Thursday, May 19, 2016

Investing In Real Estate – Building The Right Team #1: Realtor

Last week, we briefly reviewed a list of the team you should consider building if you want to become a real estate investor. Over the next set of posts, we will elaborate on some of these team members and what you should know. To begin, we will start with arguably the most important member of your team... the realtor .

What should you look for when choosing a realtor to help you with investment properties?

Consider a realtor who specializes in income properties, or at least has significant experience with dealing with investor clients both on the buying and selling side. Ask for a list of properties they have worked on and possibly for references. It is also a huge bonus to have a realtor who is an investor themselves. They will be able to speak from first-hand experience and should be able to offer excellent insight. Choosing the right realtor is especially critical when investing outside of your home market, where you’ll be relying on them more for information about that market.

In what ways will my chosen realtor help in the process?

Your realtor should meet with you, understand your goals for investing and gauge your financial and management abilities to invest in properties. They should provide you information about the rental market, including rents, vacancy rates, employment info, demographics, municipal and fire code regulations, neighbourhood info and more. At this point you should be ready to look into specific properties and narrow down your focus to the right property for you. After finding the right property, your realtor will handle offer negotiations, facilitate inspections, appraisals, etc. to meet conditions and generally handle the sale right through to closing.

In what ways can my realtor go over and above?

Your realtor should have ideas and insights to help you be successful. They should understand the rental market and what makes a unit marketable to tenants. They can provide advice regarding value added renovations, marketing of vacancies, how to handle tenant inquires and applications and general maintenance of the property to keep things moving steadily. They can also provide referrals to other professionals for your team, including lawyers, mortgage brokers, insurance brokers, building inspectors, management companies, etc. Lastly, they should protect your interests at all times. They should see red flags such as blatant fire code violations, undesirable tenants, inefficiencies (electric heat loss) and other potential headaches of future problems.

This is a brief discussion about what to look from your realtor when looking at investing in real estate. It should give you some guidelines to get you started. Good luck!

Friday, May 13, 2016


Downside protection for a Landlord is always good business, particularly when you are committing dollars into a premises build-out on behalf of a Tenant. Using this example, let’s say the request is to commit $50,000 towards a build-out with a lease term of 5 years. Here are some suggestions on how best to handle this and protect the Landlord’s investment:

  • Require that the Tenant reimburse all unamortized costs at the time of termination (if termination occurs at the end of Year 3, approximately 40% of the cost remains unamortized and is payable)
  • Secure the TA costs through a Personal Guarantee, even if the named Tenant is a corporation
  • Letter of Credit from an approved Lender, specifically against the TA amount
  • Negotiate a shorter amortization period and not necessarily the same as the term of the lease (as in the above example, amortizing it over 3 years even though the term is 5 years)

Situations when negotiating leases often arise, where a Tenant poses the possibility of an EARLY TERMINATION. This can be due to a number of factors – changing government regulations that negatively impact their business, sales volume issues and business model changes, to name a few. If  this is the reality and it’s part of the discussions upfront, it could still be a viable lease deal and worth considering. The best practice then is to protect yourself against the downside risk.

On the matter of DEFAULT, it’s often difficult to assess upfront and generally is not part of the negotiation and discussion with the Tenant. Even large corporations can fail, so covering for this downside is simply good business. In the case of smaller or newer companies, often Personal Guarantees are what is required and there should be no apologies in requesting them. You are in fact lending the Tenant money by providing a TA and as a result you need to secure this investment.

Again, we welcome your comments on how Landlords handle TA costs in your market and any other approaches you have come across. We're just a click/call away from discussing investment opportunities here in Windsor-Essex!

Tuesday, May 10, 2016

Investing in Real Estate – Building The Right Team

After doing some research on different investing ideas, you’ve decided that real estate investing is right for you. No matter how big or small you intend for this investment venture to be, its important to be ready, willing and able to handle everything that comes your way. But how do we do that? By building the proper team of professionals around you to set yourself up for success.

But what type of professionals do you need? We've put together a list of such professionals. Not every one of them is necessary for every investor, but the list is a starting point to make sure your bases are covered.

Now this is a pretty obvious one . They’ll be able to help you out with understanding values, demographics, rents, etc. Working with a realtor who either owns rentals themselves or does a good amount of income properties is a huge bonus.

A good real estate lawyer is invaluable. They will make sure your interests are protected in whatever deals your are considering. Good legal advice can be expensive but can save you money in the long run.

Assuming you will be mortgaging your properties, a good mortgage broker-professional is essential in getting your deals financed. They can give you advice so you can continue to accumulate properties and get the best terms possible.

A good accountant is also invaluable. Understanding the best way to hold the real estate, claim expenses, amortize costs, etc. can save you tax dollars. They also have your back should CRA ever audit you.

Don’t have time or the ability to handle your rentals yourself? Finding a good property manager is must-have. They can collect rents, leasing, handle tenant calls and be the general go between the property and the owner. Fees generally range from 5% of rent to one month’s rent per year and up.  Make sure you factor this cost into your budget if you're planning to have the property managed.

Not very handy? Then you’ll need to contract out any renovations or general upkeep. When you find good people who don’t cost an arm and a leg, it is important to keep them around and happy. They will make your life much easier in this business.

A good bookkeeper can keep track of all your income and expenses related to each property and make sure everything runs smoothly. They can also run regular reports so you understand your profits and can uncover trends (like increasing utility costs), so they can be addressed.

A list of maintenance contacts can go a long way in efficiently operating your property and keeping it safe and attractive to tenants. Be sure to also add these costs to your budget.

This is far from an exhaustive list, but it gives you a general idea about who you should have on your speed dial as a real estate investor. How has your experience been in creating your team?

Wednesday, May 4, 2016

Bonus – Tax Time 2016: Tax Refunds

Now that the tax filing deadlines are officially behind us, a good portion of you will be getting a nice refund from the tax man! Now, before you go blowing it on the latest gadget or on a weekend getaway, it’s important to remember that this isn’t free money and it really is just a refund of the overpayment of taxes you made throughout the year. Considering it comes in the form of a lump sum, there are many opportunities to invest that money which can benefit you on an annual basis. Today we are going to make a list of the prudent potential uses for that hard earned tax refund, from your friendly local real estate professional’s perspective

Save Up For A Down Payment On Your Next Property

A lump sum tax refund can be a great head start towards saving for your next down payment.

Renovate or Update Your Investment Property

Have you deferred a renovation because cash flow has been tight? With your tax refund in hand, now could be the time to address some of those outstanding issues.

Value Added Upgrades to Your Home

Thinking about adding a bathroom or changing some flooring? Having some freed up cash to complete these tasks will not only make your further enjoy your home but increase its resale value.

Paying Down Mortgages

Without delving into people’s personal financial situations, paying off debt is never a bad option whenever you have a cash windfall. It gives you a guaranteed return on investment (ie. interest costs  saved). If you have any outstanding non-mortgage debt (credit cards, car loans, lines of credit) I would recommend you start with those as they are typically at the highest interest rate. Once those are taken care of, I would move to the mortgage on the principle residence. Lastly, I would pay down the mortgage on the income properties because of the tax deductibility of interest (as opposed to the principle residence mortgage debt).

So there you have it readers. What do you normally do with your tax refund?

Monday, May 2, 2016

NET EFFECTIVE RENT (NER) – Good Idea to do the Math!

Whether landlords are doing incentives via TENANT IMPROVEMENT ALLOWANCES (TIA) or RENT FREE CONCESSIONS (RFC), the reality is that the stated lease rate is being affected and not necessarily in the landlord’s favour. The TIA involves an actual capital investment on the part of the landlord, whereas the RFI foregoes cash flow for a period of time. In either case there is a determinable cost to the landlord for these type of incentives and a prudent landlord should rightly do the math to understand the net effect.

NET EFFECTIVE RENT (NER) is basically what the lease rate actually looks like, after the incentive is accounted for. Consider the following for either situation on a 1,000’ unit being leased at $10/ft:
  • RF Incentive OF 3 MONTHS – 3 x $833.33/mo = 2500 in year 1 
  • NER = $7500 / yr. or 7.50/ft. ($10,000 - $2500 / 1000’)
  • TI ALLOWANCE  - $5 / ft. x 1000’ = $5000.00
  • NER = $5000 / yr. or $5/ft. (10000 - $5000 / 1000’)
It’s important to note that both of the above examples are calculated against only one year of lease income and assumes a one year lease. If the term is three years, both NER rates go up, as the total rent number is three times higher over the full term. It’s all simple math based on the specific deal. More importantly, it not only affects your cash flow but ultimately the return on investment for the property.

If we assume TIAs or RFC are a cost of doing business in your market, landlords need to focus on determining the NER early in the process when assessing any lease proposal. As with everything in real estate, in some cases the projected NER makes sense, while other times it doesn’t.

We welcome your comments about NER realities and experiences within your market. As always, we’re just a click/call away from discussing our investment opportunities here in Windsor-Essex!