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8 things you need to know

Eight things you need to know about suites, so you can PROFIT in 2016

There have been some interesting changes in the world of secondary suites of late. And it seems that nearly everyone is confused, or working off old information, when it comes to rental suites.  

I’m going to share with you the recent game-changers that have really made things open up, what it all means to you as an owner of Kelowna Real Estate and ultimately how you can use this info to make yourself some money.

So let’s start at the top:

In fall of this year, the Federal government and CMHC changed its rules:

“The changes from CMHC would allow homeowners to count the income from their secondary units when qualifying for a loan, something that would seemingly bring more people into the housing market. Under the new rules, CMHC will consider up to 100 per cent of gross rental income from a two-unit owner-occupied property. This includes basement rental units and in-law apartments.” ~ Financial Post

At the same time, almost serendipitously, local governments decided to open things up for us from a zoning by-law perspective,

Council heard a plan in October that would change current rules against mortgage-helping suites at Gallagher’s Canyon, Tower Ranch and Quail Ridge.

Planner Ryan Smith told council, staff is working on zoning revisions for the three golf course communities that would allow secondary suites to be legalized in much the same manner as they are in other neighbourhoods, without a public hearing.” ~ Kelowna Daily Courier

Affecting even more households, the City of West Kelowna just amended their zoning bylaws. This is huge:

Nearly every residential zoning in West Kelowna now allows carriage houses, and with far fewer stipulations than on the Kelowna side. The largest being that you don’t need a rear lane access on your lot. The property value increase created when a property has two dwellings is exceptional, not to mention the additional cash-flow. I

had my first client this month follow my advice and buy a rental property in West Kelowna, specifically to take advantage of this rule change. I expect many more to follow suit. 

So let’s shift our focus away from rules and regulations, and on to something even more influential when it comes to the real estate markets, and suited properties in particular: Demographics.

Baby-boomers, massive in numbers, were ‘busy’ enough to repopulate the earth at a rate of approx. 2.2 kids per household. Consequently, they have created the largest generation in human history. This generation known as Generation Y, born between 1981 and 1993, is entering the real estate market in droves.

The eldest of the Y Generation turned 33 last year, and in the next decade, there will be more people turning 33 than ever before.

Why is that important? Because the average age of a first-time buyer is, in fact, 33. Due to rising prices and affordability issues, these buyers will be looking at suited homes to allow them to make the jump from renter to homeowner. 

While at the same time, and just as much of an economic driver:

Baby boomers are looking to augment their retirement, and are turning to investment real estate to pump up their passive income, as they cruise towards their mid 60’s. Suited homes make a great investment for this demographic.

Add to that, baby boomer parents are opting to move into suites and coach houses rather than retirement homes.  This puts even more demand on these kinds of properties.

Now lets talk dollars and cents:

Building a secondary suite doesn’t cost anywhere near what most people think it does (especially if you know who to call), and the revenues have never been higher. Here’s the rent you can expect for a rental suite today: 

So what does it cost to put one in?

Here is a basic breakdown of the investment, if you paid a contractor to do the entire job (suggested):

Permits and licensing

Cash and carry for $3500, includes counter tops  

$1,500 for basic appliances, or treat yourself to state of the art new ones upstairs and bring your current ones down.

(Fire-rated and sound dampening) $3,000 


vinyl planking @ 3.50/sq ft x 800 feet -$3,000

$2,000, Includes new hook-ups

Upgrading electrical panel

Upgrading new bathtub, and vanity and toilet

Contractor labour
$7,500 (framer, flooring installer, finish carpenter)

Total: $26,500 

It can be done for as low as $15,000 and as high as $35,000, depending on complexity and quality of finish.

You don’t actually need to have any cash on hand to do this, whether you are putting a suite into a home you already own, or are wanting to put one in a house you are buying, there are really cheap financing options available to you through either a home equity line or a purchase plus improvements line.

Here’s what it would cost you on a line of credit using the highest estimate:

Prime plus .60 = 3.3%   $35,000 x 0.03 = $96.25/mo. Now let’s say you build a basic/average suite and rent it for $1100, you are netting $1,000+ per month.

The ROI on the $35,000 is 34%, and keep in mind you didn’t spend a dime of your cash on hand.

Now for the big burning question: To legalize or not to legalize.

Many of my clients come to me with hang-ups with regards to in-law suites. People often say that they only want to look at listings with a legal suite. Fact: If you limit yourself to only properties that have legal suites, you will have way less from which to choose. For example, right now on the MLS, there are 13 homes between 350 and 400 with suites, only two of those are legal. And guess what, they are at the top of the price range.

Here’s a cool stat I’ve never seen anyone publish . . . until now:

In the second half of 2015, the average sale price for a home with a legal suite was $436,000

For the same period of time the average sale price of a non-conforming suite was $413,000

This means that the value the market place is putting on the legalizing of a suite is $23,000.

The question becomes, can you legalize an existing suite for less than $15,000 and double your money? The answer, in most cases, is a resounding YES.

So, let’s look at what it means to have a ‘legal’ secondary suite in Kelowna:

Need a building permit

Need a business license

Need 2 designated parking stalls for tenant

A lit pathway

At least 30m(2) of private, open space

The suite cannot exceed 40% of the total square footage of the principal living area

Several building code standards must be met such as:


Minimum ceiling heights

Fire separation

Hard-wired CO2 and smoke detector

If you’re interested in learning more about the subject of suites and real estate investment, I’ve prepared a free .pdf report just email and I will send it over.

15 years - in the clear!

Many of you know that I have a fairly aggressive investing style when it comes to use of leverage to build a portfolio. Not everyone who reads this column wants to be a land baron, many just want a simple, bullet-proof plan that gets them to the coveted seven figures mark without taking any of their precious personal time or adding stress to their life. This article is for that person. 

I want to illustrate a painless strategy for any person with access to a down payment and some bank financing to acquire one simple investment property, and, with the help of some mortgage magic, to own this asset outright in 15 years. We will let regular inflation take care of the rest.

Now you might think it odd to learn that I find playing with a mortgage calculator a source of amusement. But I’m just so fascinated by what happens to the amortization schedule with seemingly minuscule adjustments to payments. My investor clients know I always advocate a 30 year amortization. It's the best way to ensure you have options and flexibility with your investment. Then, with a few simple tweaks, you can cut that mortgage in half.

Strategy 1: Switch to a bi-weekly payment
This alone will chop nearly five years off, and you won't even feel it.  

Strategy 2: Accelerate payments
This requires a little more discipline, but not the same kind of discipline you would need to walk by a plate of fresh cookies every day for the next 15 years without giving in. It’s just a set-it-and-forget-it decision to defer the benefit of all the glorious positive cash flow your duplex generates.  

Yes, the cash flow would make the payment on a brand new Lexus, but to be a net worth millionaire on one lone investment in 15 short years, you will need to abstain. So, we increase the payment by just enough to cut the amortization down another 10 years. Unlike your minimum monthly mortgage payment that is split almost equally between principal and interest, these additional payments go straight to principal. Not only will they have you mortgage-free a decade sooner, they will save you nearly $60,000 in interest costs.

Now, let’s talk about the other side of this equation: Property appreciation. The historical rate of real estate appreciation is 5.4%. At that rate, real estate doubles every 12-15 years. Many people have heard my two cent’s worth, that we have entered a sustainable growth period in the Okanagan that will more or less follow this historic trend for the foreseeable future. Now I can hear the skeptics already, so let me show you ACTUAL sales data for a duplex in Rutland that I recently sold to an investor, as it conveniently changed ownership every 12-15 years.

1976 - $55,000 (Oh it hurts to even see this number.)

1991 - $130,000 (If only my parents had grabbed a couple.)

2004 - $260,000 (When I bought my first. Wish I had the capital to buy more.)

2015 - $500,000 (This is roughly where duplexes have been priced at for last 7 years, I bought most of my duplexes at this price point.)

I did so out of the firm belief that history will repeat itself, and by 2030 or sooner, the market value of any of my Rutland duplexes will be in excess of one million dollars.

Let me show you how the actual numbers shake out, and how this conservative plan will require almost no input from you as the owner.

Each side of your duplex rents for $1950/mo (4 bedroom 2 bath). This means that your gross revenue for the duplex is $46,800 in Year One.

With your accelerated mortgage payments you will invest $31,824 of that revenue. *Minimum Payments ($21,871 @ 3%)

A highly competent property manager is well worth the $4,680 annual investment, so that you don't have to lift a finger or field a single phone call from a tenant. This same manager will see to it that your $3800 property taxes get paid on time. The same manager sees to it that your $1800 annual insurance premium has you well covered in case the unexpected happens.  

Now, when you add all that up, you will see that you still have about $5,000 per year in contingency money that will go towards preventative maintenance, coordinated by your manager, and will even cover a vacant month now and again, as is the case with holding property over the long term.

Your personal input can actually be reduced to an annual meeting with your manager to discuss your investment. Your only other job is to take a look at your monthly statements and send the annual report your manager prepares directly to your accountant. How’s that for painless?

If you want to see a proper analysis in black and white, including financial projections, of this exact example duplex, and multiple real world examples, email me and I’ll send a .pdf right over. 

So, dream with me for a minute here. You’re about 50 years old today, and you have a $100,000 nest egg, or access to 100k in equity in your primary residence. This simple strategy gives you a million dollar asset, paid off by the time you're at retirement age. The coolest part about this is that you now have options. If you want access to your capital, you could sell your property, pay some capital gains and take your money and run. 

Or, you could put a line of credit on the property for 80% of its new value, and take that $800,000 out tax free, reap the additional tax benefits of writing off the interest costs of the line of credit, and fund whatever passions you are now free to explore.  

There’s one other very attractive option to consider:

The revenue that this asset is still producing.  In Year One, we were getting $46,800. Now, 15 years later, it is $66,000 (based on 3% inflation), so maybe you keep collecting your cheques and travel the world? Heck, it could be a combination of the two. The possibilities are endless for those who do the uncommon.

All it takes is the decision to take matters into our own hands. 15 years from now, will we be laughing all the way to the bank to deposit our million dollar cheque, or will we be kicking ourselves thinking, “Why did I listen to the nay-sayers and give in to my fears?”

There’s no brilliance required to pull this off. You don't need to become an expert, or set up a complicated holding company. You just need to take the first step and call your realtor or mortgage broker. A duplex such as the one in the example is not particularly hard to come by but there aren’t usually more than a handful on the market at any given moment. Less than half a dozen change hands each month, will one of them be yours?

Again, for a .pdf analysis of one of these exact types of property that shows the performance of these duplex investments over time, just send me a quick email.

Right strategy for this market

The phone as of late has been ringing off the hook with investors looking to claim their piece of the inclining real estate market that we are experiencing. On the surface this is a great thing. The problem is that everyone has the same idea, thanks in part to the plethora of HGTV flip shows we see. Everyone wants to quit their job and flip homes for a living. Now I believe that this is entirely possible in certain markets, particularly the buyers market we just came through. Two years ago you could negotiate a great deal with an anxious seller. Now the market has shifted to the advantage of the sellers, homes sell quickly and for top dollar, often for bidding wars as inventory has dipped to near 2007 levels.

A successful flipping venture requires you to find a distressed property and purchase it at a deep discount. You then must renovate and control your costs to eventually sell at a new premium. The challenge now, is that anything cheap goes into multiple offers and contractors if you can find them at all, don’t do anything “for cheap”. This makes executing on budget and on time a real challenge. Again not impossible, you are just swimming against the current.

That aside, I want everyone reading this column to understand that you don’t flip your way to prosperity. Anyone who has created serious wealth through real estate has done so by holding properties that cash –flow. Now here comes the good news, this market that may not be so great for flippers, is a hell of a market to be a landlord in. In Kelowna, you have near a zero vacancy rate, which means you can have your pick of quality tenants willing to pay premium rent for decent units and you have mortgage rates that just got even lower making your mortgage payments well below what you can rent for.

"But AJ, I want to showcase my amazing design skills" you say, "I want the big before and after reveal." No problem, buy a home that needs your TLC, showcase your design skills and impress the heck out of your friends, realtor, appraiser and most importantly the lucky tenant that will occupy the property for the next few years.

With a buy fix hold strategy, you still profit from your hard work, in fact you get even more sweat equity, because you don’t pay real estate commissions or capital gains tax. All of the value increase would be immediately available to you on a line of credit.

Let me illustrate:

You purchase a 5 bedroom home on a decent street for $400,000 with 20% down you invest $80,000 of your hard earned savings into the property when you purchase. You wisely spend $20,000 on the home updating floors, paint, trim, fixtures etc and raise the value of the home to conservatively $450,000. This is doable even if you paid market value for the home on the way in. This may sound like a profitable flip, but If you sold now you would at best break even after fees and carrying costs. A better plan is to hold and utilize a STEP mortgage. To remain a conventional mortgage you can access up to 80% of the appraised value.

(80% x $450,000 = $360,000)

Since your original loan was for $320,000, this means that you can draw $40,000 out. You spent $20,000 to profit $20,000. The cost to access the profit is an interest only payment on the 40k at 2.75% which equates to $91 dollars per month.

By investing in the cosmetics you attract a high quality tenant willing to pay a minimum of $500 more per month than the time warp you started with.

Example: A 5 bedroom home with wood paneling and stinky old carpet would rent for approximately 1800/mo. The same home with new floors, paint and fixtures will fetch 2300/mo. all day long.

Your annual net on the $40,000 you pulled out tax free is nearly five thousand dollars in increased revenue. ($6,000 increased annual income subtract $1,092 annual interest cost.)

So not only do you make a 100% return on the investment and receive it tax free, your $20,000 invested continues to return $5,000 per year infinitely. If all of that wasn’t sexy enough on its own, you get the massive benefit of the tenant paying down your mortgage to the tune of $10,000 per year. You get to participate in the market appreciation we are seeing this year of at least 5% approximately another $20,000.

Now add it all up:

You created $20,000 profit on the renovation

You received $20,000 in market appreciation after a year

Your mortgage got paid down by $10,000

And you saw positive cash flow of $5,000 per year even after hiring a property manager

That’s $55,000 on an $80,000 investment!

Do that twice this year and you create the magic $100,000 per year that you wanted to make only in this example you aren’t spending it as it comes. You are building an impressive net worth.

This is an important distinction and to be candid, a life lesson I learned from watching my dad in his real estate dealings over the years. To his credit, he was an amazing flipper, he made well into the 6 figures renovating ordinary homes every year that I could remember even long before I became a realtor. He was masterful at adding value and creating equity, but because he didn’t hold any of the properties, he never realized the full promise of real estate investing. He needed his profits to live so nothing ever accumulated.

By adopting a Buy – Fix – Hold strategy you can have your cake and eat it too. You will utilize your god given talents to design wonderful spaces adding all kinds of value to your properties, but you will also realize the dream of building a portfolio of rentals that will, before you know it, be paid off providing a steady stream of cash-flow that will truly allow you to quit your job, not just trade it in for a more stressful one without the guarantee of a pay check.

A quick tip for knowledge thirsty folks out there, of the hundreds of books and courses I've devoured over the years, the book HOLD remains the authority on the strategy discussed in this article.

In addition, I always keep a short list of fixer upper investment properties for anyone ready to take the next step and actually get out there and see some Kelowna Investment properties.


Where are all the deals?

With a returned confidence in the market due to record low borrowing rates and prices trending upward, many people are turning to real estate investment once again to reach their financial goals.  As a realtor it’s interesting to observe would-be investors as they watch the MLS and constantly lament that there are no deals out there. Many even become discouraged and abandon the goal all together.

From my perspective, the problem is that they want this red hot deal to just leap out of their iPad and say, "Buy me stupid, I represent the exact return you are after!” Experience shows it just doesn't work this way.  In actual practice, whenever a home is priced so low that it represents obvious profit to the buying public, the competition for the property becomes so intense that it generates multiple offers, resulting in it going for more than it really should have anyway.

What people fail to realize is that, real estate being a commodity, has very little inherent profit built into it. Nearly all of the profits in a deal are created by skilled negotiations.  Things like negotiating with sellers to sell for less, negotiating with contractors to renovate for less, negotiating with banks for better rates and terms, negotiating with tenants for premium rent or negotiating with future buyers for premium sale price.

A deal is what a person makes of it. With the right team in place and some uncommon sense, almost any home listed on the MLS could represent a substantial profit, provided you negotiated it to be so. 

Many are content to use a very vanilla, buy and hold strategy, you don’t need to do much other than buy property, let the rent pay the mortgage off, and passively enjoy inflation doing its thing. Many ordinary folks have created multimillion dollar net worth doing just that. It just takes time.  The kind of profit most investors I speak with are looking for the sexy profit, more of an instant gratification.  We call this “walk in profit.”  This takes a lot more finesse and perhaps more importantly, patience.

It is equally important to have a proven model that you can measure each property against to determine whether or not it makes financial sense, leaving nothing up to chance.  The real estate investment network (R.E.I.N) just launched their new member site which has sophisticated online tools that you can use to analyze the viability of a property you are considering. As useful as this is, I have always found that having a couple quick-math short cuts you can use to give a property a pass or fail within 30 seconds has been the real key to being able to spot opportunity.  The power lies in the simplicity.  

So with that in mind, consider the opportunity that lay within the ordinary listing inventory, the aging inventory, the neglected inventory, the vacant inventory and the under developed inventory.  In my experience, for every 10 sellers out there, there is one that would entertain a win/win deal that gets them what they want, be it a fast closing, long closing, or an “as is” sale, in exchange for a reduction in price to the point that it fits your predetermined investment model.  

So in conclusion, knowing that the profits of any deal depend solely on your ability to negotiate, your mission becomes this.  Be crystal clear on the kind of property or project you want, the exact price range and the neighbourhood.  Once you have a clear picture of what you want, ask your real estate professional to create a custom search for you for this exact kind of property and from there it’s all in the negotiations!  

More Investment Real Estate articles

About the Author

AJ is the owner of Kelowna’s downtown boutique firm, Vantage West Realty. The firm prides itself in breaking the mold when it comes to how they practice real estate. Taking a consultant's approach rather than the tired, old-fashioned sales approach of selling kitchens and baths, they pride themselves in having a level of expertise not found in a classroom.

Having been a student of real estate through two market cycles, AJ has come to see an absence of truly qualified professionals specializing in investment real estate. This has become AJ’s role within the firm and the community, to consult clients on foreclosure sales, flipping, positive cash-flow, the benefits of lease option and other creative avenues that most agents completely ignore.

AJ is a firm believer that the current market is rich with opportunity and that there is a real need for a consultant who 'speaks the language' of the investor large and small, and understands their wants and needs. For example, many realtors would squirm from having to make low-ball offers, worried about insulting sellers and tarnishing their own reputation. AJ consults his clients to make the offer that makes sense to them based on their goals. If it’s a flip, then the mathematics on the firm’s handy 'profitable project work sheet' sets the max dollar. The same for cash-flow, if a client has a rate of return in mind, then that dictates the price.

With a well-deserved reputation as a real estate renegade, Hazzi is definitely an out-of-the-box thinker; a proactive agent willing to get creative and produce a solution during challenging transactions. He is very excited about the market we will see in the next 10 years, and feels that it will lend itself very well to his unconventional style.

AJ is an agent who practices what he preaches. He has built his own real estate portfolio up to include development property, resort property, rentals, fix and flips and cash flow properties. Arming his clients with the knowledge and confidence to invest has enabled many of them to build impressive net worth and passive income. His goal is to impart on people especially of the the X and Y generation, that depending on RRSP’s and Government Pension Plans to look after us down the road is risky business. Most people don't realize that as little as one or two properties added to your real estate portfolio now can provide a safe, cushy retirement in the future. The sky really is the limit.

AJ's past clients and business relationships are his largest asset. His business has been grown almost exclusively by referral. To hear what AJ Hazzi's clients have to say about his service view the testimonials.

For more details or to reach AJ Hazzi, please visit www.vantagewestrealty.com
Contact: [email protected]
cell: 250.864.6433

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.

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