The Universe Has Your Back - A Real Estate Fable

I thought I was helping
Image by Gerd Altmann from Pixabay

One of my tenant families struggled to pay rent. It's been an issue over the past three years.

The family would miss a rent payment. Then take a few months to catch up. Once caught up, they'd miss another payment the very next month. The cycle repeated.

I deeply empathized with their problems. I had experienced many of them in my past too - a close relative going through a critical illness, losing a job, going through challenges raising kids, car breaking down at the most horrible time, etc.

I thought I was helping the family by being patient through all their troubles. It seemed that they were trying so hard and needed a break. Besides, they seemed to have been able to always come out on top.

The Universe Has Your Back

Things always work out
Image by Gerd Altmann from Pixabay

Finally, the universe heard them. Things started turning around. First, a social housing program helped them catch up on rent - $2,200 was gifted to the family. Next, both parents found part-time jobs. Shortly, they worked full-time hours and multiple jobs. Once they apologized for a delayed reply to my text because they were too busy working! Hurrah!

With a sigh of relief, they told me one day that money wasn't an issue anymore. They'd be okay from now on. They sympathized with my dependance on their rent payment to pay my mortgage and other costs. They said that I shouldn't worry about their rent anymore.

I felt grateful to the universe! Things always work out somehow.

You Just Have to Do Your Part

Just a short month later. Another missed payment.

This time, the auto-deposit process on my end glitched. All transfers usually get auto-deposited, but

Did I misread the signs?
Image by TiNo Heusinger from Pixabay

this one went back to the sender because of a recent new release of the banking app. Not realizing this had happened, the tenants unintentionally spent the returned rent money. They had no money to pay rent. Understandable. A new cycle of struggles began.

My tenant put together a payment plan. They sent it in writing and laid out upcoming catch-up payments. Date - payment - date - payment - date payment...

Then, they missed the first catch-up payment.

What happened? 

No answer. 

What's the status? 

Apologies. CRA delayed our child tax benefit payment. It won't happen again.

Then, they missed the next planned payment.

Worried, I followed up again.

The Universe Has My Back

My tenant was frustrated. She confessed that there was a time when they didn't have any money to buy groceries for weeks and were getting food packages at the church.  Once they started working, they've been handing over their full paycheques to me. There was a list of issues at the house they weren't happy about. They didn't get sufficient value and service from me as their landlord, for their money. They brought up a poorly executed door replacement job from two years ago and said that I hired a drunk...

Please move out! I pleaded.

I checked and verified that there were more affordable housing options in the area for a family of the size. I don't want your full paycheque. Please don't give it to me! It's not right that you don't buy food. It's not right that you don't love your home.

Please, please, please don't stay in the house, especially if you are not getting a good value for the price you are paying. You know where the door is! Please please please move out.

I was sending my thoughts to the universe, begging it to resolve this nonsensical situation.

My tenant didn't reply. 

They sent the next rent payment on time. 

And then the next one. 

To be continued?

Vacancy: Landlord's Worst Nightmare

Vacancies Keep me Awake at Night!

A few days ago we filled our last vacancy.

What a Relief!

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

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

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

Vacancies Keep Me Awake at Night

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

Ouch!

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

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

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

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

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

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

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

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

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

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

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

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

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

Success! Got a Great Tenant

Needless to day, the pressure was on.

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

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

Our property manager uses Naborly for tenant screening. I've never seen a Naborly report before and was quite impressed. The multi-page document covered most of the information that I typically review for a candidate and gave some additional insights. Here is what the report covered:

• General info about all occupants
• Previous addresses and address verification
• Equifax credit summary and score
• Debt summary including monthly debt payments
• Rental history
• Financial information
• Employment history
• Analytics showing the likelihood of key tenancy risks (late payments, eviction, property damage) 
• Analytics showing the likelihood of a successful tenancy during the entire term.

Our property manager also collected a photo ID, a full credit report, and a letter from the employer. They conducted a face-to-face interview and verified employment and personal references. My property manager summarized their findings including possible risks.

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

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

No Vacancies!!!!!
Overwhelmed with JOY and
will definitely sleep like a baby :)

The property manager impressed me very much! This was the first time when they found a tenant for me and I loved how smooth the tenant on-boarding process was. 

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

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!

Oh-oh! Power Has Been Shut Off

Taking out melted
two-week-old food
out of someone else's fridge
does NOT feel glamorous

Hi! Did you have a good summer?! I hope you did!  I'll post a few articles today. I did a lot of camping in August, and stayed offline most of the time. It's time to catch up now.

Yay! We got a New Door - door #18!

At the end of July, we acquired a new asset. It’s a condo townhouse in Barrie, ON, which we will fix up, clean, refresh and rent to a nice family.


This town house is different for us because it’s our first condo – comes with a pool, gym, and snow/grass services. Very nice!


On the flip side – vacancy costs a lot more than with our typical freehold town homes: Condo fee is quite an expense to carry in addition to mortgage payments!

Oh-oh! Did I miss something??

Since we’ve done quite a few acquisitions, you’d think that everything would go smoothly! but…


I didn’t call the power company to open a new account fast enough and they shut off the power!


This mishap was a definite oversight on my part: I had a lot on my to-do list and held off with all the administrative set up for too long, so that I could finish higher priority tasks. Now, I am sitting at the house and waiting for my hydro appointment.


Since it’s summer and there is no tenant yet, being without power isn’t really a big deal.
No hydro during winter when you already have a tenant would feel a lot more stressful. And that has actually happened last December at another property when a furnace suddenly died.

Having said that, previous owner of the place was leaving quickly and left all her groceries in the fridge. I can tell you for sure - Taking out melted two-week-old food out of someone else's fridge does NOT feel very glamorous. I had to triple-bag the garbage. Yucky....

Any Costs?

Luckily for me, there is no re-connection fee.

The only cost is my time – I have to drive to/from the property and stay here during my scheduled 4-hour appointment time block.

This trip pretty much takes up an entire day! I can imagine how stressed I would've been, if I was still working and had to ask for time off to take care of this.

I am keeping fingers crossed, and hope my cell phone and laptop battery will last until the technician arrives.

Here we go… The technician is here! Hurray!

Should've Would've

Here's what I should've done.

Within a couple of days after closing, I should've called all vendors, enabled new accounts and set up auto-payments for the following services:

• Hydro
• Gas
• Water
• Tax
• Condo Fee

In addition, I should've notified each provider of my intention to rent the unit and to have tenant pay the utilities down the road.

In this case, many vendors have a process for rentals to make sure the account automatically goes back into the owner's name without re-connection fee, as tenants come and go.

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! 

Pocket Deal: You make money when you buy! Literally

Got a property with 20% off!

In one of the real estate training programs I took, we learned about pocket deals.

I knew, in theory, that if you build great relationships with real estate brokers, you'd start getting deals off the market, which they call pocket deals. But so far this has never happened to me until today.

Today is my lucky day!

Because... I GOT MY FIRST EVER POCKET DEAL!


These deals are supposed to be great because:

• Price is low - you get a gigantic discount
• No one else even knows about the deal
• No competing offers even in the hot seller market!

Here is how it happened.

One of my friends focuses of flips. It's essential for him to find properties at super low prices. So, he  designed a system of finding deals off the market and putting them under contract. His system works great!

He gets houses ch-e-e-e-e-e-a-a-a-a-a-p. Then, fixes them. And flips!

Occasionally, he comes across a house at a good discount, but the discount isn't big enough for a flip. The cost of the transaction would eat most of the profit. These situations are best for those who buy-fix-rent-&-hold, like myself.

So instead of flipping, the deal was assigned to me. In this transaction, my friend plays the part of a wholesaler. He adds a profit (aka assignment fee) for himself before re-selling the deal to me.

Here are the numbers:

Market Price	290,000	[1]
Sold to Whosaler At	217,500	[2]
Assignment Fee	15,000	[3]
My Price	232,500	[4]
Downpayment	54,375
Closing Costs	10,875
Renovation	15,000
Total Investment	80,250	[5]
Instant Gain	31,625	[6]
ROI at Purchase	39%	[7]

1) Comparable houses are currently selling for 290K

2) My friend was able to purchase the property off the market at 217.5K

3) He charged finders fee,  which is called assignment fee, of 15K when he assigned the deal to me

4) I am paying 232.5K for the house

5) To get the property, my total investment will be ~ 80K, including dowanpayment, closing costs, and a renovation

6) Based on current market prices, I'll have immediate gain of 31.6K:

Gain = 290K - 232.5K - 10.8K - 15K = 31.6K

7) The moment I buy the property, my return on investment (ROI) is almost 40%:

ROI = 31.6K / 80.25K = 39%.

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.

3 EASY STEPS: How to Make a Dream Come True

Above is a video digest of what I've resisted for the past 20+ years and finally came to piece with:

There is so much I still need to learn from all the people around me!!!

Childhood - Being a Sponge that Soaks In

Let's go back to our childhood. Growing up, we go to school for more than a decade to learn the basics. 

These seemingly basic ideas are in fact a result of thinking, trying, and failing of our predecessors during many previous generations. They worked hard to clear the road for us.

I am watching my kids grow up. 

All the way from birth through school, they are sponges soaking in numerous concepts that they are being taught. 

It's incredible to see them going from little smiley honey bunches to Homo Sapiens (Latin for "wise man")  so fast.

Working - A Sponge that's Being Squeezed Out

Some time later in life, we become the sponges that are being squeezed out for knowledge. 

We give back what we've learned. 

We contribute at work, at home, and in our personal life, sometimes to the point of complete exhaustion. However, in many cases we feel good about it. 

This is natural, since we want to be a part of the future! We'd like to contribute. 

Plus, it feels so great when you are so smart that you can teach or boss others around you, doesn't it?

Well, my husband and I certainly agree that it's fun to kick our kids around. Shhhhh, don't tell the kids...

What if You are Still Asking Yourself: 

How do I become successful?

What I realized recently, during my career change from an HRIS professional to an investor, is that the most certain method to succeed in anything you'd like to take on next remains the same as when we were little.

Whatever your new goal or aspiration is, learn from someone who already knows and is willing to teach you.

The difficult part is to stay open-minded and follow the recipe your teacher points out to you step-by-step, until you see yourself get it right and succeed.

When my 8-year old misspelled "bird" as "burt" this morning, he didn't question or argue. He laughed, took an eraser, and fixed his writing. 

Going back to myself now. I figure that if I could learn when I was eight, I can most certainly pick new things up when I am years wiser! 

This is why my three step approach has been:

1) Find a formula that works and that I believe in

2) Follow that formula exactly 

3) Repeat until I master the formula.

This works! I am learning one new formula at a time and feeling successful.

I wonder what you are thinking. Would you mind leaving a comment below?

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! 

Real Estate Income Property - Case Study #4 - Cash Flow Formula

Opportunity Awaits!

Two years into our 50 Doors adventure, we figured that it was much easier to have all our properties close together rather than scattered throughout Ontario. So we focused on Barrie, ON.

We were amazed at the crazy hot market and the speed at which housing prices were going up.

We were hunting for a new property where numbers would work and meet our cash flow requirements.

The idea was to keep repeating the same positive cash flow formula that had worked several times for us already.

It was very exciting that we started to understand the economics of the formula and could tell good deals from bad deals at least within the neighbourhood that we became familiar with.

Rental Income Property

One of the real estate agents who worked with us on a previous deal forwarded this listing. He knew it was a great opportunity and called houses like this "good bones". The structure and concept were great, but the place needed some TLC (aka tender loving care).

An elderly lady who owned the house decided that she no longer needed such a big place and wanted to move into a smaller home.

By the time we were looking at this property, we already owned two similar houses in the neighbourhood. Market was going up like CRAZY.

We got the first property for 185K and now, only two years later, similar homes were selling at 250K - 270K. That's 20% annual appreciation! Very dramatic change in a short time.

Rents went up by a lot as well from $1,200 per month to $1,450 (10% per year).

The increase of $250 in rent, given interest rates of ~3.25%, covered an additional 50K of mortgage. Or, if we put 20% down, it was enough to cover about 60K extra in property price. Meaning, if we got a property at about 240K (185K + 60K), we'd meet our positive cash flow goal.

We instantly saw the opportunity in this property! It was selling under market because it needed some cleaning: the owner smoked inside for three decades. Most local shoppers didn't want to deal with this even at a discount. 

Key features: 

• Freehold town house  
• Parking on driveway plus 1-car garage 
• Main level: 
• Entrance/hall 
• Large living and bright dining room 
• Kitchen including fridge, stove
• Entrance to a nice, deep backyard with a porch
• 1/2 bathroom 
• 2nd Floor: 
• Master bedroom 
• 2nd bedroom 
• 3rd bedroom 
• Full bathroom  
• Partially Finished Basement: 
• Utility room with washer/dryer 
• Family room with exit to backyard
• An old shed takes up most of the backyard. It came with a dead squirrel.

Purchase

• Asking price: $225,000
• Purchase price: $218,000
• Found by a really awesome Real Estate agent Realtor.ca who worked with us on a previous deal
• 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, fixed 2.55% interest
• Expected Cash Flow: ~ $350 / month

Total Investment

This property required a 55K investment. This is in line with the original plan and includes 10.5K in renovation costs.

Investment Summary

Investment	Amount
Downpayment/Closing	45,214
Capital Improvements	10,448
Total	$55,662

Cashflow and ROI 

• Initially cash flow was projected to be $350 / month
• Actual cash flow averaged at about $200 / month. The shortage is primarily due to two month vacancy in 2017 during renovation. 
• Net profit including mortgage pay down is approx. $500 / month or 6K per year
• ROI is ~ 20% over the two years and 10% annually on average

	Year 2014	Year 2015	Year 2016	Year 2017	TOTAL All Years	Average Annualized
Income
Rents (@100%)			17,400	17,463	34,863	17,432
Vacancy			1,800	2,196	3,996	1,998
Total Gross Income			15,600	15,267	30,867	15,434
Expenses
Taxes			2,449	2,864	5,313	2,657
Insurance			1,379	1,480	2,859	1,430
Repairs/Maintenance			743	1,229	1,972	986
Utilities			533	0	533	267
Admin/Advertising			30	0	30	15
Total Expenses			5,134	5,573	10,707	5,354
NOI			10,466	9,694	20,160	10,080
Mortgage - Interest Payment			3,656	4,336	7,992	3,996
Mortgage - Principal Paydown			3,608	4,033	7,641	3,820
Cash Flow			3,202	1,325	4,527	2,264
Net Profit (Loss)			6,810	5,358	12,168	6,084
Cash on Cash Return			5.75%	2.38%	8.13%	4.07%
ROI			12.23%	9.63%	21.86%	10.93%

Appreciation / Equity

Based on MPAC assessments, the value of the property increased by 21K during the last two years. Once we include the equity gain in ROI calculations, return on investment becomes 30% per year:

Total gain including appreciation: $21,000 + $12,168 = $33,168
Total ROI including appreciation: 60% overall and 30% annually.

This property is performing well and as expected. Knocking on wood... spitting three times over  my left shoulder. 

History

2018

• January - tenant is fully caught up on all payments. YAY! 😀  
• January -  notice to end tenancy for non-payment sent (N4). We agree to a catch-up plan.

2017

• December - no rent and still not fully caught up with previous shortfall.
• October - tenant renews lease for a year! Hurray! Rent increase of 1.5% by $21/month. 👊
• September to November - Several fixes needed at the house. The biggest one being installation of a fan in the bathroom to eliminate moisture and potential mold problem. I pre-paid a contractor who never got the work done. Read full story here. The good news is that this led to me finding a great new contractor who finished the job brilliantly and now helps us regularly on various tenant requests. 
• August - notice to end tenancy for non-payment sent (N4). We agree to a catch-up plan.
• July - tenants is short on rent due to change in career and taking on study courses. 
• June - dryer dies. Got new dryer.

2016 

• October - Washer breaks. Got new washer.
• September - New awesome tenants move in. Rent $1,450. 💪
• September - New roof & new floors in bedrooms. Replaced carpet with laminate. Unit looks and feels gorgeous!
• August - A tenant has been recommended by one of the neighbours. Very nice family! They agreed to wait until renovation is done and helped us picking colours for their new home. 
• August - Painting throughout, cleaning throughout, minor fixes throughout. Power washed fridge door. Purchased and installed a dishwasher. 
• July - One of the roommates finds a job in another city, the tenants move out a month early. Lots of garbage left in the garage and throughout the house. We discover a picture of a XL male organ on the fridge... in permanent marker. 👿
• May - Young professionals and the student duct-taped an old window air conditioner to a 2nd floor window above the front door entrance. This was a disaster waiting to happen! Luckily, we mounted the AC unit properly before anything bad happened.
• March - Two young professionals and a student move in. Six months term @ $1,350 rent. This was a discount of $100 from the $1,450 rent we aimed for. The reason this was good for us was because the tenants could move in right away on the 1st, so we wouldn't lose a month of rent. We planned to increase rent at the end of their term.
• February - Major cleaning - 30 years of smoking - and minor fixes. This was when I discovered that if you try to wash smoked ceilings, you get rained on with brown nicotine drops. Cost < $500. 
• February - Purchased the property