Category Archives: real estate investors

New Real Estate Investors: Essential Tips for How to Start and Be Successful

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New real estate investors have a lot to think about before embarking on their journey. Canada enjoys one of the hottest housing markets in the world, even in the aftermath of the Coronavirus pandemic. What’s more, the Canadian real estate market is not only heating up in major urban centres such as Toronto, Vancouver, Montreal and Ottawa. Small cities in the Prairies and Maritimes, and rural communities country-wide are generating a big buzz in today’s economy, which means the potential for a windfall.

But smart investing involves more than shelling out a down payment on a house or a condominium. It requires industry know-how, investing prowess, patience and initial capital. When you are beginning, it can be an overwhelming experience.

Don’t know where to start? Here are eight essential tips for new real estate investors:

#1. Ask Yourself These Questions

Real estate investing requires a heavy commitment. It is not something you can decide overnight. From upfront capital costs to taxes to various expenses associated with owning a property, real estate investors are forced to take on a lot of responsibility.

Therefore, before you initiate the process of investing in the housing market, ask yourself these questions:

  • How much money are you planning to invest in real estate?
  • Do you have good credit?
  • What is your personal financial situation like?
  • What funds will you use for a down payment (retirement, savings, investments)?
  • How much debt do you plan to take on (if any) in order to finance your investment?
  • Do you have any experience in real estate investing?

Real estate investing is not easy, and it will occupy some time. Make sure you’ve thought through the hard questions before you begin, to ensure that you’re starting your journey with enough foresight and the necessary resources at hand.

#2. Know How You’ll Be Generating Your Income

When you are investing in real estate, there are several different ways of generating an income. Here are the four primary methods:

  • Appreciation: A property increases in value amid changing real estate conditions.
  • Ancillary: This is when you have a mini business within a larger real estate investment, such as a vending machine in a laundry room in the apartment building.
  • Cash Flow: You collect a stream of cash from a tenant.
  • Commission Income: Real estate specialists earn a commission on properties they helped a client buy or sell.

When selecting a market to purchase in, or a property to buy, consider the amount of income that you’ll potentially receive through each of these streams. Is it worth the initial investment?

#3 Order Home Inspections Before Buying

Home inspections are a critical component of buying a property. In a red-hot real estate market, a growing number of potential homebuyers are foregoing this essential step so they can and the home almost immediately. This could be bad news.

Home inspections are crucial because they raise any red flags, such as repairs and renovations, that could cost you a lot of money once you receive the deed to the property.

How devastating would it be if you learned that the foundation needs to be fixed? This would set you back as much as $10,000, which is nothing to sneeze at – especially when you’re a beginner investor.

#4 Get an Appraisal

Property appraisals are just as important as home inspections because they inform you what the home is worth, using analysis from past, current and predicted future valuations. Moreover, if you are renting out the property, an appraisal can provide you with a ballpark figure of how much to charge per month.

#5 Focus on One Property

In the world of investing, it is recommended that diversification is the key to success. But while this is sound advice, it does not apply to real estate investors when they are starting out.

When you are beginning your real estate investment journey, it might be prudent to concentrate on one property at a time. Allocating your time and energy to more than one house or unit may prove challenging when you’re just starting out, and increases the risk of making costly mistakes.

#6 Consider Exit Strategies

Like shares in a stock or units in a mutual fund, you need to have an exit point. Once an investment reaches a certain point, you can hit the ‘sell’ button and enjoy the profits.

What is your exit strategy with your real estate investment? This is a pertinent question to put forward when you are just starting out, because you do not want to risk losing when you are on top. From a market crash to a new tax, there are many different ways someone can lose their investment, even when it seems like you’re set to experience a big win.

Most savvy real estate investors will advise you to define your exist strategy before you’ve even purchased the property. Some of the most common real estate investment exist strategies include:

  • Fix & Flip
  • Buy & Hold
  • Wholesaling
  • Seller Financing
  • Rent to Own

Learn about your options and based on your timeline and resources, consider which strategy will bring you close to your financial goal.

#7 Know Your Tax Laws

Taxes on real estate investing are complicated. Hiring a tax attorney, real estate lawyer, or accountant for your property is an investment that will pay dividends in the future.

Should you choose to go solo, it would be prudent to have a fundamental understanding of the tax laws in place regarding real estate investments.

Here are some basic elements of real estate tax law in Canada. This should not be taken as legal advice, and it is always recommended that investors consult a lawyer, but this list should give you some things to think about:

  • When you purchase a property, you pay a provincial transfer tax, which varies from province to province.
  • New home acquisitions are subject to the GST.
  • The Canadian Income Tax Act slaps a 25 per cent penalty of the gross property rental income per year.
  • Investors can usually deduct two kinds of incurred expenses: capital expenses and operating expenses.
  • Non-residents selling a Canadian property are mandated to give the federal government 50 per cent of the sale.

#8 Have Six Months of Money Reserves

One of the best pieces of advice anyone will ever give you when it comes to real estate investing is to have a minimum of six months of money reserves per property.

Even if the housing market is soaring or your investment has been reliable for the last 18 months, it is always fiscally responsible to have reserves at hand. The market could slump at any time, it could take time to find a tenant, or an emergency repair may crop up. With an adequate reserve fund, you’ll have enough cash to ride it out through any of these scenarios.

This cash, which could also be placed in a yield-bearing account, will prevent you from accessing credit markets, too.

Real estate investing has become a popular method of making money in a zero-interest-rate economy. Because the cost of borrowing is so cheap and the Canadian real estate market is booming, there is a great deal of interest in buying and selling properties, from semi-detached houses to one-bedroom condominiums. It can be a challenging experience when you are starting, but it can also be highly rewarding and profitable.

For more information on smart real estate investing tips, or for advice on which markets are ripe for investors, reach out to your local RE/MAX agent today!

Source; GlobalRemax.com – January 5th, 2021

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Home renovations: a primer on how to do them right

The bigger the home renovation, the bigger the risk something goes wrong. Fortunately, that can be avoided.

Niran Kulathungam, a financial life professional, real estate advisor and master coach with Legacy Global Inc., and owner of The Ascension Principle, has about 57 doors to his name. Moreover, as recipient of the REIN Multifamily Investor of the Year Award and Renovator of the Year Award in 2017, and winner of the Michael Millenaar Leadership Award in 2018, he’s far from a neophyte. Kulathungam says that whether renovations are undertaken for a fix and flip or because the owner intends to live in the home, a checklist is required at the outset.

“When you walk into a property, the first thing you do that most people don’t is detail the scope of the work. You might realize you need a new kitchen, but you should ask yourself a more important question: ‘How can I make this the most amazing, top-notch house on the street?’ I create a detailed budget and I figure out where the electrical outlets and lighting fixtures are going, and then I budget the cost for each of them. I budget for tiles and countertops, and I budget what it would cost to move stuff around. I budget for every single thing I’m going to do in that house.”

Kulathungam adheres to the ‘80:20 rule,’ which stipulates that, upon detailing the renovation plan, 20% of the improvements will comprise 80% of the value enhancement. Those improvements include renovations to the home’s exterior because of how important curb appeal is.

“Decisions to buy or rent a property are often made when the person drives by,” he said. “Would you be happy bringing your mother-in-law over to this house? Is it something you’d be proud of showing her or anybody else?”

Kitchen

Having a beautiful kitchen is a bare minimum requirement for any home that has a chance of selling in today’s housing market, but that often isn’t enough.

Just as Kulathungam asks himself how his renovated house will be the most beautiful on the street, he asks how his kitchen can exist in a class of its own?

“What about your kitchen says, ‘Wow!’ That’s where I tend to spend a little extra money. People still use cheap countertops in their kitchens, but in this day and age I always put in stone and quartz, and hardly ever any granite.”

Don’t think kitchen renovations begin and end with a nice countertop, added Kulathungam. The backsplash is a relatively inexpensive way to beautify, and differentiate, a kitchen.

“The proof is in the pudding on this one; I get good results with it. Standard practice right now is to do white subway tile for the backsplash. My question is: if every renovation has that, what can I do to stand apart? I will spend extra money on really nice backsplash because it will give me a return.”

Lighting

When it comes to lighting, don’t be miserly. Unlike most real estate investors, Kulathungam doesn’t mind spending more money on lighting if a high-end fixture or chandelier greets prospective buyers and renters upon their entry into the home, because it augurs yet more outstanding features to come.

“I want my kitchen and living room to rock,” said Kulathungam. “We renovated a bungalow in Stoney Creek and ended up vaulting the ceiling. By doing that, I dropped down three really nice lights, and to this day when anybody walks in, they go, ‘Wow!’ Lighting is crucial.”

Bathroom

To say the bathroom needs to look nice is an understatement — “you want to go for a spa-like feeling,” said Kulathungam.

That doesn’t just mean making good use of open space, especially if the home is a fix and flip; it means optimizing the things you cannot see. And what a wonderful surprise that could be for house hunters.

“Put in subfloor heating because it feels amazing and people absolutely love it. Lighting is, of course, important, and in some bathrooms I’ve done walk-in showers with glass walls and a sloped floor at the bottom leading into the drain. It’s more costly to do, but in a smaller bathroom it gives the appearance of space. If you renovate in an area where you attract families with young kids, you want bathtubs. If there aren’t young kids, then go with the walk-in.

“Put in nice taps, not cheap ones. If you renovate in Toronto, I would look at adding a towel warming rack. Although it isn’t that functional, it has that wow factor.”

Bedroom

According to Kulathungam, not much is needed to upgrade a master bedroom, however, because clutter is seldom spoken about in positive terms, and because bedrooms are proverbial sanctuaries, this room should feel commodious. Additionally, extensive closet space will make a believer out of even the most fastidious buyer.

“In downtown Toronto, closet space can be limiting. Put in barn sliding doors, with the slider outside the closet so that the entire door slides on the outside, instead of regular doors.”

Lighting inside closets, especially if you enlarge the space, is a great idea. Kulathungam recommends lighting that turns on when the door opens, and shuts when it closes. He also recommends figuring out where the television set will go and putting wiring in early on, as well as adding a modernizing feature.

“In the master bedroom and kitchen, put in some USB ports so that you can plug your cell phone directly into it,” said Kulathungam. “Little things like that go a long way towards doing a really nice renovation.”

Water issues

Identifying potential water issues is crucial because the house’s foundation, not to mention the costly renovations, could be compromised. Kulathungam begins his inspection of the house on its roof and works his way down each storey to the basement.

“Make sure downspouts are directed away from the foundation of the house,” he said, “and figure out what the issues are before you put flooring in.”

Condo renovations

These renovations are a little trickier than house renos, but many potential complications can be nipped in the bud early on in the process by simply being a good neighbour. For one, speak to the condo board right away and give them a heads up about what you’re planning to do in the unit, even though they can’t technically stop you, because certain things are allowed while others are prohibited. The structure falls under the purview of the condo board.

“I knock on the neighbours’ doors and give them my private cell phone number so that they can call me if they have any concerns,” Kulathungam. “I also offer to help them with their renovations by putting them in touch with my guys.”

Being a good neighbour doesn’t just stop there, though.

“In a condo, be respectful of your neighbours with respect to noise,” he added. “Make sure your guys renovate during normal work hours. I tell crews to keep music low and I tell them not to swear because noise carries in a condo.”

The cardinal rule of fix and flips

Plan ahead and always have a reserve budget, advises Kulathungam, because you may miss something lurking behind a wall. Most importantly, your name—your brand—is all over the property, so make sure you renovate it as if you’re its end user.

“Budget for things you did not initially budget for, and when you find a problem, don’t cover it up. Fix it. Your name is on the line. In this space, once you get a reputation as someone who can produce a great product—one where you don’t cut corners, one where you finish on budget and treat trades well, which helps you attract the best tradespeople on your subsequent projects—you also attract joint venture capital. If these lessons mean that you won’t make as much money on your first flip, rest assured that you will over the long haul, and you will create a name for yourself.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. 

Source: Canadian Real Estate Magazine – Neil Sharma 06 Jan 2021

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Micro unit financing made easy

Securing financing from A institutions for micro condos—categorized as anything below about 500 sq ft—has always been thorny, and with the COVID-19 pandemic taking a bite out of many downtown condo markets, it’s certain to remain so. However, it can still be done.

The big banks are chary about financing these units because they’re rarely end user-occupied, and nearly always purchased as income properties.

“They’re typically investor units or short-term rentals, essentially serving as hotel substitutes, and there are issues around financing,” said Toronto-based Simeon Papailias, co-founder and managing partner of REC Canada. “The bank always mitigates risk on a default scenario, and it’s not a very marketable property. They look at the heavier risk they take by lending on a micro-unit as opposed to a regular unit.

“There are special programs the five major banks rotate between themselves, depending on what the banks’ goals are for the year. CIBC can do it one year, then TD could the next. There are special programs made for this, and it’s something a prudent investor should know.” 

Alternatively, the B channel is a much less knotty way to secure micro condo financing, although the rate will be higher.

 “I had private financing with Home Trust, at the time, on a 380 sq ft micro-unit investment property in Yorkville back in 2011, when those units just started becoming more common in the marketplace,” continued Papailias. “Today, around 30% of most condo buildings are under 500 square feet, and the reason has everything to do with affordability.”

Locale is another variable, says Dustan Woodhouse, president of Mortgage Architects. A micro-unit in a building near a university or college, for example, is far more likely to receive funding than a similar-sized condo situated around fewer amenities.

Securing financing for a resale micro-unit is a little easier, he added.

“Pull title on the property,” said Woodhouse. “Pull title on that unit and pull title on four more units in the building and see who the lender is on the title. Then you’ll know who to call.”

The pandemic has left downtown condo markets reeling, but as any savvy investor knows, that’s when opportunity comes knocking.

“Prices on micro condos are dropping the furthest and the fastest over any other type of properties. On the one end of the spectrum, detached houses are rocketing upward, and at the other end of the spectrum you have micro condos dropping in price.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. 

Source: Canadian Real Estate Wealth – Neil Sharma 16 Dec 2020

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Welcome to Canada’s new real estate hotspot

A Southwestern Ontario city has emerged as one of the country’s next real estate investment hotspots.

Windsor has spent the last decade rebuilding its economy after languishing through the Great Recession. Although the city doesn’t receive much fanfare, savvy Toronto investors have had their sights set on the city for a while.

According to the Windsor-Essex County Association of Realtors, sales in the city increased by 6.31% year-over-year in November, while the average sale price rose by 24.14% to $420,007. New listings also grew by 9.74%.

Windsor’s rental vacancy rate was 2.9% in October and its rental supply has gone up 7.5%, according to Anna Vozza, a sales agent with Bob Pedler Real Estate Ltd., who noted that multi-family residences have become popular purchases.

“We had a well done duplex in the middle of the city, which would usually go for no more than $250,000, but it sold for $502,000 last month,” she said. “It was a basic duplex.”

Given that the average sale price of a Windsor home in November was less than half of what it was in Toronto—according to the Toronto Regional Real Estate Board, the average selling price was $955,615 last month, up 13% from November 2019—it’s no surprise that Torontonians see the potential in the border city.

“For retirees, it’s a great place because if you’re in Toronto selling your home, you can buy something here in Windsor and still put money away in the bank,” said Vozza. “I see Toronto buyers here, on average, twice a month because you can get an income property with an 8-9% cap rate. I don’t think you can get that in Toronto. We have a university, a college, and we’re a border city, so there’s never an issue with renting.”

A recent analysis by Money Sense identified Windsor as the top Canadian city in which to buy real estate. The average house price is $313,146 and the five-year average rent increase is 11.14%.

The 2008 financial crash was particularly damaging for Windsor because many of its residents worked in Detroit, located just across the border, and when General Motors closed its North American auto plants and parts manufacturers, as well as the transmission plant in Windsor, the city’s unemployment and vacancy rates soared—the latter even reaching 15%.

The rebuilding process was long and arduous, and the Trump administration’s steel and aluminum tariffs certainly didn’t help, but Windsor has gradually emerged as a hotspot.

“But the rule of investing—buy low and sell high—meant that a few risk takers were willing to buy into Windsor’s real estate market, and by 2015 their calculated risk had begun to take off,” stated the Money Sense analysis. “ The city’s vacancy rate had dropped to just 4% while year-over-year sales activity increased by 22%. Fast-forward to 2018, and the city’s vacancy rate dropped again to 3%.”

In April, FCA Canada, which is owned by Fiat Chrysler, announced a $355 million investment in the Windsor assembly plant, and while it will eliminate the plant’s “third shift,” it also saved upwards of 7,500 jobs, according to the analysis. Moreover, the company’s Q3-2020 earnings results indicated that while sales declined by 11% year-over-year, they improved on a monthly basis—including annual retail growth in September. It also revealed that sales for its Jeep Gladiator increased by 94% during the quarter, and by 179% through the first three quarters of 2020.

“We’re a snowball effect of the auto industry,” said Vozza. “If you see that do well, people will buy houses because they start feeling secure. We lost one shift with FCA, but they’re hiring and coming up with another product.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. 

Source: Canadian Real Estate Wealth – News by Neil Sharma 14 Dec 2020

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5 things to consider before buying an investment property

series of tiny houses sitting on top of stacks of coins

Are you thinking about investing in your first rental property? It’s a big step. But with careful research and some time and effort, it can be a great way to generate a passive income.

There’s a lot to consider before you start your journey to becoming a real estate mogul. In this article, we’ve put together a list of some important information that can help you on your road to building your real estate empire.

  1. Is a real estate investment the right fit for you? 

Great risks can yield great rewards. But consider the risks of an investment property: securing a mortgage, maintaining a budget for operating costs, securing reliable tenants who will pay their rent on time and securing a maintenance fund— just a few of the important issues to think about.

Many aspiring investors think that they will begin making a profit from their investment right away. That rarely happens. Operating costs that are too high, a heavy mortgage, vacancies that you have to cover— these can seriously eat away at your profits and leave you with next to nothing— and that’s before you deal with marketing, property taxes and other bills. All of these issues can seriously derail you if you fail to plan for them in advance. But if managed carefully, an investment property can net considerable financial rewards over time.

  1. Your Financial Situation

Can you secure the mortgage necessary to purchase an investment property? Do you carry a high debt load? Both of these questions need careful consideration before proceeding.

Lenders typically like to see a debt-to-income ratio of less than 36%. An investment property does not qualify for mortgage insurance so the amount needed for a down payment is higher than when purchasing a family home (20% for investment properties vs 5-10% for family homes). You also need to consider closing costs and emergency funds.

  1. Property Management

Are you prepared to manage your investment property on a day-to-day basis? If your goal is to buy it and forget it, you need to consider a property management company. They will deal with the daily management of your property including finding and vetting potential tenants, collecting the rent, and handling any maintenance issues that come up.

One additional benefit of using a property management company is the freedom to purchase a property anywhere the law allows and take advantage of markets where the financial rewards are greatest.

  1. Location, Location, Location

In the case of an investment property, “where” is often more important than “what”. For example, the hottest place to purchase an investment property in Canada right now is in Guelph, Ontario. You want your property to be where the people are. A beautiful vacation home, in a place no one visits, will not be a successful investment but a fixer-upper in an urban center will probably recoup your renovation costs and make you a tidy profit. Do your research before you settle on a location.

  1. The 1% Rule

What Is the One Percent Rule?

Simply put, it means that the monthly rent earned from an investment property should be no less than 1% of the price of the property. This will ensure that you at least break even. A good rule of thumb is to never get a mortgage where the monthly payment is more than the amount received from your monthly rent. It’s best if the mortgage is less than that one-percent.

There are lots of other things to think about before purchasing an investment property. Research is key to success, and hopefully, this list will provide you with a good starting point.

Source: First canadian Title – Nov 19th, 2020 | By FCT

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The Best Ways to Invest in Real Estate

Young adult welcoming older man into home

When it comes to investing in real estate, most people look at owning their primary residence with the hope and confidence the value of the property will rise in time as they build equity in their investment.

It’s a sound and fairly safe way to grow your investment if you keep your eye on the long-term. But for many novices they’re likely not aware growing an investment in real estate can take many other forms-everything from renting out a property or a vacation home to buying a home, fixing it up and selling it for a higher price to investing in a Real Estate Investment Trust (REIT).

A professional women and man walking down the sidewalk of a soon to be residential area.

As with any investment, each approach carries with it different risks–so you’ll want to thoroughly research your options to ensure you’re investing your money responsibly and strategically. 

“Realizing the dream of homeownership has proven over the years, decades and decades, to be one of the best investments available to Canadians. If you look historically and you had X number of dollars to put in a downpayment . . . what you put down and what you paid, your investment has outperformed most other vehicles that are available to Canadians,” said Costa Poulopoulos, Chair of the Canadian Real Estate Association, adding people are paying down their mortgage while the property value rises so they’re winning on both ways.

A middle aged couple looking at financial statements in a modern dinning room

“Another key point is you hear people talk about the stock market and mutual funds and RRSPs as go-to things. And sure there’s returns there and yields. But you can’t live in a mutual fund. So not only are you getting appreciation and a tremendous return on your initial investment but it’s actually serving two purposes-it’s a secure investment and it’s housing.

“There are many vehicles available for investing from the novice first time trying to figure out a secondary home and starting small to sophisticated investors, conglomerates, REITs, whatever the case may be.”

For example, Poulopoulos said many people buy properties to rent out. In this regard, the property value can appreciate over time but also you’re generating revenue.  

One of the key things to consider when buying rental properties is the financial costs including mortgage payment and paying for utilities to taxes. And of course, unless you’re hiring someone to take care of the property you do have responsibilities as a landlord you might personally have to handle.

A row of multi material town homes.

Romana King, a personal finance columnist and real estate expert, said it’s relatively simple to make money using real estate as the investment asset whether it’s speculation buying and flipping a home or investing sweat equity and flipping.

“Simple in that you don’t require a lot of specialized knowledge so you don’t have to go to school for anything. You don’t need a qualification. But with that said it’s not easy in that you do still have to treat it like a business so you really need to be aware of the numbers involved,” she said.

Young adult welcoming older man into home

That’s really important when it comes to real estate flipping. The homework required here is to make sure you understand what exactly is selling in that neighbourhood, what the current trends are in that neighbourhood and whether or not what you propose fits in with those two current snapshots.

Timing is also important. It can make the difference in achieving a great return or losing on your investment.

King said she is a big fan of investing in a rental property. 

“You can make money on rental purchases as long as you have a cash flow positive budget sheet. If you don’t and if there isn’t enough wiggle room in that budget then you’re buying a property that’s priced too high for you and you need to actually rethink your strategy. It’s still a good strategy but consider a lower price point. Even if you get lower rent all of those numbers have to make sense,” she added.

King advises people to save up a larger down payment and look for a multi-unit property to buy whether it’s a house that can be divided into two units or a triplex. That spreads your risk with more rental revenue.

She said REITs are incredible vehicles and they can be a great gateway into real estate investment. 

“It does give you a better idea of how extraordinary real estate investments can be. They can be fantastic holdings. It also helps you diversify a little bit,” added King. “I really love REITs. I love REITs for anyone who really wants to get into real estate investing but doesn’t want to do the work. That’s not a negative. Not everyone has time to do all the investigation and crunch the math and make sure you have cash flow positive. If you don’t want to do that, and you want to get the upside of real estate investment, REITs are awesome. They’re excellent.”

Young couple talking to an investor

Whether you’re a novice or a sophisticated and experienced investor, the real estate industry presents a golden opportunity to invest your money and grow that investment if one takes the time to research the many vehicles available. 

Source: The article above is for information purposes and is not legal or financial advice or a substitute for legal counsel.  Mario ToneguzziMario Toneguzzi, based in Calgary has 37 years of experience as a daily newspaper writer, columnist and editor. He worked for 35 years at the Calgary Herald

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Understanding The Loss To Lease Calculation

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When reviewing a multifamily property’s income statement, one of the first things to look for is a line item called “loss to lease.” Although widely used, the loss to lease concept is often a source of confusion. It can be counterintuitive because the word “loss” is in the name, but the presence of this line item should be viewed as a positive.

What Is Loss To Lease?

Loss to lease is a term used to describe the difference between a unit’s market rental rate and the actual rent per the lease. The loss isn’t realized in the traditional sense. Rather, it is an on-paper loss that represents an amount of money that the property owner is losing by not charging market rents on the unit.

The loss to lease calculation is simply the market rent of a unit minus the actual rent. For example, if the market rent for a given unit is $1,000 per month and the actual rent is $900 per month, the loss to lease is $100 per month. This calculation is performed at the individual unit level and summed up to the line item that appears on the income statements. For properties with a large number of units with below-market rents, the result can be a significant sum.

Why Is Loss To Lease Important?

Loss to lease is important from two different perspectives: the investor considering a potential purchase, and the owner currently managing the property.

From an investor standpoint, the presence of the loss to lease line item on the operating statement can be an immediate tip-off that there is an opportunity to raise rents, which is why it may be considered a positive thing. Usually, loss to lease is a result of market rents rising faster than actual rents, which is a sign of a strong market and/or inefficient management. Either way, it is an opportunity because commercial multifamily properties are valued on cash flow, and closing the loss to lease gap can add value quickly and result in a quick win for an investor.

From an owner standpoint, loss to lease can be a metric that is a leading indicator of a property manager who isn’t paying close enough attention to the surrounding market. By failing to raise rents to remain in sync with the broader market, the property manager is actually costing the owner money in rent that could have been obtained but is “lost” to a lower lease price.

Loss To Lease: An Example

To illustrate the importance of the loss to lease concept and its potential impact on price, consider the following example. Assume that a 150-unit apartment complex has average rents of $900 per unit, per month. The annual rent for the entire property would be:

$900 x 150 = $135,00 x 12 = $1,620,000 annual rent.

Now, assume that the property manager has performed a marketwide survey of comparable properties and concluded that the market rental rate is $1,000 per unit, per month. In this case, the property’s annual income should be:

$1,000 x 150 = $150,000 x 12 = $1,800,000 annual rent.

The difference between these two figures, $180,000, is the loss to lease.

Continuing the example, assume that the property has annual expenses of $1 million. This means that closing the loss to lease gap — raising rents on all units by $100 per month — would result in an increase to the net operating income from $620,000 to $800,000.

Finally, and this is where the impact is significant, assume that the market cap rates for this property are 6%. The increase in NOI means that the property value rises from $10.3 million to $13.3 million, just from closing the loss to lease gap! This is a big win for the owner and their investors.

Risks To Raising Rent

I chose the example above to demonstrate the point that raising rents to market rates can have an outsize impact on property value. But in reality, it isn’t always this easy. There are two challenges:

1. It can’t be done all at once. It must be done on a unit-by-unit basis when each lease comes up for renewal, which means that it can take an entire year to complete the process. In a fast-growing market, market rents are constantly changing and can be a difficult target to hit.

2. Raising rents also increases the risk that the existing tenant will decide they don’t want to pay the higher rate and vacate the unit. Depending on how long it takes to release the unit, this could result in a short-term negative because the unit is not producing any income. However, once the unit is leased, it is a long-term positive.

Summary

Loss to lease is a commercial real estate concept that represents a difference between a given property’s actual lease rate and the current market rate for the same property. It shows up on a property’s income statement and may be an indication of a strong market and/or inefficient management.

Either way, you can view loss to lease as a positive because closing the gap can result in a relatively quick win from improved net operating income that results in an increase in a property’s value.Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. 

Source: Forbes Real Estate Council – Rod Khleif Real Estate Investor, Mentor, Coach, Host, Lifetime Cash Flow Podcast Through Real Estate Podcast. 

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4 Tips for Flipping Houses Successfully

Here’s how to find the right house to flip — and know what sort of renovations will help you command top dollar.

One effective way to make money through real estate investing is to know how to buy and flip houses. Often, this involves buying homes that are priced under-market, such as foreclosures or short sales, renovating them, and then selling them shortly after the fact at a higher price.

But flipping houses isn’t for the faint of heart, and if you don’t know what you’re doing, you could wind up losing money. With that in mind, here are a few tips for flipping houses that will increase your chances of coming out ahead financially.

1. Find a house to flip in the right location

The purpose of flipping a house is to find a buyer who’s willing to pay a handsome price for your hard work. As such, there’s no sense in buying a home in a stagnant market, because that property is likely to sit for a while once your renovations are done. A better bet? Do your research to find areas where housing is in high demand. Some generally good bets include suburbs of major cities with highly-rated school districts, areas in close proximity to major attractions, or metro areas where housing inventory is generally limited.

2. Make sure you’re buying well below market value

Flipping a home often means sinking thousands upon thousands of dollars into renovations. Even if you’re handy enough to do that work yourself, and have the time for it, supplies and materials cost money. Therefore, make certain the price you’re paying for a home to flip is reasonable, given the amount you’ll need to put into it. This means you may not want to buy a foreclosure at auction, when you’ll often be unable to perform an inspection. A better bet could be a short sale or REO property, where you have a chance to see what you’re getting into.

3. Focus on improvements with the best return on investment

If the home you buy to flip has damaged plumbing and out-of-code electrical work, you’ll clearly need to address those issues if you want to be able to sell it. But once you tackle your “must do” repairs, set priorities on cosmetic enhancements. Typically, you’ll get more bang for your buck if you sink money into kitchens and bathrooms — these are high-profile areas that tend to be important to buyers. At the same time, focus on low-cost improvements that offer a lot of value. For example, paint and carpet are fairly inexpensive but make a huge impact. Refreshing a home’s walls and floors could be a better bet to drive up its purchase price and attract potential buyers than putting in high-end lighting features.

4. Don’t over-improve that property

When you buy a home in disarray, it’s easy to go overboard on renovations to the point where it becomes the nicest property in town. That’s not necessarily what you want. If most homes in the area don’t have marble flooring or ultra-high-end kitchen appliances, follow that trend. You don’t want to improve a home to the point where you have to price it at the very top of its market. Often, buyers will balk at buying the most expensive home on the block because it’s a sign that they may not recoup their investment once the time comes to sell the house .

Flipping a home is a great way to be successful as a real estate investor. Just make sure you know what you’re getting into so you don’t lose money. If you’re not confident, talk to people who have been through the process before. Enlisting the help of a local real estate agent could also help you not only identify the right home to flip, but also invest just the right amount of money into making it marketable.

Better Returns – half the volatility. Join Mogul Today

Whether over the 21st century, the past 50 years… Or all the way back to more than 100 years… Real estate returns exceed stocks with SIGNIFICANTLY less volatility! In fact, since the early 1970’s real estate has beat the stock market nearly 2:1.

Source: MillionAcres.com – By: , Contributor
Published on: Oct 27, 2019
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Hunting for your first home? Here are 5 tips from the pros

Fuchs gives a tour of his new duplex  which he bought for $292,000.

But first-timers may encounter a number of obstacles, from financial to psychological. Eliot Fuchs, 31, describes buying his first home in Newark, New Jersey, a two-bedroom, two-bath condo, as “a learning experience.”

One of his early lessons came when he lost out to a higher bid after his first offer. That sparked a realization, says Fuchs, who works in corporate strategy for Prudential.

“You’re not going to necessarily get it just because you put down the asking price,” he notes. “So if you want a competitive unit, like one in this building, you’re probably going to have to pay more than the asking price.”

Real estate investing:Is buying a property right for you? Here are six tips

Brian Nielson, right, helped Eliot Fuchs land a condo in Newark, New Jersey, after seven months of searching and placing bids on various homes.

When he eventually found a condo that ticked off all his boxes, he and his real estate agent, Brian Nielson, developed a bidding strategy.

“Once I saw the apartment, I knew that people were gonna want it,” Fuchs recalls. He says he and Nielson developed a plan for making second- and third-round bids, which prepared him for going above the asking price.

The condo, originally listed at $263,000, sold to Fuchs for $292,000.

“Having done it all, I’m happy that I did it,” Fuchs says.

Read on to learn five tips shared by Fuchs and Nielson about the first-time home-buying experience.

Get your mortgage preapproved

A mortgage preapproval – when a bank determines how much you are qualified to borrow – will help buyers zero in on their price range, says Nielson, a Realtor with Keller Williams.

“You want to make sure that you get preapproved before you start looking,” Nielson says. “That paper tells you exactly how much you can afford per month.”

Having preapproval shows sellers that you’re serious about making an offer, Nielson adds. And it can help buyers move quickly once they find a home they love.

“So when you do find something – ‘Bang, I want this property, here’s my offer, here’s my preapproval’ – the bank already knows about it and we can hit the ground running,” he says.

Fuchs gives a tour of his new duplex  which he bought for $292,000.

Hunt for the right location

Fuchs knew he wanted to move from Manhattan to Newark, where his office is based, because it would mean a shorter commute and more affordable home prices.

Nielson showed him homes around Newark, a city of about 280,000 people close to New York City, helping Fuchs narrow his search to three neighborhoods that appealed to him for their amenities and locations.

“You don’t want to ever regret buying a place,” Fuchs advises. “Cast a very wide net in the beginning … and spend a lot of time just looking at different places.”

It’s also important to know what you want in a home – and what you might be willing to give up. A home-buyer with children, for instance, might not want to budge on good schools. For other buyers, home size may be more important.

“If you want to be in a better area with better schools, then we might have to switch around what it is you’re looking for,” Nielson says. “Sometimes you want a bigger house, but in the nice neighborhoods you might not get that.”

Prepare for a months-long process

Fuchs says he eventually found exactly what he wanted in his condo but cautions that finding the perfect home can require months of searching. “That’s probably why it took like seven months to get it to find this place and get it,” he notes.

Nielson notes that many of his clients find their dream homes within two months but adds that others take six months or longer.

“It has to do with more of them not getting the offers accepted,” he says of the longer searches. “The product is there. They just didn’t feel that the product is worth the price tag.”

Fuchs chose to buy in the business district of Newark because of its close proximity to his job.

Understand the closing process

Once a seller accepts your offer, the closing can occur in about 30 days, Nielson says – or even faster “depending on how fast your attorneys are, depending on how fast your bank is with everything else,” he adds.

Make sure to budget for closing costs, he says. “Closing costs are everything outside of the down payment,” such as attorneys, insurance and other expenses, he notes. Budget about 3% to 5% of the overall cost of the home on these expenses, he adds.

Lastly, Nielson says an agent will walk the buyer through the closing process, such as setting up an appointment with an inspector to examine the property.

“The agent doesn’t cost the buyer anything,” he notes. “It costs the seller’s agent. We help you negotiate the deals and we get the deals done quickly and as fast and as securely as possible.”

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How I Built a $1.3M Real Estate Portfolio for the Cost of a 1-Bedroom in NYC

  

Hand of Business people calculating interest, taxes and profits to invest in real estate and home buying

Is this crazy? I sat there with my 23-year-old head spinning—looking at the first $400,000 multifamily rehab project that I had just put under contract.

You’ve probably asked yourself (at least) a couple times if it’s crazy to get into real estate, too. If you asked your friends and family instead, they probably immediately answered, “Yes!”—followed by a spiel about whatever aspect of managing a real estate business that scares them most.

Maybe they mentioned the risk of a market crash, the challenge of dealing with tenants, or the pitfalls of negotiating with contractors. It’s only human. We fear risk.

We fear risk even when our fears are irrational.

Even if you drink the real estate Kool-Aid and know that real estate can be an amazing way to build wealth, the fear probably hits you each time you’re about to write an offer on a building. Do I really know what I’m getting myself into?

Right Before the Plunge

On that night in May 2017, I was on the verge of taking what—to many people—would look like the biggest risk of my young life. I was 23, had recently graduated from college, and had barely six months of real estate experience. This project would pit me and my business partner against countless situations we were not prepared for, faced with countless questions we didn’t know the answers to.

Luckily, as real estate investors, it’s not our job to know the answers. It’s our job to know the numbers.

The numbers on our first rehab deal told us that even in our worst-case scenario—even if everything that people warned us about went wrong—taking the plunge would get us closer to financial freedom than sitting “safely” on the sidelines ever could.

Why are we comfortable losing money, as long as we know how much we’re going to lose?

As a recent grad, most of my college friends ended up in big cities on the coasts.

Related: Mastering Turnkey Real Estate: How to Build a Passive Portfolio

In 2017, the median rent in Manhattan was $3,150 a month. According to Rent Jungle, the average rent for a one-bedroom apartment in San Francisco was even higher: $3,334 a month. Over the course of a year, that adds up to $40,000 in rent for a one-bedroom apartment.

For reference, the median family income in the city of St. Louis is $52,000 a year. In St. Louis, that money can buy buildings.

On the coasts, it buys you the right to spend up to 39 percent more than the national average on basic necessities like groceries. The costs are pretty crazy, but the craziest part is that spending a family’s annual salary on rent is somehow considered a perfectly normal financial decision for a young person to make.

Young people spend that money with no expectation of getting a return. Rent, groceries, and transportation are costs—not investments.

What is the risk of embarking on a rehab project compared to the 100 percent certainty of spending $40,000 a year on rent?

How We Measure Risk

Risk is exposure to uncertainty. Because of this, renting doesn’t feel like a risk. Neither does spending a lot to live in a big coastal city. The costs are large, but they’re constant. We know them up front: $40,000, paid in tidy, predictable monthly increments.

Or do we?

What is the real risk of renting away your twenties—and how do you compare it to the risk of a rehab project? Does renting in a big city make your financial future—not in 10 months, but in 10 years—more certain or less so?

When you’re embarking on a rehab project, uncertainty stares you in the face. The risks are all right ahead of you, a landmine of knowns unknowns:

  • Do we have our contractors lined up in the right order?
  • Have we done everything we need to pass inspection?
  • Will we hit our rent targets once all the work is done?
  • Is it cheaper to fix this or replace it?

Those seem like hard questions to answer. Small wonder that most people warn you away from real estate.

Except when you’re following a safe, “normal” path, uncertainty isn’t gone. It’s just waiting for you out of sight.

Five years from now, will I be working at a job I don’t like? Or will I be free and doing the things that matter to me most in life?

Ten years from now, will I have the resources to protect what I love? To support my family, friends, and community?

Those are hard questions to answer.

For me, those questions would have been impossible to answer if I lived in a big city on the coast, took a fancy job where I was well paid but spent most of my salary on rent and groceries, and had to spend most of my time working for someone else.

We are conditioned to deal with long-term uncertainty the same way we’re taught to deal with short-term risk: by avoiding it.

But avoiding risks doesn’t make them go away. It doesn’t teach us anything. It doesn’t get us any closer to answering life’s hardest questions.

The numbers on our first rehab deal told me two things. In the worst-case scenario, I would come out of the deal not losing any more money than someone who chose to rent in a big city. In the worst-case scenario, I would come out of the deal with an education that would allow me to take control of my financial future.

I could live with that.

The Numbers Tell the Story

My business partner, Ben Mizes, and I started our real estate portfolio with an FHA loan. We were only required to put a small down payment on a relatively stress-free, low-maintenance fourplex.

Five months later, we were planning to borrow $315,000 from the bank and $105,000 from private family investors and spend as much of our own time, sweat, and money as it took to come out the other side of our first four-unit rehab.

The project would be our first BRRRR (or buy, rehab, rent, refinance, repeat).

We were upgrading kitchens, bathrooms, and AC units to bring the rents up from $825 per door to $1,400 per door—a 70 percent increase.

With renovations complete, Ben and I would try to appraise the building for $700,000. Depending on the lender, you can borrow between 70 to 85 percent of a building’s appraised value. In this range, as long as we hit our numbers, we could completely repay our investors, recoup our costs, and walk away owning a cash-flowing castle.

The potential upside was clear. Just as important, we looked at our downside.

Ben and I modeled a worst-case, “do-nothing” scenario, trying to understand what would happen to us if we got stuck and couldn’t complete the rehab at all.

What Could Go Wrong? 

Well, plenty.

Ben and I had a contract to buy the building for $420,000. At the closing table, the seller would credit us for the $20,000 worth of repairs that had to be done immediately: fixing a collapsed sewer, repainting and sealing damaged windows, and replacing falling fascia boards.

Note: We always, always, ALWAYS make our buildings watertight before doing anything else. If they aren’t watertight when we buy them, we negotiate for repair credits to fix problems on the seller’s dime—immediately upon closing.

The $20,000 repair credit provided by the seller brought our effective purchase price to $400,000. Combined, our mortgage payments, taxes, and insurance came out to $2,277 per month.

The numbers told us we could make our mortgage payments comfortably, even in its current (read: very rough) condition. The building was generating income of $3,350 per month, or about $825 per door.

Assuming we got completely stuck and had to keep renting the units out for their present value of $825, we would have $1,073 per month with which to pay all of our fixed and variable expenses. Utilities and HOA fees (the building is in a private subdivision with an annual assessment) came out to $380 per month, leaving $693 a month to deal with variable expenses.

In a worst-case scenario, we would be self-managing to save on property management fees. That would still leave us with vacancy, repairs, and maintenance costs, and the need to set aside money each month for a capital expense escrow.

Was $693 really enough?

Under our most-conservative model, we planned to put aside $10,000 each year for repairs and escrow. After five years, that equals $50,000 put into proactive maintenance—enough to deal with a roof, a complete tuck-pointing redo, and major structural repairs.

Then, we figured 10 percent vacancy cost—high for the area but not impossible if we had hard luck. What was the worst that could happen?

deal analysis

Under our worst-case model, we would be losing $600 every month. Losing $600 a month is a losing deal. That’s not a deal that gets you on a podcast. It’s not a deal that successful investors show off in a blog post.

Luckily, it’s not the deal we ended up with, either. (Spoiler alert: We came out of this rehab with a lot more paint on our shoes but a lot more cash in the bank, too.)

But when we talk about “risk,” here’s the curveball question: Would this “worst-case” deal be a step away from, or a step toward, financial freedom? Let’s look at those numbers again.

The Difference Between Costs and Investments

An investment is any place where you can put your money, such that it creates more wealth over time. In the model above, a lot of the expenses that look like “costs”—that is, look like places where Ben and I would have lost money—are actually investments, places where our money helps us build wealth.

Related: Why Turnkey Rentals Might Just Be an Ideal Investment for Real Estate Newbies

1. Loan Pay-Down

In our worst-case scenario, we would pay $600 a month (on average) to cover the costs of repairs and build a sizable rainy day fund.

However, our $1,600-per-month mortgage would be completely paid for by our tenants. In the first year alone, our tenants would pay for our ~$14,000 interest payments and help us build $5,000 worth of equity in the building.

Over time, that equity build-up only accelerates. In our thirties, Ben and I will build up $85,000 through principal paydown alone (pun intended).

The amazing part is that would be the case even if the rehab project was a complete failure. Breaking even on mortgage and utilities and scraping out of pocket to cover unexpected repairs, Ben and I would still be positioning ourselves to accumulate passive wealth in the future.

2. Proactive Maintenance

If you spend $50,000 on a building in five years, it becomes a lot cheaper to maintain. Under our worst-case model, we would have $10,000 a year to deal with maintenance issues before they became more serious.

When you budget to deal with problems up front, it makes for a less-impressive pro forma—but it also means that maintenance costs get significantly lower over time.

If you plow $10,000 every year into it, even a problem-ridden property will get easier and easier to take care of. It might be a painful cost to swallow in the short-term, but you haven’t lost the money that you spend on a property you own. You’ve just re-invested it.

By contrast, if you spend $40,000 in one year on rent, the money is out of your hands for good.

3. Hands-On Education

When you buy your first rehab, the most important investment you make isn’t in the building. It’s in yourself. You’re taking out (quite possibly) the only student loan in the world that can pay itself off in less than a year.

The most daunting part of diving into a real estate deal—the part that makes people say it’s too risky—is that you don’t just stand to lose money but time, too.

The time costs on this project would have made this a losing deal for a veteran investor. We spent untold hours painting, fixing plumbing, and (like you saw above) drilling holes through concrete when a contractor dropped the ball on us.

But we weren’t veteran investors (yet!). As Ben and I looked at the numbers together, we realized we were buying ourselves both a building and an education, too. Even if we broke even, we would come out of the project with an education that in itself was worth hundreds of thousands of dollars.

So—What Happened?

A few years ago, I sat looking at the numbers on a $400,000 real estate deal that could either set me on the fast-track for financial freedom or go completely off the rails. In the end, both things happened.

My business partner and I got screwed over by not one but four different contractors before we finished the project. One caused thousands of dollars of water damage to the floors, embroiled us in a months-long insurance claim, and tried to take us to court after he lost.

We dealt with an irascible tenant who threatened us and damaged his apartment.

Time and again, things took more time, sweat, and money than we had expected. But the age-old mantra of real estate investing held true: You make money when you buy. The numbers of the deal were strong.

And now that we’re done dealing with contractors, tenants, and renovations (at this property), we have a building that rents for $1,400 a door, water-tight with low maintenance costs, and a fair market valuation between $650,000 and $700,000.

Now we are on pace to refinance the building, fully repay our investors in the first year, and walk away with the funds to do it all over again.

Taking the Plunge (Again)

Is this crazy? Fast forward and I’m sitting here, head spinning, looking at the numbers of a 20-unit deal in St. Louis.

Since starting our renovation project one year ago, we’ve used the education and cash flow we gained from it to build a 22-unit portfolio—and a high-growth startup.

Now, with a refinance underway, I am looking at a deal that could double the size of our portfolio overnight, all while working full-time.

A new project brings new unknowns. More questions we don’t know how to answer and lots more numbers to keep me and Ben busy.

Source: BiggerPockets.com – Luke Babich

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