Our first joint venture real estate deal was the very first property Dave and I bought together in 2001. We were dating at the time and pooled our resources to do the first two deals. I had excellent credit, $16,000 in savings and zero debt. Dave didn’t have any savings but he did have money in RRSP’s, which he cashed out to invest in our properties. We both had good jobs at that time, although I was leaving mine to do my MBA.
We moved into one of the properties so we could put less money down and still qualify for good financing.
After that, we were out of cash and I was now a student in Toronto so we had to find other ways to get deals done that didn’t require cash or bank financing.
Despite the cash challenge, we still managed to add another four properties to our portfolio in 2002 and 2003. Two of those properties were our first external from us and we did a joint venture with a friend. Dave also made some money off an assignment deal – finding a great deal and assigning it to someone else for a fee (also called wholesaling).
During 2010 – 2012 when we were aggressively growing our portfolio and averaging one new house almost every month, the majority of our purchases were joint ventures.
The majority of these deals were structured so that we were the managing partners (finding the deals, negotiating them, hiring the teams and overseeing the renovations and overseeing management) and our money partners came to the table with financing capability and the initial investment capital required (e.g. down payment, closing costs, 2 month reserve fund).
It was a fabulous way to grow our portfolio quickly and reduce some of our future costs because our partners will split any future costs (and profits) with us 50% / 50%, but partners also can be limiting and always bring additional stress to handle when there are issues (more on that in a minute).
Options for Structuring Joint Venture Real Estate Deals
There isn’t one right way to structure a JV. Over time you’ll discover the way that is the most fair for you and your partners given what each party is bringing to the table (Also see – Real Estate Investors Checklist for Working with JVs).
We look to our partners to put in 100% of the initial investment capital (typically the down payment, closing costs, 2 months of a reserve fund and minor renovations) in exchange for 50% ownership in the property. When we sell the property, their initial investment is repaid first, then any capital we have invested, and then we split the proceeds 50% / 50% as per the ownership.
As long as we can reasonably suggest our partner is going to get 10-15% per year return on their capital and they don’t have to put in any effort, we believe it’s a fair exchange for them and for us. Those are our measurements, by the way, they don’t have to be yours.
It’s about the return and the limited amount of involvement they have in the deal – not the share of the deal they own. These folks are busy – usually successful businesses or careers, families and hobbies they want to focus on. They want to be in real estate but they don’t have the time or inclination to become experts. That’s where we come in. We’ve spent thousands and thousands of hours becoming experts. While we may only put 40 hours into getting a deal done for our partner, that doesn’t account for the $100,000 in education and 10,000+ hours we’ve put into learning what to do to minimize risks and maximize returns.
Remember all you bring to the table in your own business – whether it’s your first deal, or fifteenth. If you don’t feel you bring enough to the table then you need to build on what you have – take more courses, improve the quality of your team, get to know your area more by touring more properties and walking around. One of the most critical things you can do is become an area expert.
We prefer the traditional 50% / 50% structure, but that is far from the only option. You can create whatever structure you feel is fair given what you’re bringing to the table. For example, if you are new to the game, and are not bringing a ton of experience, perhaps a 30% / 70% structure is fair with you getting 30%. This is of course if your investor is putting in all the capital and qualifying for financing. If you both are splitting the capital contribution and qualifying for financing, then a 50% / 50% deal is more fair (again if your experience is limited).
There are endless options for how you can structure a Joint Venture Real Estate Deal but here are a few others we’ve done:
• 30% / 30% / 40% – if there are two cash partners and one managing partner or maybe one person is going to be a tradesperson offering their skills to renovate in exchange for a share of the property (essentially they are putting in sweat equity while someone else funds it and someone else is the managing partner). It’s always critical to lay out roles and responsibilities in your agreement but it’s even more important in an arrangement like this. • 60% / 40% – we’ve done this two ways. Once, when we have had to put in some money and do all the work – we took 60% of the deal. Two, when we felt that someone was bringing more to the table than our usual arrangements we would offer them more equity. Perhaps they are funding a large renovation and leaving that cash in there and we need to increase their equity to ensure they get a great return, or maybe they are offering some skill in addition to the cash or if we were new, it could be how we get the deal done if we aren’t putting any cash into the deal. • 75% / 25% – We’ve done this when we put the down payment in but couldn’t quality for financing. We gave someone 25% in exchange for their name on title and finance-ability. It would not be our first choice in an arrangement but we were in a pinch and had already lifted conditions. We needed to close on the deal and this got it done. • 50% / 50% –Someone already owns the property and is unable to sell. They don’t want to hire a property manager for whatever reason. You can step in and offer to oversee everything in exchange for 50% ownership in the property. Their ‘initial capital contribution’ can simply be the equity they have in the property as of that date (get a property appraisal to determine this value relative to the mortgage owing). We did this when someone we met at a club meeting wanted to turn their property into a rent to own to sell it but didn’t know how. They also wanted to go away traveling and didn’t want any hassles.
Simple Structure Is Best
The most complicated structure we did almost completely bit us in the butt because one of the partners got divorced (the 30, 30, 40 split).
We brought two partners into one deal. We all brought money to the table but in different amounts. One couple put less in as they went on title and qualified for financing. Between us and our other partner we covered the remainder of cash. We split the deal with them 30% 30% and we got 40%.
A few years later the couple got divorced. Thankfully they were able to settle things amicably and were able to agree to keep the property. Had their divorce gone the ugly way of many, the property would have gone on the chopping block and we would have been put in the awkward position of either selling it prematurely to get them out, or having to buy them out, switch title and find our own financing. Not always an easy thing at the best of times, but we would have had the added pressure of making it fair given our other partner as well…
Thankfully it didn’t come to that and we all still own this property together but it was a good reminder that it’s best to keep your smaller deals one partner to one property. Every partner brings their own set of complications so why make it harder on yourself than you need to by mixing and matching?
Word of Warning: JV’s are Limiting and add stress – Use with Caution
One of our rent to own properties failed. The tenant buyers chose not to buy the property from us, as per their option, and rather than selling it in a slower market, we chose to convert it to a regular buy and hold rental property.
The property barely cash flows as a regular rental, but it’s a perfect property to add a legal suite to. It would potentially be one of the easiest places we’ve tackled to add a legal suite to because of the location of plumbing, electrical and the heating source. We approached our partners with the proposal to add a suite. We were going to split the cost of renovation with them, as per our 50% / 50% ownership with them because we have already owned it for several years. We would charge a small general contractor fee just to cover some of our costs of overseeing the work, but otherwise we were agreeing to take on a ton of work and time to improve the overall performance of the property. This move would have turned a neutral cash flowing property into one that is giving us at least $600 a month. Despite all the effort required to do this, it made perfect sense to us. If we owned this property on our own that is what we would do.
Our partners said no. Not because they didn’t like the idea, it was because they didn’t want to invest anymore cash into the deal.
They want to wait until the market is good enough to sell and then they want out. Getting them out now to make the change ourselves is more complicated and cost ridden than it is worth to us. It’s frustrating as we would much prefer it to be a solid holding property with strong cashflow, but it’s one of the limitations and issues with partners.
Joint venture real estate deals are a great way to grow your portfolio when you’re short of cash resources for down payments, struggle to qualify for financing, or want to work with other people who bring something to the table that you don’t have. They are long term business relationships, however, and need to be carefully considered to make sure it’s a fit and that the structure you select makes sense given what you are all bringing to the table. Hope this gives you a few new ideas.
Other Articles on Joint Ventures & Using Other People’s Money:
Commercial Real Estate Investing vs Residential Real Estate Investing
A Video Series
You know the saying, the grass always looks greener on the other side, right?
As you deal with another tenant turnover, surprise repair request or increasing tax and insurance costs, it’s easy to think that a five year triple net lease* is a better way to invest in real estate.
But, there are some really significant costs and risks associated with doing commercial real estate deals.
As we just closed on the biggest deal we’ve done to date (a multi-million dollar medical services building), we thought we’d put together a video series to help you decide if commercial investing is right for you, and how to handle some of the common pitfalls if you do it.
If you’re staring longingly at that green grass on the other side of residential investing, we hope these videos help you decide what investment vehicle is right for you today.
*a triple net lease is basically where the tenant is responsible for most of the costs of operating and maintaining the property including taxes, insurance, maintenance, and property management
The Ultimate List of the Best Real Estate Investing Clubs in Canada
Networking with like-minded people
I was recently asked at an event, “What are the obstacles I need to overcome in order to take the next step with my real estate business?”
To be honest, my biggest obstacle was in my own head. I had A LOT of fears in the beginning and they were coming at me from a variety of different angles.
I worried “What if I mess up and my family’s finances become a permanent mess?”, and I had to deal with the rather uninformed opinions of some friends and family who thought I was nuts to be taking on what they saw as excess risk in the form of mortgage debt.
There was simply a lot of negative noise that I knew I had to get over in order to confidently move forward with real estate.
A big part of the solution to allaying my fears and taking action was finding the right group of people with whom I could surround myself. I wanted (and needed) to be around enthusiastic, successful and active real estate investors because I knew that was where I would find the motivation, inspiration and encouragement I needed to succeed.
Whether you are just beginning your investing career or you are already on your way to becoming the next Donald Trump, finding a group of people to connect with will always move you forward, no matter where you start.
The good news is that there are so many great real estate groups across the country and with a tiny bit of detective work you can probably find a club right in your community. In most urban centers, you can find your local club listing on meetup.com. Or you can go to Google and type in “your city + real estate investing club” and you’re bound to find something great.
If you would rather not do this homework yourself, I have rolled up my sleeves and investigated some clubs already. Here are some that I found that I would recommend split out by province:
The REIN community is a dynamic network that includes individual investors, families, corporations, professionals and entrepreneurs of every kind, all sharing a desire to secure their financial futures with positive cash flow real estate. REIN members learn how to apply proven investment strategies and how to take advantage of economic events that affect real estate markets across this country.
Where: Monthly meetings in BC, Calgary AB, Edmonton AB, Toronto ON and quarterly meetings in Ottawa, ON. Online membership options are also available for those not able to attend the live workshops.
Who is it for: Anyone interested in securing their financial future through investing in real estate Content/focus: Real estate education and networking Networking time: 4 hours at the monthly workshops and continuously via our online forum.
Run by: Patrick Francey (CEO) and Jennier Hunt (President)
The REINVESTORS are on a mission to help and inspire 1 million people to become financially educated and inspired to invest in real estate so they too can live a more fulfilled life. Founders of the “GO BIG TO GIVE BIG MOVEMENT” The REINVESTORS are a For-Purpose business inspiring others to set bigger goals so they can give back more to their passions and communities.
Where: Monthly meetings in Victoria, BC.
Who is it for: Anyone looking to network with like-minded people in the real estate world. Networking time: 2 hours with a guest speaker and time for networking.
This club’s focus is on education and raising one’s level of financial knowledge; Their site explains that gaining the right information and training, ultimately leads to financial independence and freedom.
Where:Surrey, BC
Who is it for: All levels Content/focus: Education focused Who runs the group: Geoff Lee
This club is aimed at individuals who understand the potential of real estate as an investment but who need more information about what to do, or more importantly, what not to do. The club’s goal is to provide an atmosphere for networking and fun, as well as to provide education and guidance to people who are thinking of getting into real estate investing, particularly in local BC markets (yes, you can make money in real estate in the Lower Mainland!). They also discuss investments in the USA and out of province.
Where: Surrey, BC (A second chapter in Richmond with Teresa Leung is coming soon!) Who is it for: All levels Content/focus: Education focused Networking: 30 minutes before the keynote speaker and 30 minutes after the 1-hour presentation. This group allows for a brief introduction from every member (why they are there, what they’re looking for, etc.). At the end of the keynote, 15 minutes is allotted for any member that has a deal, is looking for a JV, etc. Who runs the group: Sua Truong, Senior Mortgage Advisor @ MortgagesLab Financial (www.SharingBankSecrets.¬com) Marc Ramsay – USA Investment Specialist (Majura Properties, Majura Investments)
This group was founded just three years ago and has already grown to over 1200 members. The purpose of this group is to help individuals learn about real estate investing through the collective forces of a group. Every month knowledgeable guests are invited to speak on real estate investing as well as share with the group their experiences and personal development tips so investors can take their advice to build their real estate portfolio.
Where: Vancouver, BC Who is it for: All levels Content/focus: Education only (strict policy of no selling) Networking: Following the presentation Who runs the group: Bai Jiang
Join this meet-up to discuss properties on the market, contracts, mortgages and anything else about real estate investing and business. Meet and network with successful like-minded people with similar goals and ambitions. Whether you’re looking to buy your very first property or you’re a seasoned professional, we invite you to come out and meet others in the Real Estate industry. This is Edmonton’s longest running Real Estate Club, established in 1985.
Where: Edmonton, AB Who is it for: All levels of real estate investors Content/focus: Education as well as the ability to share deals with the group Networking: Plenty of networking time. Who runs the group: Brandon Rolheiser
SASKATCHEWAN Real Estate Investing Club:
We’re not aware of any active clubs in Saskatchewan anymore. If you’re attending or running a great club, please email below and let us know the details please.
Truly Invested is a club where like-minded real estate investors come together. This club is located in Winnipeg, but members can also join the group virtually. The group meets monthly and covers various topics related to real estate and investing. They are member-focused, and strive to create great networking and informative meetings to create opportunities for growing wealth.
Where: Winnipeg, MB Who is it for: Open to all levels of investors Content/Focus: Education only (strict policy of no sponsors, no relationships with vendors or service providers, no backroom deals) Networking time: 15 minutes before the presentation, 15 minutes between speakers, 1-2 hours after the meeting Run by: Ben Eko-Davis, Tamika Joseph, and Candice Bakx-Friesen
MREIA meets once per month for an opportunity to connect with like-minded individuals, grow one’s network and listen to great speakers with great content.
Where: Winnipeg, MB Who is it for: Open to all levels of investors Content/Focus: Education focused Networking time: Before and after the featured speaker Run by: Stefan Aarnio
The Rock Star Inner Circle was founded to bridge the gap between real estate theory and the implementation that provides real life results. Not only does the group provide constant education and information through members-only newsletters, interviews, classes, and events, but the team works one-on-one with investors to help them implement the strategies to reach their goals. Its mission is to help people use real estate to live their “Rock Star Lives,” whether it is travelling the world or spending time at the cottage. Either way, it is living on your terms.
Where: Based in Oakville, ON with events in the Greater Toronto Area Who is it for: Investors looking to use real estate to live life on their terms Content/Focus: A list of classes and events focused on providing current day, on the streets information and strategies with personalized coaching to implement them. Networking time: Multiple times a month during different member classes, and three times a year at “Your Life. Your Terms.” events. Run by: Tom and Nick Karadza (two brothers outrageous enough to name their company “Rock Star”)
Founded in 2008, this club has grown in active monthly attendance from three to 100 people. Every month the Durham REIC draws in great keynote speakers and then allows ample time for networking. The three main goals of the Durham Real Estate Investor Club are:
1. Network – with like-minded people focused on the Durham Region 2. Educate – wide range of speakers on talks of interest to Real Estate Investors 3. Support – provide peer support for Real Estate Investors to help their business grow
Where: Whitby, Ontario (Durham Region) Who is it for: Open to all levels (but 90% of attendees own at least one property) Content/Focus: Education only (strict policy of no sponsors, no relationships with vendors or service providers, no backroom deals) Networking time: 15 minutes before the presentation, 15 minutes between speakers, 1-2 hours after the meeting Run by: Quentin D’Souza, Chief Education Officer, full-time real estate entrepreneur.
3- Guelph Real Estate Acquisitions Team (G.R.E.A.T.)
An educational and networking group for Real Estate investors, located in Guelph. This is a strict “no selling” group. We are simply there to learn from each other and to make connections! We are not there to sell any product or business.
Who is it for: Whether you have zero properties or one hundred properties, we would love to see you! Get inspired, learn, find a mentor, network, but most of all….grow wealthy and have fun!
What to expect: They will meet five times a year to hear the stories and lessons learned from investors. Learn new ways to profit from Real Estate. Learn from mistakes, pitfalls, and successes of others. Make connections with successful Real Estate investors!
Mr. Hamilton’s Inner Circle meetings are packed to capacity with attendees that are experienced, friendly and always willing to share their investing knowledge. The meetings are not open to the public and the average attendee already owns more than one investment property. Every month the group invites high calibre speakers, conducts a review of a real estate-related book and provides need-to-know information about investing in Hamilton and the surrounding area.
Where: Oakville, Ontario Who is it for: Anyone interested in spending time with like-minded people who are investing in Hamilton and surrounding areas Content/Focus: Education and networking. This club generally avoids beginner material and instead educates its attendees about what’s happening on the ground in Hamilton and it also provides tactical information that Hamilton investors can apply to improve their business. This group has guest speakers on a wide range of subjects from goal setting to land development. Networking time: As much as folks want until they have to lock the doors! Run by: Erwin Szeto and The Mr. Hamilton Team of Rock Star Real Estate Brokerage
This group was created to empower women all across Canada to reach their personal and financial goals as well as gain independence through the purchase of Real Estate. The goal of this club is to provide solid, comprehensive education as well as the tools and systems necessary for anyone to make sound investment decisions (whether that is the purchase of one’s first home, a rental condo, or a multifamily property).
Where: There are chapters in Ottawa, Mississauga, Markham, and Toronto. Who is it for: This group is for any woman who is looking for tools, education, resources and networking opportunities to expand her Real Estate portfolio. The group welcomes women with any level of experience, whether they are a complete novice or an advanced investor. All members are encouraged to share their experiences and wisdom with others and encourage a supportive and interactive environment Content/Focus: Content and education. Zero selling from speakers. Self-promotion by members is encouraged in a “non-selling” context. Sponsorship opportunities for people who would like to promote their products or services limited to 1 sponsor per meeting with only a 10 minute speaking spot. Networking time: 30 minutes prior to the presentation. 45 minutes – 1.5 hours after the presentation. Run by: Lena Guirguis: Lena Guirguis is a real estate coach, asset management consultant and author, managing Partner New Venture Solutions, VP of Operations NV, Property Management, Founder Stilettos & Hammers
This club was founded three years ago with three main goals in mind: to share, inspire and network. Today the club has 1300 members and is still growing. Every month one to two speakers are invited to share their own journey and to educate and inspire the group with their personal trials and triumphs in real estate.
Where: Monthly meetings are held in downtown Toronto and bi-monthly meetings are held in Mississauga and Oakville. Who is it for? Investors of all levels Content/Focus: Education Networking time: Before and after each speaker Run by: Todor Yordanov – Investor and real estate agent
7. Smart Home Choice Smart Home Choice is one of Durham Region’s largest groups of investors and it offers guidance through years of experience and understanding of the market.
Where: Ajax, Ontario Who is it for: This group is to educate all level of investors to ensure they have the required knowledge and resources to allow them to make informed decisions in their investing strategies. Content/focus: Their primary focus is education. However, they do allow presenters to promote their website, materials and other content focused on providing education to all levels of investors. Networking time: 1 hour for networking: 15 minutes at the beginning, 15 minute break between presenters and 30 minutes at the end of the meeting. Who runs the group: Gary Hibbert – Real Estate Agent, Darlene Hibbert – Mortgage Agent
Thornhill Wealth Forum is dedicated to helping people build wealth through real estate investing. Beginning investors can connect with active real estate investors and prosper through knowledge sharing and networking. Through monthly meet-ups, participants get direct access to prominent investors, practical resources, local real estate deals and financing strategies to help them leverage their time and efforts.
Where: Thornhill, Ontario Who is it for: All levels Content/focus: Proven beginner strategies for building wealth, getting started with or without money, diversification and getting to the next level How much time for networking? 40% Who runs the group: Rachel Oliver — active investor, best-selling author, trainer and leading expert on Rent to Own.
The Brockville Real Estate Investment Club is a new but growing club, focused on education, networking and support in the Brockville community. Each meeting has a different theme and includes a segment on the latest news impacting the real estate world, such as a discussion of current property listings, tools and resources available to investors, a book review or legal and accounting tips. Each meeting also has an invited guest speaker whose presentation is related to the theme.
Where: Brockville, Ontario (on the first Thursday of every month) Who is it for: All levels – The club is open to new investors as well as seasoned pros. Content/Focus: The content of the presentation is education-focused. Networking: 30 minutes at the end of the presentation. This is the only time that members can discuss their respective business services. Otherwise, there is a strict “no selling” policy. The focus is on education, networking, and support. Who runs the group: Jeff Patry
9. The GTA Real Estate Investors and Professionals Networking Group
This is one of the longest running groups in the GTA and now has over 700 members. The purpose of this club is to hold networking events where real estate investors can meet, mingle and form joint venture partnerships with other real estate investors and professionals in the real estate industry as well as expand their knowledge base and stay current with trends in real estate.
Where: Thornhill, ON (at The Bayview Golf and Country Club) Who is it for: All levels Content/Focus: 1 hour educational component featuring star guest speakers as well as regular sponsors with informational booths set up at every event offering the best services and wealth creation opportunities to attendees. Networking: 1 hour of mingling Who runs the group: Monika and Vaughan Jazyk, owners of Real Property Investments, helping REAL people build REAL wealth through REAL Estate
The Ottawa Real Estate Investors Organization is a non-profit organization dedicated to providing education, networking, and support to new and experienced Canadian real estate investors in the Ottawa and surrounding areas. At the monthly meetings, guest speakers educate attendees on how to invest in real estate, how to manage their properties, how to attract joint venture partners and much more.
Where: Ottawa Who is it for: All levels Content/Focus: 1 hour educational component featuring star guest speakers as well as regular sponsors with informational booths set up at every event offering the best services and wealth creation opportunities to attendees. Networking: Plenty of networking prior to and following the speaker Who runs the group: John Walsh
An educational and networking group for Real Estate investors, located in Guelph. This is a strict “no selling” group. We are simply there to learn from each other and to make connections! We are not there to sell any product or business.
Who should join: Whether you have zero properties or one hundred properties, we would love to see you! Get inspired, learn, find a mentor, network, but most of all….grow wealthy and have fun!
Where: Ottawa Who is it for: All levels Content/Focus: Learn new ways to profit from Real Estate. Learn from mistakes, pitfalls, and successes of others. Make connections with successful Real Estate investors! Networking: Meet 5 times a year Who runs the group: Dean Curtis
QUEBEC Real Estate Investing Clubs:
1. Montreal Real Estate Investors Group
Local Meetup This group is dedicated to supporting the beginner real estate investor. At every event attendees can expect announcements about other real estate events, updates on relevant real estate articles, guest speakers and access to support. Where: Lachine, QC Who is it for: Beginner investors Content/focus: Education How much time for networking? Ample time for networking Who runs the group: Jennifer Lynn Walker
Where: Montreal, QC French investment club with mentoring, courses and club meetings. If you speak French check out their extensive website for more information. They have 20,000 members in Montreal and Quebec.
Moncton REIO is a non-profit organization group of professionals dedicated to encouraging and promoting ethical real estate investing in the Greater Moncton Area. Every meeting consists of a networking session, “positive action stories”, sharing deals and listening to guest speakers.
Where: Moncton, NB Who is it for: All levels Content/Focus: Education and members are able to share their deals. Networking: Plenty of networking time Who runs the group: Darlene Smith
This is a friendly and ambitious group of seasoned and new real estate investors interested in meeting, learning, sharing and networking with one another in order to achieve optimal results with Real Estate investing. The meetings are FREE and the club guarantees that by the time you leave you will have made new friends and increased your network of professionals as well as taking action on the path to wealth and financial freedom.
Where: Halifax, NS Who is it for: All levels Content/Focus: The content of the presentation is education-focused. Networking: 30 minutes at the end of the presentation. This is the only time that members can discuss their respective business services. Otherwise, there is a strict “no selling” policy. The focus is on education, networking, and support. Who runs the group: Richard Killeen Payne
This is a group for anyone interested in meeting like-minded people investing or planning on investing in Real Estate. Affordable real estate education is the priority to the community and different speakers present every month on the six vehicles of real estate wealth generation. This group strongly believes that real estate investing is the best vehicle toward wealth creation and it is their desire to help their members reach their goals faster.
Where: Dartmouth Private Board Room / Metropolitan Tower of Boyne Clarke LLP Who is it for: All levels of Real Estate Investors Content/Focus: The content of the presentation is education-focused (mostly on the six vehicles of real estate Investing), networking, support. Networking: 15 minutes at the beginning of the meeting for people to network and to introduce themselves and make their goals known. Another 30 minutes are allotted at the end of the presentation. Who runs the group: Nick Harvey-Pearson
By attending any one of these clubs, you will most certainly find a community of individuals filled with energy, enthusiasm and passion for real estate investing. Surrounding yourself with the right people is critical for any real estate journey, whether you are just starting or are a seasoned pro.
I am sure I have missed some really great clubs. If yours was somehow forgotten (or you attend a really great club that isn’t on this list), please let me know, as I will update the list regularly.
Gillian Irving of InvestInStudentRentals.com likes to say she was an “accidental investor”, when buying a duplex in downtown Toronto in 2009 with little planning or preparation. Luck was on her side though, and she was able to ride the value up and refinance to get capital to keep growing. At that point, she wasn’t going rely on luck and an “H&P” (hope & pray) strategy if she wanted to leave her job and provide long-term financial security for her disabled son and three other children. Gillian became a serious student of real estate investing and combined what she learned with her professional skills as a market research analyst to purchase 35 doors in Southern Ontario in 18 months. Today, Gillian is a full time investor and entrepreneur, focused on student rental investing with joint venture partners. She’s also going to be opening up a fabulous Sky Zone Trampoline Park in the Toronto area in 2015.
I’m not being dramatic here. Rent to own deals can be really crappy.
I’m not against them. We still do rent to owns. We’ve done a lot of them in the last four years. We have a training program to help our coaching clients learn how to do rent to owns. However, I am against the fact that I hear nothing but great things about rent to own deals in the education sphere and the reality is that there are some things you should understand before you dive in.
There are some really lousy things about rent to own deals, even when you do everything right.
Rent to own is when a tenant rents your property with the option to purchase it. You set their purchase price at the beginning; they pay a fee (which can become part of their down payment) for the option to purchase it in the future; and a portion of their rent is a credit that builds up over time towards their purchase. There are two approaches to rent to own – tenant first and property first (learn more about property first and tenant first here).
Both approaches generate more cash flow because the tenants are paying a higher than market rent for their property in exchange for credits that build up towards their purchase, and they are responsible for basic maintenance. Also, you typically don’t need property management because of the quality of tenants that move in and because they are responsible for taking care of repairs up to a certain dollar amount.
When I quit my job, we evaluated all of the options for cash today. Wholesaling requires constant marketing and funnel management. If you’re not constantly finding sellers and buyers, you aren’t making money. Flipping is stressful and higher risk. It also requires you to be consistently working on a flip or you won’t be filling your cash needs. We felt being a realtor would reduce the focus from our own deals and since we were planning to do a deal every month or so, we knew we’d need a lot of focus for that. And property management is not something we really enjoy, so we didn’t want to create a business around it.
That left us with rent to own as the best solution for us.
By changing a few of our existing rentals to rent to own, and adding just a handful of rent to own properties to our portfolio, we were able to boost our cash – with the option fees and the increased cash flow – to a point where we were comfortable financially from our real estate holdings. We also liked the fact that rent to own helps good people get into home ownership. Our rent to own tenants give us big warm hugs, invite us for dinner, make us handmade thank you cards, and invest in fixing up the homes.
We like rent to own because if we want to take a month off from working on our deals, we still make money. We can’t say that about any of the other strategies I noted above.
However, rent to own is not a perfect strategy, and I’m not a huge advocate anymore. When we started doing them, I was excited. I loved that we were helping people and making a great income doing it. Four years later, I like it as an exit strategy. It’s a great tool for your tool box but I don’t think it’s a great business model. If you only do rent to owns right now, you will want to read this carefully. Maybe it’s working today but it has some serious challenges. Let me explain why.
Three Reasons Why Rent to Own Investing Isn’t Always Great for Your Business
First, you can’t always do rent to owns.
The market conditions have to be right. If you are in a very hot market, you will end up selling your property for quite a bit less than you could have made, had you sold it on the market normally. On the other hand, in a market that is flat or heading downwards, pricing a rent to own in a way that is fair to a tenant and that will still make you money is extremely difficult.
And, even if the market in your area is doing okay; if the overall economic sentiment is poor, people will have a hard time believing the house will be worth the same as it is today, let alone slightly more when you sell it to them in 1, 2 or 3 years.
If rent to own is your only strategy in your business, what are you going to do when the market is not good for doing rent to own? And what are you going to do if your cash flow suddenly drops dramatically because of a market shift that makes new rent to owns difficult and existing ones fail?
Second, it really sucks when someone walks away from $15,000 or more!
If you’re a sensitive person who cares about other people, you’ll never find comfort in the fact that you still make a good profit when a rent to own fails. There’s nothing to celebrate when a family leaves hard earned money behind, even when you’ve done everything in your power to make it work.
Our first failed rent to own weighed so heavily on us. It was a couple that I would have bet my own house they were going to buy their rent to own home from us. They were pretty much the ideal rent to own tenant, or so I thought. Less than a year into it, they walked away from $18,000 in deposit and credits. We tried everything to work with them but their minds were made up. It made absolutely no sense to us why they walked away. We still don’t understand. And it weighed on us. Eventually we came to terms with the fact that we’d done everything we could do to make it work and the tenants understood the contract and still chose to walk. But, coming to terms with something is very different than actually feeling good about it.
The market has softened where we invest and we’ve had more people walk (from their rent to own…and all their credits) in the last twelve months than we’ve had close on their deals. It gets a little easier to swallow, but it never feels good. It also makes it harder and harder to want to do more. I’m less excited about the prospect of helping people with a rent to own because I am starting to see that no matter what we do, we’re only going to help half the people we work with.
Plus, while we explain the potential of a failed sale to our investment partners and we always have a plan B of being able to rent it out as a regular rental if we need to, it still feels like we’ve failed our partners when the deal doesn’t go through. They expected to have their investment capital returned to them in 2 years and that doesn’t happen if the tenants walk. Most of our partners understand and realize their return remains strong despite the failed rent to own, but some of our partners are really disappointed when the property doesn’t turn over. Disappointing someone feels terrible too.
Third, there’s minimal wealth creation in rent to own.
Rent to own adds cash flow to your business, it’s a great way to sell a home without a sales commission and it can generate a solid return for a money partner but you aren’t getting wealthy. I love buy and hold real estate because you make money with mortgage pay down, cash flow and appreciation. You also enjoy great tax benefits. With rent to own you make money mostly from cash flow. The appreciation in the property largely goes straight to the tenant as you credit their rent and recover their deposit when you sell. The mortgage pay down is always minimal at the start of a mortgage so you never really get much benefit from that. And, the tax benefits are reduced by the fact that rent to own is considered an active business and not taxed the same as regular rentals (which is usually taxed as a Capital Gain/Loss when you sell).
I’ve grown tired of the churn required to run a rent to own business. We did a deal every month because we had to keep the deals coming in to continue to fund our business and make up for the cashflow we lost when one would sell. It’s tiring. I love collecting houses. I am a fan of building wealth and knowing my financial future is secure because I have a monopoly board full of little green houses. With rent to own, we’ve bought some really great houses that we no longer own. It was so much work to find those great deals, fix them up, find and educate the tenants, only to sell the property before we really realized all the financial benefits. I am thrilled I helped some really great people buy a wonderful home in a great area but now I can only drive by and say “I used to own that house.”
I am grateful for the cash flow that rent to own’s give us. It also allowed us to transition from my salary to our real estate business in a much shorter time frame and with fewer properties than a buy and hold strategy ever would have. I’m not against rent to own – I am sure we’ll use it again when we’re ready to exit from a property – but I am not going to pretend it’s the greatest business model ever because I don’t think it is. I think it’s an important tool for your real estate investing tool box. I think it can be a great way to sell a property, help a family and give your business a little more cash flow. I just don’t think it should be the only thing you do as an investor.
A few years back we had a vacancy in one of the units we own in Kelowna, BC. This property is right by the beach, steps from great shopping and dining, and was priced right, according to our property manager and our own research. The rental market was slow, but it was not getting any interest so we knew there was an issue.
Whenever we’re having trouble renting out a property we troubleshoot the issues in this order:
How many calls / emails are we getting in response to our ad? If we are getting less than we should given the rental market conditions (e.g. vacancy rate) there’s an issue with our ad.
How many people have viewed the property?
How many have completed a rental application?
Each question can reveal major issues with your process. For example, if lots of people are viewing the property but not completing an application that can mean the property doesn’t show well, is overpriced for what it is, or that you’re marketing to the wrong people. If you have a lot of calls and emails but nobody is showing up to view the property, there’s an issue with how you’re handling your tenant leads. (You might want to read 5 Steps to Rent Out Your Property to help you with the entire process or view our video on How to Show A Rental Property).
In the case of the property in Kelowna, we had only had two calls and one showing in almost a month. There was CLEARLY an issue with the ad. As it turned out, there were three key issues with the ad. First, the ad was placed in apartments when it was a suite in a house. It was also a horribly written ad with embarrassingly bad photos. No wonder nobody was calling!
Our realtor in Kelowna was generous enough to pop in and take some great photos for us and I rewrote the ads and posted them in all the appropriate places with directions to call our property manager. The place was rented in less than a week after that.
My niece has become focused on becoming rich. She tells me about her friends who are from rich families. She shares her ideas of what it means to be rich, and then she quizzes me about whether this person or that family are rich.
Before I answer her, I always ask her how she defines rich. When she asks if we’re rich, I always answer the same way “Yes, we’re rich with love.”
That’s usually good for an eye rolling and a topic change. These days we then proceed to talk about Katy Perry or a dog she saw doing a cool trick.
If we do keep talking about money, I usually share one of these wealth creation strategies. Over time, I hope that these tips sink in for her. When I really understood these things and put them into practice my financial life changed for the better. Yours might too.
10 Tips of Wealth Creation Strategies
Tip #1: Money is ALWAYS an inadequate motivator.
Until you realize that though – you’ll probably spin in circles trying to “get rich” and wondering why you’re never getting there. The thing with using money as a motivator is that it works in the short term but when things get hard it’s pretty easy to say “ah forget about the money – I’m ok with what I’ve got”.
To be truly motivated to push through the inevitable challenges you need to get clear on the real reason you’re doing what you’re doing.
Freedom to create my day was so important to me that it consumed most of my thoughts. Not being free slowly began to choke me, especially when freedoms I used to enjoy in my job slowly slipped away. I had a vivid picture of what I wanted my days to look like and that picture is what compelled me to quit my job years earlier than we had planned.
That burning need for control over my time and desire to be free was my motivator.
I quit my job not because we were at the point where we were financially ready for it. I quit my job because I could no longer stand to live my life the way it was a single day longer. I was ready to kick butt, get kicked, and get back up to kick butt again to make my dream of freedom a reality.
I never considered going to find a new job – I set out to create the life I am living now. That was my motivator. Not money. For most parents, having more time to be with their children and be present for their family is a very compelling motivator. For others, it can be a more material desire at first (like a great home or a fun car or a family vacation), but it often evolves to something less tangible. It doesn’t matter what your motivator is, I just want you to know that if you’re using money or a goal like “get rich” to motivate yourself, you’re setting yourself up for failure.
Tip #2: You can be right or you can be rich, but most of the time you can’t be both.
Dave is in a year long business mentoring program and I recently had the opportunity to eat dinner with many of his fellow mentees. The woman in the group who has arguably seen the biggest improvement in her business as a result of the mentoring told me her success secret:“I just do what I am told. That’s it.”
She doesn’t waste time arguing why she has done it the way she has done it. She is open about her mistakes. She doesn’t resist the suggestions – she just follows the process and she is getting amazing results.
Most people would rather hide that they made a mistake or self-justify why they do something they way they do it so they feel better about themselves. She just admits it and learns from it. Very few people do that. Most people would rather be right. They’d rather explain why they think what they think or do what they do – even when they are paying five figures for a mentor.
Tip #3: Success and failure are not nouns.
Let go of it. You are never going to be a success, nor will you ever be a failure. You will succeed at some of the things you try just as you will likely fail at some of the things you try.
Tip #4: Return should not be measured in isolation.
Where there is a return there is a risk. You MUST look at what you have to spend in terms of time, energy, and money AND what you are risking to get the return for it to make sense. (Want more on risk? Here’s a video on how to analyze risk in real estate deals I posted a little while ago – you can check that out here).
Tip #5: The only place you can start is where you are right now.
Everyone wants to start at the front of the line but that’s not how the world works. Take the grocery store as an analogy. Do you ever struggle to pick a line at the grocery store – wanting to find the fastest one? Do you ever find yourself in the slowest line wishing you’d picked a different line? Do you ever switch lines? Most of the time when you switch lines you don’t get through the line any faster than if you’d just stayed in line. Once in awhile you do … but you’re always second guessing yourself for making the choice instead of entertaining yourself by reading the latest headlines on US Weekly. But you always get to the front of the line if you just pick one and get in, right? And sometimes another line opens up and you get to jump ahead a bit because you were already in line! The only real guarantee is that if you never get in line you never get to the front. Your life is like that too – so stop deciding which line to get in and just do it!
Tip #6: Master energy management not time management.
I know so many people who say time is their biggest obstacle to achieving their goals. Yet those same people can tell you all the latest on celebrities, tv shows and movies because they’ve collapsed in front of the tv for four hours at the end of each night. Guaranteed, they are making many of the time sucking mistakes that are so common.
I’ve realized that time is not their issue – nor is it mine. It’s energy. I now structure my eating, exercising and work schedule as much as possible around using energy and then renewing energy. There’s too much to cover in this short section but have the energy to achieve the big goals in your life is as simple things like getting more sleep, drinking more water, taking short walks, and cutting out sugar. Those measures can add several hours of focused energy to your day. And what you can do in two goal focused hours is pretty astounding. I would argue that you can do more in two hours like that with high energy than most people do in an 8 – 10 hour work day.
Tip #7: The pursuit of perfection will paralyze you.
When you seek perfection you’ll freeze up and not be able to move forward. Focus instead on what is “good enough” and what you can do TODAY to move forward. We love the saying “sloppy success is better than perfect mediocrity” which we heard first from Alex Mandossian. Keep moving forward – it’s not about perfection, it’s about progress.
Tip #8: Every day is a good day unless you choose for it not to be.
This lesson is from my Grandma Broad. She always tells me that if it’s not a good day it’s my own fault. I used to find that a little annoying because if a teacher gave me a bad grade or my brother hit me I figured it was not my fault things went badly. I have come to realize that everything in my life comes down to choices. Often a decision I made caused something to happen to me – so I had control over it in the first place. Or, even if it wasn’t my decision, I have a choice as to whether I let it ruin my day or not. I am not a bottle of happiness every moment of every day but when I am grouchy I do know that I am choosing to be that way and being happy is as simple as choosing to be happy.
Tip #9: Create different problems for yourself.
One of my biggest pet peeves is people who always complain about the same problem. I have a hard time understanding why they haven’t done something about it. They probably like having that problem secretly … they must! I have lots of problems too! I prefer to consider them challenges – but still. I have things that aren’t going well too. And every time I solve one problem I seem to create a new one … but that is ok for me as long as I am not dwelling on the same problem day in and day out.
Tip #10: Create more happy moments.
Make a list of the happiest moments in your life. You’ll realize that none of them (or very few of them) involved money. Usually they involved achieving something challenging for yourself, a great moment with friends or family, or an incredible experience of some kind. One of my happiest days in recent years was when I was with Dave in the Saskatchewan Pavilion of the 2010 Winter Olympics watching the Canada vs US mens hockey gold medal match. It was such an incredible experience. We didn’t know anybody else in the pavilion yet we all felt like friends. And when Canada won in overtime it was an explosion of joy heard all over Canada. I never felt more Canadian pride and joy before that moment. It was easily one of the happiest days of my life. That experience cost us less than $50.
Wealth is important but it’s not everything. Don’t get too hung up on it. Give yourself some room to just enjoy life. Figure out what moments made you really happy and strive to recreate those moments more often. When you stop focusing on money and focus more on happiness, somehow more money just seems to flow your way anyway.
It’s not that hard to make money. It really isn’t. Keeping it, growing it, and using it to it’s fullest potential to create a life you love is the more difficult part. These 10 things are all realizations, tips or strategies that have made a big impact on my life in the last two years in particular. Since leaving my job I’ve experienced bigger challenges in my life than I ever faced before (and I didn’t steer clear of challenges before … it’s just that independence is a whole different animal!), and bigger moments of job and achievement. It’s been a wild roller coaster ride of glee, fear, and excitement and every day the ride gets more and more rewarding. I wish the same for you.
If You Liked This Wealth Creation Article You Just Might Love These Others:
“I made a list of the happiest periods in my life, and I realized that none of them involved money. I realized that building stuff and being creative and inventive made me happy.”
~ Tony Hsieh (CEO of Zappos.com)
Money is a funny thing. It’s an object of much desire. It’s the number one marriage killer. And it doesn’t seem to matter how much money you have, you probably want more. At least you will want more unless you’ve come to realize that money is simply a tool not an end result.
I know – it’s a bit of a deep thought – especially for Wallstreet movie fans who are taught “Greed is Good!” but my point is simply that too many people believe money will make them happy instead of realizing that money can facilitate the time and space to do the things that make you happy but will not, by itself, fulfill you in anyway.
What’s this have to do with real estate investing?
Everyone has a different goal around money. And before you get out there and start talking to prospective JV partners, it’s a good idea for you to get a good understanding of what your thoughts around money are and why you’re investing in real estate (is it just for money or is for freedom or for comfort in retirement or some other purpose?).
I’ve met a lot of real estate investors in the past 24 months that are miserable. These are people who have bought 30 or more properties at a rapid pace. They achieved their cashflow goal or their goal to buy x number of properties by x date. They have, by the goals they set for themselves, achieved success. Yet, they are miserable. In speaking with some of them, I realized many failed to ask themselves a lot of these questions before they took the investing world by storm. And now they are cleaning up a mess or anxious to grow further because achieving their first goal still has them feeling empty.
It’s kind of the same thinking that was behind a comment made to me by a real estate author on a blog post I wrote. He said “if you did it the way I do it, you could be buying 4 or 5 houses a month instead of just the one per month you guys are doing.”
I disregarded the comment because more isn’t better.
More is just more.
And, in fact, more could just mean a lot more problems! A couple of guys I met at a conference earlier this year had some serious headaches because they had a different joint venture partner for each property, tenant troubles and quite a few properties that were worth 20% less than they had paid for them. More properties meant a lot more stress!
I share all this because it’s really important to think about what you’re doing and WHY.
If you’ve set a goal to buy 3 properties in the next year, make sure you understand WHY.
A clear and powerful WHY will help guide you when you make your decisions, will bring you confidence when you speak with joint venture partners and lenders, and it will enable you to align yourself with the folks with money (or with the deals) that fit perfectly with your REASONS for doing what you’re doing not just the numerical goals you’ve set for yourself.
If you have thought this through then you’ll find yourself working with the right people, creating the right deals and probably doing it with a smile on your face most of the time.
So – here’s the checklist. Here are the
7 Things to Ask Yourself Before You Work with a JV Partner on Any Deal
(and while we tend to take the viewpoint of a JV partner who is doing all the work looking for a JV partner who will bring the cash to the table – this checklist can apply no matter which side of the equation you are on.)
Do you need a Joint Venture partner?If you chose to grow your portfolio slower, could you do it on your own? Sometimes when you do the math it might be better to do fewer deals but do them on your own.
What value do you add to the partnership to exceed their expectation? What value do you need your partner to add to make the deal easy for you to do?
What are your core values? For us, we only want to work with people who share our core values.
What is your time horizon for the investment? You want to know this so you can align yourself with people who have the same or similar expectations.
How actively involved do you want to be in this investment? How actively involved do you want your investor partner to be?
Are you seeking anything beyond just a financial return from your investment? Is your investment partner? (sometimes our partners are looking to learn from us in addition to earning a return, sometimes we’re looking for some connections or a longer term relationship with that person).
How comfortable are you with changing strategies mid-deal or using creative strategies to acquire real estate? Do you expect that same level of comfort from your investment partner? For instance, are you okay if you change from a Buy N Hold strategy to a Rent To Own strategy mid-deal? Will your JV Partner also be comfortable with the change?
After one failed partnership years ago and a snafu with a partner last year that nearly cost us two deals, we’ve really spent some time asking ourselves these questions. And after Dave meets with any new joint venture partner we review these questions for ourselves and with respect to the new prospective partner.
We know not every person with money to invest is a good fit for us.
We’ve learned over the years that it’s more work to try and put a deal together with someone that isn’t in alignment with what we’re doing and why we’re doing it than it is to just keep looking for someone that is a good fit. And the beautiful thing we’ve discovered is that when you find someone that is in perfect alignment with what you are looking for and with what you can offer you’ll have a long term partner. We just closed on deal number three in 12 months with one such partner. What she’s looking for works perfectly with what we have to offer. And she has basically committed to doing at least a deal a year with us for the foreseeable future as a result.
Many of our readers, and yours truly, are constantly asking which is the better buy for an investor: single family homes (aka SFH) or multi-family homes (aka MFH)? Well, I am writing this to FINALLY put an end to the debate!
For the purposes of this article, we’ll consider either investment (SFH or MFH) to be a standard long-term buy and hold rental property (that means, not a reno, not a flip, not a Lease to Own, not wholesaling, short-selling, day-trading or any other real estate strategy out there!).
Now typically this discussion will take you down the road of buying Apartment Buildings versus Single Family Homes … but I am going to do this a little differently today. Sticking with where my experience has been which is in owning rental property varying in size from one unit to six units.
So for this article, a SFH is defined as a property (can be a detached house, condo, townhouse, rowhouse, etc.) that has only 1 unit and thus only 1 family living in it. A MFH, for the purposes of this article, is defined as any property that has more than 1 unit/family living in it. Thus, it could be a house with a basement suite (2 units), a duplex (2 units), a triplex (3 units), etc.
Advantages of Investing in Single Family Homes
Depending on the city/area, typically appreciate faster than MFH
Generally a broader range of potential buyers (when it’s time to sell)
Often worth more on a per unit basis (but this can be a disadvantage too as you pay more for it)
More liquid – SFH Can often sell quicker, even in a down market again due to a broader range of potential buyers
Only have to “deal” with 1 tenant, not many
Tenants don’t argue with other tenants because they are the only ones living there! There will be no issues around which tenant gets to use the bbq or front patio or even who puts out the garbage
Easier to get the tenants to pay for all of the utility bills again because they are the only ones using them
Some argue that you get a better “quality” of tenant in a SFH than in a multi-family, however, I do not necessarily agree with this. Will discuss why later.
The biggest disadvantage as an Investor is they rarely cashflow as well as a multi-family home
Can be “riskier” as there is only 1 tenant to pay the rent. If they vacate (and you can’t immediately place a new tenant), who pays the mortgage, bills, utilities, etc? You do! The MFH has more than 1 tenant so they at least continue to collect some rent to offset their costs.
Tend to have a smaller pool of renters because SFH tend to have higher rents than homes with multi-units. Thus, it may be more difficult to place a good tenant in a SFH because they tend to be more expensive.
No economies of scale with a SFH. If you or your PM are managing it, there is just the 1 house/unit/tenant. Most PM’s will offer discounts on a per unit basis if it’s a MFH, these discounts won’t apply on SFH. The same goes for doing repairs and maintenance, you may get a cheaper per unit rate if you are replacing all the windows or locks on a MFH than on, for example 3 SFH.
SFH are often slightly less conveniently located than MFH which again may hurt your chances to find tenants. Thus, SFH are usually slightly further away from main roads and public transportation, retail shops, offices, and other places that your tenant may want to be close to. This is because MFH are generally built in higher density areas. Higher density areas are built around shopping, stores, offices, etc.
Contrast these with the advantages and disadvantages of Multi-Family Homes as an Investment:
Advantages of Buying Multi-Family Homes
Potential to cashflow better because there are many more units purchased for a slightly lower price per unit – typically.
More than 1 rent to help cover your operating costs – if one unit is vacant there are other units bringing in revenue that will help you out.
Often a broader range of possible tenants to choose from as the per unit rental cost is usually less than a SFH
If 1 unit becomes vacant, you can work on it (paint, put in new floors, etc.) but still be collecting rent from your other units/tenants
Economies of scale: for instance, your PM will likely charge you less (as a percentage of the rent) on a 2 or 3 or more MFH than he/she will on a SFH. Furthermore, your utility costs will likely not be 3 times the amount (if it’s a 3 unit MFH) even though there are 3 tenants living there.
On a per unit basis are less expensive than SFH
Generally, your rent to price ratio is higher on MFH than on SFH (this can often equate to more cashflow)
Disadvantages of Buying Multi-Family Homes
Well, you can pretty much figure them out based on all of the above, but here’s a quick list anyways!
Maintenance tends to be higher as there often is more wear and tear because there can be more people living in the building, more appliances to service/replace, and often more tenant turnover.
Tenant placement costs tend to be higher as MFH’s often have more turnover than SFH. This is just my personal experience… I don’t have stats on this other than our own personal experience.
Tend to appreciate slightly slower than SFH
More limited buyer pool when it’s time to sell
May take a lot longer to sell because of the limited buyer pool
Two words: Tenant squabbles!
Financing can be more onerous.
From the advantages and disadvantages you can see there are plenty of reasons for and against both types so let’s give you a real life example of SFH vs. MFH and you can decide which is the better buy!
For this example, we are using 2 Single Family Homes purchased and compare them to 1 MFH (a side by side duplex). The reason we are comparing 2 SFH with 1 MFH is based on purchasing power. Basically, if you have X number of dollars to spend, you want to be able to compare based on that amount – rather than looking at for example $400,000 for a MFH vs. $300,000 for a SFH.
Here’s our real life case study on buying single family homes vs multifamily homes:
Bought 2 SFH properties: 1 – $74,500, rent was $720 per month 2 – $72,500, rent was $500 per month Total cost: $147,000, total rent was $1,220 per month Total expenses on these two was $1,200 per month Net cashflow of an exciting $20 per month!!
Today’s value: Total of $330,000 Total rent today: Total of $1,348 Total expenses: Total of $1,400 per month, currently a net loss of $52 per month
Bought 1 MFH (side by side Duplex) 1 – $152,900, rent was $1,600 per month Total expenses were $1,300 per month Net cashflow of $300 per month!!!
Today’s value: $350,000 Today’s rent: $2,450 Total expenses: $1,900 (after refinancing) Net cashflow of $550 per month!!
Which one do you think is the better investment?Well, in most cases I would think our savvy readers would think the MFH property is the better investment. And, for some of you it would be. There are a few reasons why I am not so sure the MFH is the clear winner. Let me explain why…
The 2 SFH’s are in a prime development area, thus the LAND value continues to go up and up and up! So, the opportunity for good appreciation is stronger in that area than where the MFH is located.
The 2 SFH’s are on freehold land vs. the MFH is in a strata community. Thus, there tend to be more restrictions on what you can and can’t do in a strata community than when you own the land on freehold title.
We have had a total of 4 different tenants across BOTH SFH’s in over 5 years! 1 of our tenants has not changed since we bought it and the other property has had 3 different families over 5 years. Meanwhile our MFH, while a pretty nice duplex, has had over 8 turnovers in the same timeframe. Higher turnover means higher placement costs, higher maintenance costs, and more stress!
So, the reason I share this example with you is to give you a taste that there often is NO CLEAR WINNER between SFH and MFH’s when it comes to real estate investing. What matters isn’t which is a better investment, it’s what is a better investment for YOUR time, energy and resources.
Before deciding multi family homes are the better investment because they have the potential for better cashflow, first ask yourself these questions:
Who will be responding to any potential tenant squabbles (me or a Professional Property Manager)?
Does the MFH have legal or illegal suites? If they’re illegal (which many are), just prepare yourself that if a noisy neighbour complains, that you may have to work with the City to either legalize the suite (can be costly) or decommission it. Either way, this may eat up a chunk of your time, energy, and money. So, be sure you don’t mind doing this.
Who’s going to be paying all the heat, hydro, and electricity bills? If each suite isn’t metered, you’ll want to determine if you can get your tenants to pay their portion or you’ll have to include it in the rent.
What about before deciding investing in single family homes is the way to go. Ask yourself:
Can I carry the costs (mortgage, electricity, taxes, insurance, etc.) when there are any vacancy’s?
Do I want to pay a Property Manager to manage just 1 tenant or can I handle the odd late night repair phone call and some minor maintenance issues?
Do I strive for more liquidity in my investments (the ability to sell faster)?
Do I want the potential for greater appreciation or just monthly cashflow?
By digging into what type of property suits you best is usually the best strategy you can have, rather than listening to all the “talkers” out there about which is the better investment. And yes, that even includes yours truly! So get out there and decide for yourself which is best….in all likelihood, whichever one you think fits your skills, personality, and aptitude, the better investment it will be for you. But, you’ll never know until you get started … so go ahead and get started!
Learn the secrets to becoming a millionaire real estate investor…in your spare time. Get the Rev N You with Real Estate Starter Tips Guide free when you sign up for our complimentary Rev N You with Real Estate e-zine.
“One good thing about being young is that you are not experienced enough to know you cannot possibly do the things you are doing.” – Gene Brown
The smartest thing my husband and I did to build our multimillion dollar real estate portfolio in under eight years was to find a couple of great partners.
As I reflect back on the things that my husband and I did in the last eight years to become millionaires – I think that finding good properties in areas with promising economic futures, and buying them with good partners was the key to our success.
Partners can bring cash to the table if you don’t have enough, they share the risk on a venture and can also provide mentoring or advice. A good partner, in our experience, brings something to the deal that you don’t have. If you and your partner have experience but no money, you will be stuck. If you both have money but no idea what you’re doing, it will be messy. But if one partner has experience and the other has money, it’s a foundation for a solid partnership.
It’s not a guaranteed great match just because you have the expertise and they have the money! There are some other things to consider before you partner with someone on a real estate investment.
Here’s what we’ve learned are the secrets to successful real estate investing partnerships:
1. Common Objectives
Some people have the expectation that buying investment property is their ticket to overnight wealth. Or they think that just a couple of deals will give them enough cashflow to retire on, but the techniques that can create giant amounts of cash flow or that are more instant in their wealth creation are extremely high risk gambles that pay off for only a few. For many others they can lead to a lot of problems, including bankruptcy in extreme cases.
Before we decide to partner with anyone, we make sure that they have similar fundamental objectives for their real estate investing as we do. When we buy real estate, we buy properties that will have positive cash flow within 12 months of purchasing it, and that we plan to hold it for a minimum of 5 years, but more realistically, 10 – 15 years.
As long as our partner has a similar mindset, and is comfortable investing their money for the long term, then we can continue discussing our partnership.
2. Begin with the End in Mind
It’s a throw back to Stephen Covey’s Seven Habits of Highly Effective People, where he says“Begin with the End in Mind”.It’s important to discuss with your partners how either one of you can get out of the deal in the future if it’s critical. For example, if you buy a duplex and each have 50% ownership, but down the road, your partner comes on hard times and needs the equity from the property. You have three options:
1. Sell the property 2. Buy your partner out 3. Find another partner to buy out your partner.
You could also do nothing, or give your partner a loan against their share in the property, but realistically you’d probably consider one of the three options.
What you need to discuss and have written into a partnership agreement is how you will value the property if you choose to buy your partner out or find another partner to buy out your partner. You should also note that any new partner must be 100% satisfactory to you. In other words, your current partner should not go out and find a new partner for you and sell their share without consulting you.
3. Be Fair
It’s not always easy coming up with $20,000, $30,000 or more for a down payment on a property. And, although we are millionaires on paper, that doesn’t mean we always have chunks of cash lying around ready for the next super property deal. But because we have a few partners that almost always have money sitting around, and because they’ve made great money with us in the past and they trust us to make good decisions, they are always willing to consider new deals from us. And, they selectively tell their friends. Because, what you’ll find, is that people with money, often have friends with money. Over time, you can find yourself with a really solid group of people willing to provide the down payment for future deals.
Just because someone is waving a stack of $100 bills in your face, doesn’t mean you should throw them on the first deal that comes your way.The secret to long term and high quality partnerships is to spend your partners money even more frugally than you would spend your own. This means you NEVER put someone else’s money into a deal you wouldn’t put your own money into. You NEVER take a cut that is unreasonable for the amount of work you’re doing relative to the amount of money they are putting in, and you NEVER make major decisions without consulting your partners.
4. Under-promise and Over-deliver
Not too long ago, our main partner introduced us to a friend of his. As the two friends were discussing their businesses and their investments, our partner realized that this person would make a great addition to our team. When we met for coffee my husband and I communicated our failures in investing as well as our successes. And we clearly told him that we aim for neutral cashflow properties that we hold for the long term.
What we told him is not totally true though. We aim for positive cash flow. But, we always try to undersell ourselves and then over deliver. We’d do the same on a specific deal. We’d tell him that we expect it to break even, but really we’re expecting it to be postive.
If you tell someone that a property is going to bring in $500/month in positive cash flow, and then it only brings in $380 each month, they will be disappointed. But if you tell them that the property will be neutral cash flow, and then it brings in $380 they will be thrilled.
We’d rather undersell someone and have them decide not to invest with us than over sell, have them invest with us, be disappointed, and be an unhappy partner.
5. Communicate Regularly
We partner with people that don’t expect us to give them a glossy annual report each year. They don’t expect a weekly progress report. We do, however, always give them updates and advance notice of money coming in and going out. And, we keep them up to date on the property. If a tenant moves out, we let them know. When the unit is filled again, we let them know. If we foresee a major expense coming, we give them a heads up. If we just learned of some recent sales in the area that indicate our property has gone up in value we let them know. If there is bad news in the market, we will reassure them about their investments. But, we do this informally. A quick phone call or an email when there is something to tell them.
And, if they call or email us, we get back to them right away. If you have money in the bank and you want to check on it, but nobody is answering your calls and you can’t get online to see how your money is doing, you will lose confidence in that bank. The same will happen to your partner if they can’t talk to you when they need you.
We found that because we take care in choosing our partners, and ensure we are all “singing from the same song sheet”, we rarely get calls from our partners. And, we also find that our circle of trusted partners is growing without us trying. And thank goodness, because now that I am retired from my job, and my husband is close to doing the same, we’ll have more time to find great deals, but less cash coming in to pay for them!
Money is tight, and you’ve got to rent out your vacant basement unit. You live above the unit and you need the rent money to make the mortgage payment. What do you do? Rent it out to the only person who is willing to move in right away. And you allow yourself to justify why that person won’t let you speak to their current landlord or why the collection agency is after them.
What could go wrong? This lovely tenant could be unstable and pull a knife on her roommate. Yes – it happened to us at 3am on a Wednesday night about 4 years ago. We had to call the police and have them separate the two tenants. The victim moved out the next morning and we were left with the knife wielding tenant who then stopped paying rent but refused to move out. It took us three months to evict her. We had to live above her the whole time. Once we FINALLY got her family to come to town and move her out (we were still a few weeks away from legally being able to throw out her stuff and change the locks), we had to send a collection agency after her for the rent money. We never received a dime.
As you can imagine we’ve taken great pains to find good tenants ever since. Here’s the overall process:
Step 1: Prepare the unit for showing
Step 2: Get your paperwork in order
Step 3: Research the market rents and place your ad
Step 4: Show your space
Step 5: Choose your new tenant.
Step 1: Prepare the unit for showing
The better it looks the more likely you’ll find a good tenant for the space. Make it easy for someone to visualize themselves living happily in that space.
Some suggestions to prepare the unit:
Fill any holes and put a fresh coat of paint over the walls.
Check all of the doors, locks, plug ins, appliances and light bulbs to ensure they are in working order.
While you are doing this, create a checklist to use when the tenant moves in or out. Include all of the rooms, doors, windows, drapes/blinds/shutters, plugs and light switches, shelving, appliances etc.). When your tenant moves in you both need to sign off on this sheet – it’s required by law in B.C. If you’re not sure how to start this sheet check out docstoc for examples.
Air the unit out before showing it – open up the doors and windows to let fresh clean air in.
Step 2: Get your paperwork in order
To attract a good tenant, you will need to be a professional landlord and have the right paperwork on hand. Contact your local residential housing branch of your government or go online and do a search for landlord forms to find the following:
Tenant application forms
Rental/Lease Agreement forms
Eviction notices or other forms you might need later – sometimes you have to order the forms so it’s better to just have them on hand.
Each provincial government has different requirements and rules for what must and what can be in each of the above documents so be careful what you download. Ensure you’ve got documents that are legal in the same province as your rental unit.
Research like units online to make sure you’re not asking too much for your unit. We check Rentometer for a ballpark range and then research in detail on Craigslist and Viewit to understand what the competition has their units priced at.
Don’t get too greedy– it’s better to price just below the market. You will rent your unit faster, have a larger tenant base to pick from, and you will have a better chance of retaining a tenant for a longer period of time. When you find yourself thinking “but I could make $50/month more easily!”, counter that thought with “but it will cost me even more if this unit goes vacant for a month or if I have to re-paint or fix up this unit in 12 months when the current tenant leaves in search of a better deal”. I’m not saying leave a stack of money on the table, I am just saying, that it’s better to be slightly below market and have a great tenant in there quickly then to get a few more dollars every month.
Get the word out! We’ve found tenants through all of these methods:
Word of mouth– we email all of our friends and let them know we’ve got space for rent. As a result, we have rented several units out to friends over the years. We also let our good tenants know about other units that are available and sometimes they move into the units and we keep them as tenants for longer, or they have friends they can recommend to us.
Advertise online! We love the viewit.ca and craigslist combination in Toronto. Viewit.ca takes pictures of your rentals. You can place a free ad in Craigslist with a link to the Viewit.ca ad so your prospective tenants can see the unit.
Craigslist on its own is also very effective and it’s free!
Put a sign up on your lawn or in the window of the unit with a phone number. Viewit gives you a sign to put up which is another benefit of advertising with them.
Local Newspapers can be a fairly inexpensive way to advertise. Ask the classifieds agent what is the best day to advertise a rental unit on to get the most eyeballs seeing your ad. We don’t advertise in the paper anymore as we find online to be very effective, but in some areas your target renters may be best reached by the paper.
University Housing Boards: We haven’t done this for awhile, but we have a tri-plex near the University of Toronto, and we used to advertise there. These days every university student seems to use Craigslist.
Step 4: Showing your space
The most efficient way to show your space is to have an open house. Pick a time to show the space for a two hour period one evening or during the weekend. Then have a back up time. When a tenant calls about seeing the unit, tell them that you will have a showing for all interested tenants at time slot one, and if it’s still available, there will be a second showing at the second selected time.
Prepare for the showing by having the unit as clean and fresh smelling as possible. Be dressed in business casual attire with tenant application forms on hand when you greet the prospective tenants.
You could show your unit to one tenant at a time. This is a great way to get to know the applicant a bit more, but it is very time consuming and inefficient, especially if you don’t live nearby. An open house environment creates an air of demand which helps get applications completed much quicker. When a prospective tenant sees the other interested parties, if they want your unit, they will act quickly to try and get it. Encourage the prospective tenants to complete the application before they leave. Then you will have the application in hand and can make notes on the application about who they were and what your initial impressions of them were. Alternatively, ask them to drop off the application the next day (especially if you’ve already received other applications – you can tell them you plan to make your decision in the next few days).
Step 5: I choo choo choose you! Choose your new tenant.
Review the Application: Look for gaps where a place of residence is not indicated, or look for conflicting information. If you liked them but there are gaps or issues with their application, ask them about it. If you start to hear things like “well my previous landlord didn’t like me because of….”, or “there is a credit agency after me because of…” then it’s not a great start. Some reasons make complete sense, others are just elaborate stories. If you can’t be sure what the case is, keep looking. Or you could end up with a tenant that pulls a knife on another tenant like we did!
Run a Credit Check:Once you’ve found one or two that you like and that has a good application, run a credit check. This is a critical piece. Many veteran landlords say they just trust their gut. Well, I trust my gut, and then verify it!
Reference Checks: Call the reference and ask them simple questions like “how long have you known the applicant?”, “What’s your relationship with them?”, and “Would you rent to them?”. This is also a good gut check, but keep in mind that a current landlord might be anxious to get rid of the tenant so they might not tell you the truth.
Final Gut Check: So they have decent credit, nothing came up on their application that makes you uncomfortable, and the references had nothing negative to say. What’s your gut telling you? Do you get a good feeling about them? Do they seem honest? Do you think they will be too messy? Or too picky? If you are happy with the gut check then you are ready to choose your new tenant.
WAIT! What if there is a tie? What if you can’t choose between two tenants? I go back to the prospective tenants with some additional questions to break the tie:
How long do you plan to stay?
What will you be doing for the next couple of years: work, school? what type of work or school?
What do you like about my place versus others that you have looked at?
Why are they moving out of their current place of residence?
Will you sign a one year lease?
Do you like to have people over on a regular basis?
After hearing the answers to these questions, you’ll usually find yourself leaning towards one tenant. Once you’ve selected your new tenant, have them complete rental agreement and collect the first months rent. Depending on what province your unit is in, you will also collect a security deposit or last months rent at this time.
Once you have a signed agreement with rent cheques in the bank, you will need to let your other prospective tenants know that the unit is rented. If a prospective tenant asks why they didn’t get it never tell them it was because of age, race, gender, or because they have or don’t have children. No matter what your reason was for choosing one tenant over another, you cannot be discriminating about the choice. It’s probably safest to say ” the other tenant had a very strong application”.
There isn’t one right way to structure a JV. Over time you’ll discover the way that is the most fair for you and your partners given what each party is bringing to the table (Also see – Real Estate Investors Checklist for Working with JVs).
Many of our readers, and yours truly, are constantly asking which is the better buy for an investor: single family homes (aka SFH) or multi-family homes (aka MFH)? Well, I am writing this to FINALLY put an end to the debate!
Here’s our real life case study on buying single family homes vs multifamily homes:
“One good thing about being young is that you are not experienced enough to know you cannot possibly do the things you are doing.” – Gene Brown
Don’t get too greedy– it’s better to price just below the market. You will rent your unit faster, have a larger tenant base to pick from, and you will have a better chance of retaining a tenant for a longer period of time. When you find yourself thinking “but I could make $50/month more easily!”, counter that thought with “but it will cost me even more if this unit goes vacant for a month or if I have to re-paint or fix up this unit in 12 months when the current tenant leaves in search of a better deal”. I’m not saying leave a stack of money on the table, I am just saying, that it’s better to be slightly below market and have a great tenant in there quickly then to get a few more dollars every month.
WAIT! What if there is a tie? What if you can’t choose between two tenants? I go back to the prospective tenants with some additional questions to break the tie: