Absolute Newbie Looking to Jump Into Rental Properties

48 Replies

Hello everyone!

This is my first post here as I am brand new to both BiggerPockets and property investments.

I have some money lying around in my bank account that's doing absolutely nothing (was made from my business), and so I was looking to build some (relatively) passive income and turn that liquid cash into property assets.

I am prepared to invest up to $150,000 CAD ($140K USD) into rental properties.

I would like my investments to be as passive and hands-off as possible, and so I would definitely be hiring a property management company.

I have endless questions, but I guess my first would be whether it'd be better to buy off properties in whole first, or to take on mortgages. Please excuse my complete naivety in this matter - everyone has to start out somewhere!

In the smallish city where I live, apartments on the cheapest end of the spectrum are listed at around 69K (all prices from hereon out are in CAD) and renting out for around $650/month. Moving up to $125K list price and they're renting out for around $825. At $150K list, they're around $875. It seems the lower end of the market has a better cost:rent ratio.

Taking the $69K - $650 rent as an example (there are a bunch of these units for sale; they're in a complex with a lot of units for sale), let's say I bought 4 of those (although I wouldn't want to put all my eggs in one basket buying all in the same building, but this is just for samples sake).

Using a 15-year amortization period with a 3% rate (I'm in BC, Canada), and a purchase price of 65K and down payment of 30K (46%) on each place, that would work out to a $241 monthly mortgage on each. That's $650/month rent on each. Say 10% for property management, and another 15% on top of that for vacancies, repairs, etc. which I believe to be conservative (but am just pulling out of my ***), and that leaves me with $487.50. I do not know the strata cost of that building yet, but let's just say $100 (they're pretty cheap). So that's $387.50.

Subtract the mortgage and that's $146.5 positive cashflow per unit. Times 4 units that's $586 net profit before taxes a month and it's building equity each month. This is not taking into consideration the closing costs of the purchases.

That's a $120K investment. Or, for roughly the same price I could buy two of those units completely and profit $775 a month (that's factoring in the expenses too) and hold full equity...

Hmm... assuming I did the math right, it seems I may have answered my own question right there? The major downside to mortgaging to me seems the fact that you don't know what interest rates will do.

My business is in an industry that is extremely volatile and unpredictable. I can go from making virtually nothing one month to making $50K profit the next. As a result, I am looking to parlay the income I do make from it and put it into more passive means of generating wealth.

Therefore, my plan at the moment is to take the money I'm making from my business and throw most of it into income-generating property. So in some ways, I may have a somewhat faster path in rental property growth as I won't be relying solely on a slow growth formula of the renters paying off my mortgages.

I need to get my feet wet first though and take the plunge. That is the hardest part, I'm sure...

Comments, suggestions, and advice is greatly appreciated!

Maybe partner with someone that has some experience.  A friend or relative would be good to start.  

There's a real estate joke that poses the question "How do you make a small fortune in real estate?"  

Ans:  Start with a large fortune.

Good luck.

@Tyler Cruz  

Welcome. Time to build the foundation below. The US is the #1 country for foreign investors in real estate. 10 Hotspots exist 6 in FL, NYC Honolulu Vegas and Phoenix.

Check out the Start Here page http://www.biggerpockets.com/starthere

Check out BiggerPockets Ultimate Beginner's Guide - A fantastic free book that walks through many of the key topics of real estate investing.

Check out the free BiggerPockets Podcast - A weekly podcast with interviews and a ton of great advice. And you get the benefit of having over 70 past ones to catch up on.

Two Great reads, I bought both J. Scott The Book on Flipping Houses,The Book on Estimating ReHab Costshttp://www.biggerpockets.com/flippingbook

Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and all the cash buyers (rehabbers) you will need.

You might consider Niche or Specialized Housing like student housing. Rents can be 2-4 times more. Remember you don't have to own a property to control it.

Download BP’s newest book here some good due diligence in Chapter 10. Real Estate Rewind Starting over

http://www.biggerpockets.com/files/user/brandonatbp/file/real-estate-rewind-a-biggerpockets-community-book

Good luck

Paul

Originally posted by @Tyler Cruz:

Hello everyone!

This is my first post here as I am brand new to both BiggerPockets and property investments.

I have some money lying around in my bank account that's doing absolutely nothing (was made from my business), and so I was looking to build some (relatively) passive income and turn that liquid cash into property assets.

I am prepared to invest up to $150,000 CAD ($140K USD) into rental properties.

I would like my investments to be as passive and hands-off as possible, and so I would definitely be hiring a property management company.

I have endless questions, but I guess my first would be whether it'd be better to buy off properties in whole first, or to take on mortgages. Please excuse my complete naivety in this matter - everyone has to start out somewhere!

In the smallish city where I live, apartments on the cheapest end of the spectrum are listed at around 69K (all prices from hereon out are in CAD) and renting out for around $650/month. Moving up to $125K list price and they're renting out for around $825. At $150K list, they're around $875. It seems the lower end of the market has a better cost:rent ratio.

Taking the $69K - $650 rent as an example (there are a bunch of these units for sale; they're in a complex with a lot of units for sale), let's say I bought 4 of those (although I wouldn't want to put all my eggs in one basket buying all in the same building, but this is just for samples sake).

Using a 15-year amortization period with a 3% rate (I'm in BC, Canada), and a purchase price of 65K and down payment of 30K (46%) on each place, that would work out to a $241 monthly mortgage on each. That's $650/month rent on each. Say 10% for property management, and another 15% on top of that for vacancies, repairs, etc. which I believe to be conservative (but am just pulling out of my ***), and that leaves me with $487.50. I do not know the strata cost of that building yet, but let's just say $100 (they're pretty cheap). So that's $387.50.

Subtract the mortgage and that's $146.5 positive cashflow per unit. Times 4 units that's $586 net profit before taxes a month and it's building equity each month. This is not taking into consideration the closing costs of the purchases.

That's a $120K investment. Or, for roughly the same price I could buy two of those units completely and profit $775 a month (that's factoring in the expenses too) and hold full equity...

Hmm... assuming I did the math right, it seems I may have answered my own question right there? The major downside to mortgaging to me seems the fact that you don't know what interest rates will do.

My business is in an industry that is extremely volatile and unpredictable. I can go from making virtually nothing one month to making $50K profit the next. As a result, I am looking to parlay the income I do make from it and put it into more passive means of generating wealth.

Therefore, my plan at the moment is to take the money I'm making from my business and throw most of it into income-generating property. So in some ways, I may have a somewhat faster path in rental property growth as I won't be relying solely on a slow growth formula of the renters paying off my mortgages.

I need to get my feet wet first though and take the plunge. That is the hardest part, I'm sure...

Comments, suggestions, and advice is greatly appreciated!

Welcome to BP Tyler,

"Business is easy, people make it difficult."

Make sure you surround yourself with people that will have your best interest at heart.

Also, the biggest mistake I made when starting was buying for the sake of being able to say that I am a property investor.

Be patient and only buy to suit your end goal.

Thanks for reading and have a great day.

Originally posted by @Tyler Cruz:

Hello everyone!
This is my first post here as I am brand new to both BiggerPockets and property investments.
I have some money lying around in my bank account that's doing absolutely nothing (was made from my business), and so I was looking to build some (relatively) passive income and turn that liquid cash into property assets

Welcome Tyler.  We cannot have all that money laying around, let's put it to work, but let's do is smartly.  When it comes to starting out, the biggest piece of "wisdom form {mis}experience" I can share with you is patience.  Being impatient will lead to you making poor decisions and deals.  Be thorough in your analysis and guided by the numbers (emotions need to run secondary to hard facts).   When the time comes to make offers, remember your are purchasing a business, not a piece of property and repeat the mantra: "there will always be another property".

I am prepared to invest up to $150,000 CAD ($140K USD) into rental properties.
I would like my investments to be as passive and hands-off as possible, and so I would definitely be hiring a property management company

If this is the case, then perhaps a better fit for your objectives is lending.  You can set yourself up to lend first or second mortgages to third-parties - either from cash-on-hand or from a registered plan (ie. self-directed RRSP).   There is a bit of learning here, but no more, perhaps even less, than being a landlord.  Most of the learning will be around due diligence and setting the correct terms of the loans ... as with tenants, lending is all about screening your borrowers. 

You can easily earn 6-14% return on your money though writing first and/or second mortgages to other investors.

Another almost hands-off approach is to partner with an experienced investor - naturally with a proven track-record of success - in your area - either in direct partnership or purchasing into a syndication.   In this type of arrangement you could have the option of being the "hands-off" money partner - you supply the downpayment and renovation costs either in the form of a mortgage (as above) or as an equity partner in the venture.

I have endless questions, but I guess my first would be whether it'd be better to buy off properties in whole first, or to take on mortgages. Please excuse my complete naivety in this matter - everyone has to start out somewhere

Bigger Pockets is a great place for endless questions.  There are enough of us out here that you will get a variety of experience and opinion in response.

In the smallish city where I live, apartments on the cheapest end of the spectrum are listed at around 69K (all prices from hereon out are in CAD) and renting out for around $650/month. Moving up to $125K list price and they're renting out for around $825. At $150K list, they're around $875. It seems the lower end of the market has a better cost:rent ratio.
Taking the $69K - $650 rent as an example (there are a bunch of these units for sale; they're in a complex with a lot of units for sale), let's say I bought 4 of those (although I wouldn't want to put all my eggs in one basket buying all in the same building, but this is just for samples sake)

That sound cheap for the east coast of Vancouver Island.  It also sounds like you are talking about condominiums/fractional ownership.   If you decide being an active landlord - as opposed to being a lender/silent partner - is the direction you wish to go, then I would suggest you look at entire buildings in addition to (or rather than) condominiums.  Owning condominiums as rentals can work well, but there will be extra costs and constraints (HOAs) with which you will have to deal (read: more politics).

Using a 15-year amortization period with a 3% rate (I'm in BC, Canada), and a purchase price of 65K and down payment of 30K (46%) on each place, that would work out to a $241 monthly mortgage on each. That's $650/month rent on each. Say 10% for property management, and another 15% on top of that for vacancies, repairs, etc. which I believe to be conservative (but am just pulling out of my ***), and that leaves me with $487.50. I do not know the strata cost of that building yet, but let's just say $100 (they're pretty cheap). So that's $387.50

The most common amortization on a residential mortgage in Canada is 25yrs.  Some of the conventional lenders will still extend a 30yr mortgage on residential rental properties (1-4 units).   If you really want a shorter pay-back period, my suggestion is to model your property (business) using the commitment of a 25yr amortization, but to make sure any mortgage you secure allows for a substantial annual pre-payment  (15 - 20%) or payment increase (again 15-20%).  This way your obligation is the lower payment of the 25yr mortgage, but you are fee to pay more as/if you can.   The effective outcome is the same, but with more flexibility retained by you.

Also, when it comes time to look at placing a mortgage, I strongly encourage you to look at a variable rate, fixed term product.  You will save 0.5+% interest over the conventional 5-yr fixed rate/fixed term mortgage which really adds up, especially in the earlier years.

Subtract the mortgage and that's $146.5 positive cashflow per unit. Times 4 units that's $586 net profit before taxes a month and it's building equity each month. This is not taking into consideration the closing costs of the purchases.

Do not under estimate your operating costs - it is alway best to conservatively over estimate them and be pleasantly surprised when you come in under your numbers than the other way around. In addition to utilities, taxes, insurance & {possibly HOA fees}, you also have administration (accounting, advertising, legal). You should also set aside 10% of your net income as a capital reserve to fund all of the renewal/replacement of the property itself (roof, HVAC, floors, kitchen, bath) which will occur every 5-20 years and replacement of appliances (fridge, stove, washer/dryer, etc).

That's a $120K investment. Or, for roughly the same price I could buy two of those units completely and profit $775 a month (that's factoring in the expenses too) and hold full equity...

I think your CBFT numbers are a little rosy, but let's say they are half of that (387.50/mnth), that is $4650/yr ... a 3.8% return.  Not wonderful.   But let's say you decide to hold a mortgage.  You can now purchase 8-10 properties rather than 2.  Your monthly CFBT will be less as you will have debt service, but your overall cash flow will be greater since you have 4-5 times the revenue sources.  Your vacancy risk will also be lower as it is spread across more units.  Finally, your tenants will be building equity for you. 

Hmm... assuming I did the math right, it seems I may have answered my own question right there? The major downside to mortgaging to me seems the fact that you don't know what interest rates will do.

While that is true, the interest rates seldom get too far ahead of rent (the early 1980s being an exception).   North America is more likely to continue suffering from stagnation than another round of {hyper}inflation.  That said, if you partitioned your available funds, using one part to acquire properties (with conventional mortgages at 2.5 - 3.5%) and the other part to private first and second mortgages (at 8-12%), then you have established an arbitrage which hedges you against the rise in interest rates.

My business is in an industry that is extremely volatile and unpredictable. I can go from making virtually nothing one month to making $50K profit the next. As a result, I am looking to parlay the income I do make from it and put it into more passive means of generating wealth

I run my own businesses as well and, though my revenue streams are not quite that volatile, I too am dependant on the business cycles of my clients.   Moving some retained earnings into residential real estate to smooth the income stream and, in may case, reduce personal travel, was what motivated me to start investing in real estate as well.

Therefore, my plan at the moment is to take the money I'm making from my business and throw most of it into income-generating property. So in some ways, I may have a somewhat faster path in rental property growth as I won't be relying solely on a slow growth formula of the renters paying off my mortgages

Just because you do not have to rely on your tenants paying of your mortgages does not mean you should not avail yourself of the opportunity.   If you are seriously concerned about mortgage rates increasing significantly, there are ways to protect yourself (lending as indicated above; retaining a substantial cash reserve to pay-off properties if interest rates jump, etc)

I hope some of this helps.

1(506) 471-4126

This post has been removed.

Originally posted by @Nick Keesee:

@Engelo Rumora 

I've never heard this before:

"Business is easy, people make it difficult."

I had to laugh when I read that :)  Thanks for sharing!

 My pleasure Nick,

Its been around for a while and to be honest with you its quite true.

Think about it. Almost every issue that arises is people related lol

Thanks and have a great day.

Thank you everyone for your welcome and responses. I'd like to thank Roy N. in particular. 

In fact, here are some follow-up's to a few of Roy's points:

- Seconding mortgage is definitely not something I considered, and I do like the more "hands-off" fact, however I believe "simple" rental properties are more where I'm leaning as I believe there is more information and resources available for jumping into that.

- Regarding "partnering" with someone else (somebody else mentioned this too) - while I completely understand the benefits of doing this, I've just never been a fan of partnering with someone else. I am too much of a control freak and have some trust issues when it comes to business.

- In regards to "...I would suggest you look at entire buildings in addition to (or rather than) condominiums." -- I do not have the funds to do this, unless you're talking about duplexes, in which case I'd still have to take on a 50% mortgage with a 150K investment fund.

Strata bylaws, politcs, and prices are all something I don't miss after having lived in a condo for a long time, but I do like the idea of not having to deal with maintenance issues that a fullly owned building brings upon. Should this be a red flag about me entering this industry?

- Regarding "But let's say you decide to hold a mortgage. You can now purchase 8-10 properties rather than 2. Your monthly CFBT will be less as you will have debt service, but your overall cash flow will be greater since you have 4-5 times the revenue sources. Your vacancy risk will also be lower as it is spread across more units. Finally, your tenants will be building equity for you. " <-- This is basically the idea I had behind my original question of buying straight out vs mortgaging. Plus, there are added benefits with "volume" such as possible reduced rates/deals from service people, agents, etc.

My mortgage broker told me that most of her lenders allow for up to 4 mortgaged properties though; is it realistic to mortgage out 10 properties at 20% down? I could almost afford to do that...

@Tyler Cruz  

Most of the conventional lenders will let you go to 5 (or more) residential mortgages before they cap you ... some will allow 10, while some do not really care.

It is important that you use the various lenders strategically, to get the most out of their offerings/comfort levels.   For example, RBC only allows you (or your investment company) to carry up to 5 residential mortgages (that's 5 in total, not 5 with RBC).  However, RBC will also write a residential mortgage and 5 & 6 unit properties under a certain value (essentially those properties generally deemed to small to be worth the while of their commercial department ... here that value appears to be 600 - 700K, it could be more on the left coast).   As a consequence, if you can find a 5 or 6 unit early on in your acquisitions, you can have it written as a residential mortgage versus commercial (i.e. 20% down payment, {marginally} lower interest rate and no originating costs).   Other lenders, such as TD are also making noises about adopting this practice.

If your broker is good, she should be able to help you plan a strategy on which lenders to approach when.

Buying a whole building does not relegate you to duplexes ... you can probably find a quadruplex, quintuplex, or sextuplex in Nanaimo area (maybe a little further afield, say Duncan) in the 300 - 500K range.

1(506) 471-4126

Welcome to Bigger Pockets Tyler!!

It's also nice to bump into a fellow local here in Nanaimo. I'm a Real Estate Investor here in town and would to help out.

To start, just a couple notes to help regarding details here:

First, the average monthly strata fees are considerably more than you've budgeted. Newer buildings are typically lowest and even those can easily reach $150. Most established buildings range from 200-400. Further, the province recently passed legislation mandated that all stratas complete depreciation reports. This has really has had quite an effect both on market values, and somewhat on fees. I'm familiar with the building you're referencing (based on the numbers) and you also need to keep an eye out on possible special assessments.

Second, nearly all of the property management in town is charging 10% so that's a reliable number for factoring the cost of hands off investing.

The condo market has been absolutely hammered in the last few years, but even with that, it can be tough to find a cash flowing property in the multi-family space. (not impossible though)

Recently, however, some local zoning changes allow for someone to develop a nice cash flowing property. I'm in midst of doing this right now with a property and am looking at a 17% cash on cash return at 20% down and 3% money and assuming standard vacancy and maintenance. The cash flow is about $700 after PITI. I'm planning to write a blog post about it shortly showing how to 'create' an investment in a market that is otherwise hard to find cash flow in.

Not sure where to go from here - did you want to maybe meet for a coffee?

Hi Tyler-  Welcome!   I would diversify your investment.  Why put it all into one property?  You can grow your investment much faster if you put down payments on cashflowing properties with conventional financing.  If you're concerned about weathering any economic downturns, keep some reserves for a rainy day.... or rainy year.  Or do private lending.  But again, diversify.  Don't lend it all to one investor.  Do 3 or 4 loans.  Take 1st position on the property.  Make sure they're getting it at a crazy discount so you're protected if you have to take it back.  Make sure they have skin in the game right from the start (equity and/or points).  Work with a real estate lawyer to draw up some "you promise me your 1st born loan docs" and make friends with a Realtor to get you good comps so you know for sure that you're loaning on a property being purchased at a deep discount.  Post your potential deal(s) on here and you'll find out if they're worth doing!

Roy - The number of triplexes, quadplexes+ around here can be counted on one hand... at least, that's what I can find publicly listed on MLS; maybe I'm missing some private listings though...

Tom - Nice to meet you (I actually already looked you up; always do my research :P).  I am actually aware of the higher strata costs (I was paying around $260 in The Fountains II before I bought a house) - my $100 guestimate was for the Willows on Bowen...

Thanks for the confirming the 10% property management assumption. I heard good things about 460...

It sounds like you're telling me that Nanaimo isn't the easiest market for someone like me to get into though... kind of intimidating...

Salvatore - I must admit that I didn't even consider posting potential deals here to get feedback. Good idea! I come from an industry that is ridiculously competitive, and therefore cannot share a word on anything, but I don't think that's too much of an issue in real estate...

My short opinion is: OPM. The less cash in a property, and the longer that you can hold on to your money the better. It can be used to acquire more homes. The great advantage of real estate compared to most other investments is leverage. Of course, the numbers have to work, and caution must be exercised to not get into financial trouble.

Hmm, well, it wasn't my goal to make it look hard - rather, it's important to make sure that the numbers work. I've been involved in nearly 100 million in property transactions in this town and have sold hundreds of houses. Unfortunately, over that time I have seen many folks get into investing and not do their homework and put themselves in the worst position - the need to sell. It saddens my deeply actually.

That being said I'm quite excited about the new opportunities available to us now. I think the ability to generate over $500 monthly cash flow on a $50,000 investment in our local market is spectacular. I see that you've done some research and you'll probably agree.

I'll reiterate again, that the strata market needs to be navigated carefully right now. I single assessment has the potential to wipe years of profit and which is contrary to why we're investing.

You mention your industry is ridiculously competitive - do you mind if I ask what industry is that? I'm curious.

Oops, missed a few replies in this thread (now monitoring it).

After a little more searching, I actually found some more multi-family units in Nanaimo here (you have to be a little creative in how you search online I guess). There's still not many to choose from, but that might not be such a bad thing.

The more I read and think about things, the more that multi-family units appeals to me... the main downside being that I'm not looking forward to being responsible for external maintenance and such things that strata usually takes care of. Financially though, I think that multi-units have a lot more going for them.

Tom - Do you think that Brandon Turner's "50% Rule of thumb" is applicable to Nanaimo?

To answer your question, I'm an internet entrepreneur and in the past 2-3 years have focused primarily on affiliate marketing. So basically lead generation through the use of online paid advertising. It's competitive and volatile as hell.... but if you can get through that, there's good money in it.

It's really "quick cash" though and not building a long-term business like the relative passive income I was generating before from my network of ad-revenue cashflow generating websites. This is why I want to re-invest a good chunk of my profits to build something that is a lot more stable and predictable.

Well, the nice things about real estate as an investment is this. You can name thousands of failed companies or even complete industries over the last 100 years but that house I flipped on Stewart Ave? Still there after 80 years. In fact, you'd be hard pressed to find a business that had been in busy as another house that I own in Europe which is centuries old. It very rarely goes to '0'.

Regarding the 50% rule, this is a rule of thumb, and as with most rules of thumb it serves as a yardstick with which one can make decisions more quickly as well as a safety net when someone doesn't have enough information or how to use it.

Here's an example on the deal I'm working on currently.

I have a big spreadsheet I use to analyze investment potential into which I plug various variables including interest rate forecasts, etc... It's into this that I plug 'actual' repair costs, etc...

The property I just purchased (for the purpose of hold & cashflow) had completed since 2010 the roof, windows, siding, electrical, plumbing, including hot water tank, new service from BC Hydro as well in the last 4 months a new bathroom, floors, fence and completely repainted.

I know that the envelope (roof, etc..) will now last 25 years, the hot water tank 7-12. The heavy lifting is done. I won't be surprised with a $10K roof bill in 10 years.

Anyway, this allows me to put in the ACTUAL values and look at the WHOLE investment to see what the REAL return is. In this case it was 17% Cash on cash. More work? Absolutely. More useful? Infinitely. 

I think that's why you'll find a lot r.e. investors are so into the numbers.

As for Multi-family, in years past, very few owners were interested in selling here. Then we had a flurry of activity a few years ago and shortly there after nearly 1/2 dozen new apartment buildings pop up and there is at least a couple more under permit right now at the city. 

Keep in mind that the vacancy rate is MUCH lower on newer units (1% vs 5% for older stock) so you'll need to factor that decision in when purchasing an existing MURB.

How big a MURB were you thinking of ?

Yeah, the relative stability of real estate is why I am interested in using my profits from my online business. The stuff I do is so volatile that I may have to do a $5,000 minimum media buy spend, and end up making only $20 in revenue, and so within a few days I've already lost $4,990. And with revenue-generating websites, while a hell of a lot more stable, it's still vulnerable to stiff competition and changing trends. Just look at MySpace.

May I ask, as both a realtor and a real estate investor, do you not find yourself in a conflict of interest, especially in a small city such as Nanaimo? Would financials be the only thing from preventing you from taking up all the good investment deals, and leaving the 2nd-best deals to your clients?

I'm still open to what I may be looking for, and I am still waiting to sit down with my accountant and crunch some numbers around (waiting on corporate year-end to finish first), but I am leaning towards a duplex, triplex, or 4-plex.

I've been looking at this one a lot:

http://www.icx.ca/propertyDetails.aspx?propertyId=...

Listed (unverified) gross income of $43,380.00 and expenses of $12,990 leaving revenue of $30,389.00. It's unclear what expenses include, but I presume it covers most of the basics such as water/sewer/garbage, hydro, and basic maintenance, but likely doesn't cover costs such as property management fees, improvements/upgrades (if any), insurance, taxes, etc.

With a list price of $509K, let's say I got it for $480K and put down 25% ($120K). Ignoring the closing cost fees and going straight to the cashflow, the bi-weekly mortgage would come out to $786, so around $1,600 a month.

Using the gross income of the property, it works out to $3,615 a month, an average of $900 per door per month.

Utilizing the ROUGH gauge of the 50% rule (which is why I'm using the gross income here), and not factoring in 10% property management fees (which I'm not sure if the 50% rule considers), that leaves $1,807 to pay for the mortgage, which leaves around $200 a month profit.

Now, when you factor in additional safety padding costs and taxes, I'd basically be breaking even more or less it appears (albeit building equity; although slow equity on a 30-year amortization!).

Alternatively,  I could straight-out bought a condo unit such as this one: http://www.realtor.ca/PropertyDetails.aspx?&Proper...

Let's say I bought it at $115K. It's renting at $825 (although that seems a little high to me for those apartments). I think that $200 strata for that place is fairly conservative. After a 10% property management fee, and let's say 10% for vancacy times, that leaves me with around $460 a month. Let's knock off 10% more for paint, move-in fees, etc. That's $377.50 a month profit before taxes. I might be missing some costs here... insurance I guess but that's pretty cheap on condos. Like $150 a year I think.

The cashflow is slightly better on the 2nd example, and is more risk-free in that I wouldn't have a mortgage, but the first example may benefit from forced appreciation and inflation.

In either case, the cashflow would be so miniscule...

It's interesting you bring up the REALTOR® / Investor question. Recently, I bumped into a fellow I did not know and was unaware of either of my roles. He was pontificating about exactly that, how he had been using an agent but dumped them after finding out he was an investor, figuring the agent would just keep the best deals for himself. 

The funny thing is, what is 'the best deal'? The fix and flipper isn't interested in an established 4-plex generating a couple thousand free cash flow and many buy and hold investors are so removed they hire management companies much less know what end of a hammer to use.

My wife and I typically sell between 2 and 4 dozen homes in a year as REALTOR®s but certainly don't have the capital or resources to jump on every deal we see. Not even close. Recently there was a dated home listed up on Canterbury for 599K. The lot, house positioning view and layout was sublime. I have no doubt that correctly reno'd to the tune of about 200K one could resell it for nearly 1M. It made me sad that I did not have an extra 800K (or access to) to take advantage of that opportunity.

Long story short, even *if* we were looking for the same thing, there are more deals than you and I have capital. I hope all that makes sense. I am glad you brought it up however as it's obviously not an isolated preconception. It's definitely something I'll remain cognizant of in the future.

The first property is a bit of interesting setup - have you been to see it? It's actual a duplex that has been set up as a bit of a rooming house with separate accomodations, but not technically suites in the lower halves, as the standard stove has been replaced with a hot plate, etc.. I have the financials for this property if you're interested. I haven't delved deeply into them but it appears that they the stated expenses cover the insurance, city utilities, etc... There are some updates (newer windows, oil tanks, etc...) It's not in the greatest location but as is typical of that neighbourhood has some nice ocean views. Also there are some long term tenants that would like to stay.

The strata fees for the condo are $139. This strata has not completed their depreciation report yet but seems in pretty solid shape. No laundry in this unit and the previous tenants were paying over $800. That might be a titch high for market rent but I've had 'vigorous' response to my rental ads last month near the university so it would not necessarily surprise me if it was filled again at the previous rate. It's currently vacant. Very easy to view.

Are you familiar with the depreciation reports?

The big factor with the condos is want to have a very good idea of the probability of any larger upcoming assessments. On the flip side, there is sometimes some very good opportunity to lean hard on sellers in buildings that have known problems as no one will want to buy there. 

One exercise that might be helpful it to think about how you envision your future as a real estate investor. I.e. cast yourself forward 5, 10 years. What do you want that to look like ideally? That will allow help you pick the *right* deals today so you're not sitting on a bunch of unwanted assets. Part of this is also having a starting strategy for how you'll secure money for future deals as the big 7 get sticky past the 4th door. Are you working with a mortgage broker or bank?

As for the cashflow, generally the cap rate on properties will all gravitate to certain amount. Slight more than guaranteed money but not as good as riskier investments such as stocks. Occasionally you can 'invest' in an investment to increase this. 'Fresh' and 'New' rentals are preferred in this town. Sometimes the market can bear a higher rent. Other times, features might justify an increase (in-suite laundry)

I am working with a mortgage broker (Julie Tyson) who I've used for my last 2 purchases (not investments) and have been very happy with her.

Yeah, I figured it was pretty much a financials thing in regards to the "conflict of interest". I think it's fair to say though that if we both had X amount of available investment cash and an awesome deal came up though, that it'd be in your own best interest to snag it up first. I don't think there's any denying that... but it doesn't really make much of a difference anyway because even if you didn't have any clients, that still wouldn't change things!

Something you touched on and that I've read on BiggerPockets here is knowing what your investment type or strategy is. I'm personally not handy or knowledgable in construction in the least, and therefore have no interest in flipping properties. That may change down the road, but it's not in my current plans.

I am also not limiting myself to only purchasing brand new turnkey properties; I am willing to do some very 'basic' renovations via outsourcing the work to others such as upgrading/replacing floors, countertops, appliances, paiting, etc. However, I'd want to avoid properties that immediately need a new roof or rewiring, etc.

I think I am interested in a long-term buy-and-hold rental strategy where cashflow is breakeven at worst; it does not need to be very cashflow positive as I do have my main business still. For the relative future, I do not plan to leverage any properties I owe in order to grow; I'd rather pay down the mortgage (if any) and have a "sure thing" before building up. This may change depending on how confident I am after having done this for a while though.

Just doing some very quick and basic research, it seems that around 5-6% cap rate is around the norm for Nanaimo. Reading more on the 50% rule, as well as the 1/2% rule, the more I realize that they are pretty useless other than looking for VERY quick numbers to get a very rough idea of things. They're more numbers to do calculations in your head...

Cap rate, I feel, is not too different... it has a lot more bearing than those other 2 rules, but a blogger at BP pointed out, a higher cap rate could simply mean that the previous owner didn't keep the property well maintained...

I have $230 worth of real estate investing books in my shopping cart on Amazon. Still haven't ordered them yet (I want to be sure I'll read them first), and I've been reading a lot on BP... I've learned a fair bit already, but I feel that a good amount of this industry comes from hands-on experience (as with most things in life).

You're exactly right about cap rate, etc...

Probably like dating, it allows you to quickly get to suitable candidates, saving you some time. For instance, if you only like girls, no point chatting up all the guys in the room. But to make a commitment you need to put in a bit of time to make sure it's a suitable match.

Drucker said it best when he said, a person needs to think about what he needs to do but not as much as he thinks.

Good plan on the books - I think that you'll get a good base of knowledge here. If anything you may want to consider some Canadian specific content. For example, while very popular south of the border, it's typically detrimental to hold property in a corporation up here particularly from a tax perspective. Stuff like that.

While it can be hard to quantify, as Rumsfeld put it, the unknown unknowns, how comfortable are you feeling right now with what you need to do and what your next step would be?

If your best option available is apartments/condo units for $69,000 and they only bring $650 in rent I would look into high yield dividend stocks.

By time you pay a mortgage, property manager, capital improvements, taxes, insurance, condo fees, whatever a strata fee is?, vacancies, and usual repairs, your returns are going to be paltry at best, and negative at worst.

With condos in particular there is the risk of special assessments that are going to happen throughout the course of your mortgage.  

Basically with the numbers you have provided you are betting on appreciation.  Essentially gambling that the value of your leveraged assets is going to increase over time.  Problem is- we are in uncharted territory with central banking throughout the world.   It's pretty clear that real estate values have re inflated to pre recession bubble values in many areas as a result of artificially low interest rates.    You may be a optimist and see nothing but rainbows and butterflies for the next 30 years, but I personally am not leveraging to make that bet unless the returns are pretty astounding.

Originally posted by @Tyler Cruz:

I am working with a mortgage broker (Julie Tyson) who I've used for my last 2 purchases (not investments) and have been very happy with her.

While your broker may have been wonderful for residential or vacation property purchases, that does not automatically mean s/he will get the needs of an investor. 

There is a strategy to approaching the conventional lenders when financing residential rental properties based on their individual offerings (i.e. RBC writes 5-6 unit buildings under a certain value as residential mortgages) and their limitations (RBC only allows you to hold 5 residential mortgages in-total where others allow 10 or unlimited).  A mortgage broker working with investors should also have a good network of private lenders s/he can match-up with investor borrowers.

While you have what sounds like a good rapport with your existing broker, have a blunt discussion with her to verify she has the experience and reach to embark on this venture with you.

1(506) 471-4126
Originally posted by @Tom Stromar:

You're exactly right about cap rate, etc...

Good plan on the books - I think that you'll get a good base of knowledge here. If anything you may want to consider some Canadian specific content. For example, while very popular south of the border, it's typically detrimental to hold property in a corporation up here particularly from a tax perspective. Stuff like that.

Tom:

I will have to disagree with your statement that "it's typically detrimental to hold property in a corporation" here in Canada.   The decision to use a holding company versus direct ownership very much depends on the investors situation.   

When starting out, it often makes sense to hold one, or a few, {smaller} properties in your own name, especially if you are in a situation where you can control your other sources of income.  You would be able to deduct some of your operating expenses against your other income {though I would propose if a property is generating more operating expenses than revenue, you have the wrong property} and, if your are in a lower taxation bracket than the top corporate tax rate, you would pay less taxes in your own hands.

However, if you have a good income from your "day job" and are already in an upper tax bracket, there is less advantage to personally hold the properties and more advantages to holding them in a corporation (income splitting, separation of liability, etc).  If you have any amount of other assets (own home, vacation property, investment portfolio, etc) there is still more motivation to use a holding company.

More prudent advice would be for the investor starting out would be to outline her/his vision: are they planning to own just 2-3 properties or do they want to grow to 10's or 100s of units; what is their timeline and growth strategy, etc.   Once they have their vision and strategy articulated, they should sit down with an accountant and attorney who are well practiced in real-estate and plan the nuts and bolts of how to organise .... when should they incorporate (if at all); will they need/want a multi-layer corporate structure (sometimes it is advantages to incorporate large buildings in their own company); will a trust ever be needed, etc.   If you take the time to consider all of this at the beginning, you  will be able to most cost-effectively alter your business organisation as your grow and will be less likely to box yourself in.

1(506) 471-4126

Ron, I agree completely and I think I did not articulate my position clearly enough.

That was this: there are Canadian specific issues that one needs to be aware of. 

The features of a corporation may still be desirable (liability control, income splitting, trust, etc...) but these benefits come at an additional cost and a higher tax rate. It has been my experience that short of setting up a REIT the rental income is taxed at its highest rate when within a corp. Combined with the effective practical loss of some benefits, for example, that lenders may still require personal guarantees, etc.. I think it's important to (as you suggest) to determine what it is you're getting (in reality) and how much it actually costs to place the properties in a holding company, such as annual corporate tax return, taxes, etc..

In fact, after being solicited repeatedly by other investors I am currently exploring options with my legal and accounting councils and money lenders for how to best setup an R.E. investment corp and honestly it's a bit of a quagmire.

In contrast, I am in no way experienced in US real estate investing but from where I sit it appears there is a bevy of beneficial structures that are *truly* investor friendly. 

Earlier in thread I did mention to Tyler that creating an end vision is one of the very first steps in the process. You may have missed that.

How are things in New Brunswick? It's an area of the country we don't hear much about out here. I imagine your cap rates are probably much higher than ours?

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