Investing In Real Estate – Building The Right Team #3: Mortgage Broker/Professional

As you continue your journey in real estate investing, unless you are buying a property with all cash (in that case can you lend us some ☺?), you’ll eventually need to get a mortgage. But how do you go about doing that? Today, we are going to talk about the next member in building your real estate team: the mortgage broker/professional.

Why do I need a Mortgage Broker/Professional?

The main function will be securing the mortgage for your property purchase. They will also run your credit and applications and move the mortgage along from the initial application phase to giving mortgage instructions to your lawyer for closing.

What will my Mortgage Broker/Professional Do For Me?

Aside from the actual securing of the mortgage, they will shop around to get you best rates, advise you on the best products for your needs and make you aware of any potential pitfalls of a certain type of mortgage. They basically work with you to ensure your interests are taken care of in securing the mortgage.

How Is Financing My Investment Real Estate Different From My Personal Residence?

Financing a personal residence is typically much easier than investment properties. On a personal residence the lender will look at your income and based on that decide how much you can qualify for based on certain ratios. Investment properties are different as they incorporate rental income and so weight is given to income and expenses of the property. There are also different rules ie. you can put as low as a 5% down payment on a principle residence(with mortgage insurance), with investment properties that is usually 20-25% down.

What Else Should I know And Will My Mortgage Broker Be Aware Of?

It is important that your mortgage broker/professional be aware of your goals as an investor. The planning for the future can be much different if you plan on only owning 1 or 2 properties as opposed to 10 or 20. Sometimes it is better to choose lenders with higher rates or less attractive terms, if it helps you down the road qualifying for more mortgages as your portfolio grows. They should help immensely in this regard. Therefore it is a real bonus to work with a mortgage broker/professional that has plenty of experience working with investors.

How Much Will My Mortgage Broker Cost?

Typically the mortgage broker/professional is compensated by the lender with a built in commission into the interest rate. So essentially they are working for you, at no direct cost to you as a buyer!  Check with them on this though as your situation may be unique and may require different services. Note: You will typically have to pay an appraisal fee once you have a property under contract and a mortgage commitment has been given. This will range between $200-500 for a residential property. Sometimes the lender or mortgage professional/broker will take care of this fee.

So there you have it readers. You now know about how important financing is to your real estate investment future. Choose your team member wisely and you’ll be thankful later!

PERSONAL GUARANTEE – Landlord’s Perspective

We touched on the subject of a “PERSONAL GUARANTEE” (PG) in an earlier blog, so let’s expand on the subject further from the Landlord’s perspective. This can often be a controversial part of any lease negotiation, so here's a practical strategy and approach to work with.

First, a PG is simply an assurance that the Tenant (likely the principal of the company) will be personally liable financially for the lease agreement and its terms. It can be structured in many ways, for example, time limited, subject to a maximum amount ($ figure), or tied to the Landlord investment towards tenant improvements. It most often becomes enforceable when the company or entity which has signed the lease fails to meet its terms.

As Landlord, you are effectively a creditor and in some situations you may have more financial exposure than just the loss of the rental payments due. Understanding this, it’s good business to construct a PG structure that fits the particular deal you are considering. Think in terms of your risk & exposure in the event of a tenant failure, with a clear assessment of the downside potential. The best practice is to think like a banker and secure the deal accordingly.

In terms of the Tenant expectations and their willingness to accept a PG, none of it should come as a surprise. The informed ones will understand why it is required, the rationale behind it and should negotiate the best terms of a PG accordingly based on their interests. Tenants unwilling to accept a PG are limited in the market options they can consider and are in effect asking you to accept a higher risk by taking them on.

Just a final thought on a PERSONAL GUARANTEE – they never matter much the day that the lease is signed, but they do when the business fails and the lease goes into default!

CALLING ALL LANDLORDS! We would love to hear any great stories on the subject from your experience(s). As always we're just a click or call away from discussing the investment opportunities here in Windsor-Essex!

Investing In Real Estate – Building The Right Team #2: Lawyer

Moving along in our series of building the right team as a real estate investor, after you’ve selected your realtor, it is time to consider legal representation. Today we are going to talk about what to look for and why you need the right lawyer on your team.

Why do I need a Lawyer?

The most basic task you need your lawyer for is to close the real estate transaction, transferring title to you. They will also provide legal advice for your investment business to protect your interests.

What will my Lawyer do for me as a Real Estate Investor?

Aside from the closing transactions, they will run title searches, register mortgages on the property, give legal advice or opinions on properties or related issues, review or even prepare real estate documents and even advise on ownership structures of your real estate.

What should I look for in a Lawyer

You’ll want to look for a lawyer who does a lot of real estate transactions and has the requisite experience. They should be able to provide relevant advice for your situation as a real estate investor and how to protect your interests. Having a lawyer that is an investor in real estate or has some sort of background in the business is a bonus.

How much will my Lawyer cost?

As in anything else, the costs will vary depending on the lawyer and the amount of work needed. On real estate transaction, some lawyers charge a flat rate plus disbursements (out of pocket costs the lawyer incurs on your behalf) and an hourly fee. Make sure you understand the costs beforehand and maybe compare prices in your market. Although the decision of cost alone shouldn’t determine which lawyer you choose, the decision is very important!

As we aren’t lawyers, we leave the legal advice to the legal experts. This is far from an exhaustive list regarding legal professionals but an intro to get your started with adding to your team. Now get to work!

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!

RECOVERING TENANT ALLOWANCE COSTS – In the event of EARLY TERMINATION or DEFAULT

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!

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.

Realtor

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.

Lawyer

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.

Mortgage Broker-Professional

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.

Accountant

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.

Property Manager

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.

Contractor/HandyMan

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.

Bookkeeper

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.

General Maintenance – Grass, Snow, Cleaning

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?

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?