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Quickest Way To Passive Income: Rents vs Flipping?

Sherilynn

Real Estate Maven
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Oct 22, 2007
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2,803
High cashflow is the best strategy for residential mortgages (that, and don't quit your day job). Most of our properties are either suited houses or RTO, both of which have huge cashflow. Our average DCR is about 1.7.

Amazingly, we have yet to hit the wall (aside from bank limits such as number of doors or total mortgage value with that bank). Since we have many more properties than the average investor, I'd say the strategy works.

That being said, I expect to 'hit the wall' every time we apply for a mortgage. At that point, Thomas' comment about the commercial approach and multi's are the answer. (We haven't been impressed with the inventory in Edmonton, so we are contemplating building a few small multi's here.)
 

Cory Sperle

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Sep 1, 2010
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Thank you Thomas, I thought I was missing something with all the comments about buying as many as possible. I would love to stay with single family and townhouses but the wall is already looming so I suppose I will need to learn new tricks in the near future.

Any recommendations for good mortgage brokers for this type of transition. (small residential portfolio to commercial).
Many thanks for all of your time and expertise

Samantha

Owning several singles does have distinct advantages over multi's in that you have partial liquidity (can sell one or two here and there), paperwork and transaction costs are much lower, and you have tons of inventory to chose from. Much more product to chose from, albeit tougher to get mortgages. That being said I know several folks who continue to buy without hitting this wall that you speak of, and as mentioned DCR is key, not taking no for an answer from the banks, as cash is abundant at cheap rates. I don't completely buy the argument that one must go commercial although there is some truth to this.
 

Sherilynn

Real Estate Maven
REIN Member
Joined
Oct 22, 2007
Messages
2,803
Another key to obtaining mortgages is to avoid personal debt (car loans, credit card debt, etc.).

Car loans and other personal debt can have a huge impact on your personal DCR, and can be a roadblock even if your portfolio is performing well.
 

Willyboy

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Aug 19, 2016
Messages
115
So for those claiming the cash flow is there I have a few questions:

1- Do you take into account evictions that might happen down the road with lawyers fees and several months of rent lost every time there is an eviction ?
2- Do you think about the property damage that might result from bad tenants and the associated high repair costs?
3- Do you take into consideration bad property management and the resulting consequences?
4- Do you factor in when tenants move out the possibility of a few months of vacancy?
5- Do you bear in mind that in the event of a recession like in Calgary the rent would go down 25% and another 25% for the vacancy?

I may have forgot other potential problems as well but the above ones are more than enough to make the cash flow easily very negative.

And this is due to the over inflated home prices where rents haven't kept up with fast home appreciation. A nice lottery for those who already own but for those entering the market now it's not that nice. And this proves my point that if it weren't for accelerated price inflation with the current rents it wouldn't be worthwhile considering how expensive houses are.
 

Sherilynn

Real Estate Maven
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Oct 22, 2007
Messages
2,803
Our three new up/down's were contracted in late 2014 (before the oil slump) and not completed until spring of 2016 (recession in Alberta). Our rents for each property are $300 below what they would have been at the time we contracted the build. Because these are quality properties in a good area, and we priced them properly, we rented them quickly.

Due to job losses, we had some turnover and arrears in the properties for this first year. And yes, some damage too.

However, we've had almost no vacancy and we have been able to collect all arrears and judgments - all due to proactive management. Plus the repairs and the lost revenue from the vacancy were included in the judgment.

So yes, our DCR of 1.55 for those three properties includes the bad with the good.

We manage in-house. I figure if I have to manage a management company, why not simply manage my own staff. That way I have my finger on the pulse of the company and can adjust strategy more quickly.

Evictions in Alberta shouldn't involve legal fees. Nor should they involve several months of vacancy. I see both as management issues rather than issues with the economy or the state of the rental market.

When we buy or build a property, we always consider the worst case scenario. If I don't anticipate consistent positive cashflow regardless of the situation, and I can't foresee a way to increase the property's revenue (such as by adding a suite), I won't buy that property.
 

Marnie

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Oct 6, 2016
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354
Thank you Thomas, I thought I was missing something with all the comments about buying as many as possible. I would love to stay with single family and townhouses but the wall is already looming so I suppose I will need to learn new tricks in the near future.

Any recommendations for good mortgage brokers for this type of transition. (small residential portfolio to commercial).
Many thanks for all of your time and expertise

Samantha
Hi Samantha, as a REIN Member you have access to the REIN Finance Centre. I would highly recommend contacting Peter Kinch's office to set up a consultation so you can discuss your long term plan for real estate investing and the financing you will need.
 
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