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Six Ways to Increase the Cashflow on a Rental Property

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You have found a GREAT property in your target market area. It fits all of your criteria but the cashflow numbers are tight … should you walk away? Or, is there something you can do to increase the cashflow and make the property work for you?

While we would never recommend you buy any property without positive cashflow, there are times when you may want to buy a property that is tight.

For us, we have a couple of properties that we bought for such a great price, knowing that they’d be high value properties in the future, that we were ok with the fact that the cashflow was tight. We also have one property that we bought with plans to develop it in the future. It barely cashflows but we have future plans for it that would boost it’s value and it’s income.

It’s not ideal to have an entire portfolio of properties that are like that because it guarantees you’ll be pulling money out of your pocket to pay for repairs and upgrades in the future. Certainly for us, it really only works because it is just a few properties in our portfolio that are like that. But, you might be in a market where tight cashflow is the norm and you’re just finding ways to make it work … or you might be faced with opportunities to buy massively under market value or hold for development like we have found in the past.

Whatever the reason you’re considering a tight cashflow property, you do have a few options to improve your situation and increase the cashflow right from the start. (And if you’re not sure how to calculate your cashflow … start here and then come back to this).

Here are six suggestions to increase the cashflow on a rental property:

1. Increasing Rents

It might seem obvious but a lot of times tenants haven’t had an increase in their rent in quite awhile. If the tenants are paying under market rents, you might have the option of raising their rents. Of course, if you’re in a province with rent controls, or the rent has already been increased recently, this might not be an option.

Even if you can do it, keep in mind that a large increase may cause them to move out, or just be unhappy tenants that damage your property.

2. Add Income from Other Sources

Things like adding storage, parking and even selling advertising space can be used to increase rents, add a new rental stream or just reduce expenses. We have a few coaching clients who put solar panels on the home for an additional income source as well. Sometimes a little creativity goes a long way.

3. Pay Less for the Property

One of the conditions we put on every offer is that the deal is subject to an inspection. This means the vendor has to give us access to the property within a reasonable amount of time to complete an inspection.

What that inspection reveals can be used as leverage to reduce the purchase price. Basically, if the inspector comes back and tells you that the roof needs replacing or that the wiring is outdated, you can go back to the vendor and ask for a price reduction because of the work you are going to have to do. Sometimes the vendor will offer to get the work done, but our preference would ALWAYS be to get it done ourselves.

Think about it—the vendor could hire their Uncle Joe to do the roof. If it starts leaking in six months, they aren’t living there anymore. But, if you get the roof replaced and it starts leaking you can chase down the company that did it and get it fixed.

As long as what comes back from the inspector is not something that makes you want to walk away from the deal, then you can use it to reduce the purchase price. Of course, if you’re in a hot market, opening the deal back up because of something that came up on the inspection may not be a wise move. You could lose the deal to someone who is happy to pay what you’re paying, even with the issues.

4. Reduce Other Expenses

Your biggest cost relates to your financing. Spend the time to research your options and find the best financing options available to you. Lower rate and longer amortization periods will increase the cashflow. Beyond that, simple things that reduce maintenance costs or energy costs if you pay them will all save you money over the long term. While you likely won’t be able to charge the utilities to your tenants if they are not currently paying for them (as per their Lease), when their lease comes due or you place new tenants, put in your Lease Agreement that the tenant(s) is responsible for heat and hydro/electricity. You may have to drop your rent a tiny bit to do this, but then you no longer have to worry about expensive heating costs in the winter as your tenants will have to pay!

5. Put Up a Larger Down Payment

It’s not always an easy solution for many investors, but one of the options to boost your cashflow is to increase the amount of money you put down because it reduces your financing costs. High ratio mortgages also have a lot of additional fees associated with them, so getting out of that category saves a lot of money each month right from the start.

6. Allow Pets

I know I know, pets can cause damage and problems and pee on your new carpet. Yes, it can cost you. I discussed my take on whether you should make your rental pet friendly right here. But, if you are very selective about who your tenants are and you include in your Lease Agreement that they are responsible for keeping the premises inside and outside of your rental unit in good condition, then this is a great way to increase rent and/or cashflow.

MOST apartment buildings don’t allow pets (or they restrict the size of pet) and only a small percentage of Landlord’s out there allow pets. So, how does that help you increase your cashflow? Because you are providing a service (allowing pets) that is in great demand and tenants with pets are generally willing to pay more to keep their loyal companions with them!

It’s easy to let fear or excitement guide you when you’re investing. This list is not to suggest that you should buy very many properties where cashflow is negative or even tight. That’s a losing strategy over time because the fact is, even cashflow positive properties sometimes need you to spend money on them. As I wrote about in More than Cashflow, all houses will need work … and the longer you hold them, the more work they need. Single family homes are a great investment because of the liquidity, the mortgage pay down which builds your wealth and, over time, the appreciation. However, you will eventually need to put money into them so you don’t want to buy one that needs feeding right from the start. But, at least with this list, you have a few more options to make it cashflow from the first day you own it.

Not sure where to start to find or analyze your deals? Summer School – taking you from Rookie to Rock Solid Real Estate Investor in 7 Weeks Flat is a great way to get started as a real estate investor.

 

Renting Out Your House: How to Live for Cheap (er)

counting coins

Looking for a way to buy a home to live in without having to carry a giant mortgage on your own income? Buy a multi-unit property like a duplex, triplex or fourplex and move into one of the units. A well chosen property can find you living in a much better area than you could have afforded otherwise and paying a lot less “rent” than you would have otherwise done.

We did this in Toronto for a few years. We moved into a three-unit property that we owned. Our friends moved into the top floor; we lived on the main floor; and we rented out the basement to some university students.

The key benefits:

  • We did live for cheap. Our “rent” was substantially lower than it would have been if we had rented the same property;
  • Parts of our home expenses were a tax write–off, thanks to the rental income;
  • We got to live in the very desirable Little Italy area of Toronto, only minutes from a subway stop. We were also right across the street from a large off-leash dog park (which our dog Bram would stare at longingly as he sat in front of the window.)

The money we saved went towards some of our other investments, paying down student loans, and renovating this property to increase it’s value and generate more rent in the future.

It’s a great way to get into the rental market business, build your wealth and reduce your personal living costs. You’re also able to keep a really close eye on your rental and take better care of any issues that may arise.

The major drawback of living in your multiple unit rental is that the burden of managing the property and dealing with the tenants. Tenant selection is just as critical when you, the owner and landlord, are going to be living on site.

When we first moved in, we didn’t select our tenants so carefully in the tri-plex and the lessons we learned the hard way became one of the founding reasons we started Rev N You and I wrote More than Cashflow. We created a lot of problems for ourselves that were preventable!

While we were living in this property, our tenants in the basement were constantly fighting. We were often being called in to play referee until one morning at 3 a.m. it all came to a climax when one of the basement tenants pulled out a butter knife and threatened her roommate with it. The tenant without the knife was terrified, called the police, and moved out in the morning.

The knife wielding tenant stayed in our basement for two months after this but stopped paying rent. Imagine the joy we felt living above an unstable tenant who also wasn’t paying rent.

And worse for us was the fact that we could have avoided all of this by making better tenant choices.

The point here is to let you know that there are tremendous advantages and disadvantages to living in your investment property while renting out the other units to tenants. It is a great way to live for less and possibly enjoy a better home or area than you can otherwise afford. Nevertheless, as noted in the above, small residential properties with two, three or four units are a great option to consider.

Canadians – word of caution for your taxes when you use this strategy:

If you do decide to live in a property that has been a rental or will be a rental for you and you decide to call it your primary residence to avoid paying capital gains taxes on the value increase that takes place while you live there, you cannot depreciate it when it’s a rental only. If you do depreciate it, you can’t claim it to be capital gains exempt, even for the period that it was your primary residence. Plus you want to get clear on what you can and should write off, and how you can determine values for when it’s your own home versus a rental. A few hundred dollars spent on good advice could save you thousands in taxes.

 

 

Handling Tenants Who Break Their Lease & Other Tenant Issues

Dave speaking

Here’s some advice on the prevention side of things … simple strategy for screening and picking the best possible tenants.

The laws are different in every province and every state, so you have to look up your specific area but this will be a good general guide for most landlords.

“Well, we’ll just give him a few more minutes to show up,” the judge on the telephone line said.

We were waiting for our tenant to come onto our scheduled dispute resolution hearing (a conference call with the “judge”, the tenant, and the landlord) so he could defend his side of the story. We’d asked for an order of possession for our property because he was a month behind in his rent payments and had been paying a month late for a couple of months now.

To get this far, we had to issue several notices, provide multiple documents to the residential tenancy branch to prove he was behind on rent, and we had to prove that we had served him all the documents. This can be done in several ways, but in our case we’d chosen to send the final notice of the hearing by registered mail after posting several documents on his door.

It’s a lot of work to file all of this paperwork. There is also a filing fee of $50.

The judge put us on hold, to presumably call the tenant. If we had not showed up, the ruling would have been in favour of the tenant but it doesn’t work that way when the tenant doesn’t show. They make every effort to get him on the phone and look for ANY evidence that the tenant didn’t know or wants to dispute the notice.

Our tenant clearly did not answer his phone as the judge came back on and said “Ok well I guess we’ll begin.”

The judge then reviewed in detail whether we had given the tenant proper notification of the hearing. He went through the facts of the case next. It felt like he was asking us questions purposely designed to trip us up. For example, we had dated the receipt of rent payment but not noted what MONTH that rent was for. The judge questioned repeatedly why we did it that way and whether it was for the current month or the past month’s rent because it was clearly paid in time if it was for this month. We started to worry that the little mistake of omitting the month of rent that payment was for on the receipt was going to cost us the judgement.

All onus is on you Mr. or Mrs. Landlord.

If you’ve never had to take an issue to a hearing or a court – just know that you must prove everything and, in BC anyway, the judge looks for any reason to rule in the tenant’s favour.  In the end, the judge reluctantly admitted our case was pretty clear and gave us the right to ask for an order of possession. Now we had to wait two weeks so we can issue an eviction notice. It hardly felt like a victory, but it was what we wanted.

It was a  better result than the last time we had a hearing. Our tenants broke their lease and we lost several thousand dollars as we had to do some work to the property to repair their damage and we lost rental revenue. Despite the fact that they were breaking their lease and had a rent cheque that bounced, we weren’t allowed to keep a penny of their rental deposit. I’ll tell you more about that in a minute.

Bottom line, prevention is the best way to handle tenant troubles.

I’ve written a lot of articles to help you find the best tenants for your properties and below is a video on one of the ways we screen our tenants, but today I want to help you by informing you as to some of the most important things you can do to cover your butt in case you ever do have to try to win a judgement.

If a tenant is moving out – ALWAYS get notice in writing.

Verbal or text message is not enough. Get it handwritten on a piece of paper with their signature or at the very least in an email. Ideally, use the forms provided by the landlord tenant board for your area.

Which brings me to an important second point:

Use the Proper Notification Forms for Your Province (or State) AND Get Proof

If you have ANY issues with a tenant regarding violations in their lease, communicate this violation over the phone or in person and follow up with the EXACT notification that you are supposed to give (the notices vary by province and state and what notice to give for what violation). Make sure you have reviewed when you give what notice. Timing of notice is very important.

If you deliver a notification to a tenant and they are not home, in many cases you can leave it taped to their door. HOWEVER, you MUST have proof that you did this. Proof can be a witness who will sign off saying they were there with you or a time stamped photograph. It wouldn’t hurt to have both.

Finally, if you are dealing with a broken lease, the onus is on you to minimize your damages.

Begin advertising the property AS SOON as you get notice. PDF and save copies of any online ads. Take time stamped photos of any signs you put up or any flyers you put out. And if you put ads in the paper, keep copies of the paper. You have to prove that you made EVERY effort to rent the property.

It doesn’t matter if a tenant violates the lease six different ways – it’s 100% your responsibility to prove that you did everything you could to reduce the damages. And, it’s 100% your responsibility to follow the residential tenancy act rules. The tenants aren’t really expected to know the law, but you are.

It’s not fair, but there is no point getting upset about that fact. It is what it is. Just be prepared!

Keep records of every communication in a tenant file.

Note calls (times and dates and subject). Save text messages (take screen shot photos of your text messages). Give receipts for rent paid, if it’s paid in cash. If it’s not paid in cash, be able to show where it was deposited (here’s where it’s really helpful to have one bank account per property). If you have two units in the same property that collect the same amount of rent you’ll need additional proof to show who paid what rent – so keep receipts of e-transfers or pictures of the cheques or issue receipts.

If you think something will be important to note, then make the effort to note it with proof.

Here’s the good news. In almost 13 years of being rental property owners and having close to 300 different tenants, we’ve had 3 issues that led us to a hearing of some kind. That’s not that bad. Think about it … that is 1% of the time!

So don’t let this freak you out … but do let it inform you to know your local laws and if there are any issues (noise complaints, pets not approved, added occupants, late rent, bounced cheques …) make sure you document the issue and serve the appropriate notices just in case it ever gets to the point where you have to fight for cash or defend yourself in court. Also find out what you can and can’t add to your lease.

The Case We Lost

In that case we lost that I mentioned above, our biggest problem was because Dave was trying to be compassionate for the tenants’ situation. He tried to work with them too much and didn’t follow the actual letter of the law until we saw there was a big problem.

The two biggest issues were in not forcing them to put their notice in writing (they text messaged us their notice but it had ambiguity) AND we didn’t use proper notification forms from the beginning when the rent bounced, the lease was being broken and other issues arose. Because we didn’t follow the rules on little things, we were unable to win a judgement for the big things. Plus, we didn’t have a clause in our lease saying we were entitled to claim liquidated damages for a broken lease. We’ve since added it to every single lease and you might want to as well if you’re allowed in your area. Basically put it in your Lease or Tenancy Agreement that if they break the lease (by moving out earlier than the term states), that you have to right to charge Liquidated Damages. The amount has to be reasonable  – probably somewhere around $300-500. It won’t guarantee you will get it, but have it in the lease so you can argue for it if they break the lease. The judge won’t give it to you if you didn’t put it in writing to begin with!

Hope you never have to find out how important this is -but if you do – at least you’re ready!

 


More Than Cashflow BookIf you want more help on picking great tenants for your property, grab a copy of More than Cashflow. There’s an entire chapter dedicated to finding great tenants – plus the whole book will help you understand why you get bad tenants and how to prevent them.

 

How to Choose Your Real Estate Investment Market: Two Factors Nobody Talks About

Choosing a Real Estate Investment MarketOne of the biggest stumbling blocks for real estate investors (new and experienced) is where to invest. What market will be the ideal location for the next investment property purchase?

At one point in our business we owned property in six different cities across Canada. We had property in Ontario and in BC. It sounded cool to say that we owned property in so many different cities, but the reality was less than impressive as we were forced to rely on our teams very heavily. Traveling to solve problems or hire new team members was expensive and time consuming.

Real estate was supposed to create freedom and wealth for us, not cost us a fortune, stress us out and suck up all our time.

That’s why picking your market is a CRITICAL step in the process of becoming a real estate investor. But, because I am coming at this from a perspective of doing real estate deals that make sense for the life you want to live not just financial sense, this video contains two factors nobody else really talks about when it comes to choosing your real estate investment market.

I’m not suggesting you invest in towns that are shrinking nor am I saying that you have to find a $1.2 million dollar Vancouver house that will cashflow (it’s kind of hard to do that…). I am just giving you a few additional factors to think about that are more important than economic fundamentals when it comes to thinking about YOU, your family, and your goals as you build your real estate investment empire.

You might also be interested in these real estate investing articles:

>> How to Find a Great Real Estate Investment Deals

>> How to Double Your Money with Real Estate every Year

>>Housing Bubble? Housing Slump? Housing Recovery? How to Tell

 

The Many Challenges with Renovation Projects – Adding a Legal Suite

I am a little embarrassed to admit it, but this project has been a GIANT pain in my butt.

I’m not a brand new renovator. In fact, I can’t even count how many kitchens, bathrooms and other parts of a house we’ve renovated since we started buying rental properties in 2001. It’s in the double digits. So I should be able to run a smooth operation … and if I had been documenting the last couple of projects for you, I would have had very little lessons to share. They went extremely smoothly with on time and on budget delivery and minimal hassles.

This project is not going nearly as well.

Every time I go to the house where we’re adding a legal suite (which these days is daily – and you’ll see why in the second video I have for you today), I find something that makes me say very bad words.

On the bright side, we’re on time completely with the one unit and only a few days behind on the other. I’ve had to eliminate some updates I wanted to do from my plans, but with those cut out, I’m not far off my budget either. So it’s not a failure, it’s just been irritating. For you, however, it’s been a great one to learn some things to hopefully save you time, money and annoyance on your renovation projects.

If you watch no other videos than these ones in my weekly series on Adding a Legal Suite, you’ll learn a few of the big lessons I’ve (re)learned in this project. Enjoy!

Week 8 of Adding a Legal Suite – Want to save lots of money? Buy your materials on sale … but beware!

 

Week 9 of Adding a Legal Suite – Not ready to check in on your project every day? Then a big renovation project probably isn’t for you.


Coming up in the next two weeks we’re cleaning and getting the units ready to show to prospective tenants.

At the same time as I am doing all of that, Dave is getting things organized to finance the property with a bank so we can pull all the cash out (or most of it!). In one of the earlier videos I explained that the key strategy we use to fund these renovations is to buy with cash and finance out once the renovation is complete.

Rental Property Portfolio ABCs

ABC of Rental Property PortfoliosEver sit down and look at what you own in your rental property portfolio today? Even if you only have two properties and one of them is your own home. Do you ever sit down and think about what you’ve got and whether those assets are moving you closer or further from your goals?

Dave does this on a regular basis. I call it ‘dances with spreadsheets’ as he reviews the cash flow and the values on each of the properties we own. I do it in a less formal way but I still look at what we own and think about whether each asset is properly performing it’s role in our greater plan.

It was during one of my informal reviews that I realized one the properties we’ve held for five years is not doing it’s job. It’s not generating positive cash flow and it’s not part of a greater plan to redevelop. It’s just making us money through the mortgage pay down and it’s slightly increased value.

We bought it by refinancing another property so we have been more forgiving of it. I mean, it didn’t cost us any money out of our own pocket and it’s still building our wealth at a steady pace so it hasn’t been a bad purchase.

BUT this particular property hovers around neutral cash flow on a monthly basis which really means it is costing us money each year because any additional repairs (like the painting we will have to do when the tenants move out or the fence we have to repair because it’s falling apart) come out of our pocket.

Spending a bit of money here and there on this place didn’t bother me in the past because I had a great paying job. The repairs were a tax write off, and the tenants were paying down my mortgage so I was still ahead. This property hadn’t cost us a single penny to buy and we’ve probably only put $5,000 into the property over the five years we’ve owned it, so we’re still making a great profit on this property. And, it’s in a great area that makes it easy to rent out. I was holding it for the long term so I didn’t really worry about it too much as long as it was rented. But, times have changed and we live off the money we make from our rental properties so cash flow is far more important to me today.
Julie at MOMAR thinking About rental property portfoliosAnd refining our portfolio to squeeze out the maximum amount of cash flow and wealth creation possible is my full time job … so I want to do better with every property. This was my focus when I was doing the informal portfolio review. (By the way … I call it an informal review because I usually think hard about things like this while running or walking the dog. When I am done thinking about it I discuss it with Dave who can back up or counter my thoughts with the real numbers and together we’ll make the final decision).

My latest informal review of our portfolio made me think of the advice my friend John Marsh shared with me recently. He said:

Take a look at your portfolio and label each property as either A, B or C. Figure out a way to turn your B’s to A’s and then sell your C’s.”

And when I thought about it in this way, it was clear to me that this property is a solid B.

The home is conveniently located to shopping and good schools. It’s very central to everything in this city. There are always tenants that want to live in the property and the area is stable economically. House prices went down a bit in late 2008 and early 2009, but they’ve recovered and are on their way up again. It creates more wealth for us than it costs us money but overall it’s not putting any cash in our pocket today. It’s not a money pit but it’s also not a cash cow which is why I would call it a solid B property.

John is a real estate investor and businessman in Alabama. He has a restoration company called Historic Possibilities where he specializes in moving and restoring historic buildings to the beautiful state they once were in. He’s really revitalizing his town one house at a time, and he loves what he’s doing! I hear it in his voice every time we speak. And with years and years of real estate investing experience under his belt and some fabulous mentors helping along the way, John has some fabulous stories and wisdom to share.

So John’s advice was running through my mind as I was thinking about our portfolio. I realized that we only have a couple of C’s but we’re keeping those for now as we plan to redevelop the land they are on at some point in the future. Beyond that I would classify all our other properties as A’s except this one.

Turning The B Property into an A+

As of Tuesday that all changed. We have turned our solid B into an A+.

Smiling Rental Property PortfolioOn Tuesday Dave deposited a bank draft for $10,000 and starting in July we’ll begin collecting so much rent from this property that we’ll be banking $700 in cash flow profit each and every month.

So what did we do? Well, basically we decided to turn this property into a rent to own! And we were totally overwhelmed with the response. Like I said, this property is in a great location. It’s a very high demand area. We actually had a wait list of qualified applicants without even showing the property to a single person! We were blown away.

What we uncovered by simply trying to find a way to turn our B property into an A was a crowd of starving people desperate to get into a rent to own program for a home in this specific area. Many of the folks we’ve talked to already rent nearby, work close by and have kids in the schools that are walking distance from this home. They want to live in this area but can’t get financing from a bank to buy. Some of the folks anxiously waiting for a home in this area include:

  • A young couple with a 4 year old son with good jobs but one person in the couple has horrible credit because they cosigned for a loan for a family member and the family member defaulted on the loan;
  • A family from Nigeria that has only been in Canada 9 months and hasn’t established their credit yet;
  • A couple going through divorces with assets tangled up in the divorce and very little cash for a down payment;
  • A single mom with credit issues coming from her divorce.

Now with our B property safely positioned as an A, we can focus on buying more properties in this area! And, while we’re doing that we’ll be carefully reviewing our portfolio every couple of months to make sure the A’s are still A’s.

If you have rental properties today … take a look at your portfolio and figure out where you can improve your holdings. If you’re holding B’s figure out a way to turn them into A’s. If you can’t turn them into A’s you should consider selling them. And if you’re holding C’s consider selling them so you can buy A’s instead.

It’s as simple as ABC … :)

ABC Image Credit: ©Limbi007 |Dreamstime.com

Smiling Face Image Credit: ©Kuzmichevdmitry |Dreamstime.com

Published May 27, 2010

Four Ways to Check Reality Before Buying a Rental Property

Checking Reality and Making Money with Rental Property I almost missed out on making $120,000 – o.k. it’s actually $60,000 because we bought the property with a partner … but, it’s still a lot of money!

You see, my husband Dave took me to see this rental property he wanted to buy, and even though we could buy it without spending a penny of our own money, I didn’t really want it. You’ve likely read some of our horror rental property stories by now … I didn’t want to buy another pain in the butt property.

The property looked more like a tool shed than a house. I had visions of constant repairs and never ending tenant troubles. Why would I want to own this? But, Dave told me to do a reality check – there were a lot of reasons to like this deal.
Four years later, that property has more than doubled in value, the rent has covered all of the costs so we’ve yet to put a single dime into it and we own a large chunk of land in an emerging area.
When it comes to making money buying rental properties it’s easy to get thrown off by the appearance of a property, your emotions or what the media is saying. Here are 4 ways to check reality:
Reality Check One: Who is Your Target Market?
I couldn’t imagine myself living in that little shack – but I was not the target market for that rental. The tenant that lives in that house loves the large yard. He doesn’t mind the exterior appearance because it’s cozy inside and the rent is cheap for the privacy and space he gets. If the property is a good fit for the target market don’t worry about whether you would live there or not.
Reality Check Two: Are You Emotionally Involved?
Emotions weren’t involved in this purchase, but at any point if you feel like you aren’t able to walk away from the deal, you need to take a step back and review everything! Once your emotions get involved you can’t be rational and make sound decisions.
Reality Check Three: Are the Numbers Really What They Say They Are?
In this deal, the numbers were what sold me. The rent covered all of the expenses and left a small cushion for surprises. Make sure the numbers are what the sellers say they are though! Always get copies of the leases to verify rents. Check market rent rates for that area to make sure the current tenants aren’t just paying higher rates because they are related to the seller. Also, make sure you obtain copies of bills you’ll be responsible for (taxes, utilities, insurance, etc.).
Reality Check Four: Are You Judging the Book by its Cover?
Many opportunities are missed because of a negative first impression. The best deals are often the properties that look rough, but can be easily brought back to beauty. Granted, our little shack needs to be rebuilt to become beautiful. Had Dave allowed me to judge property based on its looks, I would have missed a deal that grew our net worth by $120,000 and has great future development potential.
Reality is what you’ll be left with after you buy a property. Use these reality checks to ensure you aren’t missing great deals!

Posted on May 1st, 2009

 

Tenants, Toilets, and Other Rental Property Repairs

Rental Property RepairsBeing a rental property owner means dealing with maintenance, repairs and tenant upgrade requests. Even if you’ve hired a property manager, you will still have decisions to make regarding the upkeep of your property.

In general, you should set a maintenance schedule that keeps your property and the unit(s) in your property in the best shape possible. There are several reasons for doing this, but the biggest one is that a property that is kept in good condition attracts and keeps good tenants. The second big reason for doing this is that regular maintenance is often a good way to keep costs down. If you leave things unfixed for long periods of time it can cause other issues. For example, a leaky sink left unfixed could be damaging the cupboards and even the floor underneath the sink.

If you have a property manager ask about their schedule for doing the following things. If you manager your own property, then here’s a suggested schedule for checking on things.

Monthly:
Walk the exterior of the property and pick up garbage from around the property. Make sure the lawn is mowed, weeds are pulled and everything is in good shape. If you have laundry facilities, check that the lint is being removed from the dryers and take out any money if they are coin operated.

Quarterly:
Check windows, doors, and exterior of the house for any leaks or damage. It’s also a good time to check on the furnace or air conditioner and change filters.

Semi-annually:
Change the batteries in the smoke detectors, check carbon monoxide detectors, clean gutters, check appliances, plumbing and electrical outlets in the house. Check for things that might be loose as well (door knobs, railings, or screws). You aren’t looking for things to fix but you want to be aware of things that may require maintenance when a tenant moves out or trying to find little things to repair cheaply as a way to prevent bigger problems later on.

When tenants move out:
Have the carpets and drapery cleaned. Paint the walls if necessary (and usually it is), and get the unit professionally cleaned (including the stove and fridge).

Planning for this regular maintenance on your rental property makes things fairly easy. You will have a good idea of when major expenses like a new roof, a dishwasher or a paint job will be required. You can set aside a little extra rent money to cover these costs. The trickier part can be knowing when to make improvements to a rental property when a tenant is asking you to spend money.

In our Toronto tri-plex we recently turned down our tenant’s request for blinds in the living room of one unit. But at the same time, we agreed to put in a new toilet in another unit. Our tenants can easily figure out that we’re bringing in nearly $4,000 in rent per month from this property, so they may think we’re being stingy by refusing their requests. But, you have to keep in mind that, while you want to keep your tenants happy the money your spending needs to either prevent or reduce an expense or it needs to generate revenue.

In the case of a renovation or upgrade requested by a tenant, we ask ourselves a few questions when we’re considering whether to do the work the tenant is asking for:

  • What are the costs of not doing it (is the tenant likely to leave and what will that cost if they do?)?
  • Is there another way to address the problem?
  • Are there any issues with delaying the expenditure?

After we consider these things, we use a final formula to calculate how long it will take to recover our costs.

   Total Cost of the Upgrade or Repair / New Money Earned (or Money Saved) each Month = # of months to repay the expense.

On items under $1,000, as a general rule of thumb, if you can recover the cost in 12 to 18 months then the money is well spent.

In the case of the blinds, the tenants wouldn’t pay more rent just to have blinds. Instead we agreed to pay for dry cleaning the curtains which will be less than $100. There’s no direct return on this – but the tenants wanted the “dirty curtains” replaced so this will keep them happy and it’s not a large expense – especially given that the tenants have been long term.

For the toilet replacement request, we decided that getting rid of the grungy old toilet will not get us higher rent, but it will make it easier to attract and keep good tenants. And, if we replace it now, our tenant’s father (an experienced plumber) will install it for free. Finally, we’re replacing a water guzzler with a low flush model (est. water savings of $10/month) that will qualify for a $75 water conservation rebate from the City of Toronto. The formula of benefits looks like this:

    $250 – $75 rebate = $175 Cost of the Toilet

    $175 / $10/month water savings = 17 months to pay off (PLUS we save $80 on installation).

The cost savings plus the added benefits of saving installation costs made it a very appealing use of our cash. Just remember – real estate investing is a business and you need to get a return on any money you spent – even if that return is simply in cost savings!

If you are managing a property yourself there’s some great books out there to help you. Two books definitely worth checking out are:
Property Management for Dummies

Property Management Kit For Dummies

Ultimate Landlord Handbook for dealing with tenants and toilets

The CompleteLandlord.com Ultimate Landlord Handbook (and we’re pleased to be hosting William Lederer in a teleseminar in June – sign up for our real estate investing newsletter for details!)

Also, some websites worth checking out to learn how to do some of the basic maintenance things:

    *http://www.thefunplace.com/house/home/
*http://allabouthome.com/
*http://www.ehow.com/videos.html
*http://www.expertvillage.com/video/51_fix-leaky-faucet.htm

Finally, here’s a blog post I wrote last year about the difference you can make with some cheap hardware changes, paint and a bit of elbow grease.

http://revnyou.wordpress.com/2008/10/16/real-estate-renovations/

I know that’s a lot of information to digest and a substantial list of resources, but your monthly cash flow is dependent on you maximizing your rental revenue and minimizing your expenses – so this is pretty important stuff to know!

Published April 17th, 2009

Rental Property Location Research Checklist

 

Where to buy your rental propertyHere’s the really good news… when you know the signs to look for you’ll find that picking a good location for real estate investing is fairly simple. It takes a bit of leg work to research the locations and find one that meets all of the criteria on the checklist, but when you do, you will also find an enormous opportunity for wealth creation!

In an interview for Canadian Real Estate Magazine, real estate developer, investor and co-owner of Boston Pizza Jim Treliving said of real estate investing “The most important thing is to do your homework…You have to read a lot, find out about the areas you want to go into, where the emerging markets are. It’s often not the biggest ones necessarily; it’s a matter of where you see growth, go and find out, go into the markets yourself.”

The goal of the checklist is to have a barometer to use when locating a good area to invest in. Essentially you are trying to find out if the market is staying the same or is about to make a turn for the better or the worse.

The main elements in our checklist are:

Familiar Area,
Population Growth
Good Employment
Good Transportation
Healthy Housing Economy
Appealing Opportunities.

 

For some of the above items you want to see trends and where they are heading over a longer period of time for an overall market – like population growth for example. But, you will also want to find out what factors may impact that trend. In Vancouver, we are looking forward to the 2010 Winter Olympics. This has had a significant positive impact on employment opportunities and has likely contributed to a growth in the population in the last 24 months, but if you only looked at the employment or population trends you wouldn’t know that this trend could reverse or slow significantly after 2010. So, you need to take a look at the trend and then figure out why it is the way it is and what is likely to happen in the future.

Starting with an area you already know reduces your learning curve when you are starting out. Often this is not where we are currently living, but it’s somewhere we have lived or somewhere we visit on a regular basis. We do this to make it easier on ourselves. If we buy somewhere we don’t know anything about, it means we have way more research to do, and we have to start from scratch in building a network for that area. Then, we have to make an extra effort to stay on top of that market once we own a property in it. It’s possible, but it’s more work!

Ozzie Jurock, a Vancouver real estate celebrity, wrote a book called Forget about Location, Location, Location. In the book, Ozzie says:

In my view, it is always better to buy locally, because you can do your due diligence easily and deal with a local realtor. If you live in Toronto and want to buy in Phoenix, however, get in touch with a Phoenix realtor, particularly if someone in Canada is trying to sell you a packaged deal. The local realtor has the property perspective.

He also says, of buying from a distance:

Go there, look at it, kick the tires. Once you get there, you might find an entirely different property that will be a much better investment. Also, you have to bear in mind that if you’re investing outside your area, the people who are presenting you with properties are going to show you only what they have in their wagon. They’re not going to go out of their way for a stranger unless they’re assured a piece of the deal.

As you research all of the elements on the checklist, think about prospective tenants. Where will they work? How will they get to work? Where else would they live, if not in the area you are looking at? And, of course, think about an exit strategy. Julie wrote an article for the popular online e-zine Early to Rise called The Biggest House Buying Tip Ever about buying any property with the end in mind. It doesn’t matter if you plan to live in the property or rent it out … before you buy, envision yourself selling it.

You are making an investment only if there is a reasonable probability that you will make money on it while you own it and that you will be able to make money when you sell. Good location research BEFORE you buy the property will increase the likelihood of making A LOT of money from the property!

Published February 19th, 2009

Buying Rental Property from Motivated Sellers

First motivated seller in nanaimo

We bought our very first investment property in a foreclosure deal. It was our first introduction to a motivated seller. The bank didn’t want to own residential real estate and was anxious to get rid of the property. We bought it under market value and it’s rental income and value has doubled in the last 7 years.

Our current home was just about to be listed because the owner got transferred from Vancouver to Victoria. She didn’t bother to price her home any higher than what she’d paid, as she just wanted out. We bought the property for under market value and avoided a bidding war by scooping it before it hit the market.Motivated Seller

These are just two examples of good deals we have made by finding motivated sellers. On the other hand, we’ve also found that some of the most motivated sellers were motivated because they wanted to ditch their piece of garbage property! In the same vain that we always say “No money down doesn’t mean it won’t cost you” we also say that a “motivated seller may be motivated for the wrong reason“!!

We’ll call the type of motivated seller I’m talking about a “flipper”. A flipper is someone who bought the property, fixed it up and is now selling it…and wants to get rid of it quickly. When you find a flipper that is anxious to sell you often will find someone who has cut corners on the work just to get it done, and you may just find yourself spending a lot of unexpected money on repairs and surprise problems.

We made the mistake of buying from a flipper in Toronto. It was a land mine of a property full of shoddy work and the cheapest possible materials. The worst example of this was the telephone wiring that had been used instead of electrical wiring – and yes, it melted and started to spark because it wasn’t the right grade for the electrical currents.  Thankfully the lights had stopped working, so it triggered us to get an electrician to start punching holes in the walls before any fires were started!

Buying from a flipper can be the wrong kind of motivated sellerThe property had all the signs of being a cheap fix up, but we weren’t really aware of what could go wrong at the time. We ignored the signs and bought the property from Mr. Flipper and he was so helpful that he even assisted with getting us financing.

In addition to spending $25,000 to completely rewire the house we had to redo the plumbing in the basement and totally renovate one of the three bathrooms. Shown to the left, the basement flooded thanks by tree roots dissolving the clay pipes and plugging things up. We had to dig up one of the bedrooms in the basement and the entire front yard (which we had just landscaped a month before) to get to the pipes. While the plumbing work was being completed we had to put our tenants up in a nearby hotel for $200/night each.

 

The first picture below shows the main floor bathroom we renovated because cracked tile and an awkward 5 inch “step up” to reach the sink and toilet were frustrating to deal with. We discovered lazy plumbing practices had created the 5 inch “step up” that the toilet and sink had been on… and the cracked tiles were as a result of tile being laid on top of tile! The next picture is of our front yard after they dug it up to get to the pipes.

Motivated Seller - redoing the bad plumbing job and tiles

Fun thanks to a property we bought from a motivated seller

 

The red flags were waving in our faces but we didn’t really recognize the signs and looked the other way. The property had so many good things going for it:

  • It was priced right,
  • It was located in a perfect area for a rental property near downtown Toronto and steps from the subway,
  • And, it had good rental income from it’s three units.

We were too new at the investing game to realize the trouble we were about to get in because this motivated seller was motivated to ditch his crappy property BEFORE he was responsible for cleaning up the mess.

When we tell this story so many people smugly say to us “Well, that is what you get for not having the property inspected by a professional”. The issue is: WE DID HAVE IT INSPECTED!

Wiring is BEHIND the walls. The wires aren’t visible unless you punch holes in the walls. Bad plumbing isn’t visible unless you get underneath the floors or send a camera down the pipes, and other things seemed minor on the surface but were serious once you tried to repair them.

That said, we were still at fault and could have avoided this big mess because there were warning signs and we ignored them.

So – Dave and I want you to avoid buying a disaster property from another Mr. Flipper so here’s some warning signs to be aware of:

  • An investor that wants to sell because they want to invest in something else. This is not a red flag; but it would prompt us to ask more questions. The reality is, many investors will hold onto a property forever if it’s making them money. So, if this property doesn’t fit in their portfolio anymore or isn’t making them money, try and figure out why. Is something in the area changing that you should know about? Is it a problem you can fix, like bad tenants or poor management? There are a lot of reasons why an investor might sell, and many of them are legitimate, but try and figure out if there is a reason that should concern you or if it’s an opportunity to solve a problem.
  • Someone who says they ‘have to sell’ but refuses any offers below what they paid or below what they think it’s worth.
  • Someone who bought the property, renovated it, and is anxious to sell it. There are a few reasons why this is a red flag, but the biggest one is that the reason this person bought it and renovated it, was to make a profit from the flip. This can mean they cut corners to save money and it definitely means they are going to be trying to get top dollar for the property. Trust your gut; ours was giving us warning signs on the Toronto property but we didn’t listen. We love that property, and we even lived there for a few years because its location is fantastic, but the property’s problems have cost us over $50,000 in five years. Even though it puts over $500 a month of positive cash flow in our pockets, it’s going to take us a LONG TIME before we ever make that money back. We’ve even put it on the market a couple of times to sell it, thinking that we should recover our costs, but we never ended up getting the offers we wanted so we still own it today. And, while it’s a good money maker, it still gives us problems.

We don’t have good electronic pictures of the electrical wiring that was discovered behind the walls but I think the pictures will say more about what we went through than I could ever describe!

Published February 8th, 2009

Update February 10th, 2009: We received some reader mail about this article. You can read that email and the response here:Upset about the Article:The Motivated Seller You Don’t Want to Buy From.  

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