Most vacation-property owners will tell you that breaking even off their seasonal tenants is a pipe dream and unattainable.
The negative cash flow of beachfront condos is tolerated because historically they’ve offered great appreciation, personal enjoyment and that bit of prestige.
It feels better to say you have a beach spot than it does to say you have a duplex.
Beach condos tend to appreciate better than the average property because demand is high and the supply of projects that can be situated on the water is extremely finite.
Over the long term, people have done quite well buying this type of property if they can afford to subsidize it over the years.
Rarely do you get to have your cake and eat it too. Where do you find a nice piece of downtown beachfront that offers the ideal vacation property for your personal use four weeks per year, and have it cash flow spectacularly?
There are two developments in Kelowna that will tick both boxes. One is Discovery Bay on Sunset Drive and the other is also on Sunset, appropriately named Sunset Waterfront Resort.
They’re a stone’s throw from one another, and by the same developer. Discovery has 236 units and they sell for $392/sq ft. Sunset Resort is a concrete high rise with fewer units (128), so it commands $470/sq ft.
Both rent for about the same, but Discovery Bay is a slightly better cash-flow property.
I have a decade's worth of experience owning units in both complexes through good markets and bad, so I know the numbers and the secret to getting enjoyment and cash flow.
They cash flow so well because the demand for them in both on- and off-season is great and the values are still comparatively low compared to other tourism destinations.
These two developments have a special kind of zoning known as resort residential. This allows the owner to do nightly and weekly rentals and charge handsomely for it. You’ll pay $275/night or $1,800/week if you plan to stay on Sunset Drive during our beautiful summer months
The units in this complex switch back and forth each year from furnished long-term rentals to vacation rentals. Because of the location, demand is extremely strong. Keeping the units booked was not a problem, even during the great recession from 2008-2012
In the off-season, there is a frenzy of people waiting to rent them for 1,800/month. I opt for an eight-month lease From Sept. 15 to May 15. This allows me to get the place summer ready in time for the May long weekend, and I get to enjoy it for at least a week in May and then again in June. I chose these dates since, historically, I only got the last two weeks of June booked by vacationers.
July and August will be booked solid and will bring in over $15,000 in revenue. So this is prime rental time.
September, I typically block off a week for myself to enjoy the late summer weather, which is almost always perfection and the resort is more peaceful and relaxing as we enter the shoulder season. I’ll still accept one week’s booking for my usual $1,800.
As a nice little bonus, I park my boat in the protected lagoon and enjoy the most affordable moorage in the city. I can utilize the resorts many amenities whether I have the units rented or not. Spend the day by the pool and then walk to best restaurants in the city
Here is an average year’s revenue for a two-bed unit.
- Jan. – $1,800
- Feb. – $1,800
- Mar. – $1,800
- April – $1,800
- May – $1,500 (Half month rent plus 3 night rental)
- June – $3,600
- July – $7,950
- Aug. – $7,950
- Sept. – $2,700 (One week plus half month)
- Oct. – $1,800
- Nov. – $1,800
- Dec. – $1,800
- Total $36,300
Expenses for the year are pretty low as the heating and cooling and water is covered in the strata fee of $360/month, the taxes are quite low at around 2,300/year. Tenants pay for the cleaning, so you have about another $1,000 in incidentals for advertising and supplies.
Neither complex requires you to be part of a rental pool so you can manage them yourself on VRBO with relative ease and save the 20-30 per cent. For many however, the $8-10K investment in a manager is worth it to be totally hands off.
The net operating income of these investments is $28,680, which makes these a perfect 7 CAP while you can still buy them for around $400,000 multi-family residential and commercial properties are selling for approximately 5.5 CAP in Kelowna so this is extremely good.
And when was the last time you spent four weeks poolside at your duplex?
For a list of properties for sale on Sunset Drive and others that perform similarly to the above examples, email me and I will send it right over.
I've been writing for Castanet since 2013 and I have written only about strategies for acquiring property.
But now that we are in the full throes of a boom cycle, my best advice to many will be to sell. Sell anything that isn't a cash-flow rock star and take the cash, ready to re deploy for the right opportunity.
Many of us, myself included, are sitting on properties that aren't serving us well. We have too much equity in them, they don’t have good cash flow or they don't fit our current model.
We would have sold these cash vampires years ago, but the market wasn't right. Well, here we are at the edge of summer 2016, in the busiest market we’ve ever had, with inventory at levels reminiscent of 2006/2007.
If ever there was a time to seriously consider selling, it's now.
Some might argue that there's more appreciation yet to come. I would agree, but the largest returns on property are when you add value to them.
Take the cash out, and sink it into something where you can get the full three-course meal — immediate value gains with renovation, strong positive cash flow, and the rest of the appreciation this boom has left in ’er.
Having cash back in the till during a boom and, even more important, during the slump that follows every boom is paramount. What would you have done during the last slump if you had been sitting on a large sum of liquidity?
Now, there’s selling a property, and then there’s selling a property. I’m talking about specific steps you can take to create a bidding war and get over list price on your terms. There’s a formula, and I’m going to share it with you free of charge.
This is divided into two sections. What to do in advance of listing to get the value as high as possible, and what to do to create a frenzy for the property when its time to go to market.
- Get a consultation on the most profitable renovations you can do before hitting the market. It’s not uncommon that $5,000-10,000 wisely spent will return 15,000-20,000 or more on the sale price. This consult is free from an investor-focused realtor.
- Bring in the stager – Now, it's time to get the decor right, from minimizing clutter to adding the right accents. A staged home will sell for up to five per cent more than an un-staged one. The cost is only a couple hundred dollars and it returns thousands.
- Get it inspected – It's common practice in the U.S. and Australia. A pre-listing inspection has a few not so obvious, but major benefits.
Buyers will negotiate a price before inspection and often attempt to re-negotiate once issues are uncovered. Dealing with them ahead of time prevents this often adversarial and costly renegotiation at the 11th hour.
It creates more trust and good will. Again, having the inspection open on the counter puts buyers at ease, allowing them to get out of defect-detection mode and back into deciding if their life fits in the space.
You get more for a home in great condition than one that comes with a list of deferred maintenance. Fixer-uppers appeal to only experienced buyers or ones looking for a deal. They often take longer to sell and are more likely to attract lowball offers.
By investing in an inspection, you greatly increase your chances for a multiple offer situation, of having a bidder come in without any conditions, because you made it safe for them to do so. You can even get a one-year warranty for around $300, like a certified pre-owned car. We know those go for more.
Now, to the actual launch of the listing.
- One week out, place a coming soon sign in the front yard to build demand and intrigue for the home, but don’t show it just yet.
- Next, get 35 plus architectural digest quality photos taken of the property for use in your marketing to get buyers.
- Create a video walk through because buyers in Vancouver and Calgary will often buy homes sight unseen because they know they don’t have the luxury of time to fly out when the market is this hot. A good video broadens who can bid on the home.
- Go Live on a Thursday afternoon. When you hit the MLS is a subtle nuance that can make a heap of difference. You are only on the hot sheets for 24 hours, so let's make the most of this small window. Realtors are far more likely to see your listing if its featured between 3 p.m. Thursday and 3 p.m. Friday than competing for their attention as the weekend hits.
Now, you should get a ton of showings for the weekend. Make it clear that you will be entertaining offers at 5 p.m. on Monday and then let the demand and competition build for the property until then.
Come Monday, if all goes as planned you will have your choice of offers some well above your asking price. Just remember, you don’t get what you deserve, you get what you negotiate.
Well there you have it, not my typical cash flow investment, real estate centric article, but one thing I’ve learned over the years is that part of being a good investor is knowing when to it’s time to cash out and look for the next deal.
If you would like a list of the service providers I’ve mentioned in this article including my trusted Inspectors, appraisers, stagers, contractors, photographers, videographers, please email [email protected] and I’ll send it to you.
Hot market mayhem - and how to escape the insanity
All we hear about these days is that the Kelowna real estate market is on fire, houses are selling in multiple offer and for over list price.
This is not untrue, but it doesn’t tell the full story. Adding to the mayhem is a massive influx of Vancouver investors pouring into Kelowna right now, driving up the price of our cash flow properties, be it suited homes, downtown RU6 property or duplexes.
Inventory is low, but did you know it is now down to near 2007 levels?
It is most certainly a seller’s market in that we have far more buyers than we do sellers right now. The average days on market are plummeting, and it seems all we hear about are the bidding wars, especially with investment properties.
Proportionally we have almost 50% more properties selling to investors this year versus last. This translates to hundreds of investors set up on auto searches, waiting for that next hot listing.
While everyone is waiting for the ping of an alert from their new property search, there is a secret pocket of inventory equating to roughly 25% of the total inventory on the market for over 100 days.
One thing I can tell you for sure, those particular sellers have heard just about enough of realtors, the media, and the general public talking about how great the market is, while their home sits on the market desperately hoping for showings.
People forget about these listings that came on the market too high, got overlooked, and are now aging away being ignored as though they were last to be picked for dodge ball.
I get it, new is sexy, who wants what everyone else has overlooked? But that’s a follow the masses mentality.
It is the same reason why the vast majority of these “investors” were sitting on the sidelines when things were really depressed three years ago. Sellers were willing to throw in a kidney to get you to take their property, but it just wasn’t popular then.
In previous articles I have written about ways to let the numbers and cash flow potential guide your decisions around price. Based on that, every property is a good deal at the right number.
Consider this: A hot foreclosure listing just came on the market downtown on Walrod Street. It came on for 425k, the sweet spot for investors. Now all these people competing for this hot new listing will likely bid it up 30-40k over list.
So let’s assume it sells for 455k, to be conservative - although I expect it go for more. Is that a good deal? Sure, the winning bidder is happy as a clam, and the runners up go back, discouraged, to wait by their computer for the next one, telling themselves they will have to be more aggressive on their next bid. Euphoria ensues Euphoria ensues in a market like this, but. . . .
This is not the way, people. I can’t make it 2011 for you, but what I can say is, there are precisely 308 sellers of single family homes who have sat on the market for at least 100 days (I just checked). They are as close as you are going to get to a 2011 seller.
Some of them might be unrealistic and won’t listen to reason, but others have a real need to move on. They made a tactical error in the beginning by listing in what I call “no man’s land”, and now they are paying the price. These sellers would love to see an offer from you. They might even be willing to let you negotiate. Imagine that.
So, thinking back to the 425k foreclosure house on Walrod that will sell for at least 455k. Would it not be just as good, or potentially better, to approach a seller optimistically listed at $469,900 for 100+ days and offer them 450,000 or less?
In addition to the better price, you can actually get favourable terms and the dates that work for you. Go figure.
Now, armed with this info, it is your job to evaluate at what price and on what terms this property goes from being an overpriced stale listing to a home run investment that everyone else missed because they were all too focused on the new sexy.
For a specific list of properties in your price range that have spent no less than 100 days on the market, with sellers who would be thrilled to let you negotiate with them, just email me and I’ll send it right over.
Also, for those of you looking for a crash course on how investment properties are analyzed on the fly in the real world: On April 30th we are bringing back our famous Ugly House Tour. We have room for 20 on the limo bus on a first come first serve, click here for more info.
A personal story of joint venturing and how you can prosper
People often ask me to share the secret to building a multi-million dollar portfolio when not starting with a mountain of cash, or having banks tripping over themselves to lend you money.
The answer is simple, don’t go it alone.
One thing I learned early in life is the power of joint ventures. There is no chance I would be where I am today in real estate, if not for amazing partnerships. It is the key to getting started, or unstuck, because when people join forces to create win/win scenarios that otherwise would not have been obtainable, amazing things happen, and fortunes are made. A well structured JV is one of the most gratifying things one can do in business.
My personal story of joint venturing starts with my very first home. As a completely naïve 19 year old, all fired up after reading Rich Dad Poor Dad, I was ready to jump in head first.
One night in a bar, where most great ideas are conceived, I struck up a partnership with an acquaintance from high school. He had sterling credit, and I had a bit of cash saved up. We bought a basic bi-level home, put some sweat equity into it (read terrible DIY renovations the future owners couldn’t wait to tear up), and sub-letted our basement to our buddies.
As a couple of 19 year old home owners, you can bet we had a heck of a time living there (if those walls could talk). Little did we know, it would be the decision that gave us both a massive head start financially and a lifelong friendship.
Fun fact: The process of buying that house was what led me to take my real estate course.
The following year, I came across a downtown condo that I wanted real bad. Same problem, the banks can’t get new realtors out of their offices fast enough.
Give up? No way!
I approached a friend from baseball who also had terrific credit. We went 50/50 on the condo and held it for 10 years, running it together as a successful vacation rental. We recently sold it for a tidy six figure profit. I was sad to sell it, but joint ventures do end eventually. That little condo at discovery bay was a cash-flow rock star bringing in $1800/week through VRBO.
As an aside, I highly recommend those units as an investment, and believe they are still undervalued.
Now, it hasn’t all been sugar plums and lollipops for me, this next one haunts me to this day.
Days before my 24th birthday, the market is on fire, and I’ve got a serious case of hubris. I’ve joined forces with a client of mine to purchase ‘The Big One’, a 1.3 million dollar palace on two acres that had development potential. As this was out of our league, we went to a Vancouver business man, one of my partner’s contacts, and structured a joint venture to subdivide and build.
This was my first attempt at a something more complicated than your typical 50/50 JV - it included Investors and commercial financing. We formed a corporation, created a partnership agreement, and off we went. It was looking as though it would be a home run.
A few weeks later, we bull-dozed the home. The headlines surrounding the 2008 crash came out . . . aaaaannnd we were caught with our proverbial pants down.
To add insult to injury, my partner and I had purchased two units in waterscapes for a combined value of a million and a half dollars. We lost every single cent we had invested in that deal, a lesson that both cost, and taught, me as well as any Ivy League education could.
The lesson: Don’t be a speculator!
From that day forward I have purchased nothing but positive cash-flow investments.
Every crash brings opportunity. Prices in Arizona had been sliced in half, and this time I linked up with a guy I knew from a boxing club who also had a little bit of cash. Between his mother, myself, and my girl friend - now wife - we put together a little fund, and began buying up distressed condos in Scottsdale. Six years later, it has turned out to be one of the best investments of my career. It was made possible only through collaboration.
I have continued to buy property every year. Sometimes I’m in a position to do it on my own, and I do, but sometimes I’m maxed out at that moment. I don’t let that stop me, there’s always a way to create something great.
What I’m about to share with you is the formula for creating equitable and profitable joint venture partnerships.
First: The Quadrant
This chart shows a quick way to figure out who is doing what, and who is entitled to what in a partnership. In each corner of the quadrant, you will see the appropriate share hold for each component. Many successful joint ventures involve an expert deal finder who will take on all but the initial capital contribution. This allows the investor a hands-free investment that requires none of his own time or personal borrowing power.
There are no shortages of people out there who will warn that family and business don’t mix, or that the easiest way to ruin a friendship is to jump into business together. As someone who has made almost every mistake in the book and come out the other side a little smarter each time, I can tell you with confidence that the times when things go wrong will only stem from expectations not properly set.
Most partnerships out there are done based on a handshake and a pile of assumptions. This is doing everyone involved a huge disservice. For starters, when things aren’t laid out clearly in writing, you are putting your relationship in serious jeopardy. All of this can be avoided with a simple memorandum of understanding that will later be the basis of a partnership agreement drafted by your lawyer.
Who will do what? For how long? How does one of us get out of this partnership if need be? These are the kinds of things often overlooked by overly eager ‘honeymoon phase’ partners. Don’t fall into this trap!
Second: The Partnership Agreement
Your next step is to draft a partnership agreement. I’ve got a great pft that I obtained through my affiliation with REIN. It has a phenomenal checklist to ensure that you get all the expectations and ‘What Ifs’ sorted out prior to committing to a property. Armed with this checklist you are ready to strike up a partnership that could be just the synergistic force that makes both of you very very rich.
Lastly, I’ll say this, the one thing I know for sure: There is zero chance that a 19 year old kid with $8,500 bucks burning a hole in his pocket and no credit goes on to become a multi millionaire by age 30 without utilizing the awesome power of teamwork. I would hedge a guess that the vast majority of self made people did so through a series of win/win partnerships along the way. I encourage you to go out there and do likewise, but learn from my mistakes.
Here is what a typical 50/50 joint venture looks like when one party has the cash and the other has the time and the expertise.
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