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Five Signs You Might Be a Bad Landlord

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Are you a bad landlord?
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We can’t all be the perfect landlord (I know I’m not as much as I try!), but there are definitely a few sign that could indicate  you could be heading down the path of becoming a bad landlord.

If you recognize one of these signs, you should be ok. Just correct the problem and you should be able to ditch that bad landlord stigma.

If you recognize two or three of these signs in how you’re running your landlording you’re going to have to make a decision about where you’re heading. You can continue down the pathway towards being a bad landlord, or you can do a bit of a course correction and straighten yourself out.

Finally, if you see four or five of these traits showing up continually with your rentals, it’s time to sell. You’re giving the good landlords a bad name and it’s time for you to move on!

Are you ready to find out about these signs?

Sign #1 You Might Be a Bad Landlord

No Written Leases

Listen, you need a written lease and you need it signed by all the tenants residing in your property.

If you don’t have a written lease you’re leaving yourself open to misunderstandings, potential problems and a ton of ambiguity.

Your written lease should address potential issues before they become issues such as rules regarding smoking, pets and even subletting (where allowed, some areas the “rules” don’t let you dictate what is always allowed or not allowed).

It should break down responsibilities for snow removal, grass cutting and property maintenance where applicable. And it should include what the repercussions for transgressing those rules specifically are.

It should cover all those details that could be rather vague, unless they are pointed out and it needs to protect you as much as possible within the local laws that govern landlord and tenant rules.

By not having your lease signed it’s just as good as not having one and the big problem is situations without written leases become a situation of he said/she said. This ends up being a situation where there is no proof you originally told them it was non-smoking, or that they couldn’t start a rabbit breeding factory in the spare bedroom (no pet policy).

So if you’re serious about being a landlord and you don’t have leases in place, go find some.

It may involve spending a bit of money with a lawyer or it may involve buying them from a local landlord association. Whatever you spend will pay for itself time after time and year after year going forward by reducing problems, headaches and even evictions when things do go bad.

Sign #2 You Might Be a Bad Landlord

You Haven’t Inspected Your Property In Over A Year

visit your rentals every six monthsIdeally you’re visiting your property and doing at least a quick inspection every three to six months, but worst case you need to at least get in there yearly, even if they seem like great tenants!

A lot can go wrong in a year, heck a lot can go wrong in three months!

That beautifully renovated property with the new carpet and high end hardwood may need to be replaced if you find out your tenant has been rebuilding his leaking motorbike on it over the winter months.

The little leak underneath the kitchen sink that the tenant didn’t catch could require completely gutting the kitchen and replacing everything. And these are the obvious things you’ll notice just by visiting and taking a peek!

With quarterly or every six month visits you can replace furnace filters which will extend the life of your furnace, you can replace smoke detector batteries which could save lives and your property and you can even notice potential problems that could grow into huge problems if left un repaired.

If you haven’t visited a rental property of yours in the last six months stop reading now and start scheduling a visit before continue on! Don’t be a bad landlord or a landlord who suddenly has to deal with a very expensive repair in the near future!

Sign #3 You Might Be A Bad Landlord

You Refer To Your Property as “It’s Only A Rental”

If you’re referring to your rental property, your expensive investment, as “it’s only a rental property” you’re setting yourself up for failure.

If you’re creating a mental environment where you’re not thinking of your property as someone’s home, where you’re potentially allowing sub standard work, lower grade finishes and even ramshackle repairs to be done, you’re setting yourself up for failure. And that’s what happens if your property is just a rental.

When you start referring to your property as only a rental you’ve already established you don’t care about it and it’s not long before it starts to become neglected (refer to Sign #2).

It’s too much work to go inspect it, it’s too much expense to do proper repairs (after all it’s just a rental) and in no time flat you start seeing your tenant turnover sky rocket and your vacant periods increase.

Then after a year or two of losing money you become another one of those landlords who say Real Estate doesn’t work and sell off your potential asset.

It’s not just a rental it’s a long term investment that can reward you handsomely over time and with proper care and attention. Remember that, or save yourself time and start planning to get out now.

Sign #4 You Might Be a Bad Landlord

You Ignore Your Tenants

return tenant calls promptlyThere’s nothing as annoying as getting interrupted when you’re out having a nice evening out with a spouse or girlfriend or even your family. It’s worse when it’s your tenant calling about a problem with the furnace, in minus 20 degree weather.

At least until you realize that because you have that rental property you’re able to have a nice evening out, or that you have a few extra creature comforts, like heat, because you’re setting yourself up for long term success.

It’s freezing out and they don’t have heat so you need to get on that and not ignore it!

OK, that’s one of the worst case scenarios, but even if it’s something simple like a broken dishwasher, clogged sink or slow drain in the bath tub, they shouldn’t be ignored.

How you handle situations with your tenant can directly affect how long your tenant stays with you and if you keep them happy by dealing with issues in a timely manner they will stay much much longer!

If you can reduce tenant turnover to once every few years it will make a direct impact on your bottom line.

Tenant turnover leads to vacant months with no rental income, extra time spent on advertising and meeting prospective tenants and money flowing out of your pocket as you cover expenses related to the property like water, heat, insurance, taxes and mortgage payments with money out of your bank account.

Even if you don’t have an answer, don’t leave your tenants hanging. I currently have a tenant in a property about two hours from me with plumbing issues (not a water leak, but a shortage of hot water, probably a tank that simply needs flushing).
I don’t have an answer right now, but I’ve replied back to her that I should have an update later this afternoon. I’m keeping her in the loop, I’m acknowledging there is an issue and I’m addressing it and she knows I’m not ignoring her!

So don’t ignore your tenants. If you keep them happy and keep them satisfied you’re a good landlord, not a bad landlord who can’t be reached, you’ll be rewarded with longer term tenants and more cash flowing into your bank accounts!

Sign #5 You Might Be a Bad Landlord

You Don’t Treat It Like a Business

I bring this up a lot, mostly because it’s important, but also because failing to treat your landlording like a business can lead to you failing. And failing with property can be an expensive lesson.

The more you treat the entire rental business as exactly a business the more you’ll do to set up the proper practices to help you succeed.

This can involve moving from using a simple spreadsheet to track your income and expenses to moving to dedicated software of customized accounting systems that allow you to track and control much more of your business.

It involves moving from picking a tenant cause they seem nice to having a proper system in place to screen tenants, places to acquire credit and criminal reports as necessary and understanding the local laws regarding rentals and how they apply.

If you treat it haphazardly you make mistakes, or take shortcuts and those mistakes and shortcuts cost you dearly. I’ve seen landlords use free leases they found online that were invalid because they didn’t refer to local laws.

I had a landlord try and evict a tenant using an eviction form from the incorrect state (it gave the tenant another free month of rent as he had to resubmit the correct form after the fact).

These are the shortcuts that backfire on you and are another reason that can cause you to quit the rental business.

Set yourself up for success.

Don’t Take Shortcuts

Shortcuts are attractive because they may get you started in the direction you’re heading faster, but shortcuts don’t always provide the results long term you’re looking for.

If you’re serious about being a successful landlord,  become an educated landlord, learn to manage your properties as if it is a business and it will all become easier and simpler to either carry on as is, or to expand later. If you’re doing it right it gets easier.

And if you’re dropping a ton of money into Real Estate already what’s another little bit to make sure you’re doing it right.

Money spent on having the proper leases, money spent on getting the software to make your job as a landlord/property manager easier and time spent making sure you have systems in place all come back to reward you as you move along your rental property ownership path.

Lining up accountants and lawyers familiar with Real Estate make your life simpler and more controlled long term. These are all parts of your long  cut to long term financial wealth so try not to stray.

Is there any other additions I should have on this list that bit you in the butt as a landlord? I’d love to hear your feedback, leave me a comment below!

 

 

 

 

 

 

The Trump Era – Why Landlords Should Be Happy

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Your Rental Property Doesn’t Care Who Won

Storm is ComingAs the stock markets react with fear, uncertainty and turmoil to the election results, it should be comforting to you as a landlord that your property values are essentially the same as yesterday.

You see that’s the great aspect of property and land. It’s not affected with the immediate fear and uncertainty that hits the stock markets after major events like an election. It can still provide shelter, even during stormy times.

Now I’m not going down the rabbit hole of whether Trump will be good or bad for America, it’s far to early to really say what the true outcome will be, but I will say the one aspect that doesn’t change with these results is people still need homes and properties to live in and to rent. And this is good for you!

If the stock market decides to plunge even further (as of the latest news several major markets plunged 4-6% since yesterday but are now holding steady), home prices will generally remain unscathed at least for the near future. Will the markets recover, probably and that’s the great thing about fear based markets, the fear fades and reality eventually returns.

Now there is a chance that if the 48,000,000 Americans who announced they will move to Canada if Trump wins actually do leave there may be some huge fallout, but we all know that isn’t really going to happen.

So today, whether you are feeling despair or triumph, stop for a moment and think about your property. Think about the positives. Think about how smart you were when you first bought it and how much smarter you hopefully feel today.

Owning property now, having an investment that you control and that is not subject to the instant fear, turmoil and uncertainty that accompanies the stock market makes you just that much more secure in your life and you shouldn’t forget it.

So stay the course, be happy you’re a landlord and continue to become more educated and more aware of how your investment will carry you through the uncertainty that will be unfolding over the next little while and the uncertainty of the future.

 

Buying Your First Rental Property – Financing Part 3 – Financing Strategy

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Rental Property Financing Strategy

financing strategy for rental propertiesBefore we get too deep into talking about some financing strategy for your rental property I need to point out the obvious.

Mainly because what should be obvious to everyone only seems to be obvious to a few…

So what’s obvious about this topic?

Well, how about what works for one person may not work for the next? Perhaps just because this works for someone in their fifties with a high paying job, maybe someone in their thirties’s making less money should have a different strategy.

There is no single strategy in Real Estate that works for everyone, YOU, yes YOU, must find what fits your individual time and circumstance.

You need to realize you must to have a plan in place that works specifically for you and depending on your current job (or lack of a job), your current age (young or old) and your current long term plan that strategy can vary drastically.

If you didn’t read the first two articles about financing rental properties, you can find them here, Buying Your First Rental – Financing Basics and Buying Your First Rental – Financing Terminology.

Now that that’s out of the way, let’s talk about the main strategies investors look at with their investments.

The Main 2.5 Strategies With Rentals

There are really two main strategies that Real Estate investors seem to focus on with their rental properties. Yes, I’m ignoring the long term play of property appreciation for several reasons.

One of those is inflation will do most of the heavy lifting for you in this department as the overall cost of everything rises and two, we’re talking about financing which is more of the here and now and less long term. Although it does come with long term implications. I’m also throwing in a half, because there is also a combination of these, which should make sense one we get a bit deeper into this topic.

Over the next portion of the article I’ll talk about these two main strategies and then I’ll explain some financing strategies to help provide ideas that can move you in the direction that best fits your needs.

So, let’s do this logically and start with strategy number one, which is cash flow.

Cash Flow NOW

As I’ve said before, Cash Flow Is King. With good cash flow a landlord has so much more flexibility than if they bought a property that was breaking even or worse losing money.

When the market slows down the extra cash flow gives you wiggle room to lower rents and when times are good the extra cash flow can be squirrelled away for reserves.

Cash flow can also be extremely important if it’s your source of income and that’s the goal of many investors, to have their rental income replace their job income. As quickly and as closely as possible so that there is little change in lifestyle.

So does that sound attractive to you? Stop for a second and think about it, what if you didn’t have to go to work anymore, at least at your day job? You could stop dreading Mondays and every day could feel like the weekend.

Now to be fair, some people love their jobs, but many don’t and they want out as fast as they can making the thought of enough cash flow to escape the 9-5 the ultimate dream.

Being in this situation can change your outlook on life. No more stressing about work, the freedom to sleep in, to stay up late, to paint, to go on vacation and to pursue your hobbies whatever they may be.

The Challenge of Cash Flow

The challenge you run into when focusing on replacing your job income is being able to realistically get enough income coming in to replace your wages.

If you’re currently earning $60,000 per year, that means you need to conservatively make $5,000 per month of rental income ($5,000 x 12 = $60,000). If you’re not working full time you will be saving money on transit, work clothes lunches etc, but you may also have to pay additionally for health insurance, travel expenses and more so it does become a balancing act.

If we’re working with the number $5,000 and your current rental property is cash flowing $500 after all your expenses and reserves, you only need to replicate this ten more times!!

TEN MORE TIMES……Ouch.

Now you need ten more down payments on properties, ten times more work and don’t forget, if you end up spending time traveling you’ll likely need a property manager who will charge around 10% of your rents. Suddenly you need eleven properties!

OR, you can focus on increased cash flow.

What if you were getting $1,000 per month cash flow? Now you’re down to 5 properties, what if it was $1,750 per month? Now it’s three… $2,500 and it’s only two!!

Al right maybe the $2,500 is getting a bit crazy, but we can all dream and there are some scenarios where it’s possible. More realistically though $1,000 or even $1,500 may not be out of line either though.

So how do we get more cash flow from properties?

Increasing Cash Flow

Increase Cash ReservesThere are only two ways to improve your cash flow on any property. Either increase your rents, lower your expenses or do a combination of both.

As landlords we’d all love to be able to increase our rents (if you’ve never increased rents you may need to rethink that as even minor increases help you offset increases in taxes and insurance) but the reality is often the market won’t support it, but that still leaves many of us do have the option of lowering our costs.

One of the main ways to do this is to reduce our biggest monthly expense, our mortgage, which leads me to a couple mortgage strategies. Now both of these strategies have a significant plus (increased cash flow), but they also come with some negatives (risks, more overall debt), so go into this with your eyes wide open.

Option One

The first option is to extend the amortization period. If you recall from our last financing article, the amortization period is the entire length of the mortgage. By stretching a 25 year mortgage out to a 30, 35 or even 40 year mortgage where available, you can see cash flow increase significantly each month due to stretching the payments out over a much longer term.

Take a look at the image below to see the differences in both monthly payments, and total payment amounts for the 25 year amortization term on the left versus the 40 year on the right.
dealing with financing

The difference is an increase in cash flow each month of $232.45. If you did this across four properties, that’s slightly under $1,000 extra cash flow per month ($929.80 to be exact) , that’s the plus side.

While this increases the cash flow, it also increases the amount of interest you pay out over the longer term. Depending on the mortgage amount and the term this could be tens of thousands of dollars more or even hundreds of thousands of dollars more.

In the example above the total interest paid jumps from $84,527 up to $143,685!!

The important part to remember about this is that none of this money comes directly out of your pocket, as the tenants cover it with their rent, you just end up stuck in the mortgage longer.

By switching to a longer term you’re adding five, ten or even fifteen years to pay off the mortgage, so if you have a very long term plan this also works well. If you’re targeting equity in the property as retirement funds in the next 10-15 years this wouldn’t work as well.

It’s very important for the educated landlord to understand the ramifications of both the good and the bad when making these decisions.

Option Two

Now, option two is a lower interest rate and similar to how we’d like higher rents, we’d also like lower rates and lenders don’t typically help us out in this scenario. Unless of course we look at other products than standard fixed term mortgages.

In this case I’m talking about variable rate mortgages. Variable rate mortgages tend to be lower than fixed rates by as little as .5% to as much as 2% lower. This can make a huge difference to cash flow, but it too has it’s dangers!

You’d want to go over the options with a qualified mortgage professional to see how a lower rate could help your monthly payments. Just be aware rates can change fairly fluidly as the markets change, so what may work well at one point, may be a poor option with a market where interest rates are rising rapidly.

And that’s the danger of variable rates.

If rates do start moving upwards it doesn’t take too many increases to wipe out any savings you have from the initially lower rate and you could even find yourself looking at a higher rate than you would have been able to obtain with a fixed rate mortgage.

So understand the risks, do your homework and see what works for you.

Now is also probably a good time to point out you also need the right type of property to achieve the goals you have set out.

One student of mine owns multiple properties that each have two suites and an external garage that gets rented out. That is the type of property he targets, because he knows it works and it gets him to his goal.

The majority of those properties generate in excess of $1,200 per month cash flow and during low vacancy periods he’s seen cash flow well above $1,500 per month.

How many properties like that would it take to replace your job?

For this fellow cash flow is key as he has several children attending college and the leftover cash helps support his lifestyle, so always know your goals and have a plan!

Another example is my rooming house property portfolio. My rooming house properties provided huge cash flow and changed all the rules for me. I had several rooming houses that provided $2,000 per month cash flow after all expenses and one larger property that was closer to $3,500 per month so you could see the appeal.

Just keep in mind that huge boost in cash flow also came with much more management!

Bottom line though, each individual needs to have their own plan so they can make decisions accordingly

Are you ready for strategy two?

Cash Flow Later

Strategy two involves a longer term goal of getting your property or properties paid off in time for retirement or even early retirement. This is ideal for someone who loves their work, but wants to supplement their retirement or even someone looking to cover their bases as they approach retirement.

Or maybe they just want a larger stream of cash flow once they quit work so they can finally travel and have all their expenses covered.

Imagine owning a property with $2,000 or more of gross income coming in and having the mortgage paid off. You’d still have insurance costs, some taxes and maintenance bills to save for, but a majority of that cash flow would go directly into your bank account. How freeing would that be?

The goal for this strategy is to put as much of your extra cash flow (and possibly extra earned income) back into the property to pay the mortgage down as quickly as possible.

financing strategy for your rentals - longer amortization to increase cash flowThis is where a couple simple strategies can pay huge dividends and the first one to talk about is switching to bi-weekly payments from a single monthly mortgage payment. Note I said bi-weekly versus bi-monthly which is a big difference.

The difference being two extra payments against the mortgage per year (bi-weekly is every two weeks, so 26 times per year (52 weeks /two) bi-monthly is only 24 payments (12 months x two)). This by itself makes a small difference and as per the image it can take three years off the mortgage amortization term. To accelerate that even faster, by increasing those bi-weekly payments by as little as 10% you can shave as many as eight years off a standard 25 year mortgage.

If you’re able to increase those payment amounts by 20%, you can get to that nirvana of being mortgage free that much quicker! And don’t forget you may also be able to make an annual bulk payment each year allowing you to accelerate to your goal even faster.

Now the caveats. Not all mortgages and/or mortgage products are created equally and not all lenders treat additional payments the same.

Many mortgages only allow you to pay a certain additional percentage towards the mortgage each month and/or year. This can be as low as 5% or much higher for some mortgages. On top of that, you need to ensure the additional payments go towards the principal and not towards the interest owing.

I’m mentioning this because while the majority do this by default, you need to ask just to be sure or you could be in for an unpleasant surprise when you look at your statement at the end of the year and see no change. In the end, if your goal is to be at mortgage amount zero as quickly as possible, making sure you have a product that allows you to do that is paramount to your success!

I can’t stop hammering this part enough, but part of ensuring your success with either of these strategies is having a long term plan. If you have this and are able to share this with your lender when shopping for a mortgage it will help you avoid any ugly surprises like not being able to make these extra payments.

The .5

I mentioned 2.5 ways, well the .5 is a combination of both of these ideas. Sort of a mix and match!

If you know you need increased cash flow in five years, but right now you have strong income from a job it could be hugely beneficial to pour as much money as possible into the principal on your mortgage for those five years.

You could make the extra payments on top of the normal payments, you could pay bi-weekly and then throw extra money on the principal again each year for five years. Then once you hit your five years, if cash flow is the priority, you have a huge amount of principal pay down in place and could reverse strategies.

You can switch back to lower monthly payments increasing cash flow, you could refinance and extend the amortization period and suddenly your cash flow is way up. The extending of the amortization prospect may set you back time wise, but again, it depends on your ultimate plan.

If your need for lots of cash flow in five years is the priority, this allows you to get there strategically, which is what smart investing is all about.

Wrapping It Up

There is no one size fits all solution for your financing strategy with your investment properties. There is only what works for you, or what you let happen to you when you don’t plan ahead.

If you understand your upcoming needs, your future goals and what you want your properties to do for you it becomes a much more freeing proposition rather than just accepting the standard fixed rate 25 year mortgage.

The real message from this article and the previous articles is to show you there are options, to educate you about some of those options and to inform you that you can make some real strategic decisions that can benefit you, yes YOU, going forward.

Now, I want to hear from you.

I would like to have you comment below and let me know if this helped, if you’re going to be talking to your broker and if you’d like more “strategic” thinking articles like this or just want me to stick to the basic stuff?

If you don’t make your voice heard you end up just accepting what you’re given, so I look forward to your thoughts. And don’t forget, if you found it helpful, be sure ot share it with your mortgage broker, other landlords and other investors so we can help as many people as possible.

Buying Your First Rental – Dealing With Financing Part One

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Financing Rentals

financing your rental propertyWhen you first start buying rental property one of the biggest challenges you’ll have is dealing with financing.

It seems simple enough (or at least the way they portray it on TV or in slick Real Estate seminars makes it appear simple), put some money down, put a mortgage on it and away you go, but that’s only at first glance.

And on TV..

But in the real world…

Well, if it was that easy in the real world then anyone could do it!

That’s why I’m going to talk a bit about the basics of financing here.

I won’t tell you whether getting the lowest interest rate is what you need (often it isn’t), I won’t tell you whether you should be getting fixed or variable rate mortgages (I have a blend of both and it depends on my plans with a property) and I won’t tell you it’s best to put more down (it usually isn’t, but it’s a case by case situation).

I will however warn you about some potential traps you may fall into with your first property and those warnings are worth the price of admission, which is free so it’s very worth it!

Why The Basics of Financing Aren’t Basic

Part of the challenge we face as Real Estate investors is we get bunched into a different class of borrowers by the lenders, so we also have to typically follow different rules.

Of course these rules also vary depending on where you live, so make sure you have someone who can help you work through them properly and legally!

One aspect that does seem to be consistent where ever you live is investors tend to have to jump through more hoops to get financing for rentals versus a regular home purchaser. If you understand this before you get to far it does take some of the stress of acquiring financing out of the equation.

Some of these hoops and challenges could mean higher down payments, less flexible payment terms and as your portfolio grows less flexibility with lenders. So be ready and also be preparing for the future!

Now the question many new investors have is why is it so much more work? Well, according to statistics landlords are simply higher risks than home owners!

Whether it’s because so many are uneducated about the process or whether it’s easier to give up on a rental than a personal residence I can’t answer for you. It’s just how it seems to end up and as they fail, the extra burden falls on the current and upcoming investors.

I know it’s true that some investors simply get overwhelmed or taken advantage of and ultimately end up losing the ability to pay their mortgage debt which leaves them few options but foreclosure. But that doesn’t mean it’s our intent!

It’s this danger, or higher statistical danger, that causes extra hurdles for those investors who simply want to do it right.

But if you’re here and you’ve been following me for any period of time hopefully my articles and videos are helping you to avoid following into some of those situations of overwhelm or of being taken advantage of, right?

Hopefully you did say right and if you did, let’s move forward and talk about one of the first warnings.

Why The Bank May Not Be The Best Option

financing with banksWelcome to the first trap/warning/mistake that new investors make with financing!

OK, perhaps it’s not a trap, but it is a misconception that your bank is out to help you. They’re advertising says it’s true, but we are far gone from the days where bank loyalty really helped you out.

I’m probably a little jaded with dealing with banks, but they do so many little things that annoy me.

Like trying to break down relationships with their main staff. There’s a reason banks tend to transfer managers so often, it’s not to provide upwardly mobile career paths. It’s meant to break up any potential relationships that could cloud sound financial practices.

I’ve had it happen to me where I’ve had great relations at the front counter, know the tellers kids names, I’m up to date on upcoming staff weddings and I even took extra steps to be remembered, like bringing in donuts on the 1st of the month when I would do big deposits.

We all like to be remembered and this went a huge way to helping us stand out from their regular memorable clients. It also helped me with little things like getting a fee for a bank draft waived or perhaps an overcharge getting wiped out, but when it comes to big manager level issues suddenly it’s all business.

My real life example of this was a bank we’d been dealing with for many years, that we had multiple accounts through and that had handled hundreds of thousands of dollars worth of transactions for us. 

We discovered we were paying a ton of extra service charges for all the accounts and I inquired with the teller if there was a chance to get the fees reduced. Due to the great rapport I was informed it shouldn’t be a problem, especially due to our high number of transactions (and likely the donuts), but I’d need to talk to an “account manager”.

This too went great as I was recognized by her and was again informed it shouldn’t be a problem, again due to our high volume, but they did this all the time for customers, she just had to get it approved by the manager…

Two days later, I was simply told no the manager wouldn’t approve it… Welcome to the world of zero relationships and all business. And yes I did move all my accounts within sixty days, so now they moved from $800 per year worth of service charges to zero, and I quit delivering donuts!

Part two of the problem is banks also like to cap their risk. They don’t like over extending themselves to any one individual (note this doesn’t qualify to those that don’t need to borrow money, banks love to loan those people even more money!).

This results in you potentially having an easy time getting your first rental property mortgage. Then for property number two the hoops become more varied and tighter to get through.

Finally somewhere between property three and five they simply tell you that you’ve reached your capacity with them and they won’t loan you anymore money.

Now, you have all your properties tied up with one lender and no leverage. they control all your options so you have to start fresh somewhere else.

That’s Why I Recommend…

It’s due to those types of issues that I recommend you look into dealing with a mortgage broker if you’re serious about investing in Real Estate, oh and not just any mortgage broker.

You’ll want to find a broker who is familiar with Real Estate investors and dealing with financing of rental properties.

If you’re not familiar with the role of a mortgage broker the easiest way to explain it is to think of them as someone who deals with many lenders and banks, versus a bank who traditionally only offers there in-house mortgage products.

This can open the door to a variety of different options and products involving your mortgage and a mortgage broker who is experienced with investors can warn you in advance which products fit your needs best.

An example of this is variable mortgages versus fixed rate mortgages. Variable rate mortgages fluctuate with the bond market while fixed rate mortgages stay at a fixed rate for the term of a mortgage. Both are important, but they also have different applications depending on your investment plan.

If you’re in a market where values are increasing quickly variable mortgages give you more flexibility with less penalties typically if you decide to break your current mortgage early and refinance or sell to acquire some of the equity for another purchase.

Sharing your investment plans with a knowledgeable broker can ensure they fit you with the products that save you money not just up front, but on the back end too!

dealing with financingAnother bonus of having access to a broader width of lenders is more flexibility if you continue to expand.

You’re able to have your “eggs” spread to multiple baskets.

Now if you start having challenges with one lender it’s not quite the deal breaker anymore and you’re not feeling quite as locked in anymore.

Trust me, this can be stressful as I’ve run into situations where one particular lender changed their policies a couple weeks before a renewal. This forced me into a situation where I had to sell the property and since I dealt with a broker, I was able to let my broker know I wouldn’t deal with that lender anymore.

With a large portfolio tied to one lender, this would have been a major headache.

Dealing With Financing Overwhelm

I’d really hope to provide a nice concise article about financing, but I find my self explaining more than I anticipated (might be due to the amount of information I need to cover!) and including more and more information.

All this financing stuff can really get overwhelming!

So I’ll stop here and make this part one of my financing series versus article.

While you’re waiting for part two (and possibly part three), why don’t you leave me a comment with some of the challenges you have faced with financing, or with banks!

Also, let me know if you’re currently using a broker or dealing directly with the bank and the experience it’s provided you with!

Looking forward to your feedback.

Part Two & Three Of This Series Is Up!

You can find it here,

Dealing With Financing – Part Two Terminology

Dealing With Financing – Part Three Financing Strategies

Understanding The Basics of Leverage and Return On Investment

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Leverage in rental investmentsIf you’re buying your first or your fiftieth property one challenge that almost every Real Estate investor runs into is financing their properties.

In a perfect world we’re all sitting on a huge trunks of money and can simply purchase a property all cash. No financing required, no banks or brokers required and it all gets incredibly easy.

Yet, if it was easy, everyone would do it…

And if everyone had trunks full of money, sites like mine wouldn’t be necessary as money is supposed to fix all problem.

So let’s get back to reality and talk about a couple of areas involving financing. These are the benefits of leverage that financing gives you and I’m going to introduce some of you to the concept of Return on Investment or ROI.

Leverage is one of the most exciting aspects of Real Estate and it’s also why so many people get involved as it allows you to get involved without completely paying for a property.

I’ll break out other exciting tidbits a bit further, but for now let’s dig into the power of leverage.

The Power of Leverage

The Basics of Leverage in Real EstateIf you’re just getting started with owning rental property hopefully this little walk through can help you understand how leverage can benefit you as a Real Estate investor.

To help get the point across I have some examples that hopefully make it much clearer than just rambling on.

It’s also where you get to learn the basics of Return on Investment (which I’ll refer to as ROI going forward through this article). Anyone excited yet?

For ease of understanding I’m keeping this to the very basics very basics. I’m simplifying this by not taking into account any additional costs and expenses. These would typically include legal costs, taxes, financing setup costs, cash flow, mortgage pay down and many more annoying yet vital details.

Why skip these important aspects you might be thinking?

Because I’m only making a point about leverage, I’ll have a separate post about annoying yet vital details later to keep all the detail folks happy 8’].

So let’s go look at some examples!

Example 1

An investor purchases a property for $100,000 all cash and over the next five years the value of the property has increased by 10% making it now worth $110,000.

His $100,000 investment has grown by $10,000 and his ROI is 10%. That’s determined by dividing the growth amount or return, $10,000 in this case, by the original investment and multiplying by 100 to turn it into a percent.

ROI is typically referred to as a percent so it’s easier to compare across properties, industries or sectors.

The formula being

(Growth/Original Investment) x 100.

In our example the numbers look like this,

(10,000/100,000) x 100 = 10% return.

On a yearly basis the it works out to be 2% or the total percentage divided by the number of years. 10%/5 = 2% per year.

With inflation normally between 2-3% per year, this is a break even situation at best, but likely a net loss.

Example 2

In this example, lets say you still have the $100,000, but decide to now put only 50% towards the purchase price ($50,000). Then you use traditional financing for the remaining 50%.

Again, the value of the property has risen 10% over five years but the important difference is the return on the investors investment.

Using the same formula, but with a much lower investment, we get some much better returns.

Here’s this example,

(10,000/50,000) x 100 = 20%

Suddenly that return has doubled. Even on a yearly basis (20%/5 years) it’s double at 4%, so now you’re potentially slightly ahead of inflation!

But the aha moment is you still have $50,000 and could repeat the process on a similar property. By duplicating this and purchasing two properties your gross return would be $20,000 (2 x $10,000 in growth).

Your individual (and your overall) return on both of these properties would still be 20%, so that doesn’t change, just the amount of money you at the end does which is the important factor.

Example 3

This is where it gets exciting. We’re now going to look at only putting 20% or $20,000 down to purchase the original $100,000 property.

With everything staying the same except the amount put down, 10% increase in value over 5 years, lets look at the Return on Investment calculation now.

(10,000/20,000) x 100 = 50%

Anyone else excited? Same property, but now buying it with way less money and you’ve created a much larger return.

Breaking it down to a yearly basis, you’re seeing a 10% per year return on your $20,000 investment.

Let’s rethink our aha moment and now consider buying 5 $100,000 properties with our original $100,000 by putting only $20,000 on each.

With a $10,000 increase on each property that $100,000 dollars that only increased to $10,000 in the first example now becomes $50,000. Same original amount, just leveraged to allow additional properties and resulting in a 50% return on investment.

Which my friends, is the power of leverage!

And The Lesson Learned Is…

It’s also why you don’t want to typically buy a property all cash when financing is available. Is it always the case, no, but it is in my simple examples!

The issues do get more complex as you add in mortgage paydown, cash flow from having tenants in place and other external factors, but the one point I needed to convey with this article was the power of leverage.

Hopefully it made sense and it provided some clarity for you. To further help, I’ve created a Simple ROI Calculator for you to use. Just click the link below to download and once you’ve downloaded you should be able to open it in your spreadsheet program of choice!

Simple ROI Calculator

It just covers the basics, but it might be fun to play with when looking at a current property you own or even to project a return by estimating growth. Hopefully you find it helpful.

If you have a chance to play with it, I’d love to hear about your ROI, so leave me a comment. If you already understand ROI, let me know if I explained it clearly by leaving a comment, and if you think this will help others please share it with them!

Why Listening To The Media Will Mess With Your Mind

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Housing Market Set For Biggest Downturn Since 2007

Houses OverPriced By 20-40%

Real Estate headlines shock landlordsHave you seen any Real Estate headlines like this lately? Depressing isn’t it, well don’t worry if you either check the next days paper or find another one you’ll find headlines like this.

Housing Market Booming

New Home Construction Set For Record Growth

I’ve even run into similar headlines to this on the same page, one calling for a downturn, the other calling for a boom and that’s the problem with much of the media these days. They have an agenda.

While they may have different underlying agendas, their main one is to sell papers and headlines that scare people or pump them up sell papers, magazines and TV news which is why you have to take them with a grain of salt.

How many economists, politicians, billionaires and people in general nailed the financial crisis back in 2007? Just a handful.

How many of those had accurate forecasts before that? Just a handful again.

And how many have been 100% right all the time,  if you guessed zero you’re right.

Many of them have just picked a stance and stood fast on it until they were right. In the early 2000’s there were many vocal critics of the housing booms forecasting an imminent crash and for five years plus they held to that and sure enough they were completely correct. Eventually.

Meanwhile the landlords and homeowners who bought at the beginning of the growth were still far ahead. Yet, if they followed some of the headlines and listened to these media experts, they would have missed out.

surprisedsmallNow I’m not saying you can’t listen to what’s out there, but you can’t take the headlines verbatim. You need to get more of the facts and look further into the details. There are so many variables that affect housing, the world economy and even the cost of groceries that it’s almost impossible to predict with complete accuracy anything these days.

An unexpected frost can cause orange juice prices to skyrocket, a dock strike can leave fruit hanging in the orchards causing shortages two months down the line, a country dealing with debt can change the confidence of a whole continent and these affects trickle down throughout our very interconnected world.

So you need to stay informed, but try not to let the media headlines cause a panic in your life. The panic of the up and down swings will give you an ulcer or worse a heart attack and it’s just not worth it.

As I told another Real Estate investor a day ago, you have to look long term. The panic headlines today are laughable ten years down the road when you look back at all the cash flow you’ve generated, the amount of your mortgage that was paid down by your tenants and the current value of your investment.

As we’ve talked about before, Real Estate is a long term plan and a long term solution. If you have planned for the long term the day to day and year to year hiccups all even out over time. Having said that though, if you’re getting to a point in time where you  are selling everything off to simply enjoy retirement it may be more important to pay attention to the current market.

Just remember not to get caught up in the headlines and look at the actual details usually buried in the article!

Dealing with Realtors When Buying Investment Property

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How to deal with a REALTOR® when buying investment property?

Buying investment properties with a realtorWhen I first started out as an investor I didn’t realize there was a difference in a Realtor helping me buy my first home versus buying my first rental property. I assumed they had the same training and knew all the answers, but I assumed very wrong.

After going through many different Realtors until we found one who understood what we were doing, we often wondered what the problem was. Well, looking back there were several very obvious problems.

The first was us not realizing what we needed and the second was the Realtor not being aware of our specific needs. Because of this we actually drove some of our first Realtors away and others we became too much work for, so they essentially dropped us.

To help you avoid some of the headaches and problems we went through I went to someone with some answers from the other side of the table. A friend, fellow investor and a Realtor Joe Samson who was gracious enough to write the following article which I am sure many of you will find not just helpful, but also insightful to you as you move forward.

So take it away Joe!

So you’re confused and left wondering why your REALTOR® never called you back when you had plenty of money in your bank account to buy several investment properties.

You were very serious when you asked him to “call me when you find a good deal”.

I’ve been a real estate agent and investor for over a decade now, and these are some of the most irritating words that an investor’s agent can hear from a client. Here’s an insider’s look into what it takes for a real estate investor to have a good relationship with a REALTOR®.

So your REALTOR® never called! You’d waited patiently and watched others how they’ve been scooping up prime real estate one after another and you’re wondering what happened to all those real estate agents that you have recently told about your plans?

Don’t get me wrong, since we only get paid after a transaction is completed, I appreciate every opportunity I can get to help a client with their real estate purchase. But in this case I have to say: “Thanks, but no thanks”. Read on to find out why this awkward scenario is not ideal to anyone.

REALTORS® and investors need to find the common ground on which they can work together. Just like the example given above there are hundreds of other pitfalls or opportunities where a relationship can easily end up in the gutter or go sour due to a bad decision that you should have approached differently.

Working with a REALTOR® during your search is the cornerstone of your journey. Selecting the wrong type of property or if your real estate agent is not fully understanding your plans during the process, then it could be devastating to your investment or you could end up wasting significant amount of your time.

There must be hundreds of opportunities where a REALTOR® – Investor relationship can go wrong. To avoid heated conversations, let’s take a look at some of the obvious, but often ignored causes of failures when working with your agent.

Taking Responsibility

As always, everything is a matter of perspective and someone else will need to be blamed for sure if the investment goes belly up.

Let’s admit it, we have all said this before: “…it ain’t my fault”!

Then who’s fault is it? Once we start pointing fingers at others, the damage is most likely already done, regardless if it’s your advisor’s fault or not.

When you hear these words: “Taking Responsibility”, it may bring back memories to you from the days when your parents were trying to beat this message into your head. Back then we have just shrugged our shoulders, but let’s face it, they were right about it.

As a business owner we’re faced making decision every minute of the day. Some of the decisions we make may be as little as answering an e-mail to a tenant, hiring the right cleaning crew or writing a cheque for hundreds of thousands of dollars.

At the end of the day, we need to realize that it was us in the first place who has decided to engage the services of our team members. The ultimate conclusion is that we opened the door for them to do business with us, therefore we need to be very diligent with whom we decide to work with.

Hiring The Wrong REALTOR®

Choosing the wrong realtorThe truth is that there are thousands of real estate agents out there right now who are waiting for your phone call. Almost any one of them is capable of filling out a standard purchase agreement after opening a door for you to a house that you are interested in. But in this case you’re not interested in buying A house, rather you are looking for THE house that is going to bring you positive cashflow with very little maintenance headaches, aka: investment property.

Asking lots of questions about the real estate agent’s past experience is a very crucial step that you can take. Working with the “new kid on the block” may not necessarily be to your best advantage. The key question to ask your future agent is if he owns any investment properties on his own. Make sure you get some details as well to verify the depth of his experience.

Find out from exactly how many properties he owns as you don’t want him qualifying his personal residence as his investment property just to give you the impression that he is the guru whom you have been looking for. Next, ask when did he purchase his properties, what were his biggest challenges as a landlord and so on. I believe that these question are vital to verifying the agent’s experience.

You may run into some individuals who might be reluctant to share these details with you. They could be claiming that it’s private information and there might be all other sorts of excuses that they could come up with for not sharing. I think that’s just baloney and it may be a red flag to me personally. Most real estate investors whom I came across were very proud about their achievements and they are usually excited to talk about their experiences.

In the housing business a word of recommendation is as good as gold. I was a little bit hesitant sharing this advise in the first place, but you can also ask your real estate network if they can recommend anyone whom they worked with in the past. Just be cautious and ask the agent good questions about how is he going to prioritize his clients when the “good deal” shows up.

Thanks to technology, service providers are becoming more transparent of their performance then ever before. Spend 10 minutes online and see if you can find any reviews or testimonials of the person you are meeting with. Someone who’s been around the block a few times should have plenty of reviews available.

Key tip: randomly select 2-3 reviews before the interview and ask the REALTOR® if you can have those client’s phone number to request a quick feedback of their experience with him. Some people may be dishonest about how they are trying to portray their image to the public, so going the extra step may be worth it.

Once you have purchased your property, part of your learning curve is becoming an impeccable landlord. Surrounding yourself with likeminded people and team members who you can rely on can make your life very easy. Since you have decided to work with an experienced real estate agent, he should be a crucial part of your going forward strategy when you are managing your tenants. Having an experienced advisor available can be a real rock for you when you will be facing some challenges. Find out from your REALTOR® if you can rely on him to ask question even after the sale is completed.

Being Emotional

For most REALTORS® working with real estate investors can be a whole other world than what they might be used to dealign with. The typical residential buyers or “moms & pops” can often go through emotional roller coaster rides before making their lives biggest decision.

On the other hand, real estate investors need to leave their soft feelings at home and they need to become fearless business owners as if they’re going amongst a pack of wolves.

Seriously! This is probably the number one cause of failure why investors loose their shirts in this business.

I’d seen it countless times after spending weeks or months of looking at investment properties and nothing was to the client’s liking. The numbers made sense, the location was great and the property was in good condition as well, yet the buyer just couldn’t pull the trigger. This is a huge turn off for many REALTOR®S when their client cannot look at an opportunity objectively. In the residential area this indecisiveness is an everyday occurrence. But when you are committed to invest in real estate, be sure to step up to the table when it’s your turn and don’t hesitate. Otherwise an unspoken conclusion might be forming in your agent’s head regarding the level of your commitment.

On the flip side of the coin, there are some real naive buyers who may be so hyped up about getting out there and buying anything just to claim their first rental property. They get so emotionally driven that if they end up having the wrong person on their team, they will fall in to this trap very quickly.

You need to educate yourself in advance so that you can make decision on your own and be able to recognize the difference between a good and a bad investment.

Having a Plan

Buying Your First Rental Property GuideComing up with buying strategies and crunching the numbers can be overwhelming for the novice investor. Expecting your REALTOR® to serve the opportunities for you on a silver plate is very unlikely to happen. Unless you tell them exactly what you are looking for.

Since every market is different, strategies need to be very adaptive to the local environment. For example: some investment methods might work well in the U.S. while the same strategies may not fly in Canada due to different rules and regulations.

Before you decide to spend hundreds of thousands of dollars on an investment property you should have a pretty good idea about how the entire process works. You can gain knowledge by reading books about real estate investing in a specific market. You can also join networking groups or invite others for lunch who have purchased investment properties before.

Before approaching your REALTOR® to help you find the property that you’re looking for, you will need to be able to understand what is it that you want. Otherwise how are you going to recognize a great buying opportunity if you don’t know what it looks like?

Being a Property Addict

Have you ever caught yourself looking at houses online for hours? Were you jumping from one website to another to see if you can find that gold nugget of opportunity that only seems to be a fairy tale? Perhaps you spent countless hours surfing online at your job when the boss wasn’t around? I’ve done it too.

It’s a completely normal thing to do when you are very interested in finding a solution to a problem. However it’s not necessarily a good thing for you. According to Google, addiction can be defined as a condition of making a habit of a particular activity.

When you are looking at hundreds of irrelevant properties on a daily basis it could push you off track. Wasting your time is one thing, but not having a clear sense of understanding of your goals can trap you in a maze of confusion.

Dealing With Realtors

Being more specific could have been the main thread of my entire point throughout this post. It is imperative to clearly set-up your property targets and identify your niche. Focus your search on a selected area where you intend to become a landlord instead of being all over the city. Decide on the type of property that you are looking for. Ask yourself if the house needs to be a certain size? What is going to be the minimum number of bedrooms that you require? Are you looking for newer or older buildings? Do you like condominiums more than houses?

Having clarity in your vision is going to free you from all the unnecessary activities that you may be doing and it will bring you closer to your goals. Try to resist the urge to look at all sorts of properties all the time and focus on spotting the ones that are relevant to your search criteria. By doing this you are going to soon become an expert in your niche and you’ll be able to weed out the bad investment properties that should have never showed up on your radar.

Being an investor’s agent comes with great responsibilities and I consider it a noble opportunity to work with anyone who is striving to become financially successful. You can reach me, Joe Samson at http://www.JoeSamson.com and I will be happy to guide you along with your investment questions.

Joe is a local Calgary Alberta Realtor, so he may not be able to help everyone as I know many of you come from all over North America and the world, but the advice and information in here should definitely be able to help you with whomever you work with. If you have soem feedback or questions for Joe or myself, we’d love to hear them! – Bill