May 11, 2013 / 5:00 am
1. Take Pets - It always amazes me how few landlords are willing to take tenants with pets. There are two main reasons why ALL my rentals are pet friendly and full for that matter. For starters, tenants with pets have very few choices so not only does your phone ring off the hook from a carefully crafted ad with “Pet Friendly” in the headline, but they are way less likely to try and brow beat you on price when they come out. Tenants with pets also tend to stay longer for the same reason. Secondly, you get twice the deposit. BC tenancy laws say you can only ask for half a month's rent as a security deposit. Welcoming “Spot” sweetens the pot with an additional half month. My experience with tenants is it’s not the pets we need to worry about damaging the place. In the event of a midnight dash or non payment of rent situation, you’ll be thankful for the additional two weeks revenue cushion.
2. Learn to spot the BS - A prime example of the kind of stuff you need to watch out for is the phony reference. This is where they put down their buddy as a past landlord. A simple way to counteract this little scam is to phone the number provided, but instead of announcing yourself as a landlord looking for a reference, call as if you were a prospective tenant. Say, "Hello I’m calling about your place for rent.” The friend that’s been prompted to tell you what you want to hear won’t see this coming and will respond with some kind of, “What the _____ are you talking about? “I don’t have a place to rent dude, wrong number.” - click. You see a real landlord would respond with one of two answers, either: “I’m sorry we are presently fully occupied” or say, “Yes what can I tell you about it?” At that point you know at least it’s a real landlord you’re dealing with and can quickly switch gears to get the info you are after.
3. Use TVS - Tenant Verification Services is the best thing to happen to landlords EVER. It creates some much needed accountability for tenants. Essentially it is a credit reporting agency that allows a landlord to report tenant behavior, good or bad. Delinquent tenants will find their score diminished while diligent tenants will have their scores rewarded and even receive a certificate of successful completion at the end of their tenancy, which is a reference on steroids. The best part of the entire system is the initial meeting with the client when you share with them that you belong to TVS and that their tenant habits are being recorded. They sign an acknowledgment and immediately realize you mean business. This one step alone prevents 9 out 10 issues from even occurring.
4. Have an on time payment “discount” - Sounds a whole lot better than a late payment penalty doesn’t it? Essentially it’s the same thing but it has one major advantage. Discounts can be taken away without increasing the rent. Landlords are restricted to very small annual rental increases. Sometimes in a good economy, the local rental market would bear a $200 dollar rental increase just to stay with the market. Unless the tenant vacates on his own, good luck raising the rent to what it’s worth. This could take 3-5 years depending on the price point. Now if at the outset you had set up your tenancy like this, you wouldn’t have that problem.
For example: Tenant responds to an add for a suite for $1100/mo. When it comes time to do the paperwork and before the deposit is taken, you introduce the fact that the advertised rent was taking into account your $200/mo on time payment discount. “You do intend to pay on time correct?” “Absolutely!” they will respond. “Great, because $1300 is actually the amount I rent this suite for, but for all payments timely made, I am willing to extend this discount and you can see here on my agreement that I’ve put this in writing for the length of our term.” They will now be made aware that late payments do not benefit from your discount and the amount on the lease agreement is due for all payment made after the 1st. It is also noted that after two late payments, the discount is eliminated and the lease reverts to its $1300 amount. I’ve been using this strategy for two years now since learning about it through my involvement with REIN and have never had a single prospective tenant balk at this. In addition I have almost never had to impose the penalty. It works that well.
5. Learn how to advertise your properties properly - Now more than ever a basic understanding of where people go to find rental ads will be essential in remaining rented. Firstly, where to post your ads. This can be a zero cost endeavour that literally puts thousands of eyeballs on your property in the first week. Castanet is by far the cornerstone of any local rental marketing campaign. Next, Kijiji works extremely well and captures people moving to town from elsewhere. Craigslist does have a lot of horse power as well but definitely a distant third. After that a post on Facebook with a five dollar promo spend will yield about 1000 impressions. The social nature of the site will cause it to be spread to anyone looking for a new home. So that’s the where, now let’s speak in terms of how. There is a lot that goes into a well crafted ad, but for the purposes of being brief here are the 3 main points that are easy to implement:
- A strong Headline. This could be your only opportunity to capture your prospects' attention. Don’t waste it with a dull headline. Humour works well here - anything to stand out a bit from the crowd. List your main differentiate in the headline too (huge fenced yard or steps to the beach, or pet friendly).
- Describe the property in terms of benefits to the customer. (ie: Unwind at the end of a long day in your soaker tub or, never hear your roommate snore with bedrooms on opposite sides of the home). You get the idea.
- Use Keywords. Weave into the headline and body of the ad some search friendly keywords so people using search engines will find you. People will “Google” in terms of what and where. (ie: Condo for rent downtown Kelowna). Put this phrase into your ad and it will rise to the top of Google very quickly. Kijiji especially is an SEO rock star for classifieds.
6. Preventive maintenance - It’s a part of the business, maintenance items will crop up. So now you have two options. You can wait for the disgruntled tenant to call you with the news that their _____ stopped working or their _____is leaking. These kinds of calls always seem to happen on a Saturday morning when you’ve got a day of boating planned with your friends or at 11 at night after a long day's work and three glasses of wine. Never a good time. The other and much better option is to check in with your tenants about potential up and coming issues to get ahead of the issues. Inspect your properties regularly and take inventory of things coming up. As things reach the end of their lifespan you can pro-actively address them rather than being reactive. It's counter intuitive, but preventative maintenance is actually easier on the pocket book. Emergency repairs often require additional service costs because they need to be done ASAP and you don’t have the luxury of shopping around. Where this really shows up on your books is the prevention of vacancies. Tenants of well-maintained properties tend to stay. Tenants that have things failing on them all the time tend to look for greener pastures. I learned this one the hard way.
7. Match your tenants wisely - This is applicable in the up and down or side by side duplex or suited house scenario. Anytime when two separate tenancies are sharing a wall or floor/ceiling you need to pay attention to how they mix. Sometimes just in an effort to get both of your suites full you will just take the first to come along. This kind of short term thinking can cost you nothing but headaches and create bank breaking vacancies. The single guy in his 20s beneath the family of five with three young kids bouncing, running and screaming will go together like oil and water. The older gentleman living above a couple of 20-something, girl roommates may seem like a great plan except the fact that the girls crank their Rihanna until 2 AM on weekends, and their friends cars block the poor guy's driveway.
8. Treat them like a client - Start off on the right foot. Get them a welcome present. Remember their birthday. Check in to see if they need anything. Communication is key. When you honor your tenants with respect, they will reciprocate by taking care of the property and watching out for your investment. They will stay longer and if they do decide to move on they’ll give you plenty of notice and leave the suite in great condition. This is a huge piece of the puzzle and one that is missed 90% of the time. Far too often Landlords and Tenants take this adversarial approach and miss out on what can become not just a mutually beneficial relationship in business, but also a personal relationship as well.
9. Use a GOOD laminate floor - Don’t fall victim to the temptation to buy the 89 cent bargain laminate you see on sale at Home Depot. This stuff will spread, bubble and chip, and replacing it is a huge hassle. Invest a little more upfront in something that will pay off huge in the long run. There’s a great product at Costco for 1.74/sq.ft. It’s a 13 mm laminate that looks great, clicks together easily, comes with its own under pad attached, and best of all, stands the test of time. Not having to replace your flooring every other year is equivalent to eliminating two vacant months every year.
10. Understand Rent to Own - Funnily enough you can eliminate the need for any of the first 9 tips if you simply implement this final one.
The best way to eliminate all of the risks associated with owning investment real estate is to utilize a rent-to-own strategy on any of your rental properties. Rent to own executed properly will yield a large deposit, higher monthly cash-flows and eliminate all maintenance and management. You almost completely remove the risk of vacancies. This enables you to achieve a premium sale price into the future that makes your return on the investment very worthwhile. The best part of the strategy is that you are helping people on the brink of success, people aspiring to become home owners that just need some time to get their down payment together or take care of some small credit challenges. As a licensed brokerage, Vantage West specializes in structuring win/win deals for investors and tenant/buyers that accomplish the dream of home ownership for one and a healthy return on investment for the other.
I learned all of these strategies the hard way - through years of making mistakes and paying the price. As a result I have a very expensive education that finally led to a practical intelligence not taught in any classroom. My purpose now is to share what I have learned so that other Kelowna investors can experience all of the amazing aspects of owning investment real estate and immunize themselves the kind of thing that makes you want to sell in a down market. It doesn’t take very much additional effort to implement these strategies and making the choice can be the difference between an investment providing you with a 20% or better cash on cash return or an embarrassing headache that turns you off real estate forever. Good luck and of course feedback is always welcomed!
Mar 26, 2013 / 5:00 am
What is Leverage? By definition it is; A method of financing an investment by which an investor pays only a small percentage of the purchase price in cash, with the balance supplemented by borrowed funds, in order to generate a greater rate of return than would be produced by paying primarily cash for the investment; the economic benefit gained by such financing.
So why is Leverage such a dirty word?
Canadians have been pounded over the head lately with this concept of being over borrowed. Our debt coverage ratio is the highest it's ever been - oh my! The debt ratio is based on the notion that a person’s debt should not exceed what they earn in a year. On the surface that sounds like conventional wisdom, good, safe, I only pay cash mentality that many Canadians have adopted. Can we really lump all debt together? Isn’t there a difference between mortgage debt and consumer debt?
What happens when we examine the debt coverage ratio of Canada’s wealthiest real estate investors? People that own multi-million dollar portfolios, the ones we should be taking advice from. You will find that almost all of them strategically employ mortgages on each property they own. In fact they have it down to a science in that as soon as properties get too high in equity, the return on that equity falls below their acceptable level and they refinance. They then take the cash, get another loan, and invest in more property. Funnily enough, the highest net worth people you will encounter have debt coverage ratios so far out of whack that it would make your head spin. Ask them how they sleep at night. Let me tell you, they sleep like lumber in $3,000 dollar sheets.
The real ratio people need to be focused on is debt service ratio, meaning how much income we allocate towards the servicing of our debts (payments). This is the real stat that economists pay attention to. It just doesn’t sell nearly as many newspapers.
To illustrate, let’s consider a very normal Kelowna scenario; homeowner of a $400,000 home with a $360,000 dollar mortgage on it. This hypothetical Kelowna couple probably makes a combined annual income of approximately $90,000. According to the fear mongering statisticians they’d have a debt coverage of 4:1 or let's say we're trying to sell news papers - Kelowna couple has put themselves 400% beyond the nations safe debt ceiling…will they survive? Hmmm…
Let's run the numbers quickly. Their mortgage payment would be approximately $1700/mo - this equals 20% of their household income. This is approximately half of what their maximum borrowing ability would be based on CMHC guidelines. I’m thinking they’ll be okay. Remember CMHC is the one holding the bag if Canadians default, so they certainly have an interest in keeping Canadians afloat.
REIN Canada shared a stat that as compared with year 2000, Canadians have a lower debt service ratio. They also pointed out that our mortgage default rate has gone down a considerable amount too. Imagine that, the important stats say we’re in better shape now than year 2000? Interesting…
So let's say for a minute I’ve managed to temporarily neutralize the effects of this month’s news headline long enough for you to take an innocent peak at the wonders of applying leverage to your portfolio.
An investor is eyeing a side by side duplex for $400,000. It’s attractive because it is renting for $1500 per side or $3,000 per month. The CAP rate is strong, almost 9%. So does the investor pay cash and receive after property taxes and maintenance, a return of 6-7% per year on his money? Or….
Put 20% down ($80,000). Carry a $320,000 mortgage ($1327.28/mo), leaving net operating income at $20,072.64 per year. Less the same expenses I used for the example above leaves a net of $15,072 on an investment of $80,000. That’s 18.8%, which is almost triple the return of the unlevered. But wait, there’s more! What about the fact that the tenants have been paying down the mortgage? In one year they’ve increased his equity by nearly $7,000. That on its own is 8.75% ROI. Combine the benefits of positive cash flow and mortgage reduction, the leveraged investor is raking in 27.3% on his $80,000 investment.
And there’s even more to the story! This investor still has $320,000 dollars of the 400k he contemplated placing in the duplex. What ever will he do with that, another duplex or two perhaps? Let's just say he wants to play it safe and put the remainder into a blended real estate fund offering 8-10% known as a REIT. Now he’s making approximately $30,000 in dividends from that investment too. Is this making sense?
I’m thrilled to share that Kelowna residents have decided that it's time to come up from the bomb shelter and take whatever money they survived the recession with and put it to work again. Since this time last year we have seen a steady increase month over month in the percentage of real estate transactions that were purchased for investment. This is encouraging not just for the economy but for my firm specifically as we have carved out a niche in the Kelowna market as Real Estate Investment Advisors.
Recently clients have come to us looking to make a real estate investment, well done! Great choice! However many have been adamant that they pay cash for the property. Try as I might to explain the benefits of all time low interest rates and the powerful effects of leverage on their ROI, still they choose to stay away from this scary debt monster. My job is to educate and inform however, I fear consumers are far too influenced by the media and don’t make the pragmatic decision to learn how leverage works. I hope this helps a few.
Feb 22, 2013 / 10:57 am
I recently saw an article by CBC that hit close to home the other day regarding rent to own and it was referred to as a “scheme”. They were exposing a deal gone bad involving an unlicensed person who makes his living doing a well-known US strategy called sandwich leasing. Essentially getting sellers to agree to option him their property at a certain price allowing him to market it as a rent to own home on sites like castanet and his website. He makes his money on a portion of the rent each month, and since he is selling his contract with the seller, he keeps whatever up-front deposit the new rent to owner has to put up. If the deal goes wrong, which it did in this case, the seller is left without any cash deposit, and no recourse to get the person out of the house. There is no real estate board or council to call, the paper work they have doesn’t even address this kind of situation. They are in a bad spot, and I can totally empathize with them. A scenario like this puts “Rent to Own” in a bad spot as well, it makes it seem predatory or unethical. And this is where I feel I need to add some perspective.
Having an understanding about rent to own is something that will serve you well regardless of whether you are a buyer looking to get into the market, a seller looking to get out of a property, or an investor seeking significant returns through real estate, in the safest, most hassle free way possible.
Some local licensed real estate brokerages do offer a fully accountable version of rent to own. It was born out of necessity as the market became challenging. Regular clients needed a solution beyond the traditional buy or sell method. This is what we call a hybrid strategy; it’s the middle ground between renting and buying. It represents a compromise that produces real benefits for both parties and it gives prudent real estate agents another option when serving their clients.
In recent years, as sellers faced being upside down on their properties, meaning they had less than zero equity left in their home. A common example of this would be someone who bought with 5% down in 2006 or 2007. If they had a need to move today they would likely be faced with this reality of being “underwater.” Their only options, it would seem, would be to drop their price by a further 10 or 15% to get the place sold, which would usually mean a loan from a loved one just to pay the mortgage and fees, or they could rent it and take on all of the risks associated with renting your home such as damages, vacancy and deferred maintenance costs, couple that with the fact that most of these homes don't rent for enough to cover their mortgage, taxes, insurance, management and maintenance. They would be left subsidizing their renter’s living situation considerably for an unforeseen amount of time. Not a great spot to be in.
Or what about the buyers who have some money for down payment and have decent credit but no longer make the cut with the new lending requirements tightening up after the feds raised the qualifying rate and shortened the amortization periods from 30 to 25 year amortization? This affected roughly 15% of would be buyers. Would they be destined to rent forever now?
Having studied the rent to own or lease option program for some time, it became very apparent to me that done correctly and done with honesty, transparency and integrity, this program is exactly what the two above-mentioned scenarios needed to solve their respective problems.
Here’s how a proper rent to own deal would go done through a brokerage. Firstly the agent would not place themselves into the deal as middlemen; Meaning they wouldn’t first sign an option with the seller creating an interest in the property. They would market the property like any other on the MLS. The price and payment based on a consistent model. A model based entirely on the realities of home ownership. Buyers should make the same payment as if they had financed the home today including property taxes. They should build equity in the home at the very same rate.
It should require a healthy up-front deposit to be in a rent to own program, this deposit is paid to sellers as this becomes a welcomed cushion as well as making sure the buyer has enough skin in the game to prevent vacancies. The result is a future buyer, living in the home with a monthly payment that covers the seller’s costs in the interim. They get credit for the portion of their payment that goes toward the mortgage principal. They assume the responsibility of maintenance and treat this property like their own. That’s because at the end of the term, it actually will be.
Properly executed Rent to own programs set buyers on a course toward successful completion. The length of term is set based on their unique situation, they should meet with a mortgage broker to determine the appropriate timeframe and get some guidance as to what needs to happen between now and the end of the term to ensure success. Sometimes it need only be 1 year, some people require up to 5 years. A good program should be set up to be mutually beneficial the whole way through. The sellers should receive a higher price for each year of the term requested to keep step with inflation so they too participate in the benefits of ownership over time.
No deal is without some inherent risks. A traditional sale comes with a whole host of potential risks, and occasionally deals go south. People ask what if they cant close? To this I say a potential buyer not completing is a real risk every seller faces in every deal not just rent to own. This is why a licensed realtor, trained to write proper agreements, facilitate adequate deposits and engage in buyer screening is important whether you are selling or lease-optioning your property. No deal can be fool proof, there will always be fools out there but when things are done properly you can go a long way to mitigate these risks and accomplish your goal.
Whether you are a buyer, seller or investor it would be worthwhile having a conversation with your real estate professional about rent to own. Don’t believe everything you hear or read. A deal going sour shouldn’t paint all rent to own deals with the same brush.
Jan 15, 2013 / 5:00 am
OK so were in a flat market, this isn’t good or bad news; it just is what it is. We are well into the recovery on the road back to the next boom but the next few years are predicted to perform at the regular completely un sexy inflation rate of 3.0-3.5% Since most of us pay about that in interest on our mortgages, the equity we have in our homes is rendered “dead” or stagnant for lack of a better term.
So with that said how do we make the equity in our houses do what all capital is designed to do, create wonderful opportunity for its master. What you’re about to read is an extremely easy strategy to employ, in fact by the time you’re done reading this you may wonder why you haven’t already done this a couple times over every year since you’ve been able. All it requires is for you to “tap” the existing equity in your home utilizing a line of credit. For this example we will use a sum of $200,000. This may seem like a lot of money however statistically; almost half of Kelowna home owners would have access to at least this amount.
So here is the move. It involves buying a property in the 160-190 range, one that would typically be a $250,000 property if not for the special “selling circumstances”. What we are looking for here are distress sales, court ordered or estate sales, something that needs cosmetic help to reach its full potential. You might be saying, oh yeah, and how do we go about finding one of those? Let me say this, before sitting down to write this, I found 3 good candidates in matter of 20 min which I’d be more than happy to share with anyone who asks. Simply put, they’re definitely out there, if you know where to look.
So lets fast forward for a moment, you’ve located a distress sale for 189,900 and made your offer, once you’ve negotiated the best price on the property say $180,000, you now have 20k left in your 200k budget to help this property get up to its full potential. Something in this price range can easily be totally overhauled for 10-20k even using professional contractors to do all the work. This is the fun part! Allowing 3-6 weeks for the renovations to complete, you have created a tremendous amount of what we call “sweat equity.”
OK so now what? You’ve got a property that is now worth 250k and you are into it for $200,000 total after costs and renovations. This is where things get exciting, to a real estate geek like me anyway, it’s time to bring every penny of this capital back into your hands. For this final step we need to engage the services of a good mortgage professional. It should be a smooth and extremely easy process as you currently own this property outright, with zero debt. The bank will order an appraisal to verify the current value of 250k. The mortgage broker will then qualify you at 80% loan to value for a rental property. The property will bring in approximately 1300-1800 in rent which will more than offset the 850/mo mortgage and 150/mo property taxes. Once the loan against the clear title property is approved. The bank advances funds to your lawyer, your lawyer registers the mortgage to the property and a 200k cheque is waiting at the front desk of your legal beagle’s office.
Now you have a decision to make. Do it all over again? Or simply replace the equity you utilized from your primary residence and sit back and enjoy the fact that you have just created $50,000 in equity, hundreds of dollars in positive monthly cash-flow and a wealth building rental property that your tenant is paying off by almost 500 dollars per month, on a property that now stands you ZERO
Some of you are thinking wow that’s brilliant! Some of your heads are spinning with information overload and have some major questions, either way please don’t hesitate to contact me for a one on one consultation. The purpose of these articles is merely to show what is possible when you become aware of the opportunities that are right in front of us. There truly is a fortune at our feet.
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