Discovery of the Year: Passive Income Exists! and why I say so

Lo-o-o-o-o-ng road to Financial Freedom

Up until very recently, I thought that 4% return on your money was a GREAT deal.

In fact, I believed that anything better than 4% was most likely a SCAM.

Given this information, my freedom seemed practically-unattainable:

My financial freedom was THREE MILLION dollars away

3 million @ 4% = $120,000 / year = $10,000 / month

Imagine, how HAPPY I was when I learned that there are 

NUMEROUS LEGITIMATE WAYS

to make more than 4% on your money! 

How about 6%, 8%, 12%, 17 % or even 20+%?!?

With higher returns, the path to financial freedom is much shorter! 

For example, at 8% return, financial freedom is

1.5 million away:

1.5 million @ 8% = $120,000 / year = $10,000 / month 

Discovery of Private Exempt Market

During summer, I started investing in what is called private exempt market. I learned about this type of investing from a good friend, whom I met at a networking event about a year ago.

Investing means lending your money to someone who will use it to create value and pay you your money back with a profit.

You have to remember that investing can be risky - you can lose time, money, go through a load of stress, etc.

This is why there's a whole slew of regulation around investing in private exempt markets, which is in place to protect consumers (aka you and me) from making bad decisions and getting themselves into financial trouble.

Private market means all non-public businesses, from mom-and-pop-shops to huge private enterprises.

Exempt means that there are rules for investing into these private deals.

You have to meet one of the exemptions to qualify. 

These exemptions are governed by law. Their purpose is to protect the consumers from financial losses, which they can't withstand.

Up until a couple of years ago, only accredited investors were qualified to invest in private exempt market and private companies could not advertise investment opportunities to non-accredited investors.

Accredited investor is someone who meets at least one of the following criteria:

• Earns more than $200,000 per year before taxes
• Together with spouse, earns more than $300,000 
• Owns more than $1 million before taxes of financial assets but net of related liabilities
• Owns more than $5 million of net assets 

Needless to say, the whole concept of private exempt market was invisible / forbidden / unattainable to average middle class professionals because most of us don't qualify as an accredited investor, so we fall under the protected class.

I personally had no idea about these deals. Protection worked :)

The Good News!

The good news is - the legislation was updated and we now qualify and can learn about investing in private exempt market. 

Here is the recently added Eligible Investor exemptions:

1. Owns $400,000 or more net assets
2. Earns more than $75,000 per year before taxes 
3. Together with spouse, earns more than $125,000 

Lastly, there is one more exemption - Any Investor!

Legislation still protects us by setting the limits of how much Eligible and Any Investors can invest.

Yet, we all now have an opportunity to invest into many of the same deals that accredited investors have been investing into. And I bet, most accredited investors wouldn't be too thrilled investing into something like this, which I constantly see in my Facebook feed:

This is NOT a good deal.
Hope you aren't clicking on ads like this one...

My First Two Assets in Private Exempt Market

11% vs. 3.2% - Gets You There Faster!

I invested in two private exempt market deals so far. Here are the key reasons why I chose them:

1) Like the horse and bet on the Jockey 

• I educated myself about the details of the project and understood it. I checked with people who are a lot smarter than I will ever be.
• I am very clear about the business model, project plan, exit strategy, and underlying securities 
• Most importantly, I verified the track record of the Jockey. I know that they’ve done what they are about to do over and over and over and over again successfully. 

2) Operating within my comfort zone

• Using RRSP money, which will not be available to me anyways for a couple more decades 
• NOT putting all my life’s savings into a deal all at once - I allocated two chunks and spread them across two independent projects 
• Selected projects within the real estate niche, which I'm familiar with
• Am comfortable with the timeline and the fact that my money will be locked for 3-5 years

3) Trust but verify

I chose one asset with frequent cash distributions and another one with higher return and longer waiting period.

The former pays investors quarterly. I chose it because I wanted to see how the asset works start to finish, before looking for any other deals.

I got my first quarterly deposit! Over $900 dollars - a single quarterly payment covered my family's internet for an entire year. Not bad!!!

The best thing is this income was purely passive.

I can imagine how much work it has taken the private business to generate this return.

For me, it is truly passive - zero effort - 11.06% annualized return.

Now, that I've completed this small proof of concept, the sky is the limit :)

Hope this blog post helps.

I wonder if you knew these deals existed and 6, 8, 10, 17% or 20+% passive return was achievable? 

What was your experience? 

Feel free to leave a comment below! 

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.

Hey! Where should I invest?

I often get a question:

"Hey, I'd like to invest in .... 

plug in any town or city you are wondering about - Toronto, Milton, Hamilton, Windsor, Oshawa, Montreal, Ottawa, Rochester, Buffalo, etc... - 

... what do you think?"

To be honest, in most cases, I think absolutely nothing. I'd really have to do some homework and educate myself about the market before I can answer such a question.

Sometimes, I have a gutt feeling. Especially, when I've had some previous experience in a certain city. Still markets are so fluent and I'd need to look up latest stats and information, in order to provide an educated opinion.

I'd like to share a few questions that I research, whenever I'm getting ready to expand into  a new location.

If you have questions or would like to share your own tips on how to choose a great location to invest in, please add a comment below or send me an email!

1. Do People Want to Live There?

Ideally, population should be 100,000 - 200,000. If it's smaller, you'd really need to study the demand and supply carefully and make sure you know who your tenants are and how you'll find, attract, and keep them. You’ll also need to verify current inventory. Last week, I came across a city that had 26,000 vacant units while the total number of households is around 85,000 and has been declining. This tells me that supply drastically exceeds the demand and I’d have issues filling in units. Prices will not go up for a while in this market. 

There should be evidence and factual proof of recent and upcoming population growth. There are many great cities that, for one reason or another, have experienced population decline. Study latest trends in detail, before deciding to invest in them.

For example, if you come across a town that has been losing people over the past 50 years, I wouldn't bet on a sudden popularity spike. Watch out when you see outward migration, job loss, crime rate increase, poverty climbing up, vacancy rates sky-rocketing, lots of unused or abandoned inventory, etc. All these signs show you that you will likely have difficulty finding quality tenants. 

On the other hand, if you see population decline slowing down, flattening out, and notice people  starting to flood back in, you are onto something! Projected population spike might be a potential gold mine. If you start investing at the right time and get your property at a price that works, you might catch the wave of appreciation. 

Even though appreciation is always a bonus and should not be used in your assessment calculation as a given, it still makes sense to look for areas with high probability of growth and stay away from dying towns.

Projected population growth, recent considerable increase in population, new jobs and businesses opening, new or refreshed infrastructure changes, nearby city or town becoming hyper expensive and over-populated, and vacancy rates dropping are some signals of an emerging market.

2. Lots of Diverse Positives 

Look for social and economic diversity with lots of positives. Be careful when you see a location that has only one great thing going for it. An example of this is all the single big employer cities as well as cities majorly supported by a single industry.

I know that it might seem highly improbable for a giant company to shut the doors, yet we’ve seen so many examples. Windsor, Detroit, and Rochester are some examples of cities that went through a relatively long down town due to larger employers leaving.

One of the ways to find cities with lower risk of over concentration is to look for diversified and balanced list of positives across a wide spectrum: diverse demographics, income levels from entry to high, education from high school to PHD, household sizes from single person to families with kids, several unrelated employment industries, various types and levels jobs - white color, blue color, small businesses, large businesses, new technologies, and established employers, etc.

3. Who and How is Helping the City Grow?  

Lastly, I do a lot of research regarding economic development plans for each location that I plan to invest in. 

Looking at the plans of a City gives you a lot of insight into upcoming trends. For examples, some cities would promote latest technologies, set up programs to attract businesses, implement solutions to upgrade skills of the population to meet incoming businesses' requirements. You'd come across articles when agreements are made between various levels of the government to fund major infrastructure improvement programs: build new bridges, highways, and train stations; grow wind mills farms; re-build airports, etc.

On the other hand, you might come across a town that has its entire budget dedicated to fixing some pot holes in the roads. Most achievements listed on their website would be outdated or insignificant. No major partnerships with outside investors would surface, when you search for news on economic development. You'd realize that no one cares if the city grows. The focus is on status quo. In this case, you'd need to make sure you are good with the status quo and it works for your strategy. Momentum might last a few more years and this may be sufficient.

To recap, since my strategy is mainly based on buy-fix-rent-and-hold-long-term, I focus on finding locations with a high probability of market appreciation due to:

• Sufficient market size for my needs
• Recent, current and projected positive trends in population growth
• Lots of evidence for finding quality renters and demand for the type of units I offer
• Good supply/demand balance and trends 
• Minimal risk of economic collapse due to over-concentration in a single niche/industry/social group/etc.
• Great leadership and people interested in helping the city grow with budgets dedicated to major improvement projects that will attract jobs, people, businesses, and money. Work already under way! 

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. 

Real Estate Income Property - Case Study #3 - Bad Tenant

Everyone makes mistakes. Unfortunately, this case study shows how my bad judgement and a poor choice of tenant resulted in two years of stress and big losses. The lesson I learned is - if you make a mistake, find the courage to fix it fast. I dragged my feet with the eviction for too long and, literally, paid for it.

Rental Income Property

Beautiful Home

This beautiful semi-detached home is located in Barrie, ON.

We were lucky to have met the seller, as she stayed at the house for a couple of months being our first tenant while finalizing the closing of her new home.

The seller shared that she got the house at 20 and lived in it for 28 years while raising two amazing children.

Based on her words, the schools and neighborhood were amazing. Neighbours were great and supporting: a lovely retired couple on one side, a professional woman and her son on the other side; and a couple with a sweet little girl across the street.

The owner was certain that whoever would move in here next, would be happy. 

Key features: 

• Semi-detached house  
• Parking on driveway plus 1-car garage 
• Main level: 
• Entrance/hall 
• Large living and bright dining room 
• Kitchen including fridge, stove, microwave and dishwasher 
• Entrance to a nice, deep backyard with a porch 
• 2nd Floor: 
• Master bedroom 
• 2nd bedroom 
• 3rd bedroom 
• Full bathroom 
• Extra storage 
• Finished Basement: 
• Utility room with washer/dryer 
• Family/exercise room 
• Bathroom 

Purchase

• Asking price: $239,900
• Purchase price: $231,000
• Found on Realtor.ca
• Owner occupied at purchase
• Expected Rent: $1,450/month
• Expenses:
• Utilities: paid by tenant
• Taxes: $200 / month
• Insurance: $100 / month
• Misc repairs and maintenance: $100 / month 
• Expected NOI: $1,050 / month
• Financing: 80 LTV, 30 year amortization, 5-year term, variable 3.25% interest
• Expected Cash Flow: ~ $250 / month

Total Investment

This property required a 95K investment, of which a big chunk of 40K was spent on renovation.

Initial expectation for renovation cost was 10-15K. Unfortunately, we made lots of mistakes choosing the right tenant and sub-contractors, which led to a much higher spending than planned.

Investment Summary

Investment	Amount
Downpayment	$47,687
Closing Costs	$8,857
Capital Improvements	$39,121
Total	$95,665

Cashflow and ROI 

• Initially cash flow was projected to be $250 / month
• Property has been barely cash positive over the first three years because of continuous tenant issues. 
• Cash flow averaged $43 / month or 518K per year
• Thanks to mortgage pay down, net profit is approx. $300 / month or 3.5K per year
• Cash on cash return is practically 0% so far 
• ROI is 4% over the four years and 11% annually on average

	Year 2015	Year 2016	Year 2017	TOTAL All Years	Average Annualized
Income
Rents (@100%)	2,900	17,400	20,000	40,300	13,433
Vacancy/Non-Payment		1,365	2,250	3,615	1,205
Total Gross Income	2,900	16,035	17,750	36,685	12,228
Expenses
Taxes	585	2,395	3,003	5,983	1,994
Insurance	311	1,512	1,406	3,229	1,076
Repairs/Maintenance	446	170	3,745	4,361	1,454
Utilities	373	287	1,641	2,301	767
Admin/Advertising	45	0	0	45	15
Total Expenses	1,760	4,364	9,795	15,919	5,306
NOI	1,140	11,671	7,955	20,766	6,922
Mortgage - Interest Payment	796	4,712	4,594	10,102	3,367
Mortgage - Principal Paydown	683	4,160	4,268	9,111	3,037
Cash Flow	-339	2,799	-907	1,553	518
Net Profit (Loss)	344	6,959	3,361	10,664	3,555
Cash on Cash Return	-0.35%	2.93%	-0.95%	1.62%	0.54%
ROI	0.36%	7.27%	3.51%	11.15%	3.72%

Appreciation / Equity

Based on MPAC assessments, the value of the property increased by 33K during the last four years. Once we include the equity gain in ROI calculations, return on investment becomes 15% per year:

Total gain including appreciation: $33,000 + $10,664 = $43,664
Total ROI including appreciation: 46% overall and 15% annually.

15% ROI per year is pretty good! This shows you that even in an absolutely horrible situation tenant-wise and after a streak of bad decisions, overall return can be fairly OK thanks to mortgage pay down and market appreciation. I got lucky!

Appreciation is like lottery. Hence, we can't bet on it. Therefore, selecting a good tenant is a MUST going forward.

History

2017

• Spring 2018 - Tenant is behind on rent. Got an eviction court order and agreed to a payment ctach up plan with the family. Yay! They are fully caught up on past rent now. Hooray!! 👍
• December - Hired a great snow removal company after avoiding a fraud contractor
• September - all pipes updated. New tenants move in. Gross rent up to $2,100 inlcuding utilities 😁
• August - Pipe bursts 20 minutes before the appointment with the new tenants 😡
• August - New contractor found and finishes the job brilliantly 😁
• July - False Bed bugs issue
• July - Contractor disappears, floors not finished.
• June - New AMAZING tenants found. They will wait until all work on the unit is done. 😁
• June - Cleaning, Paining, and more cleaning
• June - Tenant evicted. Total cost 30K as outlined in this post
• May - Eviction confirmation sent to Sheriff/Enforcement office
• May - Eviction requested at Sheriff/Enforcement office
• April - Plumbing issue resolved at $950. Water leaked from upstairs bathroom, ceiling damaged on the first floor. 💦
• March - Notice to end tenancy served (N8)
• February - LTB court hearing. Mutually agreed to a rent catch-up schedule. Shook hands with tenant agreeing that this was her last chance.
• February - Water bill payment late. Balance $232
• January - Application to evict submitted (L1). 
• January - Rent paid consistently late notice sent (N8)
• January - Rent non-payment notice sent (N4). Balance $2,900

2016 

• November - Water shut-off for non-payment. Balance per city $397. 
• November - Rent non-payment notice sent (N4). Balance $2,200
• October - Rent past due. Balance $750
• August and September - Tenant caught up with rent as agreed.
• June - Landlord and Tenant Board Hearing. Mutually agreed to a rent catch-up schedule.
• May - Application to evict submitted (L1). Balance $2,470
• May - Rent non-payment notice sent (N4). Balance $2,300
• February through April - Partial or late rent
• January - Rent on time 💪

2015 

• December - real tenants moved it: a couple with two young children. Rent $1,450.
• October to end of November - Previous owner stayed as our first tenant for two months while she was looking for a new home. We agreed to a discounted rent of $900. At the time, we had several other projects under way and we were running around like headless chicken, so getting partial rent immediately after closing was very helpful.
• Purchased in October.

Fraud Contractor Avoided

Let it Snow!

I can't believe how early it started snowing this Winter. It's not even Christmas and my kids already made a ginormous snowman outside!

Snow Removal: Sold Out 

Last week, I started looking for a contractor to handle snow removal at one of the properties in Barrie. I searched for local companies and contacted a few that looked good. It was almost 6 pm on Friday night, so I was surprised that many people picked up the phone and gave me some info.

But I was even more surprised that most of the snow removal companies were already booked solid for the entire season, even though it was only December 15th.

I started to worry that I wouldn't be able to find anyone for the job.

Finally - Great Fit! 

Eventually, a guy named Chris sent me a text message and said he was available. I asked him some questions about the services he provided, his company, insurance, etc. He replied to all my questions very quickly and gave me perfect answers.

He sent me a contract late on Friday evening. I was very impressed - he was very well organized, easy to deal with, and eager to work. Chris seemed to be a great fit.

On Saturday morning, I printed the contract, read it start-to-finish, thought about it, signed it, scanned it and almost emailed it back to Chris.

But, as I was about to click Send, it occurred to me that I haven't done any due diligence. So I back paddled and started checking.

Oh No! Fraud Alert!!!

I noticed on Chris' website that the service area is Halton and Peel, which doesn't include Barrie. This seemed weird to me. So I texted Chris to confirm if they actually service Barrie.

Chris replied that they've expanded and now service several properties in Barrie.

I started looking for additional information about the company, and sure enough, I found numerous reviews from various people, who signed a contract with Chris, made either a deposit or full payment, and never heard from him again.

Feeling Grateful

I am very grateful to all those people who shared their experience online and saved me from another bad contractor! THANK YOU!

At 7 pm, Chris texted me: "Your driveway was just done. Please send payment for the winter package". I replied that I will not go forward with the winter package and Chris sent a few more texts advising that I should pay for the work done ASAP to avoid late fees. I ignored his texts.

And today I continued my search and hired an awesome legitimate snow removal company! Yay!

Key to Investing Success: Get Good Deals and Avoid Bad Ones

My real estate mentor once told me that "Success is not only the good deals that you get; it's also the bad deals that you don't get".

Here is a recent example of a bad deal that I didn't get.

Perfect Find - Very Ugly House

My husband and I accidentally walked into an open house in Barrie, Ontario. The property was being sold by an estate. It was in a super rough shape. The house had to be gutted and re-built. Most investors would agree that this was the best type of an ugly house you can ever find - a flipper's dream come true type of a deal. Asking price was 250K. Next door houses were selling at 350K.

What Was Given 

In our situation we knew that:

• We could find funds at 10% interest rate
• We could complete the renovation in 3-4 months and sell the property in about 6 months
• We wanted to make at least 25K at the end of the project
• Real Estate Commission on sale would be 5%
• Closing costs on purchase and sale would be approx. 2.5%
• HST applied to real estate commission on sale would be 13%
• Most prominent costs would be interest and renovation. Assume utilities, insurance, etc. would be part of renovation cost.

Good Deal Numbers

We confirmed with our contractor that the cost of renovation would be approximately 100K.

We added up all major costs ans saw that if we buy the property at 185K and sell it at 358K, we'll make our desired profit of 25K.

Given current market price of 350K, it was reasonable to assume prices will reach 358K by the time we will be selling.

If market remained the same and we'd sell at 350K, we'd make ~17K on the flip. This was acceptable to us.

We made an offer at 185K.

Bad Deal Numbers

There were 2 competing offers with the highest bidder being at 250K. Our agent asked if we'd want to increase our bid.

At 250K purchase price, we'd be losing 60K.

In order to make a 25K profit, we'd have to sell the house at 434K or 24% over current market price in only 6 month (48% annualized increase).

Betting on 48% annualized increase would definitely be a "buy and prey" type of investment.

We did not increase our bid and passed the deal. 

What Actually Happened 

After the recent mortgage rule changes, market actually rolled back from 350K down to ~330K.

If we purchased the house at 250K, we'd be looking to lose about 80K on the flip. Given rent and utility costs in the area, rent & hold on this property would be cash negative as well. 250K would have put us in a very bad position.

Looking back, it is obvious that our numbers did not make any sense at 250K. However, it was very hard to walk away from the deal in the moment when the events were happening. What if other bidders with much higher offers were smarter, more experienced and knew more than us? What if the real estate agent was right saying that this opportunity to get a property at 100K below market was a miracle? What if market would keep rising like a rocket ship and we'd miss out if we don't take the deal?

No matter what everyone else was doing, thinking, saying, or predicting, it was crucial for our success to stick to our own business and make the decision of not getting a bad deal, given the facts we had at the time.

Overcoming Hurdles with New Rentals

I am working towards closing 5 new doors at the beginning of December. So far, transaction isn’t going very smoothly.

On financing side, our application is being reviewed by the lender. It’s been several weeks since we applied and the process is going very slowly. I worry that we will run out of time. My back up plan is private money. This option will consume most of the cash flow and is not ideal. But even with private money the opportunity is still worth going for.

Today I learned from my insurance adviser that we will have to look at sub standard market insurance providers. Standard market insurance companies don’t want to take on the properties since the properties don’t meet their “best in class” underwriting guidelines. This is expected. There are a couple of things that need to be fixed per inspection. The plan is to obtain a short term insurance policy with a sub market vendor, make improvements upon closing to bring the properties to “best in class” level, and switch to a primary insurance provider. 

Keeping fingers crossed. I am grateful for all the help from our mortgage and insurance advisers. 

New Income Propery

How (NOT) to Buy Rental Property with Positive Cash Flow

Signs Of Trouble

Signs of Trouble

I am fairly superstitious and have to admit that I constantly knock on wood and spit over the left shoulder. So I should've known better when I purchased house #66 with unit 6...

It turned out 666 was probably one of the most valuable experiences of my life. Simply because it provided me with an opportunity to learn how to be a landlord hands-on.

I also learned what NOT to do when you buy a property with positive cash flow.

Clues I Ignored

Looks Great, but 66% Vacant

Unfortunately, I was so in love with the idea of purchasing a six-plex that I didn't pay close attention to the following signs of trouble.

After the inspection I knew that, out of 6 apartments:

• A unit was used by the seller as a storage.
• Another unit was used by the seller's girl friend as a storage.
• One more tenant just left last month.
• A tenant was being evicted for non-payment before closing.

My Thought Process at the Time

Totally Oblivious

Back then, it all seemed just fine to me! 

Sure - it is okay that the seller and his family are using two units. I knew the seller had the building for over 30 years. My assumption was that the mortgage was paid off over this time. So he probably didn't have to worry about income & expenses that much. Therefore, why wouldn't he use a couple of units for himself?

It also made complete sense to me that if a tenant left just before the building was put for sale, it would be better that the unit remained vacant.  My preference was to find my own tenant, increase rent to market, and have everything under control going forward.

Lastly, eviction seemed as really great news to me. In fact, with all my heart I was grateful to the seller for letting me know about the issue and going through the eviction process before closing. I knew it was much better to have another vacant unit, than to get a non-paying tenant right off-the-bat. 

What Did I Miss?

All of the thoughts were self-talk. I convinced myself that the situation was perfectly acceptable. I didn't look at the numbers, knowing that at least 3 units were vacant.

Lesson 1: Never Buy Based on a Pro-Forma Statement

Find Your Truth

When you purchase a rental property, seller provides an income statement, which shows rents collected and expenses paid.  

In most cases, you'd get a pro-forma statement instead of an actual income statement. Key differences between pro-forma and actual:

• Pro-forma shows what income would look like, if all tenants paid you market rent every month. Then a market vacancy rate is applied (ex., 2%).

• Actual income statement shows the money that was collected during a year or last 12 months.
• On pro-forma, some expenses are adjusted from actual. For example, the seller might subtract 25% from electricity cost because the government is planning to issue a refund up to 25% next year.
• Actual income statement would show you an amount exactly as on utility bills.
  
  
• Only vital expenses are shown: Utilities, Insurance, and Property Tax.
  
  
• Actual income statement would also include other common expenses: property management fee, garbage removal, snow/grass care, handyman, plumbing, fire inspection, cap-ex, etc.

Lesson 2: Always Verify All Numbers 

Be a Detective

To make sure I am operating with actuals rather than pro-forma, my rule of thumb now is to double check every number. I then put worst case amounts on my property evaluation spreadsheet. This helps me understand if the property is a good or bad investment at the purchase price.

To do this, I find an alternative source of information to check both rents and each of the expenses.

Here is how I go about it:

• If landlord pays water, I call the city and confirm what they typically estimate for water expenses. In one of the cases, city staff told me they use $55 per person per month, for every other month. So now, if I see a 2 bedroom apartment, I estimate water at 4 people x $55 x 12 / 2 = $1,320 per year.
  
  
• Similarly, if landlord pays electricity or gas, I call local vendors and confirm typical costs for a year for a similar property.
• On the city website, I find out the expected increase in property taxes for next year. I use next year's tax amount in my calculations. You can also look at several similar properties on MLS (Realtor.ca) and check taxes and see if there is any information regarding changes to property values in the area on MPAC.
  
  
• It helps greatly to call several property management companies in the area and confirm their fees for managing a property of similar size in the same location. You can also confirm and make sure the area is not a D area (D for drugs, disaster tenants, etc.), ask about typical costs for snow / grass and any other services property manager provides to their clients, and verify current market rents.
  
  
• Your real estate agent can help you find out from the seller how they handle garbage, snow, and small fixes. Often, this gives insight into pricing and scope of additional contract services.
• Confirm current market rents on Kijij. If units already have tenants, I always use current rent (especially if market rent is higher). It takes time to turn tenants over, so it's safer to stay conservative on income side.
  
  
• For Vacancy rate, I use 5%. This is what most lenders would use in their underwriting as well.
• Don't forget to budget for minor fixes and major upgrades per inspection.

Happy End

The biggest mistake in my numbers was around the cost of utilities. Since 3 units were vacant,

Have Fun Learning!

utilities listed on pro-forma statement were a lot lower than actual. After the purchase, it turned out that utilities cost was twice what I thought it would be. This resulted in a negative cash flow at the price that I paid for the property.

As a wise real estate coach once told me: "In real estate, time corrects all mistakes".

Over two years, we renovated all units. Got good tenants in all of them. Increased rents to market. Separated electrical meters. 

With a little bit of luck, some market appreciation and an awesome real estate broker, we sold the property and broke even. 

Big bonus - I learned a ton.