When we’re first learning how to start real estate investing, MOST of us are really excited and terrified at the onset of their first deal. Usually, either emotion affects the outcome of the deal slightly.
For me, it was the excitement that taught me five lessons I will always remember:
When I learned how to start real estate investing in Canada I should have…
Slowed Down
I was so excited to ‘find’ my first Rent-To-Own tenants so quickly after only learning about this strategy a few months before. I thought ‘this isn’t that bad, tenants are easy to find for this’…boy was I wrong. I didn’t even advertise and see what else was out there, I took the very first couple who agreed to everything on a handshake.
Screen Tenants Properly
Moving too fast led me to ignore many red flags when I was ‘screening’ my tenant/buyers. Things such as
- No NOA (notice of assessment)
- One wanted to be left off all paperwork and refused to have credit pulled
- The other had extremely poor credit and no job
- The other, self-employed with fluctuating income…VERY fluctuating
- just to name the top four…
Kept My Emotions Out
I was already hesitant on the deal and the tenant buyers, but I felt compassion for these people because I’ve been self-employed too – I knew what it felt like. When the wife cried many times in front of me because it was her ‘dream home’, my heart broke, so I let things slide.
Analyze Better
I was strictly looking at this deal from only one angle; the Rent-To-Own which meant large over market rent and I saw dollar signs. If it would have played out, I would have been very happy with a great return and cash flow, but it didn’t. Therefore when the RTO failed, the property would not cash flow as a straight rental which leads to….
Have my ‘stuff’ in order
A major reason the property would not cash flow is the mortgage interest rate. I did not have my proper documentation completed and had to ‘squeeze’ this deal through other channels, resulting in higher interest rates. On top of that, I could only ‘break’ the mortgage and pay huge penalties if I SOLD the property, nothing else…I could not even re-finance!!
My Tuition Fee
At the end of the day, this property purchase taught me many lessons about sophisticated investing –I like to call it “my tuition”. I quickly learned how to properly analyze WITH stress tests and conservative numbers; I learned why it’s important to choose a tenant profile and follow the guidelines to secure great people who fit that profile and to have a plan on what, where, why and how I’m going to buy property.
All of the above had nothing to do with the market, rent-to-own, or even the tenants. I am the only one to blame for it all. If you look at blaming others for your mistakes, you will get nowhere in business. Most would tend to look at the above failed RTO as the tenants fault. But really, it was my call and my mistake to put these people in this position in the first place.
This is why today when I look at doing a deal whether it’s rent-to-own or a straight rental, not only do I screen tenants carefully, I ensure they FIT my property. Just because they say they can afford something doesn’t mean they can…and even so, if they are stressed trying to make ends meet, that stress is passed on to me sooner or later so I’d rather pass them up.
Today, I’m grateful for this huge mistake happening, but through the latter half of 2009 and early 2010 before I sold it, I thought it would never end. It was vacant for six months while I scrambled to do whatever I could to stop losing money… I was unprepared for the outcome of choosing poorly two years earlier.
Wow! Great lessons from your first deal!! Our first deal wasn't the teacher … but we've paid our tuition for several schools too!! 🙂
You hit the nail on the head though – all the things that happened came back to decisions you made. When we realized that it was a tough pill to swallow BUT it's also comforting because you realize that most of the yucky stuff that comes up with real estate can be prevented by better decisions.
So true Julie – really it is a self realization on how I used to approach life – which is blaming everyone and everything else for what happens. Owning your actions and admitting your faults only makes you a stronger, smarter investor. I choose to learn from what I did wrong not only three years ago, but thirty years ago as well. If I can bring this to the table for others to learn from and avoid, I know I have contributed.
There are many more 'yuck' stories to come and some very vulnerable posts that is going to shake this up. Stay tuned as I take it to the next level.
As always, thank you for reading and being part of my circle of influence!
WOW Joey, You see, I know you as a "systems" person! You have learned! Again what valuable experience to offer your JV's and future JV's …if they need answers for their fears…systems are VERY GOOD however this is EXPERIENCE on what you have tried and learned. As we all know that we learn from mistakes when we do not repeat them! You can proove it so use it!
Yes, this is part of developing everything to offer your JVs. CCI – Credibility, Confidence and Integrity. As you go through the dips where most quit, the ones that continue through have the experience to draw from and you are right, it's very important to have some 'failures' in your business imo. If you don't then it's very hard to deal with when it happens when you have a JV partner on board!
Hi Joey, I got your name off the reinspace website.
I need an impartial second opinion. I know that my own research and
number cruching are key, but I just purchased a property in Barrie ON
and am now working on securing the financing. I thought this would be
a good investment, but when I'm running the numbers (lesson 1 – run
the numbers before buying a property) I am not sure this is going to
cash flow. Would you be willing to advise?
List price $253,000, purchase at $245,000.
Rents will be $1,450(min)+ utilities
Taxes are $2,804
I plan to manage and there is no repairs needed. House is only 4 yrs
old and in excellent condition.
Also, is it possible for me to get out of the deal at this stage if
my financing is approved?
Any council would be much appreciated.
Hey Debbie!!!
I'm very happy to see you moving forward on your financial independence and using Real Estate as your vehicle. You have lesson 1 down pat – congrats!!
Now, looking at your property at purchase price of 245, the quick rent you would need to satisfy the REIN 8-10% cash flow zone filter is just over $1600/m.
I would have to know more about the area and type of house to advise if you would get this type of rent. Diving further into the analysis, I've added 700$ for insurance, 5% vacancy, 5% repairs and maintenance (ongoing) and 8% property management. I know you said it's a new house with no repairs and you will manage, but you MUST include these for the future and unforeseen issues. Plus, when you grow your portfolio, you will more than likely want to hand this off to a property management company and this will ensure you have already factored in the costs.
I've analyzed the property at 80% LTV with a 4% interest rate and 30yr am ( I usually stress test at 25yr amort at 5%) which is negative cash flow of about $40/m.
This is not bad considering your property management fee of $116 is actually coming in AS WELL AS $145 from vacancy and r&m allowances. So the actual cash flow is just about $200.
Remember, the cash flow coming in are paper expenses and if it was me, I would not take that cash flow out of the property because it should build more of your staying power fund.
For a property priced this way, you should be able to hit the $1500 mark depending on the location.
For your exit on the deal, as long as you have not signed off on all your conditions, you should be able to still cancel the deal. Approval of financing means nothing as long as you have not fully signed off.
I hope this makes sense – if there are any other questions, please post below so I can help ….
If anyone else reading has questions, please feel free to post and I will answer as best I can!!!
Wow, Joey, Thank you so much. I have an analysis sheet that I was working from but your explaination has helped to clarify.
I do not plan on spending the funds set aside for maintanance or management because I want to create a buffer account for any unseen expenses in the future or for management when that time comes.
I did some searching of rentals in this area (South Barrie) and I think I could market this closer to the $1,500 mark which would cause me to break even with expenses and increase the cash flow set aside to around $265.
I see now that there is some buffer and I appreciate your council. This is scary and exciting all at the same time!
Debbie
You are so welcome Debbie, when you consider the buffer, I would personally put away three months of rent immediately into the account when you purchase which also allows some breathing room for the ongoing expenses building that fund.
Yes, if you are in South Barrie especially near the GO station, then you will be able to rent that for $1500 min. Don't short change yourself and be sure to market differently and stand out.
One way to stand out (which is what I do there also) is to stage. It's a very minimal expense for you and it will help you increase your rents because people will be able to envision their stuff better. Check out http://suitedesign.ca – Donna works very closely with investors in key markets.
Be more excited!! You are on the right track!
Hi Joe, I would like to know whether your JV partners are willing to work with absolutely beginners and the people that are flipping houses…and if yes, how exactly your JV partners are working
Hi Mila!!
Thank you for the question – Let me clarify about my joint venture partners: these are people whom have come to me to help them build their wealth with me doing all the work such as finding the property, maintaining all the daily operations both tenant, management and business operations. They wanted high returns they could not get anywhere else, plus monthly cash flow and most of all a very secure investment so they stop losing money in other investment vehicles.
So basically, people have partnered with me because they are interested in my investment model – I don't really match people with other investors.
If you are looking for joint venture partners, then I would begin going to real estate seminars, local clubs and gatherings to meet people who have money so they can invest in your system.
There are many out there and one I highly recommend is the Real Estate Investment Network (REIN). If you would like, I can even provide a guest pass for you to check out a monthly event so you can experience the caliber of people there.
I hope that clarifies how my joint venture partners work 🙂
If you have any other questions, I'd be happy to answer…
Hey Joey,
I have a few questions about business that you may be able to give insight on. I am looking to buy my first home in April and want to have the business structure in order. Some of my question are:
1. Did you register an HST/GST account?
2. Do you have one bank account for all your real estate business or separate accounts for each property?
3. What exactly needs to be registered for your real estate business?
I don't quite understand how to set up the business structure. I know I want to have a sole proprietor business. Any insight about the business side of running a real estate investment business would be very helpful for new investors!
Thanks
Jonathon Araujo
Hey Jonathon, thanks for posting here – these are some great questions!
1) When you register your business, you don't need to set up an HST account unless you are planning to 'sell' product and services that are going to bring in more than 30 thousand in revenue per year – ( I believe that's the threshold) – most Real Estate investors do not register for the number unless they are paying themselves a property management fee as an example that would bring in significant revenue. Now you CAN register even if it's not over the threshold and that would depend on your overall strategy and intention of your full business. It's best to talk to your tax professional about this. (By the way, if you haven't got a professional yet, check out the bottom of this page for my accountant and have a chat with him)
2) With regards to your banking system, have one main account set up for your own properties. For every joint venture partner you have, set up another bank account so everything is easily tracked and separate. When I began, I DID set up an account for each property, but going forward I'm scaling this back to one account for every three – five properties. You don't need twenty bank accounts to manage if you know what I mean.
3) Overall, setting up a business structure as a sole proprietorship is the easiest and often first choice for Real Estate investors to set up – mainly because there is no cost to it (just the cost of registration). When you have a sole proprietorship, all the liability is personal, you will pay higher taxes on income and you can file using your personal tax return. A corporation is much more structured and is completely separate from you as the owner. It is more costly to set up and maintain, but will also have tax advantages as the corporation pays a lower amount. A corporate structure is also beneficial if you want to extend remuneration to family members etc. MOST people do not start off with a corporation – I would again, advise you to talk with your professional telling them what your entire PLAN is – this is why I strongly encourage people to have a plan in the first place.
If there is anything else I can help you with post below! Thanks Jonathon
Hi Joey,
It was nice to meet you at the REIN event on the weekend. I am actively looking for tenants for my property now and would love any tips you have on where to advertise, how to do a prelimiary screen of tenants etc.
But, that isn't the reason for this post. I have another question related to the bank accounts inquiry above. I have purchased only one rental property so far and I am not yet set up in the banking department (the property has not closed yet so no mortgage payments made yet). I am planning to go this week and open a separate account for my first few rental properties but my inquiry is more about the down payment, closing costs and other fees that I will and have already spent on acquiring this property. Is it wise to set up the 'properties' account and transfer in a chunck of funds to cover all my costs and then do individual transactions to pay myself back for the ones that I've already paid for out of my personal funds or is this not necessary?
Thanks for your advice,
Hi Joe, Yes, this is very helpful and is along the lines of what I was thinking. I will contact my accountant as well to find out exaclty how I should go about this but your post has been very helpful.
Thanks
Perfect Debbie…good luck!!