The first realtor I worked with latched onto me like a leech. I was twenty-six, inexperienced and looking at buying my first rental property: a triplex. The man was from a firm that (I later discovered) was known for fake leases, cash in suitcases and fraudulent financing. After I called to visit a property he had listed, he basically attached himself to me. He kept calling and calling, pressuring me to see buildings and to work with him. I didn’t know how to get rid of him!

After two weeks of searching, he pressured me into making my first offer. I wasn’t sold on the deal, but I was also insecure and after he kept the pressure up, he “closed” me and I signed on the dotted line. 

The property ended up being profitable and relatively trouble-free. I still own it today. But our relationship was very unpleasant. I can still remember the stained wall-to-wall carpet and fluorescent lighting in his office and the way he pressured me to make a decision I wasn’t ready for. 

When it came time for my next purchase, I vowed to do things differently. 

Do Realtors Add Value?

While Real Estate agents have a reputation for being sharks, I do believe they add value. 

When I buy and sell properties today, I work with a broker, even though I am a licensed realtor and have enough experience to manage my transactions personally. A second opinion—a professional one—and the second pair of eyes is worth the commission cheque. 

If you’re starting out, the value-add of a realtor—the right realtor—is even greater. Here’s why.

Negotiation

Realtors negotiate for a living. Negotiating is both an art and a science. Getting the best deal depends on knowledge of the market. Realtors see a lot and therefore know a lot. It’s their job to keep their nose in the marketplace. They’ll have access to comparable sales. They’ll know the reputations of other realtors—which ones are crooked, which ones ethical. Their knowledge is a value-add.

Professional Networks

Realtors also have a professional network behind them, including inspectors, contractors, lawyers, architects, etc. This team of professionals will advise both you and the realtor if there is any uncertainty. For example, when I have doubts about a transaction, I call the director of the brokerage firm I’m affiliated with. When I’m unsure how to structure a complex offer or build protection into a deal, I, unlike my clients, have someone more knowledgeable to speak to. All of this is part of the value-added by working with a competent realtor. 

And why not? For the buyer, it’s essentially a free service.

The Real Estate Board

In terms of due diligence, the real estate board heavily penalizes realtors if they don’t follow prescribed processes. Your agent will need to check the tax bills, any liens, the leases, the certificate of location, and so on. They will also be better at doing due diligence than you are. This is how they obtained their Real Estate license.

Professional Insurance

Realtors have professional errors and omissions insurance. If they overlook anything, are negligent, or jeopardize the transaction, there’s insurance coverage for you, their client. Working with a realtor offers you a certain level of security that private sales don’t.

Don’t Trust the Listing Agent

If you visit properties on your own and end up dealing with just the listing agent, don’t think you’ll end up in a better bargaining position. Many people think that the realtor will cut his or her commission to give them, the buyer, a good price. Don’t be fooled. The listing agent wants to do a deal and their first allegiance will be to the seller. This won’t put you in a position of strength in the transaction. You’ll also end up paying commission anyway (indirectly as part of the sale price). 

Get a broker in your corner. Being represented by your own realtor will likely add no cost to you. If you work with someone competent, it will almost certainly save you money through the negotiation process. There’s basically no downside to being represented by a realtor when you shop for a property.

Show Me The Money

One caveat: Real Estate agents make money at closing. From a business standpoint, their motivation is to make the sale. Your realtor wants you to buy a building. Preferably without too much lollygagging. You, on the other hand, want to purchase the right building. Notice the difference in motivation?

Finding a property that meets your needs can take time. No matter how ethical, realtors want you to choose any building in the least time possible. Their commission will be the same whether you visit one property or twenty. Consider the pressure this puts on them. When realtors push people to make a purchase, it can be because they’re simply motivated to close the deal. 

Then, factor in that not all sellers pay the same amount of commission. Realtors make between 2.0% and 3.5% on a sale. Do the math. On a property worth $450,000, that’s a difference of $6,750! This places realtors in an ethically difficult position. They’re expected to present properties neutrally despite vastly differing commission amounts. As a realtor, it’s difficult to avoid encouraging your clients to buy a building where the seller offers more commission, whether consciously or unconsciously.

Realtor or Investor?

Conflicted motivations aren’t the only thing to be aware of. How much do you know about the qualification process for becoming a realtor? It has nothing to do with investing. Many agents are great at making deals but they may not know whether a property is a good investment. While they can negotiate and fill out contracts competently, most residential realtors don’t know much about cash flow statements, leases, or tenant issues. 

When selecting an agent. You’re going to need to pick someone who knows rental property. Learn how to select an agent. 

Learn more about being a mindful landlord, get your copy now.

How to Make A Multi-Year Maintenance Plan

For Your Buildings

Every landlord is also a maintenance manager. The day we pick up the keys at the notary is our first day on the job. If we researched buying Real Estate before making a move, very few of these hours are spent learning about building maintenance! 

Is it any surprise that this aspect of investing is a struggle for many new landlords?

Here are a few things you can do to simplify building maintenance. 

The Building Inspection

Maintenance begins with the pre-purchase building inspection. The inspection report is like a general medical check-up. When you purchase a building, one of the conditions of sale (hopefully) is having the property inspected by a professional. This service costs money, but the takeaway is normally a fifty-page report with photos and maintenance recommendations. A good inspector will also place time frames on the issues he or she identifies. 

A report is a tool you can and should use to negotiate a lower sale price.

But don’t put that precious document in a drawer and forget about it! 

Use your building inspection report to prepare a maintenance schedule. The inspector will flag issues in the report, coding them according to the level of urgency. 

You will them listed as follows:

• fix immediately
• fix within the next year
• will need repair in one or two years
• keep under surveillance

This report is actually a blueprint to plan and budget for these repairs. It does the work of planning timelines for you! 

Make a Plan

How do you turn the report into a plan?

Create a spreadsheet or print this form.

Follow this guideline in order of priority:

Before or Immediately After Closing

• Fix any major issues that are not up to code (wiring, plumbing and fire-code violations).
• Address items that are a risk to tenants (missing guard rails, electrical issues, doors that don’t lock properly etc.)
• Fix or replace leaky plumbing, caulking, and insulation. Fix any water infiltration.
• Address ventilation issues (bathroom fans that don’t work, humid crawl spaces etc.).

Ongoing

• Organize a biannual check-up in spring and fall.
• If you have a flat roof, get someone to inspect it twice a year. Make sure no leaves have accumulated. Make sure the roof drains are free and open. Add or spread out any gravel as necessary.
• Check and empty the gutters.  
• Check the caulking on the windows.
• Check the basement and/or crawl space. Check the humidity levels and look for any water infiltration.
• Check all bathrooms and kitchens. Look for mould. Check the grout and silicone seals to make sure they’re watertight. Look under the sink and counter to make sure there are no slow leaks. Check any fans and ventilation.

 As Per the Inspection Report

 Fix any issues in the following order:

• Water. Fix any existing water leaks or infiltration that involve the building’s shell (windows, brick, roof, foundation, etc.). If you don’t have the budget for a permanent solution, patch what you can. Keeping water out is important while you save up to do the job properly.
• Plumbing. Consider installing a backwater valve if there isn’t one. Make a plan to replace any galvanized or lead piping.
• Structure. Address any structural issues with the help of professionals. Serious structural issues progress slowly. Although you need to formulate a plan to fix such issues, water leaks and infiltration are more pressing problems.   
• Electrical. Have any electrical concerns been checked by a licensed electrician? If in doubt, pay for a written report. Electricians will provide a list of recommendations and/or a certificate attesting that they verified the installation and found it acceptable. Put this in your files just in case.
• The shell. If major repairs to the building’s shell are required, get estimates for a proper job. Figure out how you’re going to finance this work even if you can put it off for a few years.
• Other systems. If any of the building’s other systems (heating, AC, water heaters, etc.) show signs of inefficiency, have them checked so you can plan for what might happen if one of them decides to conk out.

Budget

Once you’ve determined your priorities, you can make a multi–year budget. The spending plan will allow you to save up through the winter so you’ll have money for expensive jobs that need doing over the summer—or vice versa.

Talk to the bank to obtain a line of credit with the lowest possible interest rate. You can sometimes get blindsided by expensive problems at the worst possible time. Avoid putting big expenses on a high-interest credit card when you’re in a pinch! Shop for a line of credit with a better rate before you actually need it. Banks are more likely to give you a better rate before you max out your cards or fall behind on payments.

Access to cheap credit is a kind of insurance policy. You don’t have to use it, and it costs you nothing if you don’t, but you’ll be very happy you have it when you find yourself in a tight spot.  

Revisit Regularly

Review your maintenance plan every quarter. Check off repairs that have been done and add any new issues that have come to light. A building is like a living organism. New issues appear as it ages. Cold, heat, pests and precipitation can cause different symptoms and weaknesses. 

Treat your investment as you would a patient of yours: keep his chart up to date and verify vital signs on a regular basis. This is the best way to make sure things don’t get out of hand and turn into full-blow diseases. 

Sample Maintenance Plan

The following is a copy of the maintenance schedule we use for our properties.  

Building Maintenance Schedule Date:_________________________

Property Address:____________________________________________________________________

• Immediate
• 6 months
• 1 year
• 2 years
• 3-5 years

Learn how to become an experienced and mindful landlord. Get your copy of The Mindful Landlord here.

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Should I Purchase A Single-Family Home?

When I talk to my younger clients, one question comes up over and over: should I buy a single-family home or a condo? 

 The path to Real Estate success involves turning some conventional wisdom on its head. One area that can require reassessment is home-ownership, especially for younger investors who may not have as much capital to play with.

So, is homeownership a sound investment?

The Question

To evaluate homeownership as an investment, we need to view it through the lens of capital deployment. We also need a unit of comparison. 

First, if we’re comparing purchasing a home (read: appreciating object) to spending money on consumer goods (or depreciating objects), it makes total sense to become a homeowner. So yes, homes—because they are appreciating assets—gain value over time. 

But, if we’re evaluating an owner-occupied single-family home as an investment vehicle, we’ll face a different financial analysis. We’ll need to compare a home to other types of passive income generators like a rental property.

1. Capital

As investors, we spend money or tie up capital to make a profit. That’s what a hard-earned bank balance is for. Deploy capital to generate the best returns. That’s the first law of investing. It’s actually the definition of the word “investing”.  

If your capital is the golden egg that will get you out of the rat race, are you sure it will mature properly if you place it to a condo or a residential property? The question shouldn’t be “Am I losing money on my single-family home?” It should be “How can I apply my hard-earned savings and capital to generate the most return?” 

To answer this question, you must calculate the rate of return on the cash you plug into a rental property, and compare it to what you save on rent plus appreciation on a single-family asset. This will give you two rates of return that you can evaluate side-by-side. 

Most people—when they think about owning a home—frame the mathematics of homeownership in terms of saving rent money. But they tend to forget about the golden rule of capital deployment. The golden rule is: spend money to make money or let your capital chase the highest returns. 

You mustn’t automatically assume that using your capital to save rent money is the best investment opportunity available to you. Seed capital must make a profit. If you take one expense—rent—off your balance sheet, will it truly open the door to financial freedom? 

You can find a sample calculation—of renting versus owning as an investment opportunity—in the Business Case section of my book.

2. Expenses

When calculating money “saved” on rent, don’t forget to factor in all the expenses that come with homeownership. Of course, there’s the mortgage. Payments are part principal (capital payments that decrease the overall loan amount), but initially, a lot of the payment is bank interest. 

Interest isn’t the only expense: homeownership comes with property taxes, the chimney sweeper, the insurance, the plumber, the exterminator, etc. Many homeowners like to do remodels and renovations. Because these upgrades generate no income, they are—in a sense—also expenses. 

Likely you will find homeownership, once you factor in covering all expenses, costs way more than paying rent.

To see P&L statements of renting versus owning as an investment opportunity check out the Business Case section of my book.

3. Tax Implications

There are tax implications to homeownership. When you own rental property, you can deduct mortgage interest as a business expense. All the renovations and maintenance are tax-deductible. Travel expenses, administration and home-office fees, part of your cellphone bill and accounting expenses—all tax-deductible. 

Wealthy people sometimes own rental property for tax planning! 

The same doesn’t hold for owner-occupied properties. Expenses associated with primary and secondary residences are not eligible for tax deductions. 

There is a capital gains exemption when you sell your single-family home (you do not have to pay tax on the appreciation of your property if you occupied it). The rental property comes with a tax liability that comes into existence at the time of sale: the capital gains tax. But this is akin to owning RRSPs (Registered Retirement Savings Plans). You accumulate wealth by investing for years and then when you cash in your investments, you pay tax. 

In Canada, capital gains tax is calculated on fifty percent of the appreciation. This boils down to a 25% flat tax on the appreciation of your rental properties. Depending on your tax bracket, it might be more advantageous to pay capital gains than to pay income tax! 

4. A Lifestyle Choice

Overall, home-ownership should be viewed as a lifestyle choice, not an investment. When you do the math, you’ll likely find better uses of capital than to park your nest egg in a single-family home. 

Should you buy a home then? The answer is, it depends on where you are in your investment journey. Once you have passive income streams and income-generating assets, why not splurge on lifestyle if you have extra capital lying around.

Mindful landlord’s advice: go through the exercise of evaluating return-on-investment before making a decision to purchase a home. You might be surprised! And at least you’ll be making an informed decision. 

Learn More

For a full detailed financial model that will help you compare the two scenarios—renting and owning as an investment opportunity—see the Case Study in my book.

Related articles:

Do’s and Don’t of Selecting an Agent

How‌ ‌to‌ ‌Find‌ ‌a‌ ‌Real‌ ‌Estate‌ ‌Agent‌ ‌that‌ ‌Adds‌ ‌Value‌

How to Manage Contractors When Investing in Real Estate

How to Make A Multi-Year Maintenance Plan For Your Buildings

5 Secrets of Effective Networking for Real Estate Investors

Should I Purchase A Single-Family Home?