Eyeing Better-Than-Market Returns? Avoid This Mistake

Eyeing Better-Than-Market Returns? Avoid This Mistake

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Those sexy numbers might be hiding something

Every year I encounter one or two new investors who want the best deal ever made in human history. He or she (but usually he) expects to buy a property with outstanding upside. For buckets under market value. The first time they do a deal. In a competitive market. The investor then proceeds to look properties farther and farther in the boonies, with bigger and bigger defects, and worse and worse tenants. Sound familiar? If so, here are a few words of advice to consider.
Risk & Reward
When you invest in stocks, your broker (should) mention risk tolerance. In stock investing, it’s common knowledge that high returns carry high risk. If you want a portfolio that offers ten plus percent return, you gotta be willing to deal with a downside. Read: you can make big returns, but you might take big losses.
Real estate is no different. Real estate markets – like other markets – operate according to baseline metrics (Cap rates, GRM, NRM, and so on). If you’re looking to beat these returns by a wide margin, chances are you’re heading for one of two not-so-great scenarios.
 
What’s Your Time Worth?
First, it’s possible that the time component is missing from your number crunching. Let me give you an example. A building full of studio apartments may show juicy returns on paper. On the ground, these returns aren’t quite so sexy. A property filled with small units may indeed generate lots of income. But, your turn-over rates will be bananas. Bad debt percentages on these kinds of properties are usually high. You’ll probably pay utility bills and perhaps have to maintain appliances. The tenants will call you more.
Basically, you or someone you pay will be spending time dealing with a high maintenance property and population. This will eat your on-paper gains. Certain types of properties are time-suckers. Learn what they are and avoid them. Or else make very sure you’re accounting for your time.
 
Banks & Insurance Companies Judge Risk Better Than You
Properties that show higher-than-average returns on paper can also be riskier. Small-unit properties like the one I mentioned carry higher fire- and water damage risks. This is why banks are more reticent to finance them, and why insurance is costly. In fact, take the banks and the insurers as a guide. What is expensive to insure or hard to finance is probably risky.
The same goes for buildings with commercial revenue. If a property has a good mix of commercial and residential tenants or even a good mix of commercial tenants, the risk may be mitigated. But, if a building looks profitable based on the occupancy of one commercial anchor tenant, you may want to watch out. With Amazon and the current trend in online retail as well as telecommuting, the market for commercial space is definitely in flux. Factor in that commercial tenancy is very sensitive to economic cycles and neighbourhood evolution. Also, when cash flow depends heavily on one commercial tenant, this indicates a high-risk scenario.
That’s why the bank demands higher interest rates, more information, personal guarantees and higher interest rates for commercial properties. Commercial insurance is more expensive. This is not robbery. Banks and insurers charge a premium because these kinds of investments are, statistically, riskier. Trust me, whatever calculations you’re making, the bank made them a long time ago. If they’re nervous, maybe you should be too! They’ve been in business longer…
Debbie Downer Does Investing
Don’t get me wrong. It’s very possible for beginners to make money investing in real estate, and even to find good deals once in a while. Simply, it’s important to be mindful of market realities and to factor risk and time into closing decisions. As your network and experience in the industry increase, so will your ability to discover and pounce on a great deal. Don’t let greed and Ego make the wrong decisions for you early on.
So, please go out and look for deals, but play safe!
Yours in property investing,
Terrie
2018 GUIDE TO MONTREAL REVENUE PROPERTY: Make 2018 your year !

2018 GUIDE TO MONTREAL REVENUE PROPERTY: Make 2018 your year !

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Want to invest in rental property in Montreal in 2018? Don’t miss this Meet-Up!

Terrie Schauer, rental property manager, runs a workshop that will help you outline your investment goals for 2018.

This workshop will show basic financial guidelines for identifying profitable investments. Terrie will share her insider’s market analysis of which areas are profitable, as well as price-points for making profitable investments (condos, small plexes).

Join us! Don’t forget to bring business cards and your notebook.

https://www.meetup.com/GROUPE-IMMOBILIER-MONTREAL-INVESTIR-GERER-RENTABILISER/events/246023549/

What's the biggest act of self-sabotage real estate investors make?

What’s the biggest act of self-sabotage real estate investors make?

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Dear Fledgling Real Estate Investor,

If you want to make positive cash flow buying rental property: please, please, please don’t shop for yourself!

Yours,
The Agent Who’ll Be Stuck Renting Your Overpriced Units

Let me describe one of the biggest acts of self-sabotage I witness when I work with beginner investors.

“Terrie, I want to buy an investment property.”

“Okay. Tell me.”

“I was thinking of a condo in ***insert over-priced, high-end neighborhood here***”

Watch as I hold my head. Housing, maybe more than any other business, is an emotional industry. I get it.

But, if you’re purchasing an investment property, it’s got to have positive cash flow, right? If you’re renovating a rental unit, it’s to maximize your return on investment or to protect it, no? Aesthetics has its place. Providing good, reliable services to your tenants are important. But be mindful of what makes economic sense and what is a matter of personal taste. You’d be surprised how many beginner investors struggle with this concept.

Let me give you my take on where this issue comes from. If you drive a Mercedes or let’s say, one of the old Volkswagen beetles, it might be difficult for you to imagine that anyone would want to drive a Toyota Camry. I get it. BUT which manufacturer sells more cars? Which car is easier and cheaper to maintain? Which producer will do better in a recession? Which car brand is more vulnerable when people start cutting back on luxury items?

You see where I’m going with this. When economic cycles take their toll on local economies, the one-bedroom for seven- or eight-hundred dollars stays rented. In fact, if this type of unit takes a price hit in a bad market, it’ll be a fifty-dollar hit. No so for the luxury two-thousand dollar a month loft in your oh-so-trendy neighbourhood.

The bread and butter of the residential tenancy markets are in middle-and-lower income areas. It stands to reason that higher-end rentals are in direct competition with the condo market. Whoops! The promoter decided to throw up another tower just as interest rates went up? You’ll have to keep your rent below what his prices are now. Lower end units don’t face this type of competition.

Also, your cash flow is directly related to the cost you pay per unit. What’s the cheapest condo you’d personally consider living in? Don’t like the ground floor? The busy street? That not-so-awesome graffitied neighbourhood. That’s fine! You don’t have to live there! The only thing that should interest you is how much someone else is willing to pay to live there.

For all we know, the owners of McDonald’s don’t like the Big Mac. The point is, enough people do, and the cost of manufacturing the sandwich leaves enough margin for the business to make money. You don’t have to want to live in your rental units. Your tenants do! That’s how you make an investment make cents.

Investment property is a business. Our success as investors depends on selling the right product to the right market. We need to be in the business of providing what the market wants, not in the business of creating something we personally would like, and then desperately trying to sell it to cover our overhead costs.

Think of that as you evaluate what type of investment property to buy.

Yours in investment,
Terrie

Local real estate prices too expensive

Local real estate prices too expensive? Here are come creative solutions…

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Shopping for real estate in Montreal’s Plateau Mont-Royal, the GTA, or BC can be frustrating. Markets in these areas present a challenge for first-timers and more experienced investors alike.

It’s hard to find properties that cash flow. Barriers to entry for a first purchase are about to take a step skyward. With changes planned to lend criteria early next year, many will see their buying power decrease. It may be tempting to throw up your hands and conclude you’ll never be able to get into the real estate game, or that your portfolio is doomed to stagnate at its current size.
Not so! Maybe it’s just time to get creative.
There may be answers outside your local market. Instead of plopping down 500k for a condo in the Plateau, why not consider a triplex in a less sexy part of Montreal? Duplexes and triplexes in areas like Mercier or Lachine go from 300k-450k. At this price, it’s possible to find properties that break even or have slightly positive cash flow. If you want to live in an overpriced area, why not consider renting? When you run numbers, you’ll be surprised how cost-effective renting may be.
Don’t forget: you pay your mortgage on a principal residence with after-tax dollars. Add to this the fact that interest paid on your private residence is not tax deductible. Now you’ve added tax burdens to compound already exaggerated real estate prices.
Worried that with Toronto prices you’ll never own property? A one bedroom condo in Montreal can go for 175-200k. With a property like this, well rented, you can cover your costs with pre-tax dollars. You can deduct interest as a business expense.

What to do about problem tenants?

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The most popular question my clients ask me is: “What can I do if I have problems with my tenants?”

This issue is so pressing in the minds of would-be investors that it’s the fear that prevents them from taking the plunge into the world of property investing. As a property manager and investment real estate broker, I’ve seen my share of problem-tenants! I have lots specific case-by-case advice for specific situations.

But… and it’s a big but… I’m going to answer this question without answering it!

Let me clarify with an analogy. If you own a nightclub, and you want to know: “What should I do if a fight breaks out?”

My answer would be: “Maybe you should hire a good bouncer so that problem-people don’t get in and start fights in the first place.”

My answer about problem tenants is the same. Instead of giving strategies to solve the million-and-one issues problem-tenants will create for you, limiting their access to your property. Manage problems by having rental practices that screen out the problem-tenants before they get a chance to cause problems!

This is the best advice I can give new investors, or investors hoping to build their portfolio.

Here are a few Do’s and Don’ts for winning tenant screening:

Do : 

  • Always always always do a credit check. This is the single most important piece of info you will get! If I had to, I would base my decisions solely on credit reports. People with bad credit don’t always end up not paying. With experience, I’ve learned, however, that they tend to be the authors of most tenancy-problems.
  • Always call the previous owner. Don’t just ask if the candidates paid on time. Ask about cleanliness, maintenance requests, politeness and any other issues.
  • Always call their employer. Find the phone number of HR online.
  • Always do a criminal background check and a check with your local rental board. Most rental boards have a platform on which you can consult decisions rendered under their jurisdiction. You’d be surprised :/ !!

Don’t :

  • Be fooled by a good first impression. Always, always do your due diligence when renting to people. Seeming nice for 15 minutes is easy. Living life responsibly, less so. You’ll be entering a long-term relationship with your future tenants. Don’t base your decision on a good first date!
  • Call the numbers given to you by the candidate on their application form. Look up employers online. Check that the name of the person the candidate gave as a present landlord matches the city information as to who owns the property. (This information is available online).
  • Be sweet-talked into accepting big deposits or additional months of rent to make up for bad credit. It might look seductive, but once that money is gone, you’ll still have questionable people in your unit.

When in doubt, consider hiring a realtor or a property manager to rent vacant units. They’re professionals at this and can save you a lot of headaches. My agency will even coach new owners through a first rental if they ask us.

Airbnb

Did you know Airbnb can be risky business?

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Thinking of Airbnbing your condo?

Maybe you’re already making extra money hosting guests for a few weekends.

Landlord beware! Here are a few risks to consider before choosing this business model:
  • More and more condo associations are forbidding Airbnb. Even if some continue to tolerate short-term rentals today, there is no guarantee that at the next association meeting co-owners won’t decide to ban the practice.
  • Insurance presents a serious risk. Even though Airbnb offers its landlords some type of insurance, you can be sure your home insurer won’t like short-term rentals. Most insurance companies require that landlords sign long-term leases with tenants (usually 1 year+). Your insurer may not know what kind of lease you have running at this very moment, but you can be sure that if something major goes wrong they’ll go digging. If you’ve been signing short-term leases and your policy forbids it, they may not cover damages. The same goes for your condo association. Co-properties have collective insurance. If something goes wrong with one of your rentals and the condo association gets involved, the building’s collective insurance may refuse to pay. You’d don’t even want to imagine the lawsuit here!
  • Most governments have laws governing rentals and the hotel industry. In Quebec, for example, the rental board requires a lease to be minimum 28 days to qualify as a falling under conventional rental laws. Below this number of days, you are considered a bed and breakfast. This requires special permits, taxes, and inspections. Bed-and-breakfasts also have to have special insurance and fire-code conformity. Although the risk here is relatively low; from what I know most areas don’t police this actively, there is nonetheless some risk.
  • Finally, consider this: insurance companies don’t want short-term renters because they consider the risk very high. This should be a loud warning message. Insurers calculate risk based on statistics of when things go wrong. As a property manager, my experience has confirmed these statistics. Bedbugs, neighbourhood disputes, broken furniture, holes in the walls, loud parties and angry neighbours are just a few examples of the more minor irritants I’ve observed often.
In projecting to the future, it may be wise to consider converting your Airbnb to a long-term rental. In the short term, this may hurt your pockets a bit. No one wants to hear this. But it’s better than building your business model on something shaky and borderline illegal.
Happy renting!
– Terrie Schauer, Rental Property Expert
Did you know you can ask tenants for a co-signer?

Did you know you can ask tenants for a co-signer?

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Your tenants filled out an application and you ran a credit check (hopefully). You have a good feeling about them (or maybe you don’t) and now it’s time to sign the lease…

Wait! Did you know asking for a consigner or a guarantor costs nothing? And it can save you big cash if things go wrong.
Having another person who is responsible for rent payment and potential damages is a huge plus, especially in cases where the candidates don’t have awesome credit, or when they’re young, at school or in some other kind of precarious financial position.

Here’s how you should proceed.

  • Inform applicants early in the application process that impeccable credit, references and sufficient income to pay the rent is necessary ***a “healthy” financial situation is one in which rent/housing expenses comprise 33% of gross income***
  • If any of these criteria are not met, inform the candidates that you’ll consider renting to them if they provide a consigner who meets these criteria.
Make sure you run your application on the consigner!

Now it’s time to add the consigner to the lease document.

  • Depending what type of lease you’re using, there may be an existing clause to add a consigner. If so, use it but make sure it contains some version of the following:
  • Person x (the consigner) agrees to act as a guarantor for person y (tenant) (and person z, and person w… if there are multiple persons on the lease) ; this is important because you don’t want a guarantor covering only part of the rent, in case, for example, one tenant doesn’t pay while the other does
  • Person x is jointly responsible for rent payment, damages, and any other expenses related to the occupation of the unit (remember your tenants may bring bugs, break things, cause problems for other residents). You want the guarantor responsible in all of these situations
  • “Person x shall remain as guarantor for this lease and any successive lease-renewal periods.” Most residential leases have automatic renewal clauses. Make sure the guarantor remains on the hook even if the lease prolongs itself automatically.
  • Finally, “All signatures on the lease are jointly responsible for payment of rent, any damages or any expenses related to occupancy”. Again, with this, you’re avoiding the famous “I’m only responsible for my part” argument.
Last but not least, make sure you get everyone’s details up front (social insurance number, permanent address, bank information). If ever things go wrong in the future, better to have a complete file should you need to pursue parties for damages, bank seizures and so on?