Why Investing in Second Suites Can be Bad?

I've been thinking back about my recent post on getting into real estate investing through secondary suites strategy. I'd like to share why this approach and the specific example I provided will not be good for me personally.

Numbers in the example were based on current (October 2017) home prices and rents in Barrie, Ontario.

Need More Money

You need more money. 

Typically, I invest with 20% down payment plus 10-15K capex budget for the first couple of years plus closing costs. Secondary suite addition requires an extra 50-70K to build the suite.

So, for a buy-and-hold property at 500K, I'd need to come up with 100K down + 15K CapEx + 10K closing costs = 125K. 

While for secondary suite project, I'd need 100K down + 15K CapEx + 10K closing cost + 70K build costs  = 195K. That's 1.5 times more money!

Repeating Financing

In secondary suites strategy, you have to get financing to start, then re-finance the house after the suite is done to get your build money back. Here I must say, I really don't like the idea of going through financing twice on the same deal. Financing is such a labour intensive process!  I am sure there are ways of doing this elegantly, so it would be essential to find what they are.

Negative Cash Flow 

As soon as I see negative cash flow in a deal, I personally walk away. In the example, we saw a negative cash flow of about 2K per year, or 10K during the first 5-years.

I always try to find deals that I can repeat. The idea is - If a deal is good, more of the same deal will be even better. Now, if I had 10 of these secondary suites, I'd be losing 2K x 10 = 20K per year. This will be hard to justify to my family. I'd have to get other deals just to feed money into this deal.

Appreciation Assumption

Lastly, one of the assumptions in my 5-year projection was market appreciation of 5%. 

5% seems reasonable for GTA. We are hearing a lot about a large gap between housing demand and supply; increase in demand due to immigrants inflow, etc. So, why wouldn't market appreciate?

The answer is I don't know.

But in my deals, I always ask myself - if things go bad, will I be able to hold on to the investment property and wait out until better times? So I'd re-do my projections with 0% appreciation or a slight decline and see for myself.

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!

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.

Cash Flow Basics

This Image belongs to Rich Dad company

Ever played Cash Flow game by RichDad? 

I love it. It covers all the cash flow and investment fundamentals and it's fun! "Investment and cash flow fundamentals is fun???" you'd ask.

Well, yeah... The reason I play the game so much is because my 7 year-old loves playing it and thinks it's fun.

He gives me two choices "Minecraft" or "Cash Flow". I am really bad at Minecraft... so we play cash flow.

After a while, you start following the game rules in real life making better money decisions with real life deals. Let me give you an example.

Assets

One of the key definitions in the game is that of an Asset.

Asset is something that puts money in your pocket. In the game, you come across various examples of assets in three main categories: Small business, Stocks and Real estate.

Stocks

One of my early mentors retired early, at about 45. His retirement strategy was based primarily on dividend paying stocks. 

Stocks represent pieces of corporations. So, if you own a stock, you own a small piece of a corporation (aka a business). In Canada, there are many great corporations that pay dividends regularly and consistently. This means that for every stock you own, you get paid every quarter. 

Speaking in cash flow game terms, buy a dividend paying stock and you got yourself an asset that will put money in your pocket.

Key Benefits

Low Risk 

For example, each of Canada's top 5 banks has been paying dividends for over 100 years. Shares of these banks are very reliable and low risk assets. There's a great article about it on dividend.com.

Each RBC share currently pays $3.64 per year in total. So 100 shares would pay you $364. 

Tax Free

If you open a TFSA account (Tax Free Savings Account) to hold your stocks, your dividend income will be tax free. In our example, if you made $364 at work and your average tax rate is 30%, you'd only have a net of $254 in your pocket. With TFSA, you'd keep all of the profit, 100%.

Growing Like a Weed

In addition, you can set up an automatic re-investment of your dividend payment. This service is free and has no commission or transaction cost. Meaning your $364 would automatically turn into two more RBC stocks plus change. This way your wealth will be growing on its own. You can stop this process whenever you like. But it's really awesome to have this option, especially for busy people.

Bonus for Real Estate Investors 

Suppose real estate is the primary asset of your choice. As you continue to invest in real estate and look for financing for new deals, some lenders will ask you to show a certain level of liquidity in addition to down payment. For example, a bank can have a liquidity requirement of 100K plus down payment.  

Lenders consider funds on a TFSA account liquid. This is because you can quickly turn your TFSA into cash, if you need. So the bank will accept your TFSA account statement as a proof of required liquidity. 

At the same time, your money is not just sitting. It's working very hard for you, with great returns.

Rent Renewals

Who are my customers?

My customers are those who work or stay at home, professionals, moms, dads, families, kids, retirees, students, couples, tradesmen and women, experts and newbies. Some are shy and others are outgoing. Some are smiley and others reserved. Some always have ideas about what can be improved; while others like keeping things the way they are. Some are artists and others engineers by heart. Many have pets. All of them have their stories. And all of them love their home. 

One of the most crucial aspects of being a property owner is keeping great tenants happy and making sure that each house is someone's home.

Here by "home" I do NOT just mean "[noun] Where your wi-fi connects automatically". By home, I mean the place where you feel you belong and can always retreat to.

Should you increase rents every year?

I know annual rent increases may seem a logical and easy thing to do for most aspiring landlords. For me, it was the hardest task ever! I kept having an endless dialogue with myself about the pain that rent increase would cause my tenants. I also thought that low rent would help me keep good tenants because they'd feel good about having a house at a below market price. So I couldn't do it for months. 

Why do landlords fail?

At one time, when I was looking for a new rental property to buy, it finally struck me. I noticed that in many cases when a good deal comes along, I buy a house for cheap from a landlord who didn't make it. 

It suddenly became obvious to me that if rents haven't been increased for years, expenses still went up no matter what. The last time prices went down in Canada was in 1952! 

So poor landlord ends up with a property that causes serious continuous financial loses. Like many of us, he doesn't have deep enough pockets to re-adjust, so he is forced to sell for cheap.

Why do bad tenants stay and great tenants leave?

As I defined above, tenants are people. Life changes often and great tenants will likely leave at some
point because of a life event: marriage, graduation, job change, new hobby, moving out of town, found a better place, etc., etc., etc. You can't keep great tenants forever! But guess what?

If you never raise rents, your bad tenants will always stay. The simple reason is that the rent will become so unbelievably low relatively to everywhere else, that your bad tenants will never be able to find a new place to move to. No matter how you try to incentivize them, they will hang on forever.

How To Increase Rents Every Year

1. Let your tenant know of an upcoming rent adjustment. The change must be in line with Ontario Landlord and Tenant Board guideline for the year. Note: you have to give 90 day notice.
2. Provide some information about various relevant expenses that went up during the year. For example, property tax increases.
3. Ask tenant to please let you know if the rent increase will cause them any financial hardship, so you can discuss.

Example (click on image to enlarge)

Here is a copy of a recent rent adjustment email and a tenant's response.

Follow Up Confirmation Letter

In a couple of weeks, send a confirmation rent adjustment letter and ask the tenant to sign it. I use DocuSign to get signatures online and usually receive a signed letter back very quickly.

Hope you found this article helpful. Please feel free to leave a comment below and share.  

What's worse than Bed Bugs?

A Russian saying goes, "trouble never comes alone" (in other words "when it rains, it pours")

Unfortunately, we had to go through an eviction process and kick-out a tenant. This was not a pleasant experience and psychologically difficult for me procedure. Costly and mentally draining.

Once the tenant moved out, neighbors called the City of Barrie because she left literally a ton of garbage on the front yard. The nasty smelling garbage appeared to be alive from buzzing flies and crawling maggots. Official yellow notice on the door knob requested for the issue to be resolved within 24 hours. This was a challenge given that we arrived at the house on a Saturday morning and there were two hours before garbage drop-off would close for the day. We made it!

Needless to say, inside of the house and on the backyard, everything needed extensive cleaning, painting, and repairs. Carpets had to go. We hired a contractor to replace the floors. The contractor called us shortly after starting and advised that the house had bed bugs infestation. Understandably, the contractor wouldn't continue any work until this issue was resolved.

Pest Control to the rescue. After the first treatment, the house had to remain empty for two weeks. All work was set on hold. With outlet covers, light fixtures, and carpets all off, the house remained completely naked and deserted.

2nd treatment followed two weeks exactly after the first one. Bed bugs problem now seemed to be solved and house resurrection project could finally start!

The cost of the house de-bugging was at least 3.6K, $1500 to pest control + $2100 lost rent + flooring contractor who freaked out so much that we never heard from him again. Given that on average I make $200 profit per house per month, it will take me a year and a half to pay this off.

What's the moral of the story and what can be worse than bed bugs?

Upon completion of the job, pest control service advised us that they did not find any evidence of bed bugs in the house. They found some beetles, which could be easily scared away with a $15 Home Depot spray. Pest control team kindly left us with a bed bug identification card, so we can inspect any future bed bug suspects and assess the scope of the issue independently before calling pest control service.

The moral of the story is Look Before You Leap. Spending 3.6K on fake bed bugs is worse than on real ones.

How I Approach Inspections for my new Rentals

I am in the process of acquiring three new rental properties: a two bedroom single home and two duplexes. Inspections took place yesterday and I'd like to summarize my approach and some of my key take-aways.

Knowledgeable Home Inspector

It's important to get an inspector who knows his trade very well and has lots of experience. Usually, your real estate agent can recommend a good inspector to you in the area.  Make sure that both your real estate agent and the inspector specialize in investment properties of the type you are interested in. 

In my case, I am after older singles, duplexes, and triplexes that need some clean up / modernization and catch up on maintenance but have good bones and structure. The inspector who went through the houses with me yesterday was recommended to me by my real estate agent.  He is a retired construction company owner and has built over 30 houses start to finish in the town where I am buying. In addition, he has framed and re-framed over 130 houses; and has worked in a leading hydro company for many years. 

Don't be afraid to tag along with your inspector and ask questions. It's your opportunity to learn about your property and plan out how to address key issues.

Goals for the Inspection

For every small property before I make an offer, I automatically add a budget for repairs and maintenance that I expect to spend within the first 1-2 years of ownership. During inspection, I assess if the budget I have in mind will be sufficient or needs to be adjusted. I look at the worst case projections after the inspection and figure out if the investment still makes sense.

During inspection, I follow the inspector, ask him (I haven't run into a lady inspector yet!) to tell me about key priority items and repeat back my understanding to him. My goal is to walk away with three things:

1) Any small but high priority items that must be fixed ASAP 

2) Major (most costly) items that must be fixed as soon as possible and their approximate cost

3) Answers to the questions for my insurance agent, so I can get a quote on insurance

Typical Small High Priority Items

Water Related 

Anything water related can cause a major issue if you don't address the root of the problem promptly. For example, once a tenant told my husband that she thought she heard an annoying drop behind her shower wall. My husband came by and didn't hear anything major, so we decided to wait and see how it goes. Several days later, the tenant called us at 10 PM and said that water was rapidly flooding into her bedroom from under the floor... It turned out the annoying drop was coming out of  a rotted pipe that was about to burst. In my experience, water situations end up really costly and in many cases are preventable, so at inspection I keep track of things like:

• Caulking in the bathrooms and kitchens
• Missing water stoppers and shower curtains without magnets
• Leaking toilets or faucets
• Clogged toilets 
• Clogged or slowly draining sinks
• Eaves plugged with leaves or dirt
• Missing down spouts or parts of them

Keep Good Tenants Happy

Tenant turn over is costly. If I run into a good tenant (i.e. unit looks clean and taken care of!), I always ask them if there are any items they'd like to get addressed. For example, a tenant that I saw yesterday shared with me that he loves the place and the only thing that would really help him is having a washer / dryer at the house. I will definitely add a coin laundry as soon as possible. This will help me keep the tenant happy and get some additional cash flow as well. Missing mosquito nets on windows is another frequent complaint that can be easily resolved.

Safety Concerns

Health and safety related items should always be first to be addressed. I believe in being safe rather than sorry. Here are some items you can take note of during inspection:

• Sufficient number of functional fire alarms
• Railing on all stairs
• All outlets must have covers
• Lose or missing posts in a balcony railing
• Mold in the bathroom or on window seals
• Wires touching steel pipes in an unfinished basement
• Missing brackets that hold hydro cables on the side of your house.

Other Things Per Inspector 

Make an effort to address as many items as possible of the ones that your Inspector points out to you as important (no matter how small they are). Here are some examples of what I have on my list now based on the inspection yesterday:

• 2 feet of galvanized pipe to be replaced with copper
• Furnace needs serious cleaning
• Get electrician to replace some knob-and-tube (to be honest, I wrote down what inspector told me but had to google this term he-he)
• Lock up unsafe garage and don't let tenants use it 

Tally Up Bigger Items

Here is what usually goes onto my bigger items list. I typically get houses with existing tenants. However, my list includes all updates that I'd have to do to make a unit look fresh and relatively modern as soon as one of existing tenants moves out. The benefit is that you can get a great new tenant and increase the rent to market. Also, it is crucial to make sure deferred maintenance doesn't build up.

Note: only keep track of what is applicable in your situation. You don't have to worry about all of the below! But you'll likely have 2-3 major items if you are buying an older property.

External:

• Roof: 3-5K (Flat roofs are more expensive)
• Garage door: 1.5K
• Eaves & Siding fixes: 1 - 2 K get a quote from your roofer
• Trim a gigantic tree: 1.5K

Internal:

• Replace / remove old carpets or other flooring: 5K
• Bathroom renovation: 5K
• Add fan to a bathroom and paint/clean: 1.5K
• Kitchen renovation: 5K
• Paining & wall patching: Size of house times 2.5
• New LED light fixtures all across: # lights times $40
• New furnace / water tanks: Get rental and add to monthly expenses
• New toilet: $250 times number of old toilets
• Dispose of a ton of garbage: $500 
• Cockroaches: $500
• Bed bugs: 1.5K plus a big head ache
• Freshen up a small and relatively tidy unit: 5K
• New outlets, switches, and covers all across
• New white blinds on all windows
• New thermostats
• New door knobs and locks
• A fresh coat of paint

I typically notice that a relatively clean and small unit takes 3-5K. A townhouse with several bigger items takes 10-15K. Sometimes things go wrong all at once and I spend 25K on a house within the first year. 

One of the property managers that I love reading and listening to and have learned a lot from is Nick Sidoti (http://www.drcashflow.net/). Nick says that there is no deferred maintenance, but there are owners who don't take care of their properties.

Mistakes Avoided and Made

I had once walked away from a property with foundation and structural issues. The house was a century house with wooden foundation. Inspector pointed out to me that almost all of the structural elements seem to have been moist over a long period of time (years) and water caused so much damage that I would have to address this ASAP.  My gut feeling told me that it would be a few additional thousands on top of my typical "internal/external" wear and tear items described above and I decided that I'm not yet prepared to take on such a major project. 

Besides house inspection, I always revisit market research, re-evaluate cash flow potential from the property I am purchasing and assess all key day-to-day expenses (taxes, utilities, insurance, mortgage) at the time of inspection. In one of the deals, I noticed as part of my checking that MPAC assessment value was more than twice lower compared to the purchase price and that taxes on a property decreased by 2 times in the last four years. This was unusual for me, so I started looking further and discovered that I was about to pay twice the current market price. I was happy I re-checked and didn't get myself into trouble.

Once, I purchased a property for a lot higher price than I should have. This was because I underestimated the cost of electricity. In a 6-unit building, the seller only had 2 units in use, but made it seem as if 4 were occupied. Timing coincided with a spike of hydro costs in Ontario. Unfortunately, this was one of my early purchases and I didn't know how to estimate utilities properly. Cash flow was negative. Tenant issues added to the trouble. After holding the property for two years, I successfully sold it and broke even thanks to hand-holding from one of my real estate coaches Don at Dave Lindahl's group (https://rementor.com/). This was a great learning experience.

Info I Provide To My Insurance Agent

During inspection, I always confirm all the info I have to send to my insurance agent, so she can help me with an insurance quote. Here is the list of insurance questions and #10 is what you should get during the inspection:

1. Who will be the registered owner of the property? 
2. Are all the units occupied? 
3. Are any of the units rented to students? 
4. Are there annual leases with all tenants? 
5. Do you require that all tenants carry insurance? 
6. What is the annual rental income for all units? 
7. Who is responsible for the maintenance of the property including snow removal? 
8. What building limit do you require? 
9. What limit of coverage to you require for the appliances (laundry, fridges & stoves)? 
10. Please provide information regarding the updates:

a)      Roof – type of roof, when updated? 

b)      Heating – type of heating, when updated?

c)       Electrical – type of electrical, fuses or breakers, what ampage, when updated? 

d)      Plumbing – type of plumbing and when updated?

I hope this article is helpful! Ping me if you come across it in the WWW and would like to bounce off ideas. Also, please ping me if you'd like to add or adjust any of my findings based on your experiences, so we can keep growing this cash flow knowledge base and help out others who'd like to learn.