Forced Appreciation for Noobs

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

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

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

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

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

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

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

Here is an example.

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

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

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

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

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

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

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

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

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

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

Fortune Property Management 

converted my mumbling into 

two beautiful apartments 

within a couple of weeks.

Thank you!

$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!

Update on Two New Duplexes: Maintenance Catch Up Status

On September 25th, we closed two new duplexes in Chatham. This is my first time working with a property management company. The company I am using is amazing (knocking on wood). They collected October rent from all of the tenants quickly, so transition was very smooth. Now, they are working on various required fixes and catch-up on maintenance. Communication is outstanding! The company office manager keeps me in the loop on all of the progress and replies to my questions very thoroughly.

I am truly grateful for their help.  Here is a list of items that need to be addressed, with some of my comments. Priority #1 are the most important and 5 least important. I'll post updates to this post as things get done.

Last updated: Nov. 3rd, 2017

Duplex A (#41 J)

Priority #5 - nice to have down the road:

• Insulation blow guys - Attic add insulation
• Done Oct 24 2017 Electrician - inoperative ground fault circuit interrupters (external)

Priority #4 - roof on porch is starting to rot:

• Roofer - replace shingles on the front porch. Add ventilation

Priority #3:

• Handyman - some missing bricks in foundation walls - patch with cement or add bricks
• Done Oct 24 2017 Handyman - finish painting the deck. It is half painted
• Handyman - need a new dryer vent
• Handyman - some bulbs need to be replaced in 2nd floor unit
• Done Oct 24 2017 Handyman - missing cover plates - external & basement
• Handyman - new filter for the furnace - 20 x 20 x 1
• Done Oct 24 2017 Roofer - downspout - extend front corner away from house
• Roofer/Handyman - siding is lose and needs to be fixed (wind can blow siding off and cause issues)

Priority #2: - Moisture and water issues. I think this will cause a lot of damage if we postpone for too long.

• Contractor - 2nd floor bathroom - renovation (toilet leaking & bathtub water/wall damage, need fan)
• Contractor - 2nd floor - mold & water stains on walls in bathroom, hallway, and bedroom(?)
• Contractor - 2nd floor - check windows, some are water damage; storm glass broken
• Contractor - 1st floor bathroom - caulk & grout
• Contractor - 1st floor - ceiling stains from bathroom above
• Contractor - add a 4x4 post (notched joists) -?? I am not 100% sure what this was about...

Priority #1: 

• Furnace serviceman - get service for the furnace (basement & 2nd unit). Old furnace. Inspector was not sure if heat will come on. 
• Done Oct 24 2017 Inspection by heating/cooling company: one of two heaters is not making heat (fan was running) and unit to old, so new parts cannot be found.
• Done Oct 24 2017 Furnace filter changed
• Done Oct 27 2017 Heating company temporarily resolved the issue. Heater is currently working, but needs to be replaced. Property management is looking into finding a replacement unit
• Done Nov 2 2017 Cost to replace with a pre-owned (aka used) unit ~$1700. Replacement is being scheduled.
• Done Oct 31 2017 Increase rents
• 90 day notice provided: Eff. March 31, rents will increase by 1.8% according to Landlord and Tenant Board Guideline

Duplex B (#141 S)

Priority #5

• Future: House slopes inward towards the middle 
• Future: might have to add electric heater to far end of 1st floor unit

Priority #4

• Handyman - Flooring - 2nd floor carpet is partially removed - will need new flooring
• Handyman - Walls - 1st unit - damaged(?)

Priority #3 - I THINK THIS IS IMPORTANT

• Tree cutter - clean all branches off the roof & trim big tree - Tree branches scrape the roof,  will be heavy in winter and will most likely shorten roof life by a lot.

Priority #2 - I think this is all doable and should be fairly quick

• Handyman - remove shed - tenants complained and it looks like a potential safety issue
• Done Oct 24 2017 Handyman - add railings to front & side, fix loose railings (rear)
• Done Oct 24 2017 Handyman - trim trees near walkways (trip hazard)
• Done Oct 24 2017 Handyman - some rot on deck, boards should be replaced
• Handyman - interior wire used for external light (replace)
• Done Oct 24 2017 Inspection by electrician
• Handyman - caulking of external light
• Handyman - install cover plates where missing in the basement
• Handyman - 2nd floor - toilet running & caulk & grout bathtub
• Handyman - 1st floor - toilet leaking & caulk & grout bathtub
• Handyman - Install missing screen on one of the windows
• Handyman - weather stripping on the doors

Priority #1

• Furnace - get service and cleaning for the furnace - less critical than in 41 Joseph, but should be done before it gets cold.
• Done Oct 24 2017 Inspection by heating/cooling company: one of two heaters has been condemned and needs to be replaced
• Done Oct 25 2017 Quote for new heater ~3K
• Done Oct 31 2017 Increase rents
• 90 day notice provided: Eff. March 31, rents will increase by 1.8% according to Landlord and Tenant Board Guideline

Proven Way to Get into Real Estate Investing: Put 154K in Your Pocket

How to get into real estate investing?

At a Real Estate Investment Group MeetUp earlier this week, the host asked the group how many were new and how many had some deals already.

It turned out the ratio was about 50/50. The presentation was on secondary suites. Lots of discussion and questions followed because both types of attendees found the topic interesting.

Everyone learned something for their first or next deal.

Here's what I learned. Hope it will help you as well! Especially if you are just looking for various strategies on how to get into real estate investing.

Secondary Suite Investment Strategy

Definition

Secondary suite is a self-contained residential apartment with its own kitchen, bathroom, and bedroom(s). 

Secondary suites also go by second units, basement apartments, accessory apartments, granny flats, in-law suites, nanny suites or garden house. Read more at CMHC website.

Legality

Please check your local legislation for second suites legal requirements.

In Ontario, Canada, The Strong Communities through Affordable Housing Act, 2011, amended the Planning Act to require that all municipalities authorize second units in their official plans and zoning by-laws. 

Each municipality has its own rules & restrictions that you should comply with in your investment. There are areas where second suites are not allowed. There are some specific characteristics of a property that make it a good fit for an economical addition of a legal second suite. Verify what these parameters are in your area before you purchase a house.

How The Strategy Works

1. Confirm second suite and property requirements in your area
2. Purchase a property that has no legal second suite, but is appropriate for adding one in
3. Apply for and obtain a permit for adding a second suite
4. Engage & manage contractors who will do the work
5. Rent out main suite 
6. Complete adding a legal second suite
7. Rent out second suite
8. Re-finance the property
9. Repeat.

Benefits of Secondary Suites Investment Strategy

There are numerous ways to invest in real estate. Secondary Suites is one of them. It became very popular around here in GTA, ON Canada. Here are the main reasons:

Demand - Secondary suites strategy is widely supported by the government in many municipalities because it helps to increase supply of rental units where demand exceeds available inventory. Ontario, Canada, for example, made it required that all municipalities allow legal second suites to boost their creation.

Cash Flow - Rental income from the second unit increases cash flow considerably. For example, in Barrie, ON, a 3-bedroom house can be rented for about $2,100 / month. If you rent the second unit, for an additional $900, your gross rental revenue will increase from $25,200 to $36,000 per year (42% increase) and result in better cash flow.

Value of Property - Investment property is a business. The value of this business strictly ties to the income that it produces. Second suite increases the income of the property and, therefore, increases its value.

Flexible Investment Product - Secondary suites work well for many types of renters (young couples, single people, retirees, students,  travelers, etc.). They also allow flexibility on investor side. In many cases, entrepreneurial home owners use a second suite to off-set their own mortgage payment.

Higher tenant quality - Many tenants are interested in living in high density residential areas within great communities with good schools, established infrastructure, and safe neighbourhoods. This allows for highly selective tenant search and qualification process, resulting in higher quality of tenants.

What are the Cons?

Here are some of the cons you should be aware of. 

Size of Initial Investment - In order to pursue this strategy, you will typically need 20% down payment plus 50-70K budget for adding a second suite. 

Project Management - Coordinating the project to add a legal second suite may be a lot of work, especially when you do it for the first time. 

Compliance - Requirement to comply with Ontario Building Code, the Fire Code and municipal property standards by-laws adds complexity. Please conduct thorough research and select all sub-contractors carefully.

How to do it right?

The presenter at the MeetUp specializes in second suite design, communications with municipalities, obtaining, engaging with reliable sub-contractors throughout GTA, and overseeing the project start to finish. His company already completed over 50 units.

Here are some of tips on how to do it right:

• Ensure accurate documentation 
• Obtain all required permits
• Before you purchase, confirm critical legal second suite requirements in your area. For example, 
• Parking 
• Ceiling height
• Square footage
• Windows/exists 
• As you design and build the unit, plan for most optimal layout, some important aspects are:
• Acoustics - it often helps to mirror top unit 
• Heating & cooling
• Plumbing
• Dry living space.
• Like with any investment, do thorough due diligence and validate all numbers.

Step 1 - Increase Property Value 

Suppose you purchase a property for 500K.

Now, let's assume:

• Initially: rental income = $25,200 and Expenses = $8,500
• With second suite: rental income = $36,000 and Expenses = $14,875
• Market remains unchanged with Cap Rate = 3.3%

Then, the value of the property with the second unit, is $21K / 3.3% = 632K.

The property now is worth ~25% more, compared to the original purchase price.

Example: Increase property value from 500K to 632K by adding a second suite

Step 2 - Refinance the Property to Pay Build Costs

Let's assume, total costs so far are as follows:

• Closing costs were = 10K
• Second suite cost = 50K
• Interest on short-term construction loan = 10K
• Refinancing cost = 3K
• Total = 73K.

If you re-finance the property to 80% of the new value of $632.5K (see Example 1 above), you will receive 33K back (632.5K * 80% - 400K original loan - 73K).

To continue this sample scenario, I assume that we do not pull the remaining cash out. Instead, we use it to decrease our mortgage to 473K (632.5 * 80% - 33K extra cash).

Refinance property and pay off the cost of adding the secondary suite

Step 3 - Put 154K in Your Pocket 

Five-Year Cash Flow Projection

Let's assume, during the next 5 years: 

• Rents increase by 2% every year
• Costs increase by 2% every year
• You hold a 3% fixed interest mortgage with 30 year amortization
• Property is doing fine and you spend about 25K on any cap-ex expenses, vacancy and small fixes
• Real estate appreciates at 5% rate in the area.

Unfortunately, my dummy example leads to negative operating cash flow and you invest another 9.4K into your rental.

This is because principal re-payment doesn't go straight into your pocket until you sell or re-finance the house at the end of the 5-year term. 

Notice that at the end of the term, the investment results into a positive outcome:

154K goes into your pocket.

Return on Investment (ROI)

In our sample secondary suite project, initial investment was 100K down payment plus 33K to reduce mortgage after the first refinance, total of 133K.

Therefore, ROI =154K / 133K = 116% over five year period; or

ROI = 23% annually on average.

THANK YOU & PLEASE LEAVE ME A COMMENT

Thanks for reading my blog. I hope you find the example helpful.

If you have any questions or notice anything that I should add or adjust, please let me know in the comments below.

Please also let me know what posts will be helpful for you to see in the future. I will really appreciate all your feedback!

PS I am very curious to know what you think. Please click on the pencil icon below and leave a comment!