Offer Rejected on 2020-2020 Edgar Street

After negotiating for most of the week last week on a duplex in Regina. I ultimately decided to walk away. The property itself has very good fundamentals and here was my analysis.

The numbers

• List price $185,000
• $750 rent per side = $1500 total (By August 1st, 2011)
• Taxes 2010 $1383.00 ($115.25/ month)
• Insurance about $1100 a year
  
• Property Management would've been $170 a month
• Vacancy allowance and Repairs and Maintenance of 5% gross rents (75 bucks each per month)
• Mortgage at 5% would've been $865 a month.
• $37000 down payment (Required 20% for rental property)
  
• About $4500 extra cash to close (Legal, Appraisals, Inspections, and one month reserve)

About $100 cashflow was what I calculated with these fairly conservative numbers. Even at a 6% mortgage it still cashflowed about $20 bucks... meanwhile variable rates can be had at 2.1% at the moment... and the tenants are existing and interested in staying as well vacancy rates in Regina are below 1% at the moment. (So I'm saying actual cashflow would've been higher (up to about $400 a month if using aggressive numbers)

The issues (no property is 100% perfect or else I would've just snapped it up)

• There are obvious moisture issues in the basement meaning foundation work would have to be done to create a proper seal around the foundation and prevent future leaks.
  
• The north wall faces a laneway that the city would probably not allow us to dig up so at least on that one wall anything we need to do to fix the moisture problem would have to be done on the inside. Damp-proof wall, internal weeping tile to sump pump
• To fix the moisture issues themselves my Property Manager estimated around $9000... give a regular contingency of 15% or so and you have over $10K for it to be done right.
• Windows are drafty
• Older house needs updated flooring, kitchen, etc (not necessary, but I like to have nice places for my tenants)
• The units are actually very small (1056 sq ft for BOTH sides... so 528 sq ft for each side and they are TWO bedrooms... how the heck?)
• I would be buying it sight unseen since I don't live in Regina and must trust that the inspectors do a good job (After watching too many Holmes on Homes and Holmes Inspection on HGTV) I must admit I'm fearful of NOT getting a proper inspection.

I have no doubt the property should sell fairly quickly to someone who actually lives in Regina, and is possibly fairly handy. I just didn't find I had enough of a margin of error to be comfortable. I do have the cash reserves and a sizeable Personal Line of Credit but I give a priority to the preservation of capital... and I could see this becoming a bit of a money pit to make right... so that I can provide my tenants with a safe and comfortable living environment and myself with a safe and sound property.

I'm gonna check back on this property in a month or two... who knows... it may still be on the market at that point. Anyone is welcome to it ... I like to think that there is always another deal.

Paperwork for Offer to Purchase in Regina

I've recently made another offer on a property in Regina and was amazed again at all the paperwork involved just to make an offer. Even though my friend compared my purchase to mail order real estate it was definitely much more tedious than ordering a book off Amazon. I used another real estate agent rather than the agent I had used in my previous purchase last year. The reason being that this agent is also an investor and seemed to understand what I was looking for and the jargon I used making it easier to communicate. Though I must admit there isn't much currently in my price range and criteria (only one property really even worked for cashflow... guess Regina prices are getting a little heated). I thought I would go through each of the pieces of paper that required my signature with a brief explanation.

Saskatchewan Real Estate Commission: Residential Contract Of Purchase And Sale.

• Has the brokerage, your name, the buyers name and address (civic address and legal description: lot, block and parcel)
• The Transaction: Offer Price, mortgage amount, deposit and down payment balance
• Conditions: What I wanted the offer to be made conditional to (financing, inspections, tenancy lease agreements and transfer of damage deposit, and my lawyers approval)
• Additional terms which I had none
• Closing: basically when the property would transfer ownership and consequences if that doesn't happen. Also what the buyer and sellers responsibilities are.
• Insurance: When responsibility transfers from seller to buyer and the fact I must have insurance on date of transfer
• Warranties and Representations: What chattels are included (appliances, , surveyor certificate, sump pumps, etc.) And that the seller has the right to sell the property.
• Remedies/Disputes: What happens if offer is accepted or rejected. (conditional and full)
• Offer: Date and time the offer is good till and this is where my signature and my witness' signature are to go.
• Acceptance: This is where the seller(s) signature(s) go, their witness and our lawyers.

Ancillary Services In The Purchase Of Residential Real Estate
Just in case your conditions weren't already clear enough this makes sure it is crystal clear what inspections and reports you will require.

• Electrical inspection - get a qualified electrician to check the home out (many older homes with aluminum or knob and tube wiring the might have to be changed would be expensive)
  
• gas line inspection - make sure nothing has been built over municipal gas lines
  
• house inspection - general expectation for soundness of house
  
• property condition disclosure statement - basically what the sellers will self disclose about what they know is wrong with the property
  
• septic/sewer inspection - make sure the sewer and septic system is good... no roots cracking through anywhere.
  

Other interesting ones include roof inspection, engineering report, furnace and chimney inspection, appraisal report, municipal compliance report, real property/Surveyors certificate, wood stove/fireplace inspection. Need to sign and date with a witness.

Agency Disclosure Brochure
Basically agreeing that you've read and understand what "Agency" is (Sellers, Buyers, Dual Agency) and agree to the limitations therein. Sign, date, with a witness.

Identification Mandatary/Agent Agreement
This one was one I didn't in my last purchase but was needed this time to verify I am who I say I am to the agent because she had never met me in person. You require a professional of some sort (Accountant, Lawyer Doctor) to verify who you are. You also need to provide proper identification like a driver's license or a passport with the appropriate document or license number. Your Identifying Agent then signs and dates this form (I used the ID'ing agent as my witness for all other papers as well)

Receipt of Funds Record
This is basically the form you use to tell the agent how you will make your deposit as well as which address the deposit is for and the broker you will be using. You put in your amount and how you will be paying (cheque, certified cheque, cash or other). I chose to use electronic transfer so would be "Other".

Those are all the forms I signed, dated and required a witness for in order to send in an offer to purchase. I made this offer to purchase from my home in Yellowknife and it was on a property that I have not seen in person (but had pictures and descriptions from the real estate agent).

They definitely don't make it as easy as Amazon's one click =)

Review: The Automatic Millionaire

I rediscovered the public library last week and have so far read 3 books in 3 days (I'm sort of obsessive sometimes). One of these books was one I've read about in various personal finance blogs and is a fairly well reviewed and famous book.

The Automatic Millionaire: Canadian Edition by David Bach


It's neat that there is a Canadian Edition first of all. I'm guessing instead of 401K's we get RRSPs. This book was written in 2002 so we don't yet have the TFSAs enacted yet. The premise of the book is that to become a millionaire you basically have to automate it, but virtually anyone given enough time can become a millionaire. If you have to manually budget and put away money for the future... you generally won't.

There are a lot of extremely good tips on how to automate your whole financial savings plan. From asking your employer to automatically deduct from payroll to fund an RRSP to setting up other automated accounts to take money from your main account and put it into a separate account (out of sight out of mind and you won't miss it). David has an interesting and enlightening way to explain the concept of paying yourself first. He brought out a formula which I found really changed the way I looked at this concept. He asks the questions how many hours last week did you work for yourself?

1. How many hours do you work in a week? ______
2. What is your hourly wage before taxes? _____
3. How much did you set aside (or save) for retirement last week? ____
4. Divide the amount you saved by your hourly wage and you get the amount of hours you paid yourself or worked for yourself (instead of the government, or your credit card, etc.) last week.

He states that generally Canadians only have a 2.6 percent savings rate... which works out to about 10 minutes a day that we work for ourselves. Very sad indeed. He believes we should at least work 1 hour a day for ourselves, for our future... and it is fairly motivational to think about it this way. At least to me. How many hours a day do you work for yourself?

He has a few other concepts that are interesting as well, such as the Latte factor (where people can generally find little things that can add up to a lot after compounding and about 40 years).

Why am I reviewing a personal finance book on a blog that deals with property investment?

Well one of his biggest points is that renters can't become rich and you NEED to own your own home. I actually disagree with this myself. As I've stated previously I see a primary residence as a liability and not an asset. Also I don't really believe in generalizing things like this. I mean if rents are WAY lower than a similar place you can get with a mortgage does it still make sense to buy your own place?

Absolutes can be good and quick rules of thumb (but they can also be wrong)... I mean owning a house is a forced and automated savings account in a sense... so it fits with David's system(The automatic millionaire)... and as you gain equity in your home you definitely can use that money from a HELOC or whatever to buy other investments you desire. But you can't tell me that if I can find a place to rent for say $600 a month... and an equivalent condominium would cost me $1200 a month in mortgage along with say $36,000 down payment... that I would still be better off buying... (Think of the average costs of real estate in places like Toronto or Vancouver... versus the rents people can get... and you'll see that this is true for quite a number of major centres.)

You can just as easily automate investing more into your investment accounts from what you save on your rent vs mortgage payments and probably come out ahead in some places.

I believe that rental properties can be a good investment (obviously), though not for everyone. I found it interesting that his automatic millionaire couple also owned an investment property (one reason I'm reviewing it here). Just that being adamant that you have to own your personal residence to become rich didn't gel with me. Another one of his books The Automatic Millionaire Homeowner, Canadian Edition: A Powerful Plan to Finish Rich in Real Estate seems to deal with investment properties in more detail. (Haven't read it yet, but did borrow it from the library).

One other point I was not in total agreement with was his choice to tell people that a fixed rate mortgage was the ideal solution and only to look at variable rate mortgages if you don't plan on staying in a residence for more than 7 years. Most things I've read is that you choose a variable mortgage and pay at the mortgage rate of the fixed rate you could get or at the rate that you feel that interest rates could go up to (say 6%). Many people have talked about the choice of fixed versus variable... and it seems variable is generally the winner. Since as most people attest... the majority of your payment in the first 10 years or so is towards interest... if you can decrease your interest rate (from what I can tell variable interest is usually like 1 to 2% or more below the same fixed rate of the same length... say 5 years)... but pay the same amount... you will hit the principal mortgage amount harder and save a lot of interest during the life of your mortgage (and of course pay it off much faster as well)

This isn't to knock The Automatic Millionaire it really is a great book and has some very useful tips for getting to that 7 figure mark slowly and surely. It definitely isn't a get rich quick book with time frames of 30 or 40 years... this book is probably for people in their 20's and early 30's and less for people closer to their retirement age. Though I think most people could benefit from the message of automating your financial life so you can't screw it up. I am curious though if David would still think10% in the stock market or if housing is still such a great asset following the 2008 financial crisis and the huge housing bust that came out of the U.S.

Tenant Selection Application Form

I believe most landlords agree that tenant selection is one of the most important (if not the MOST important) part of renting out property. Having a good tenant means your property is taken care of properly and is of minimal hassle to manage. My definition of a good tenant is one that:

1. Pays rent on time (obviously)
2. Maintains the property (cleans regularly, doesn't damage the place or wreck appliances, and informs me any time there are problems that might compromise the property... leaks for instance)
   
3. Is a good neighbour (quiet and respectful... no wild parties at weird hours)
4. Doesn't smoke (I screen specifically for this)
5. Doesn't own pets (I also screen specifically for this)
   

From all I've read, and my own experience you really have to be careful in your tenant selection. It will only hurt you in the end to accept the first person that is willing to put a deposit down... even if your place has been on the market for a number of weeks or months. A bad tenant will cost you way more then a few months rent (imagine holes in walls, damaged appliances, or just having to go through an eviction process because of not paying rent... or all three?).

I've been rather lucky in my short time managing my condo (3 years so far and 3 sets of tenants). But I have been fairly diligent in my processes to screen and check my tenants and it all starts with the application form.

I recently listened to an interview with Chris Bradnam from Credit Info Canada talking with Russell Wescott of Real Estate Investment Network. I downloaded it awhile back but only recently actually listened to it. Credit Info Canada from what I understand handles credit checks for landlords as well as doing the chasing down debts owed to landlords if need be. I don't use them myself, but I found the interview had some interesting points. One of which was that if a prospective tenant can't be bothered to fill out an application form properly then they probably aren't an ideal tenant.

One of his clients even has a 5 page tenant application form. I'm not exactly sure what they would put in there... but there are definitely some must have fields that I have on my application form. (Generally what the credit check requires is the bare minimum and I've added a few of my own)

1. Name
2. Date of Birth
3. SIN/SSN
4. Phone Numbers (Cell, Work, Home)
   
5. Current Address and previous address
   
6. Reason for leaving
7. Landlord name's and contact (last two landlords)
   
8. Employer address
9. Supervisor name and phone number
10. Salary and length of employment
11. Emergency Contact info
12. Driver's license#
13. Required Possession Date
    

With this information you then have to do your due diligence before accepting them as your tenant. After getting your applicants there are a few things to look for an do:

1. A high income. Generally you want to make sure that their take home pay can easily cover your rent. You don't want someone who needs to use more than 35% of their take home pay on housing. Yes someone with a high income could also stiff you on rent, but I just feel safer with someone that can easily cover their rent versus someone who will require say 50% of more of their pay to cover their rent. (I've had people that were around the 60 to 70% range apply...)
2. Check their references. Former landlords. Any problems with them? Did they pay their rent on time? Were they clean? Would you have them again? Talk to their employer. Good reliable employee? Is their salary what they say it is? Have they worked for the length of time they say? (Not all people will answer all questions and you can generally tell when people might be hesitant... sometimes it is gut feeling)
3. Do a credit check on your top applicant to see if there are any signs on their credit report that show they might be a credit risk.

I've been fairly lucky thus far with my tenants. I'm also on the board of my condominium and have only heard praises for the tenants that I've had from the next door neighbors.

First impressions are also useful. There is something to be said about gut feelings and how someone treats you and your time. Were they on time or early for their scheduled showing? How were they dressed? How did their vehicle look? (Is it messy and not well kept?) There will always be people who also don't show up... but those people aren't worthy clients anyways (even if they try to call back and reschedule, not worth it... they don't respect your time and won't if they were tenants)

Is there anything else I maybe missing? I'm constantly trying to improve my tenant selection process.

Applying for a Personal Line of Credit

As a real estate investor it is always nice to have credit available to you. I've researched a couple personal line of credits(PLoC) at different banks. CIBC worked best for me because they are an interest only PLoC meaning I don't have to pay back the principal until I'm good and ready. TD Bank had a forced schedule of repayment that didn't gel well with me. (Not enough flexibility)

From what I understand a PLoC cannot be used as a proof of down payment since then technically you are borrowing more than the allowed on top of your mortgage. (Could even be up to 100% in some cases). Talking to my mortgage broker though it sounds like as long as you actually can show you have the cash or investments available as a proof of down payment you can still use the PLoC for the actual down payment. Say you don't want to cash in your stocks or TFSA for the down payment of your next property, but you can easily show that you have the money available... then you can use the PLoC to do the down payment and just pay the interest as you go and not have to upend your investment portfolio.

An interesting positive to a PLoC is IF you borrow your max and for some reason later on the bank wants to decrease your credit... at least you can just keep paying the interest and it won't be a squeeze to your cash stores (I mean they can't decrease it more than you already owe... but as you pay it off they can decrease it down to what you owe). That sounded confusing. An example might help. Say you had a limit of $25,000... you borrow the $25,000... say later on you lose your job... but your investment properties easily cashflow to cover all your loans... but based on the banks assessment you are more risky and wouldn't qualify for the $25,000 PLoC... the worst that can happen is you just keep paying interest on the $25,000 but don't ever pay it back... but say you do pay back $5000 of the principal... they may decrease your limit to what you still owe ($20,000). Anyways just a small perk.

Back to my experience applying for the actual PLoC. I had an appointment with my banker and she requested my most recent two pay stubs. Thing is that wasn't all she required. Luckily I had brought my "Sophisticated Investor Binder". (Those who have read Don Campbell's book on the ACRE System will be familiar with this). She asked for fairly detailed accounts of my assets:

- Balances on RRSP, TFSA, Margin trading accounts
- Each of my bank accounts (not just a summary of all the cash you have available)
- Investment property information (Mortgage payments, rent, taxes)
- Worth of my personal car (guess they also count that as an asset)

I thought it was rather interesting anyways. She did compliment me on being organized and having it ready. (Even though she only told me to bring two pay stubs...)

I was automatically approved for a $35,000 credit limit at Prime + 3%... but if I had a a limit of $50,001 the interest goes to Prime + 2.75%... a quarter percent difference... not huge... but I might as well try and get it. Thing is anything over $35,000 must be sent in for approval and is not done automatically at the branch. Oh well I'll wait a few days... worst they can say is no right? Either way... Prime is currently 3% at CIBC... so a 6% interest rate isn't that bad... similar to what average mortgages used to be.

Review: Everyday Real Estate Millionaires

I just renewed my subscription last month to the Canadian Real Estate Magazine and was given a book for renewing, Everyday Real Estate Millionaires: How Average People Really Do It by Paul M. Hecht. This is a book I probably would've bought anyways due to the title and my interest in real estate so getting it included in my subscription was a bonus.

The book itself is written from the first person perspective of 4 different people each writing their own story with Paul being the 4th and last story. Each persons story is unique and offers a different strategy to become a real estate millionaire. Starting with Cam the Accounting Controller who made a decent wage and took the slow and steady, live well below your means and invest the rest, route to Paul who went from bankruptcy to millionaire in 24 months.

I found that the book was a fairly light read probably around 160 pages of actual material (not including the introductory 15 pages and the end 20 pages which were all advertising for Paul's website and his services such as mentoring, DVD training kits etc.)... big font. I ran through it in a weekend. There are some little investment tips that are highlighted in each story such as positive cashflow being very important in case you lose your job and the property has to support itself (I'm paraphrasing)... or buying the worst property in the best area is better than buying the best property in the worst area (again just paraphrasing). Most of them I've already read about in other books, but if this is your first book on Real Estate they are good little tips to know.

It was interesting reading the different ways each family made it to financial independence and Paul does highlight a very large range of methods to make money in real estate outside of the traditional Buy and Hold strategy. I learned about Sandwich leases from this book which is when you sign a lease option with a seller and then turn around and create another lease option with another buyer for a profit... in a sense making money from being the middle man with no real upfront capital for yourself. Of course there is a the flip the house strategy which worked well prior to the financial crisis (and which may still work in certain regions) but which is probably not AS lucrative with 110% returns in a year like some of the stories in this book. Lease Options, Seller Financing and I believe even MICs or Mortgage Investment Corporations were also talked about.

All in all it was a pretty good read. Broad and not detailed so you won't necessarily be able to just put these stories into practice. Probably more of a motivational read and an eye opener into the many ways that you CAN actually make money in real estate, but you would require other resources to become adept in your chosen strategy or strategies. If you are actually serious about investing in real estate in Canada I would recommend buying the Real Estate Investing in Canada: Creating Wealth with the ACRE System book by Don Campbell. It mainly deals with the buy and hold strategy, but is a lot more in depth in what you need to find the right property, gather the right team, finance and run the property.

Response: Rescue your retirement

I was reading the latest edition of Canadian Real Estate Magazine (May 2011) and an article by Gord Lemon and Daryl Hemingway caught my eye. It was titled "Rescue your retirement".

This caught my eye because I'm always interested in retiring early and the gist of the article is that you only need 5 properties, 17 years and you would be making $7376/month (not accounting for inflation still enough for most of us to live comfortably).

The properties they would be buying are duplexes @ $266,000 each per year... with a 25% down or $66,000 for each of the 5 years and rental income of $2300 per month. Mortgage of 5%.

Expenses:
Property Taxes : $250/month
Property Insurance: $100/month
Heating (gas) $325/month
Water/Sewer: $35/month
Vacancy allowance: 5% or $115/month
Total Expenses: $825

The numbers definitely sound very good, but I did have a few things that I believe would fairly difficult to overcome.

1. Where to find $66,000 a year?
Average family income of two or more people in 2008 was 74,600... so under 40,000 per person... then accounting for %35 housing costs... the average household would have difficulty saving up $66K a year for the down payment. Not that this is impossible, there are definitely households that make much more than this. As well this is an article targeting those in their 50's and many people of that age do own their own home and might have $330,000 equity in their house to take out in the course of 5 years. But definitely not a viable strategy for those without a decent nest egg or equity already built up.

2. Where to find duplexes with over 10% cap rate and at $266,000?
Average Canadian single family house prices were $327,000 excluding Vancouver. To find a duplex at $266,000 (meaning $133,000 per side) which also rents at $2300 (or $1150 per side) seems like it might be a tad difficult. It might be possible in the US market... but there are definitely other concerns when buying in the US (financing for one, currency risk, I'll try and get into more in another article). Plus this article was written on Canadian Real Estate Magazine so I'm assuming Canadian deals can be found. I guess if you're only looking for ONE deal a year there might be a very motivated seller every year that you can find. Possibly with creative solutions. Just seems very difficult even in a fairly cheap market like Regina where I am looking.

3. Missing a few numbers like Repairs and Maintenance, Property Management and Cash to close?
It's usually good to budget 3 to 5% for repairs and maintenance every year... because properties do require maintenance (roof, furnace, windows, yard, etc)... I do like their fairly conservative vacancy allowance of 5%... so lets add another 5% to maintenance. (Another $115). While you can manage your own properties... I for one know I can't find duplexes in Yellowknife for that price (more like double that price bare minimum... or close to 800K for the one I currently live in... 400K a side)... which is why I am buying in Regina. Property Management is usually around 8 to 12%... with many just charging a flat 10% of gross rents so to be conservative lets say $230. Their net cashflow is already down to $63... still positive and with all the conservative numbers probably more than that in reality... but still.

My other concern is how they just pay the $66000 a year and are able to own the property... There's still the lawyers fees, appraisal for the bank, Inspections (house, sewer lines, furnace, possibly electrical and plumbing, structural), title insurance and I like to have at least a months rent reserved (will you really rent it out the DAY you gain possession or will you have to correct details brought up in the house inspection first?). I'd say you'd need closer to 72K for cash to close a year for a $266,000 property. (or about 9% more)

I have a minor quip about the insurance as well. Rental properties are higher insurance risks than normal owner occupied properties. My insurance on my $140,000 property in Regina is $1064 a year... I'm guessing it would cost me more than the $100/month they have budgeted for a duplex at $266,000. This of course depends on the age of the property, location of the property (different jurisdictions have different costs... and even different locations in a city could have an effect on the cost).

4. What kind of mortgage allows THAT much of a pay down every year?
I don't know where they are getting their mortgage terms, but they seem VERY flexible. I mean I have a mortgage that lets me double my payments and put up to %15 a year on my mortgage... but near the middle of the plan they seem to already be putting a lot more money into each mortgage then can be done without penalty. I guess theoretically they could be spreading it out amongst the mortgages and it is LIKE they've paid off each property in year 8, 12,14, and 16... in terms of the amount of equity they have in the properties... anyways this one is minor... if the other 3 points didn't get you... this 4th point is minor.

Conclusion
It was an interesting article that I think makes investing in real estate sound a bit too easy. A good little thought provoking exercise IF you everything in the article was taken at face value. So you have $330,000 (or$360,000 that I believe you would need) AND you can find duplexes at that price ever year for that amount of rent AND you manage the properties yourself AND your houses never need maintenance... anyways you get my point.

If we're looking at thought exercises and not having to account for inflation... you can grow $330K into 1.5 million at 10% a year... which was what the stock market traditionally returned before inflation. Meaning on the 18th year you would make 151K... or about $12600 a month... which is quite a bit more than the $7376 / month with the real estate. (I also didn't account for taxes... but neither did this article... though there are more ways to shelter from taxes in real estate... hopefully I'll remember to get into that later as well)

Both are fairly nebulous in my opinion, but the basic concept is the same... basically have a plan, keep saving and eventually with time your money will compound and you can be financially free! Which I do totally believe in... so the message is good.