAFETY concern and had to be addressed ASAP. Apparently, wires inside the electrical box were lose and several of them had signs of burning. He had to replace fuses, do some re-wiring, etc. I agreed that he should go ahead and address the safety issues, thinking that eliminating the risk of fire is a much higher priority than getting rid of the draft.

What I didn't expect was that these safety issues would take up ALL OF THE THREE DAYS. So by the end of the slotted time period, all of the new issues were addressed, but the contractor didn't even start on the door.... 

It turned out, that since the heart attack, the contractor wasn't aloud to drive a car. So the work took him longer than normally, because he had to take a bus to and from hardware store during the day every time when he needed some parts. His partner drove a truck, and gave him a lift when possible, but still capacity limitations became apparent. Tenant observed that the contractor only spent 2-3 hours a day working, while I was under the impression that he spent 3 full days onsite.

Anyways. New issues got resolved very fast! Old issue was still not started. 

We were now watching the weather again. Tenant started getting quite frustrated. The house was cold and they were concerned about really high heating bills. It was the end of January - 2.5 months have already gone by.

Mistake # 4 - Always be in Control. Excuses will NEVER end.

And for the fourth time, we scheduled several days. By this time the tenant was extremely anxious. They shared with me that they expected the contractor would find an excuse not to show up.

And he did.

Three days before the appointment, the contractor called me. He politely explained that, as he was preparing for the appointment and unpacked the door, he realized that the new patio door turned out to be welded rather than bolted. As a result, it would not go through the entrance door since it can't be taken apart. And since the front door is the only way to access the backyard in this town house, we'd have to postpone the appointment.... 

Well. This is when meditation practice comes in handy.

I counted 5 breathes in my mind before asking what he thought our options to overcome this hurdle would be... There were two options: 1) get a new bolted door which might be problematic, since manufacturer now makes all doors welded and we'd have to look for an older model; or 2) find a way to bring the door in through a neighbour's backyard.

I explained in detail that it was very important to finish the project and install the new door as soon as possible and that the tenant was not happy and I really needed all his help to get to a conclusion on this. I was offering help and asking if there was anything I could do to help. 

The contractor started calling hardware stores and by the end of the day he found an old model of the door, which could potentially be delivered early next week. Great! Let's do it. 

As a backup plan, we agreed that if there would be a hiccup or delay and the new door wouldn't be delivered early next week, we would implement a backup plan. 

Backup Plan

My husband and I went to check if there was a way to bring the door in through the back yard. We found out that one of the fences at the end of the backyard was only about 4 feet high. We thought that it would be possible, with enough man power, to bring the door in over that fence.

The neighbour was not home and we left him a note with our phone #. We also left our # and information with other neighbours. No response. Contractor told us that he also stopped by and left his card. No response. My husband and I went there again the next day at a different time of the day - no one home and no call back.

Contractor said that he wouldn't carry the door without the neighbour's permission since that would be trespassing. 

My husband and I made a decision that we would personally trespass and carry the door in, through the back yard. We clearly communicated this to the contractor: please, just bring the door, we will get it in for you, then please install it. We spent time on the phone re-iterating this plan. It seemed we all were on board with this backup plan.

Contractor assured us that he felt backup wouldn't be necessary since he already scheduled the delivery of a bolted door for Tuesday. Awesome! Even better.

By this time, tenant refused to pay rent. They explained that they paid hundreds of dollars for heating month after month after month and they were fed up with it. This was the first time ever when a tenant yelled at me. I hung up and submitted a court hearing application. I was very offended by the yelling. Draft or no draft, rent must be paid... However, I decided to find out how much extra heating costs my sloppy implementation of door replacement was causing.

Do You Know What Happened Next Tuesday?

You would not believe it. It was now mid February and winter started fading away. +7C outside. 

8:30 AM. 30 minutes before the appointment. Contractor calls. He'd have to postpone the appointment because it is pouring rain. It is very dangerous to work with power tools in the rain and since he'd be using power tools as he'd be installing the door, he can't proceed. He cannot risk his life and show up.

This time I was not even mad. I've become immune and emotion free. Having said that, all my dreams over the past few nights were strictly about patio doors.

I called the utilities company and found out that my tenants' actual heating consumption was super low through the winter. The service desk could only provide general averages to me, but it became obvious that if my tenants' bill was several times higher than average WHILE their consumption was several times lower than average, they hadn't paid their bills for a while. 

I no longer felt guilty. I knew that I just had to get to the end of this whole door situation. At the same time, it was obvious that I didn't have to worry about my tenants' high heating bill and reimburse them for extreme consumtion. Phew!

Grand Finale

I called the contractor a day later and realized that he still didn't have a new bolted door. Still, the biggest issue was that we couldn't carry the welded door in. Why I asked? I thought that a bolted door was supposed to be delivered back on Tuesday. Oh no - he thought that I didn't want it because I asked him to carry the welded door through the back yard.

Alright. I insisted that we schedule a day when he'd bring the welded door to neighbour's drive way. My husband and I would take full responsibility for trespassing and we'd have the door carried in.

In my mind, I set a deadline of the following Friday giving it final 9 days. I decided that if I wouldn't see a door by then, then that door probably didn't exist and most likely I had bought air for $1,275.77 . I already started asking my friends for trustworthy contractor referrals, so I could quickly find a replacement and start all over again. It wouldn't be the first time when I lose a deposit.

I discussed the situation with the tenants. We agreed to give this operation the last chance. We also discussed utility costs and rent payments and came to an agreement. Our court hearing was scheduled for March 26, just in case our verbal agreement wouldn't go as planned.

The End

Love the new door!
Super thick, 4-panel, warm home next winter :)

Drum roll!!! The following week, on Wednesday a new bolted door was delivered. The Contractor carried it in through the front door. He installed it and finished by Friday.

Somehow, there was a missing part on the lock of the new door, but at this point I was not going to worry about it. The contractor came up with a work around for it, so the door locked.

The bolted door, apparently, was $400 more expensive than the welded one. I asked the contractor to show me receipts for both doors and explained that I couldn't pay any additional money without seeing a receipt. He said that he'd gladly eat that cost given how many problems we ran into along the way. I told him that I appreciated it.

The contractor's computer mysteriously crashed and he wasn't sure how much labour costs we originally agreed to. The numbers in his journal were $200 higher than what my notes said. He agreed to go with the numbers I wrote down. I thanked him for that as well.

Door installed. After 3.5 months of struggling it was a Happy End after all. I am grateful and happy about it!

PS Lessons Learned

In future I will ALWAYS require:

• a written work estimate including timeline and cost
• a written agreement for full money refund if project doesn't get done by a pre-agreed upon date
• receipts and a proof of purchase for all major purchases/materials before I pay for them 
• invoice before I pay for the work done
• myself to know market prices and key parameters of the most costly parts of a project.

I realize now that the best course of action would have been to use a specialized Doors/Windows company rather than a General contractor for this project. If someone changes doors every day, I'm sure they'd know about welded vs. bolted doors and how to deal with them. Even though this seems obvious, this realization only came to me after a couple of months of weather checking. 

I wish I could also make sure that no one ever gets sick and the weather is always great, but since that isn't an option, I'd just say that for all external work, I'd notify the tenants that they might have to wait till Spring. If I set expectations correctly, all the re-scheduling would've just been a part of the original plan.

You never know how the circumstances will play out and all the various factors that may work against you. So you need to have a planned way out of an existing engagement in case it fails. You shouldn't be making yourself a hostage of a contractor and/or a series of unfortunate events.