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The Starbucks Area

A little extra on location

 

In our most recent purchase, which is to be our new home in Burnaby, I told Dave I wanted a home in an area with a Starbucks factor. I don’t go to Starbucks everyday. In fact, I don’t even drink regular coffee. But, I do walk our dog everyday and I like to have places to walk to.

Starbucks AreaI have watched Starbucks pop up all over Calgary and Toronto, and they always choose the areas I would live in. It seems they pick the emerging or emerged trendy spots. Typically it’s a street with plenty of foot traffic, good shops and nice restaurants. All things I look for in a neighbourhood right now. (Recently, the Globe and Mail read my thoughts, and featured the Starbucks factor and how a new Starbucks impacts house prices in an area).

Starbucks area may not be what you are looking for in an investment property, but think about who your most likely or most desired renter is and think about what they would want in an area. If you are renting to young professionals like Dave and I, you may want to find the Starbucks area. If you are renting to families, look for close proximity to schools and grocery stores. If you are renting to students, being close to public transportation, entertainment and university/college would be beneficial. More on these considerations next month when we talk about evaluating your potential purchase.

Evaluating Your Real Estate Investment

How many properties can you afford if each one costs you $400/month?

To buy, or not to buy that real estate investment?

You have found your perfectly located property and are convinced it meets your goals. How do you know whether you should buy it? What if the rent is not enough to cover all of the expenses?

Many of the get rich quick books like Robert Allen’s Multiple Streams of Income or Russ Whitney’s no money down real estate courses are quick to focus on monthly cashflow. They preach that you must buy properties where the rent is high enough to cover mortgage, expenses and profit. We don’t disagree, but just as we have in the last three editions, we want to take you back to your goals before you rule out the ones that don’t have good cash flow.

When we moved to Toronto almost five years ago we bought a small condo in North York. Rents were higher than a mortgage, and we thought we would live there for awhile and rent it out. That is exactly what we did, but it costs us almost $400/month because the rent doesn’t cover the maintenance fees. Why haven’t we sold it? Right now, it still works for our goals.

In an ideal world you would find a real estate investment in a location that is right for you (as discussed last month) that will give you:

  1. Positive cash flow each month (you are taking in more money from rent than you are paying out in mortgage and expenses)
  2. High potential for appreciation over a five to ten year term (or sooner!)
  3. High level of liquidity (in other words, everything about the property is desirable and it wouldn’t be hard to sell in a hot or cold market).

Unfortunately, we don’t live in an ideal world and you will likely have to prioritize which ones you want based on what your short and long term goals are.*

Cash Flow

One of the most common methods of evaluating a purchase in commercial and residential real estate investment is cash flow. In commercial real estate you will often here everyone talk about the cap rates. In residential real estate a common one is the gross rent multiplier (GRM). To calculate GRM:

* Estimated (or known) rent x 12 months = Annual Rent
* Asking price (or what you plan to pay for it)
* GRM = Asking Price / Annual Rent.

For example, if your monthly rent is $1,000, and the asking price is $100,000 your GRM is:

$100,000 / $12,000 = 8.33.

The basic rule of thumb is that you need a GRM of 10 or less to have decent cashflow. This is based on the assumption that your operating expenses are less than 40% of your monthly rent. Operating expenses include your property manager, taxes, insurance, and maintenance and repairs. It also assumes that your financing costs do not exceed 60% of your monthly rental income.

Just to give you an idea of expenses, our properties average about 37% of our rental income each month for operating expenses.

Once you narrow down your list of potential investment properties, contact the listing realtor and obtain an income and expense sheet for the property or ask for actual receipts to determine the true expenses and possible rent of each property. Now, you will be more informed whether to continue looking at this property on a cashflow basis or you should move on.

If your goal is to find properties that will provide you monthly income, then you will need to focus on this method of evaluation. The two other considerations (appreciation and liquidity) should be less of a concern. If you are holding properties for the long term, and looking for ones that are less likely to cause you problems with tenants or repairs, then you are likely also going to be factoring in the other two evaluation criteria.

Potential Appreciation

It is difficult to evaluate appreciation potential as it is based on what happens in the future. There are ways to feel more confident in the potential of your property increasing in value though. For example, consider:

* Are more people moving into the area than out of the area?
* Are there new developments around? What about schools, stores and other services?
* Is there a shortage of land to build new homes?
* Are new roads being constructed? Is the economy in the area diverse and growing?
* Is it a Starbucks area? (from last month’s edition)
* Are people renovating and spending money on nice landscaping?

None of the above guarantees appreciation of a property, but if appreciation is a primary concern, you need to be mindful of these elements.

Liquidity of a Property

Many of the same factors that may help to identify properties that will appreciate are the same ones that will help you evaluate it’s potential liquidity. The objective here is to determine whether you could sell the property in a hot or cold market at a good price.

For us, liquidity is important, but comes in third because we make all our purchases with the intent of holding them for 5 – 10 years or more. In a long term hold situation, liquidity is less of an issue because you do not need to sell it in the short term, and can hold on to it in bad market conditions and wait for the cycle to return to one of strength.

How do you evaluate liquidity? Current market conditions will help you in the short term (how many listings there are on MLS relative to sales is one), but when trying to figure out liquidity in the future, you can consider:

  • Single family, detached homes are always more in demand than any other product, especially ones that are well taken care of,
  • Safe locations near parks, schools and shopping are in demand no matter what the market is doing,
  • Properties that are without extras that people do not need and will not pay for in hard times (pools, 3 car garages, large acreage).

Essentially, you want your property to appeal to the masses in order to ensure liquidity. If it is too unique or too specialized then your market is smaller, and therefore it will be much harder to sell in a market downturn.

Maybe you are tired of hearing it, but it all depends on your real estate investing goals what criteria are most important in your decision. If you only want one investment property and you want the most appreciation potential and least hassles, putting $400/month into it is not a bad thing. Especially if you are in a higher income tax bracket. You can write-off the mortgage interest as well as most of your investment property expenses (speak to your accountant). Furthermore, if your mortgage interest rate is reasonable (less than 6%), your tenant will be paying down a portion of the principal, helping you to build equity (which is our situation with the condo in North York). If you can’t afford to put a dime into the property each month, then you must find one that has good cashflow regardless of the other criteria.

July 16, 2006

Long Distance Real Estate Investing

It helps to have “Peeping Toms” 

Startled by the couple wandering around the yard, and looking in windows she decided to yell over to them and ask what they were doing. “Excuse me, are you looking for something?” she called as she watched the couple peak into the basement window. My parents replied, “Um, our daughter is considering buying this house, and she told us it was vacant and asked us to look around. She lives in Toronto, and needs to be sure this is a good investment”. Thankfully the neighbour believed my parents, and was kind enough to tell them more about the area, but it could have ended a little differently had the neighbour just called the police on my peeping parents!

Unable to find anything that met our goals in Toronto, we began searching for a property in Vancouver or Nanaimo to invest in.

Vancouver turned out to be a bigger financial committment than we were prepared to make at that time, so we eventually focused on Nanaimo. We found a place, put in an offer, negotiated the deal and closed on our purchase from Toronto. I did not see the property before we bought it. In fact, we have had it for almost a year, and I still have not seen the property.

How did we do this? First of all, Dave grew up in Nanaimo and knows it very well. This is the fourth property we have bought in Nanaimo (fifth if you count the one Dave bought with his mom many years ago), and we have a very reliable and trustworthy real estate agent and property manager, Lindsay Widsten. Dave kept in close contact with Lindsay, and kept his eye on MLS listings to spot opportunities.

Second, we both have family in and around Nanaimo. Dave’s Mom did the initial walk through with Lindsay when the opportunity arose. She sent us photos and described it to us in detail. My parents went over on a different day, and walked around the block and peaked in the windows.

There is not much you can’t do over fax, phone and email these days. All our negotiations were done via Lindsay over the fax and phone. We had our lawyer here notarize our signatures on the purchase, with another lawyer in BC acting on our behalf for the purchase. We used the same fantastic mortgage broker in BC, Cindy Faulkner, who has convinced many lenders to loan us money at great rates. Finally, we had Lindsay rent it out and manage it for us.

It helps to have the right resources, and to have some knowledge of an area to make a purchase. It definitely makes it more comfortable. And, if you don’t need to see your investment on a regular basis then it’s definitely worth looking in other locations to find your investments. It gives you more flexibility, and may diversify your risk of market crashes because those are often very geographically focused.

Published June 16, 2006

Worth Checking out for a Canadian Perspective:

 

Real Estate Investing Is Still About Location, Location, Location

Think location doesn’t matter in real estate investing? Location impacts the rents you can get, the tenants you attract, and the problems you can encounter. It also impacts the appreciation of your property and the opportunities you may have in the future.

Ozzie Jurock tells his readers to Forget about Location, Location, Location that it’s actually about value, value, value. Other experts have said to buy the worst house on a block regardless of where that block is located. We think it’s best to combine the search for value with the search for a location that will help you achieve your goals.

It’s still about location, location, location! Finding the location that is right for you and your goals

would rather own a well built home that requires little to no work in a slightly rougher area, then the worst built home in a good neighbourhood. That doesn’t mean location isn’t important, it just means location isn’t everything in a purchase.

Last month we went over why knowing your real estate investing goals is a key step before choosing and locating your property type, and this month those same goals will come into play as you consider location for your investment.

If your goal is to “flip” a property (buy it cheap, renovate it, and resell) then you really do want to find that beat up house in a great neighbourhood. If your goal is to have a lower maintenance property that will attract good tenants, appreciate over the years, and you aren’t as worried about the amount you have to invest today, then you are looking for a great location and a good house. If you want good cashflow without putting much money down, you are likely going to have to look in the lower demand areas to find the motivated sellers.

You see how goals are important in your choice of location? Your personality and risk tolerance also come into play. If you need to see your real estate investment on a regular basis then you will want to look in your neighbourhood. If you prefer not to be involved at all, then you may want something further away from you.

If you aren’t sure where to look to find the properties that meet your goals, it’s time to begin your research. If there is one thing I know, it is researching real estate. Another day we can talk about my addiction to the Multiple Listing Service (Realtor.com and Realtor.ca), but for nowhere is how I find properties to buy:

  1. Go to open houses (usually 2 – 4pm on Saturday and/or Sunday)
  2. Look at local listings in your newspaper and at MLS or CLS (for more than four units)
  3. Drive by your desired areas regularily, or better, go for walks along the streets you want to buy on
  4. Speak to neighbours (walk by on a sunny day and people will be in their yards) or ask questions of the agents at the open houses.

Once you determine what properties are selling for and if they are within your price range and goal objectives, your next task is to figure out rents. To do this I usually:

  1. Browse online classifieds offered by newspapers across the country
  2. Review Viewit.ca on a regular basis as they take photos of each listing as part of their service
  3. Read CMHC published information
  4. Speak to the real estate agents at open houses and ask them what they think their listing would get in rent, and ask about other properties in the area.

Quickly you will identify areas where you can buy something and rent it out at prices that meet your goals. And, if you have done your research well, you will be able to act quickly and confidently on opportunities when they do arise. You also may be able to grab them before they get on the market, like we did in our most recent purchase in Vancouver. We have to save some stories though, so I will tell you more about that another month.

Now, you have found your location, and maybe you have even been lucky enough to find a property that meets your goals. Are you sure it is the right one?

June 15, 2006

Worth Checking out for a Canadian Perspective:

 

No Money Down Real Estate Deals

Manslaughter & a Crack House: No Money Down Real Estate Deals

No money down“, “100% Annual ROI”, and “Positive cashflow” are all catch phrases commonly used by real estate investment gurus. It’s hard not to get wrapped up in the hype. I certainly did. After participating in some investment seminars and reading several no money down books, I decided to go after my dream of quitting my job by age 35.

Find foreclosures in your area - Free TrialFrom what I learned, it seemed the only way to do this was to buy several positive cash flow properties with little or no money down. After some searching, I was able to find two of these “gems” in Las Vegas North; Niagara Falls, Ontario. I bought a total of nine units for about $5000 of my own cash.

I have now learned there is usually a reason that you can buy a property for no money down. It is because no one else wants it!

The first clue that these properties were not a real bargain should have been when the only one who would manage them was a shifty character I’ll call Bob. I became aware of Bob through the seller of the property.

To begin with there was an occasional fire code issue and frequent police presence on the property. And, of course, my tenants always paid in cash which made it easy for Bob to skim some extra for himself. These issues were small compared to what I would face though.

The real problems began when Bob killed a tenant in another property. In an altercation where the victim was harassing other tenants, Bob delivered what ultimately was a fatal punch to the head. The death of this person sent Bob into a drug induced pit of depression. He slowly turned one of my properties into a crack house, while letting everything run into the ground at the other.

All of the crack use and prostitution in the buildings attracted the attention of the fire department. Several substantial orders against each property were filed, and $25,000 later (including a $5000 court fine) I am finally in the clear with the violations.

No money down, doesn’t mean it won’t cost you!

Properties such as this can make you decent positive cashflow, but they are very stressful. You also need an outstanding hands-on property manager, and access to a lot of cash. Property issues often arise because of tenant abuse and property defects.

We both have very busy full time jobs and several other properties to oversee. Having a run down stressful building was not a good fit for our goals, even if there was sometimes positive cashflow.

We are no longer completely focused on cashflow, and let’s face it, 35 isn’t too far away. I am not going to be quitting work just yet.

We want the numbers to make sense, but that isn’t the only factor we consider in our purchases. We now look for properties in good or improving locations that have features that will make them easy to rent, easy to resell and that we can proudly say we own. These properties aren’t on every street, and it takes more money to buy them, but it is a property type we can handle.

Published:May 15, 2006

Real Estate Investing Goals

Last edition we talked about whether investing in real estate is right for you. Assuming you’ve decided it is, then the next consideration is what are your real estate investing goals. When we bought our first two properties we were quitting our jobs to move to Toronto from BC. I was going to do my MBA and Dave was going to find a new job. My goal was to make my money work for me while I was in school.

Why is it so important to know what your real estate investing goals are? In order to figure out what type of property you are looking for you will need to know what exactly you want to get from real estate investing. Are you looking for monthly positive cashflow, longterm appreciation and equity building, or a combination? Are you interested in investing for the long term or the short term? How much time do you have and what is your risk tolerance?

Before you can determine your property type, it’s necessary to assess your current financial state and understand what you are trying to achieve and what is possible.

Your Five Year Plan – Goal Setting

This is a technique we use over and over. Sit down right now and write down:

  1. Where you want to be financially in five years (be specific, for example do you want to be earning $100,000/year in your job, own two properties that are giving you $500/month in positive income, and have $20,000 in RRSPs)?
  2. What can you do in the next 12 months to achieve each of the above items (once again, be specific and try and make the items measurable)?
  3. What can you do in the next six months to move towards your 12 month goals?
  4. What must you achieve this month to move towards your 6 and 12 month goals?
  5. Review these goals regularly. We used to do it monthly, but now we just do it quarterly. Find what works for you, and stick with it.

We will leave how to achieve your goals aside for now, and just focus on finding a property type to help you move forward in your real estate goals. Some initial considerations before you begin a property search:

  • Will you live in one of the rental units or will you be an absentee landlord?
  • Do you have any savings to use for the purchase (or can you use your RRSP’s as part of the first time Home Buyer’s Plan)?
  • What size of mortgage can you qualify for?
  • What is your risk tolerance?
  • How much spare time do you have to devote to the property?
  • Do you have any construction/renovation knowledge (or know somebody that does)?
  • Will you manage the property yourself, or will you hire a property manager?
  • Can you afford to supplement the property monthly if necessary?

Think carefully about your answers, as each one has an impact on your choice of property. For now, let’s focus on the very first decision: Living in the building with your rental unit or being an absentee landlord.

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