[FrugalTrader]

I'd like to hear from some real estate investors. I have invested in real estate in the past, but have recently sold my last rental property.

Personally, if you find a good cash flowing property, it can be great for the cash flow. However, land lording is a job in itself and really requires a certain personality to enjoy that aspect of real estate investing.

For the investors, what criteria must be met before you consider purchasing the property?

For me, it's (more details here):
1. Cash flow positive
2. Nice neighborhood
3. Decent condition
4. Under market value

 

[Lakedweller]

This is certainly the right time to buy rental property in some markets. The huge price increases between 2001 and 2008 pushed many potential buyers into the rental market. So the availability of good quality tenants is still there. The entry level new houses are a great investment if you want to keep your hands clean.
As far as landlording is concerned, there are many companies who will manage your property for a small fee. (www.ipinvestments.ca)
There was also a time where I would have said property values were less suseptable to deflation. Anyone coming into the market in the last three years might argue with me, but long term it is a proven leader for beating inflation.
Finding under-valued properties is a full time job. Unless you have intimate knowledge of planning or development proposals, it is difficult and risky to buy under valued properties. It is also more difficult to rent them.
Cash flow is not the be all and end all of property investments, especially as your "pockets" get deeper. Being able to hold a cash negative property for 5 to 10 years can be great long term investing. Look at all the farmers living on the fringe of most cities. Do you think the small guys are making money? Not without farming subsidies. But developers are buying their land at 2,5,10,20 times the price they paid for it.
Buying a property in a nice neighbourhood is like buying a GIC. Sure you'll get 2-4% return over the long term, but is it worth the headache of being a landlord? Not likely.
With the move under foot in most municipalities to encourage higher density and infill and brownfield development, buying a property in a redevelopment area is a good investment. Go in with no money down and assemble three or four properties in a row and market them as a single parcel for a 4 storey apartment.
That means learning about the planning processes in your municipality.

 

[Sampson]

Our first residence (condo) has now become our rental. We leveraged the unit at the height of the market to pay down our higher interest rate on our residence so its a funny one to look at.

I agree with lakedweller that cash flow does not have to be positive. If you count principal pay down, we are positive, in addition we have all those tax benefits.

We chose an 'up & coming' neighborhood, since we new we wouldn't be at the condo long, and there are significant city planning projects to make our neighborhood extremely desirable.

Other than that, if/when we look for more, those four criteria are most important in my books. Next time I'd look for something that could be cash flow positive even after management fees. We've been lucky in the past with problem free tenants, but I know that string is about to change (as I get in my car to check out repairs I need to do...)

 

[fifi]

A friend-partner and I, who have similar goals and thoughts about real estate investing, began about 2 years ago--we started with a small 2 bedroom rental, then purchased a full duplex. Our first, we bought a fixer-upper, since we both had some time, and reno'd--it's been breaking us about even. We also do no-down (use our HELOC for down payment), which makes great mortgage rates even better with tax-deductibility.

The duplex has been great--we're leaning more and more towards multi-family for the future. I should qualify that we are both public service employees, not wealthy at all...

Guidelines we follow or will be following:
1. Average out the ups and downs of the market--we will be buying one property each calendar year (we don't have time to research more either!!).
2. Must be multi-family (even if it's just an up-down rental)
3. Area that has good access to public transit/amenities, with good future growth potential.
4. No major structural problems (even if reflected in price--it seems to snowball quickly from friends' perspective).
5. Must have positive cash flow or very close to it (or what we see as becoming positive within a year or 2.).
6. Must have future redevelopment possibility (such as having the potential to knock-down and build 2 infills).
Of course, when we look at each property we aren't close-minded--something could come around where we could bend the rules, but we won't rush in to anything (if we're beaten to a property by another buyer, we just assume that they inherited a multitude of problems--makes us feel ok about it!

fifi

 

[ethos1]

cash flow with 100% leverage

walk away position if the market tanks and/or the rentals cannot be maintained

Low cost of purchase is good, but the leverage & cash-flow is primary

 

[Germack]

I was a real estate investor but sold all of my properties. It is impossible to find properties with decent CAP rates at the moment. RE investment should always be cash flow positive with 100% financing otherwise I believe they are poor investments. The cost of ownership doubled during the last 8 years, however cost of renting just increase with inflation. This is just not sustainable over the long term. I believe the Canadian real estate market is way overvalued and headed for a major correction.

 

[DrStan]

I used to have a rental property, but at market prices here in Ottawa, it was impossible to generate any kind of strong cashflow (the townhouse could rent for $1400 a month, which barely covered expenses and left no room for vacancies), notwithstanding my $50,000 downpayment that I could have invested elsewhere. The time aspect was also a bit of a downer, considering all the time I spent on that project. In the end, after two years and a half, I sold the property and walked away with a grand total of about $10K profit. Not worth the dozens and dozens of hours spent on it. From now on, REITS will make a fantastic proxy. Just as an example, if I had used my $50K downpayment to purchase RioCan at that time, I would have made about $3,000 per year in income (at 6%), which is not far from what I earned through a ton of hard work over the time I had the property. My mistake: counting on capital gains instead of cashflow and financing some of the monthly shortfall with my own cash. Not smart, but enlightening.

 

[The Financial Blogger]

For me, it's (more details here):
1. Cash flow positive
2. Nice neighborhood
3. Decent condition
4. Under market value

Hey FT, I wonder how you can actually find a cash flow positive rental property in the current market? In Montreal, you can't get a cash flow positive property unless you inject 35 to 40% cash down. That's insane! Is there any alternative?

 

[FrugalTrader]

Hey FT, I wonder how you can actually find a cash flow positive rental property in the current market? In Montreal, you can't get a cash flow positive property unless you inject 35 to 40% cash down. That's insane! Is there any alternative?

Personally, I've found the best way is to find deals. Basically properties that you can negotiate down under market value. It's more challenging to find deals already listed, most are found via private sales and advertising.

 

[Germack]

Hey FT, I wonder how you can actually find a cash flow positive rental property in the current market? In Montreal, you can't get a cash flow positive property unless you inject 35 to 40% cash down. That's insane! Is there any alternative?

I know what you are talking about. I am from Montreal too. The only alternative I see is staying on the sidelines and not investing in RE at the moment. Sooner or later prices will fall back to its fundamentals.

 

[Sampson]

if I had used my $50K downpayment to purchase RioCan at that time, I would have made about $3,000 per year in income (at 6%),

But that investment would be down by close to 33-50%. Housing prices have come off, but not that much.

 

[DrStan]

Hi Sampson,

The value of the investment in REI.UN would have dropped, but as a long-term investor stock prices over a couple of years are not a huge concern, as long as the bacon keeps rolling in. I guess it's a question of "woulda, coulda, shoulda", but it just illustrates that there are some ways of making strong revenue from income properties without buying a residential rental.

To folks who are considering buying income properties in Montréal, please note that the Québécois renter is the most protected species this side of the snow leopard. They can give the runaround to landlords for months on end, not paying their rent, refusing legitimate rent increases while landlords' costs explode, play games with the housing tribunal, etc. There is an interesting opinion article in La Presse this morning, from a disgruntled landlord who mentions that he has lost thousands from being played by his overprotected tenants. I would never touch that market. Si vous lisez le français:

http://www.cyberpresse.ca/opinions/forums/la-presse/200904/06/01-843814-la-regie-ma-eu-a-lusure.php

 

[Bullseye]

Also a former RE investor, currently out of the market completely (REIT's aside).

I agree that cash flow positive with 100% leverage is a requirement, and that must be with ALL costs in, including vacancy provision, maint and repair, and management (to compensate for my own time and hassle).

The problem is that the rental market has been flooded with new 'investors' the past few years, driving up prices and reducing CAP rates to where it's not profitable in most places to bother.

Rent minus mortgage payment and property taxes does not equal profit, but that's what all these people pouring into the market seem to think.

So I wait, biding my time. A shakeout is coming, already starting, I believe. As these investors realize they are holding losers and flee, I will be there waiting to lowball them and pick up some great properties in the panic. If it doesn't happen, I'll remain out of the market.

 

[Jademonkey]

I'd like to hear from some real estate investors. I have invested in real estate in the past, but have recently sold my last rental property.

Personally, if you find a good cash flowing property, it can be great for the cash flow. However, land lording is a job in itself and really requires a certain personality to enjoy that aspect of real estate investing.

For the investors, what criteria must be met before you consider purchasing the property?

For me, it's (more details here):
1. Cash flow positive
2. Nice neighborhood
3. Decent condition
4. Under market value

By Cash Flow Positive, is that only referring to the mortgage or everything(property taxes etc)?

 

[FrugalTrader]

By Cash Flow Positive, is that only referring to the mortgage or everything(property taxes etc)?

Jademonkey, cash flow positive after ALL expenses. Mortgage, insurance, property tax, vacancy, estimated repairs.

 

[lazy cdn]

help

I have cash money for a dp, but cannot find value anywhere.

 

[fishnguy]

But that investment would be down by close to 33-50%. Housing prices have come off, but not that much.

Your line of thinking is way off. If you put 20% down on a home that subsequently loses 10% of its value, guess what....you're down 50%! That is the joy of leverage. It is not an apples to apples comparison.

 

[Genius Boy]

Think commercial or multi-family units

Dear FT:

I'd contemplate thinking commercial or multi-family units. Requires much higher up-front costs, but you can leverage property upon property. Commercial properties have longer terms leases, and generally less hassle than being a landlord. And being a busy professional, that's important.

Why commercial?

Pros: Less hassle, longer-term leases, usually companies that can afford to pay you (i.e. better guarantees that you'll get paid). Usually, better property appreciation values (if you buy wisely in downtown cores). Easier ability to leverage with more properties.

Cons: Higher interest rates, requires higher downpayments. Need to spend lots of time finding cash positive property.

For example: I found a property with a 12% gross, 7% net cap rate. i.e. from the start, I've been making 7% net. That's irrespective of property appreciation. The key is doing your homework, and making sure you get good property value.

Once it gets big enough, you should set-up a holding company, which has massive tax advantages (through dividend splitting). For example, if my wife decides to stop working ... I can take the profits and give it to her at her lower tax rate (and via a dividend, which is taxed lower). These tax considerations are important the wealthier one becomes.

 

[FrugalTrader]

Genius Boy, do you have your commercial property under a corp?

Dear FT:

I'd contemplate thinking commercial or multi-family units. Requires much higher up-front costs, but you can leverage property upon property. Commercial properties have longer terms leases, and generally less hassle than being a landlord. And being a busy professional, that's important.

Why commercial?

Pros: Less hassle, longer-term leases, usually companies that can afford to pay you (i.e. better guarantees that you'll get paid). Usually, better property appreciation values (if you buy wisely in downtown cores). Easier ability to leverage with more properties.

Cons: Higher interest rates, requires higher downpayments. Need to spend lots of time finding cash positive property.

For example: I found a property with a 12% gross, 7% net cap rate. i.e. from the start, I've been making 7% net. That's irrespective of property appreciation. The key is doing your homework, and making sure you get good property value.

Once it gets big enough, you should set-up a holding company, which has massive tax advantages (through dividend splitting). For example, if my wife decides to stop working ... I can take the profits and give it to her at her lower tax rate (and via a dividend, which is taxed lower). These tax considerations are important the wealthier one becomes.

 

[Alexandra]

Rental Properties

One way my husband and I make some money "on the side" is by owning rental properties. We have bought (and sold) a few in the last seven years, and I thought it might be useful to share some of the things we learned.

1) Never make an emotional decision when buying a rental property. Chances are you will not love your rental property. That’s okay - this is not your home…this is like any stock or bond. You need to make the decision to buy with your head, not your heart.

2) Before you make an offer, walk through the place with your contractor so you know what the place will cost you to repair and what you may have to fix/replace in the next few years.

3) Before you make an offer, create a spreadsheet that breaks down exactly what the place will cost you each year. Work on a “worst case” assumption. This includes the cost of the mortgage, repairs, maintenance, empty units, broken appliances, roofing every 10 years, etc… If you cannot get positive cash flow from the property each month, then do not buy.

4) Bargain hard for the purchase price of the place. Make barely acceptable offers. Be prepared to walk away. Be prepared to end up bargaining for several houses and to keep getting rejected because your offers are too low. That’s okay…you will find something eventually. You are not emotionally invested anyway, right?

5) Our experience has been that the more rental units in one place, the better. If you have a single-tenant apartment and the tenant is terrible, or the place is empty for several months, you have no income. With a house with several apartments, you are at least getting some cash flow even with a unit or two sitting empty. It is also much cheaper to buy one three-tenant home than three single-tenant properties…you essentially have almost the same cash flowing in each month, but at a much lower purchase price.

6) You need to set aside a lot of emergency money for each rental property. Assume that you will need 6 months of rent, in case you cannot get a tenant. Set aside a few thousand dollars for miscellaneous repairs. Or get a line of credit. You will need it.

7) Assume that you will get at least one call per month about an issue you have to address. Many people think that rental property is hands-free. It is not. If you do not have the time to address issues, you will need a property agent, and this eats into profit. If you want hands-free investments, rental units are not the way to go.

8) Look for a handy tenant. We have one tenant who basically manages our three-unit property for us. He takes care of any small jobs, and has a list of our contractors for any larger jobs. In return he gets a small break on the rent, use of the garage, and use of the backyard to grow produce.

This is getting long, so I will end here. Does anyone else have any tips they would pass on to someone looking to buy rental property?