People lately have been asking me what the best place to put their investment capital and energy is now that the real estate market is showing signs of becoming a bull market again. This question is a challenging one to answer because there are so many variables. Not the least of which is a person’s risk tolerance.
A good flipper can hit 30-35% return on their cash invested and turn two or three properties a year, for annualized returns of up to 100%. However, this requires a lot of time, skill, and a fairly high tolerance for risk. In a flip there are just so many un-known factors to be considered low risk.
A person with cash-flow property goals can follow a simple 10 times rent multiplier rule and see returns of 20% on their equity. This is playing the long game. Cash flow is only one part of the equation as I’ve shared many times in previous articles. The true returns will never be known until it comes time to sell and you factor in your mortgage pay down (none of which came from you) and your market appreciation. A five year hold often produces overall returns that would rival the best flipper and the risk is much lower. It’s also far less effort to manage a duplex then it is to manage multiple, successful flips per year.
Now it may sound like I am steering you towards cash flow properties over flippers but in actuality I recommend a healthy mix of both. In my own real estate journey I’ve always tried to use the capital from one to fund the other. This can work in either direction because both require adding value to the property whether it be to flip, or to hold.
My previous article about how far 100k could take an investor seemed to resonate with a lot of people, so consider this a continuation of that train of thought. 100k invested into a duplex around 450,000 in need of some renovations, would be a great place to start.
*Bring its value up to $550,000 by finishing basements or upgrades and re-capture your 80k on a line of credit.
80% of 550,000 = $440,000
Current Mortgage $360,000
Available Equity = $ 80,000
Now take this 80k and buy a 250k townhouse and put 20k into it to create a nice, 320k resale property. When the smoke clears you will have your 100k back in the till and should be looking to add another holding property to the portfolio.
This system will work until the banks decide that they won't give you any more mortgages, which will happen at about the five properties in your name level. This makes absolutely no sense, but banks seem to prefer rookie investors to professional ones - go figure. At that stage it's time to go multi family (5 units or more) and then you deal with the commercial department of a bank and it’s a whole new ball game. More on that in my next article!
So for now if you are stuck and want to know where to start, feel free to reach out, I’m always happy to help people gain control of their finances and income through the exciting world of real estate investing. There truly is nothing like it in the world. Show me another investment or stock that you can choose to add value to whenever you want, you can live in it, you create a home for someone else. You can borrow against it, subdivide it, farm it and on an on it goes. It really is in a league of its own and that is why I live, breath eat and sleep this stuff.
Do you want the secret for how I find such amazing positive cash flow rental properties? Well this month’s article is all about one shockingly simple formula that once you're tuned into, things become almost ridiculously simple.
The simple rule I am referring to is the 10 times rent-multiplier. The best part of this formula is how easy it is to do in your head, which allows you to instantly analyze the positive cash flow potential of any Kelowna property for sale, anywhere. I will share 10 great examples of properties that fit this formula to eliminate any doubts that you may have.
First let me explain the formula;
Take the annual rental revenue for a Kelowna investment property for sale, and then multiply it by ten. That’s it, the entire formula! The number you now have is what you want the property price to be equal to or awfully close to if you are considering it as an investment property. For many people especially ones that have rental property that falls way outside this rule of 10 don’t leave me just yet, please allow me to show you some real world examples:
1. 5-plex in Enderby listed at $369,000
- rents are 36,000/year
- $36,000 x 10 = $360,000
- Net cash flow = $ 1004 /mo
2. 5 bed House with legal suite purchased at $312,000
- rents $31,000/yr
- $31,000 x 10 = $310,000
- Net cash flow = $ 981 /mo
3. Condo at Discovery Bay listed 339,000
- Rent $35,000/yr
- $35,000 x 10 = $350,000
- Net Cash-flow = $1083 /mo
4. Half Duplex with in-law suite purchased $240,000
- rents are $24,000
- $24,000 x 10 = $240,000
- Net cash flow = $810/mo
5. 2 bed Condo in Alexis Park Purchased $70,000
- rents are $7,200
- $7,200 x 10 = $72,000
- Net cash flow $318/mo
6. Side by Side duplex with in-law suites purchased $484,000
- Rents $48,000/yr
- $48,000 x 10 = $480,000
- Net Cash flow $1398/mo
7. Side by side duplex in Rutland purchased $360,000
- rents are $36,000
- 36,000 x 10 = $360,000
- Net Cash flow $1107/mo
8. House in Phoenix Arizona purchased for $160,000
- rents $16,500
- $16,500 x 10 = $165,000
- Net cash flow $527/mo
9. Condo in Scottsdale purchased for $118,000
- rents $12,000
- $12,000 x 10 = $120,000
- Net Cash flow $ 456/mo
10. House in Fort Mac Murray listed for $750,000
- rents $72,000
- $72,000 x 10 = $720,000
- Net cash flow $2065/mo
The last few I included to illustrate the point that things fall into this factor of ten in all the hottest markets you've been hearing about, up north or down south. Most people are led to believe that these fabulous positive cash flowing investments are only if you are brave enough to invest someplace far far away. I’m here to tell you that the above examples are all real, and there are dozens more I could share with you. The bottom line is, they exist and with bank rates now under 3% for fixed term mortgages, the cash flow picture keeps getting sweeter. Let me illustrate for the fellow number geeks out there:
$360,000 Purchase price
$ 72,000 invested in cash
$ 2,400 taxes
$ 1,400 insurance
$ 1,440 Vacancy (4%)
$ 2,160 Maintenance (0.6%)
$ 14,200 Net cash flow
$ 6,000 mortgage pay down
$ 20,200 per year in profit
Buy and hold this property for 5 years and let's see what we get for results:
- Mortgage reduction $32,084
- Positive Cash-flow $72,000
- Total gain $104,084
- Gain is 70% without factoring in any property appreciation.
Now this is obviously an overly simplified way of valuating a rental property, the long handed way of doing it, is to take the net operating income and divide it by prevailing market CAP rates at the time. This requires a thorough analysis from your professional Kelowna Realtor once you’ve decided to pursue the property.
For an updated list of Kelowna real estate for sale that cash flow well from day one please don’t hesitate to reach out us at any time.
Renovating and reselling a property for profit is alive and well in Kelowna’s accelerating market. It is by far one of the most profitable short term strategies an investor can employ, offering returns over 30% per project in many cases. With that said, I want to shed some light on where "flippers" go wrong. Here are the most common, often costly mistakes made by amateur home flippers.
1. Renovate to their tastes
Most people start with the idea that they have great taste, therefore people will want what they create. Usually this starts with someone who has tastefully decorated their own home and has spent years perfecting their sophisticated style and friends constantly affirm what they know to be true; they’ve got great taste.
The problem with this is that when you start to look at your renovation project as an extension of your personal style, you start making the wrong kind of decisions. Impulsive buys on $300 vessel sinks, and $1500 vanity sets are fair game in your own home but chances are you will never know what percentage of that you will recoup should you sell. In a flip however, these kinds of things only add up to a blown budget. You don’t get to simply raise the price because the fixtures budget was blown by $3000.
The same person will find it hard to put down laminate flooring in their reno project because they would never settle for this at home, again the ego creates a costly mistake. A tasteful and cost effective laminate flooring will translate to the same eventual sales price as the much higher priced hardwood. The huge savings is in the labor as many people can lay the click together laminate themselves or pay a handy person a few hundred bucks for a day's labor installing them for you. This is much more cost effective than paying a professional flooring installer three dollars per foot to install your exotic planks.
The key is to keep perspective. The idea is to rescue an outdated home and make it shine like new. Its neighbourhood and price range should dictate the finishing. The only time you should venture into luxuries, is when you find them on sale for prices that are as good or better than the perfectly adequate supplies you can get from Costco or Home Depot.
2. Lose track of time
The old saying that time is money is a truism you cannot lose sight of in this current market. In 2007 you could take forever and the consequence would only be that the market went up another 10% while you doddled along. Bring that same lack of urgency to a present day project and you will find that mounting carry costs like interest, insurance, utilities and property taxes gobble up your profit making you nothing more than a pro bono contractor for your future buyer. Cosmetic renovations should take 3-6 weeks depending on square footage. This will be the difference between doing one reno per year with a marginal profit and three efficient flips per year netting you a six figure profit. The latter is something you could do full time, the former is something you will likely only do once and write off as an “experience”.
3. Blow the budget
A blown budget is by far the single biggest reason for failed flips. There are many ways this can happen from misguided spending as suggested in number one, over estimating one's abilities to DYI. Many amateur flippers think that they will be doing all the work themselves and then the reality of their limited time, talent and tools leads them to hire a contractor that was never budgeted for.
The other big reason for blown budgets is a lack of due diligence prior to purchase. Things like having to replace plumbing and electrical when it wasn't expected can be devastating. Sewage systems and mechanical also add to costs without the opportunity to recoup the money when you sell. Simply put, the 5k spent on replacing the aluminum wiring won't translate into a 5k higher sale price. Getting a thorough professional inspection and sending your realtor to city hall to check on permits are ways to safe guard yourself against buying a money pit. You don't have to run from properties that need these things done, just make sure that the purchase price reflects the costs.
4. Too much DIY
I love the satisfaction of a job done on my own. It’s a proud moment when you step back and see what you’ve accomplished. These feelings are wonderful, but if we are to treat this like a business we must take a good, hard look at the facts. Firstly; how long did the job take us? The time spent on YouTube watching how-to videos, the days of prep, the unforeseen hurdles to jump mid project, and the seemingly endless finishing touches. When you factor time into the equation, the six weeks it took to do your own drywall might outweigh any savings you found by not calling a professional. Secondly, how was the finished product? Was it “really good for someone who isn’t a dry waller?” or was it perfect, professional craftsmanship? Obvious “DIY” jobs give buyers that uneasy feeling and will often cause you to lose thousands on your sale price.
When you factor in time and quality of work, having a team of skilled trades that can finish a job in a couple of days and do it perfectly, is rarely more expensive than going it alone.
One quick tip; I always ask a contractor how long the job will take them. Then we establish the best hourly rate - say 30/hr. With this I now have their “day rate”.
If they say they can have all the tile work done in three days then you now have a price $240/day x 3 = $720.00. How long would all of that tile take you? And let’s be honest, would it look as good?
5. Approach the venture backwards (without the secret formula)
This is the cardinal sin of flipping. It goes something like this. A person buys a fixer upper because they were told it was a deal. All sorts of ideas came flooding in on how they could rehabilitate this home to its former glory and with their knack for picking colors and materials, someone was sure to love their finished product. So off they go doing their best to control costs and work quickly, but a couple of complications came up that led them to take a little longer than predicted. Oh well, this is normal right? They spent a little more than they'd originally estimated on a napkin the night they closed the deal. Obviously they couldn't say no to that stunning fireplace insert that ran them a pretty penny. The flipper believes that their finished product looks great and works through this common process to arrive at a price to market the property to the public.
They start with what they paid, and then add up all the costs. “Wow did we really spend that much?”
$ 41,000 renovations
$ 13,000 selling costs
$ 6,000 interest payments
$ 3,000 utility bills
$ 3,000 ppt
$ 1,500 property tax
$ 1,500 legal fees
$319,000 total costs+ Desired Profit
= Sales price
Then based on how they feel about all the hard work over the months, as well as the risk and stress they’ve had to take on, they add a profit that feels "worth it".
“I’d like to make at least 30k” they often say.
Adding the profit to the cost they select a list price of $349,000. Their realtor obliges, hopeful at first, but they soon become frustrated as the property sits for three months with few showings, while comparable homes sell for $325,000 around them. “Well they're not as nice,” the amateur says while they wait…
This is the wrong way, in fact it's completely backwards. The good news is there is a secret formula that you must use BEFORE you buy your reno project. It’s simple and it looks like this.
Start with the eventual price and work backwards from there:
$325,000 Eventual Sale price (Comparable avg less 5% quick sale factor).
Subtract the following:
$ 30,000 Profit margin (10% of the value of property)
$ 40,000 Renovation Costs ( budget plus 10% )
$ 9,000 Carry Costs (Monthly interest + monthly bills x projected timeline)
$ 15,000 Professional fees (Realtor+Lawyer+Accountant)
$ 3,000 Property Transfer Tax (1% on first 200k, 2% on balance)
= $228,000 Buy it now price
This buy it now price tells you exactly what the most is that you can pay for the property to protect your pre-determined profit margin.
Follow this strategy and you take most of the guess work out of flipping. This is the formula I have followed on dozens of successful flips and the exact formula I consult my clients on today. Avoid all of the costly mistakes above and the world of flipping can be an exciting and rewarding business. It’s not as hard as one might think as long as you have the right information and a team of great professionals behind you that specialize in this kind of thing. Happy flipping!
The last twelve months brought a wonderful mix of opportunity for those that knew where to look. To the average person on the sidelines who only considers pricing as the indicator of what the market is doing, real estate in Kelowna would've seemed under-whelming to say the least. Prices weren't the big headline; however behind the scenes the right combination of positive economic factors came together to produce some little pockets in the market that yielded amazing returns in the otherwise flat market. So no, the prices haven't started climbing dramatically just yet, however informed real estate investors look for positive cash flow, or potential sweat equity to determine the viability of a potential investment. Following the fundamentals of smart investing, they continue to see their net worth and cash flow grow year after year regardless of average house values. So let's take a look at the Top 3 profitable investment property types and also the 3 big misses of the last 12 months.
1. Buying Cash-flow: Return on equity of 20% or better was very attainable for investors that focused on the specific property types that produce a rent multiplier of 10 or better. (Example: a house that rents for 2000/mo. x 12 is 24000. Using a multiplier of 10 would mean 240,000 max purchase price). Side by side duplexes, half duplex with suites, and even single family homes in strategic neighbourhoods fit this model to a "T".
Here are some great examples of properties picked up by our investors last year:
6 bedroom home near KLO Campus
POSITIVE CASH 1500/Mo
8 Bed Side-by-Side Duplex w/In-law suites
4 suites rented after renovation
4 suites @ $1100/mo.
$4400/mo. x 12mo = $52,800yr
POSITIVE CASH $2200/MO
2. Fail Safe Flipping: For the few that had the gumption to attempt a flip in what was still considered a buyer's market, profits of 30% and more were achieved. By following a simple reverse model template that predetermined; future price, Reno costs, carry costs and a host of typically overlooked soft costs, profits were crystallized at the outset by allowing a formula to guide them before making an educated offer.
The below property was purchased through the courts for $245,000 and was rehabbed for approx. $40,000 and sold 6 months later for $334,000. A net profit of $30k with approx. $90k invested is well above the 30% ROI. This was a great example of what’s possible in today’s market.
3. Investing with Rent to own exit strategy “Empowered Renters”. For many, this is a brand new concept. We were able to produce amazing win-win scenarios for home buyers on the verge of being able to get a home, and investors looking to make a return while empowering others to achieve their dream of home ownership.
Below is an example of a fantastic deal that was put together in 2013.
Tenant-Buyer under contract to purchase house by 2016 for $736,000 pays $3600/mo.
Put up $120,000 deposit
Investor purchased Home for $665,000
1. Speculation buying of condo - There weren't many new condo developments coming to market in 2013. Luckily the ones that did come to market concentrated on filling their properties with people who intended to live there. Gone are the days when a person could tie up a condo with a modest deposit and then wait for a sellout, list for more, and sell for a profit before taking possession. This is a fast track to the poor house and is in no way investing in real estate. This is speculation in its purest sense and is a fantastic way to blow savings and end up in court with a developer.
2. Resort property buying - Unfortunately, there wasn't any money to be made purchasing recreational properties this year. Big White to Osoyoos there was nothing in the market stats that showed these kinds of properties should be purchased for anything other than your own enjoyment and lifestyle. My philosophy has always been to rent these kinds of places. Investment capital is better placed into positive cash flow properties that will pay for your weekends at Big White or Osoyoos Lake and then some.
3. Speculation building - Although home starts were up marginally, we have not yet returned to a time when anyone with a builders license and access to credit could run out, buy a lot, construct something ordinary and presto they sell it and make big bucks. Building on spec is risky business and for the time being should be left to experienced builders with a proven formula that works in all markets.
Where we go from here in 2014
With sales volume forecast to rise again and with inventory on a steady downward trend, it’s not long before prices begin to creep upward. With that said, it is important to remember that market appreciation is really only the gravy in a Real Estate investment. The bread and butter will always be cash flow and sweat equity. The above strategies will still work wonderfully in 2014, but will become increasingly harder to find. This is where an investment focused agent will be your ace in the hole.
To quote the legendary Don Campbell; 2014 will also be filled with opportunity, confusion, excitement, protests, politics, procrastination, predictions, and pontificators… everything we witnessed in 2013 only elevated. Our job as strategic investors is simple: to hack our way through the reeds that obscure our view, to filter the noise that covers the true market signals and to stay focused on achieving our goal of financial independence through real estate.
“It’s been proven time and time again that real estate is the best way to increase your wealth.”
Read more Investment Real Estate articles
- How far can $100,000 get you? Jul 19
- Top ten landlord tips May 11
- The 'L' word Mar 26
- Rent to own, good or bad? Feb 22
- Waking the Dead...Equity Jan 15
- Real estate - listen to the pros! Oct 19
- How does today's 30 year old retire at 55? Aug 13
- Flipping 101 - Is it time to quit your day job? Jul 20
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