This post is by Point B Investment Team’s John Su. John specializes in joint ventures and investment properties. He helps clients invest in the Alberta and British Columbia markets to successfully purchase investment properties, and provides helpful landlord tips.
Many investors think that foreclosures are really great deals because they are paying substantially below market price for the property. But did you know that when you buy a foreclosed or bank-owned property, you cannot include any of the appliances like refrigerator, stove, microwave, or dishwasher with your offer?
This is because the bank doesn’t own those items. They only own the land and the house. I’ve heard of cases where the foreclosed owner even took the light fixtures, door handles and toilets with them in spite!
As the Buyer, you are purchasing the property “as is, where is”, with no warranty from the Seller. So there’s nothing you can do about it if any of the above are missing on your date of possession.
If you are the first person to submit an offer, you are able to put in subject clauses like inspection and financing and even negotiate on the price. Once the offer is accepted, it then goes to court. In court, anyone can bid on the property knowing what the accepted price is. The only caveat is the offer in court must be subject free. Therefore, it’s important to know the risks involved and to ensure financing is in place before making an offer in court.
What can investors do to analyze foreclosure deals?
To further demonstrate if foreclosures are indeed a good (or bad) deal, we’ve done an analysis of a foreclosed property sold to an investor. Based on our findings, and considering the adjustments, we found that the investor actually paid market value for the property. The investor may have even received a poorer asset because the comparable property had a river view and had newer renovations costing $10,000.
Click Here to View Analysis Example
So the next time you are looking at a foreclosed property, remember that you may not be getting the best deal. It may be better to find another property where you are able to the negotiate and price, terms, and inclusions. That way, once the offer is accepted, nobody else has the ability to grab it from under you!
You can always contact us here at Point B to help you evaluate whether the investment property you are considering, foreclosure or not, is a good deal.
If you are an investment newbie, you probably have a lot of questions in mind. What is real estate investment? Why should I invest my time in it? Is it worth investing my time? Where do I look? When do I start? How do I proceed?
To help clarify things, here is our guide for real estate investment newbies.
What is real estate investment?
In the past week, I went around asking this question to some of my friends both in and out of the real estate field, and the responses I got were quite interesting.
“Oh you mean flipping a home?”
“I think it’s like buying a house and selling it for profit?”
“Buying a house…?”
“Buying a property and renting it out?”
The most surprising thing I found was that, no one was sure what real estate investment really means. They all sounded hesitant with their responses.
But the good news is that everyone was on the right track. Real estate investment involves investing in a real property for the purpose of making money. There are numerous ways to do this, some simple and some very complicated, so to simplify this for a newbie, I’ll just speak on the most commons methods to invest in real estate. Most people purchase property to either, 1) buy and hold to generate rental income, or 2) buy and flip or to sell to someone else when the market price goes up. But let’s be honest here, there is nothing wrong with doing both.
Why should I invest my time in it? Is it worth investing my time?
As you may have guessed, the keyword here is passive income. Imagine earning supplementary income in your sleep – sounds too good to be true? It’s not. With the right properties and having other people manage the property for you, it is very possible for you to make money while you plan your upcoming vacation in Hawaii. But is the income really passive? Yes and no. Yes, if your property manager will treat your property like it’s their own, which is unlikely. Therefore, in the real world, most people will need to spend a little bit of time to manage the managers, and to keep track of what they are doing and if it is inline with your expectations.
Leveraging other people’s money
Yes, you read it correctly. Unlike daily commodities, you don’t need to pay the 100% cash for real estate. As this is a hard asset that the banks can take back in-case of defaulting on payments, they will lend you up to 80% of the purchase price in the form of a mortgage. If the investor chooses to use their home equity line of credit (HELOC) to finance the down payment and all starting costs, you can effectively leverage 100% of your property using the bank’s money. How cool is that!
When you do the math before you purchase, you will already know your estimated monthly expenses and income. As the years pass, it is likely that your property’s value is now worth more than when you purchased it. Essentially, this means that as your mortgage balance is going down, your home value is going up. Everything in between is the equity on the property that your tenants helped you get. What a beauty.
Where do I look?
Real estate investment will most likely be one of the most significant investments of your life, so it’s obvious that you want to put a lot of thought into it and make an educated decision on the location. Areas where there are job growth, population growth, and low vacancy rates is what we would recommend.
Check out the list of top British Columbia Investment Cities on our website at https://pointbinvestment.ca/where-to-invest/
When do I start?
Assuming you have the money to invest, my honest answer to you is as soon as possible. Having said that, when do you know you’re ready?
Consider asking yourself these questions:
- Is your source of income secure enough for you to be making an investment?
- What are your priorities in life? Would real estate investment help you fulfill your goals?
- Are you able to set aside some time to connect yourself with resources that will help you get your first property? E.g. time to do research, time to meet with mortgage brokers and realtors who could help you with your investment, etc.
How do I proceed?
Find a realtor who is also an investor him/herself. They will already know the best places and properties to invest in, thereby fast-tracking your learning. You also get the opportunity to leverage the knowledge and experience from the real estate investor’s team.
In addition, the team will be able to guide you through a wide range of considerations from conducting a cash flow analysis to supporting you through your concerns about the process of investing (and they could definitely relate because they’ve been in your shoes before).
You think you’re ready? Unsure? That’s okay! It’s never too early or too late to start investing in real estate. Contact Point B Investment Real Estate Team today by emailing us at success@pointBinvestment.ca to learn more about real estate investment and get advice from experienced professionals.
We look forward to hearing from you!
***Ask about our FREE Lunch ‘n Learn Seminars beginning in November 2016***
Many of my investment properties are furnished short-term rentals in Vancouver’s Fraser Valley and Kelowna, BC. I like short-term rentals as an investment strategy because I can charge ‘per night’ as opposed to ‘per month.’
For example, when I charge $100.00 to $125.00 per night for a two-bedroom condo, I can average about $3300 in income each month. If I were to rent that same furnished condo to a long-term tenant, I would only be able to charge a maximum of $1600.00 each month. Even if I throw in a 10% vacancy rate, hydro, cable and WIFI at $200/month into the per night calculation, I’m still on top.
With short-term rentals, prospective tenants compare your unit with a hotel, so $125.00 per night for a two-bedroom unit with two bathrooms and full working kitchen would be considered ‘cheap’.
As the name suggests, short-term rental means that you are renting out a space for a set amount of time, usually less than six months. It can be as short as 1 day, 1 week, 1 month, 6 months, or anything in between. The space that you’re renting out can be a bedroom in your house, a condo, or even a little guest house, assuming you have the space to do so. The tenants you attract will depend on what you’re offering and how you market your unit.
If you treat your rental property like a business, you will make a business income. But if you treat it like a hobby, you’ll get a hobby income.
If you’re like me and prefer a minimum 30-day rental period, you should use the BC Residential Tenancy Agreement that you can find online. Everything is stated on the contract including what is included with the rent, what is not, and most importantly, what the damage deposit is.
If you are renting for a shorter period than 30 days, it’s still a good idea to make sure that you have a professional contract similar to the BC Tenancy Agreement. Make sure you take a damage deposit, and list what is included with the rent and the dates of the tenancy.
With so much competition from others trying to capitalize on the phenomenon of short-term rentals in Vancouver and surrounding areas, having a well-written ad is essential. If you’re not a great writer, borrow bits and pieces from marketing brochures of new construction projects in the area or go online to find MLS listings.
Be sure to highlight things like area attractions, building amenities, proximity to transit, the Walkscore of the area (www.walkscore.com), and shopping centres, as well as what is included.
“You will find quality construction and high end finishing here including:
– Top quality stainless steel Frigidaire kitchen appliances
– In-suite stacking washer and dryer
– Modern bathroom with soaker tub, marble countertop, and rain shower head
– Smart TV & sound bar
– Luxurious hotel-quality bedding and linens”
Place your ad on Vancouver Craigslist, AirBnB, and/or VRBO (Vacation Rentals by Owner). If advertising on Craigslist, remember to renew your ad every few days or at least once a week.
Photos and Staging
As the saying goes, “a picture is worth a thousand words” and for any rental property, posting beautiful photos are a must. Whether if it’s short or long-term, decorate the unit tastefully and then take professional photos with good lighting. Oftentimes, people decide whether or not they want to rent from you within seconds of looking at the photos of the unit.
Ensure that your photos are realistic and represent what you are actually offering. Have you ever seen those cheap hotel photos that look amazing but when you arrive it’s actually a run-down property that smells just as bad? You don’t want to have your tenants disappointed.
Research what hotels and other short-term rentals in the area are charging per night. If you are close to a convention centre or stadium, see what conferences and events are going on, and price accordingly. You don’t want to charge too little or too much for your area.
If you follow what the hotels charge AND know what events are going on in your area, that’s where the big bucks can be made. You don’t want to be charging $100 per night when all the hotels are fully booked and charging $400 per night.
The short-term rental business can be seasonal and it’s common to charge higher nightly rates during Spring Break and Summer. You can also charge higher in the Winter if your investment property is close to the ski mountains. It’s important to capitalize on charging higher rents during high tourist seasons to cover vacancies during the low season.
If done correctly, short-term rentals can be quite lucrative with only a minimal amount of work. Once you get the property up and running, you will have enough experience under your belt to know how to market the property, write the contracts and recognize good tenants from the bad ones. Before you know it you have yourself a part-time business!
Good landlord-tenant relations are important for social media ‘reviews & testimonials’ and for referrals. This means that you have to be available for your current tenants by phone in case they have questions or issues with the suite. A partner of mine takes orders for a free case of cold beverage or fresh fruit platter upon the tenant’s check-in, and goes into the suite 15 minutes early to turn up the heat/air conditioning and have soft music playing in the background. It’s those unexpected special touches that will make you memorable.
My advice is to hire a professional (and thorough) cleaning company to help turn over the unit after each tenancy, or clean every other week for longer tenancy periods. Having cleaners in the suite every other week is a good way to make sure your tenants are not doing something they shouldn’t, like smoking, or damaging the unit, so you can address problems quickly. You can charge the tenants a cleaning fee in most cases or write off the expense against your rental income. So why bust your butt trying to do everything yourself to save a buck?
If you are planning to purchase a condo or strata property as your investment, be sure to read the property’s by-laws first for any rental restrictions. If you skip this step and the building does not allow short-term rentals (or even long-term rentals) then it’s not a good investment property. Hiring an investment-focused realtor will eliminate this issue as their job will be to ensure your business strategy is in-line with the types of properties they show you.
With the tips above as your guide, you’ll be able to achieve higher profits while avoiding costly mistakes in the highly competitive short-term rental market.
To your success! Teresa Leung
I’ve had the pleasure of watching David Chilton speak in person at the Vancouver Investors Forum in November of 2012. For those of you who don’t know David, he is the new Dragon on CBC’s hit TV show, Dragon’s Den, and the best-selling author of “The Wealthy Barber”.
At the end of his speaking engagement, David was kind enough to give us a copy of his latest book, “The Wealthy Barber Returns”. He even talked to us for a few minutes while he signed our books. My impression of David was that he’s a smart and conservative guy who is very knowledgeable about the stock market, investing and saving money.
A few weeks after meeting David, I started reading “The Wealthy Barber Returns” and I must say that I enjoyed the book more than I thought I would. It was an easy read, contained a few chapters that made me laugh and provided a few useful money-saving tips. I completely agree with David’s money-saving ideas and have actually adopted a few of them myself, however most of his book is based on the concepts of “saving up to buy RRSP’s for retirement” and “paying off your principal residence ASAP”. I completely disagree here as David Chilton seems to forget about the opportunity to build wealth through real estate.
(Don’t) Save to Buy RRSP’s for Retirement
The most common RRSP investment products are GIC’s, mutual funds, and stocks. Yes, GIC’s are guaranteed, but they pay extremely low interest rates that barely keep up with inflation. Also, when you invest in mutual funds and stocks, there are no guarantees that you will make money or even retain your principal. Both of these latter investment options give you a highly unpredictable return.
My philosophy is save your money to buy multiple investment properties. When you retire, this option can provide you with monthly passive income so you CAN stop working. You also have the option of selling each property as you need the money. Here are some of the other advantages of investment properties you won’t get with traditional investments:
Leverage. When you purchase an investment property, the minimum down payment is 20% of the purchase price, providing you get approved for the mortgage, the bank will loan you the other 80%. For example if you buy a property worth $200,000, your down payment would be $40,000 and the bank will finance $160,000. Therefore, for a low $40,000 you could own a property worth $200,000. – NICE!
Using Other People’s Money. Providing your property receives positive cash flow (monthly rent collected is higher than monthly expenses) your tenants are paying down your mortgage, your property taxes, your maintenance fees (if strata present), your property management fees (if you don’t manage it yourself), your insurance and all other related monthly expenses! AND you will receive some extra cash or passive income each month. – EVEN NICER!
Instant Equity. For the $200,000 property, if it appreciates even at a modest rate of 3% per year, in 25 years time, your $40,000 down payment would then become $423,004 (see table below). Your equity would be $152,250 and your total return on investment after 25 years would be 1057% ($423,004/$40,000). This is not a typo; your profit would be over 10 times over your original investment of $40,000. Now, imagine having 4-5 or more of these babies? – CHA-CHING!
(Don’t) Pay off your principal residence ASAP
A method that sophisticated investors use to expedite the growth of their investment portfolio is to USE the equity in their primary residence towards the down-payment of their investment properties. You achieve this by applying for a Home Equity Line of Credit or HELOC from your bank.
From there, you re-finance your investment properties every 5 years to draw out the equity to buy more investment properties. Why do you do this?
Dead money. Equity sitting in your home doesn’t do anything for you; in other words, your money cannot grow there.
Smart money. This is very much like how compound interest works, but at a much larger scale as there are now 3 income centres 1) positive monthly cash flow 2) mortgage pay down by tenants 3) capital appreciation. The first two you can control, the third is unpredictable, however, we know from history that real estate has doubled in value every 20 years. As a bonus, the interest borrowed from your home equity loan are considered to be business expenses since it is borrowed to generate income.
My Recommendation: The sad reality is that most people have to forget freedom 55. Most people will be achieving freedom 75, freedom 85 or no freedom at all. The reason- people just don’t have enough monthly passive income if they stopped working and most of the traditional ‘safe’ investments like GIC’s barely even keep up with inflation. Real estate investing is simple. The buy and hold strategy of real estate investing requires patience and endurance. It will not make you rich quickly. However, through the 3 income centres of cashflow, mortgage pay down, and appreciation, combined with ‘compounding’ your investment properties over time, real estate will get you rich FOR SURE. So David Chilton, care to write your next book with me? Let’s call it “The Wealthy Barber Returns Even Wealthier”.
– by Teresa Leung
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