Newbie Investor need your advice

zarmas01

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Aug 22, 2013
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#1
Hi,



I am new real estate investor and would appreciate your feedback/advise to my specific situation.



I am 39yrs old

income per year $105000 personal

income per year $145000 Family (mine and spouse)

Have one property that is currently being rented. Value of the property is Aprox. $350000 with about $260000 owing in mortgage.

I have a second mortgage on this property of $30000.



My wife and I were recently discharged from consumer proposal in December 2012. I have no other debts.



I am considering investing in more real estate properties, I am planning on starting with Duplex to live in one unit and rent out the other for addtional income/cash flow. The property I am looking at is $370000.



I am looking to refinance my existing property and take out the maximum amount that I possibly can, payoff the second the mortgage on the property and use the rest as the down payment for new property.



Is there a possibility or hope for me to become a real estate investor in current situation or am I just dreaming?



Any advise and feedback would greatly appreciated.
 

invst4profit

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#2
Anything is possible although the bankruptcy is not a good indication of your money management skills.



You may be able to answer the question yourself by analyzing your existing rental property to determine what the positive (or negative) cash flow actually is. Then do the same with the duplex you are looking at buying. You need positive cash flow to survive and although some investors believe otherwise without it your chances of survival are slim to none.



Post some numbers on your income versus expenses and someone will give you their opinion.
 

Sherilynn

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#3
I agree that cashflow is a requirement for successful investing.



As for a mortgage, if you can't qualify due to the proposal (which is likely), then you may want to consider a joint venture. You have a couple of options:

  • You could potentially be the "real estate expert" and manage the investment, you could provide some or all of the down payment, and your partner qualifies for the mortgage. The partner's share of the property would depend partly on how much money he contributed to the down payment and partly on how much your expertise is worth. Basically, whatever the two of you agree is fair is an appropriate split.
    You could be the money partner in a JV with an experienced investor in your area of choice. The partner would qualify for the mortgage and close on the property, and you would later buy into a share of the investment. As the money partner, you can invest in real estate without managing the investment or being on the mortgage.
 

zarmas01

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Aug 22, 2013
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#4
Thank you Greg, it wasn't bankruptcy but consumer proposal, and was due to circumstances as both my wife and I lost jobs in 2009 and were forced to into the proposal rather then risking losing everything including our house to creditors. We've both landed successful jobs and paid off our proposal way before it's due date. So I am not an irresponsible individual and I don't mismanage my money. Having said that my current property has positive cash flow and new property that looking to buy will have cash flow as well as the second unit will generate $1200 in rental income and will cover most of my mortgage. This will enable me to save enough money in six to eight month buy another investment property.



Thanks,

Mark
 

zarmas01

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Aug 22, 2013
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#5
Thank you Sherilynn for your response and valuable advice, I know getting mortgage will be hard but not impossible. I am very persistent when it comes achieving the things I want and I sure I will get a mortgage one way or another.



As for the JV, even though it's an option but I'd rather do the first few investments on my own and maybe in the future consider going in to JV.



Thanks,

Mark
 

invst4profit

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#6
[quote user=zarmas01] Hi,



Is there a possibility or hope for me to become a real estate investor in current situation or am I just dreaming?



Any advise and feedback would greatly appreciated.






Lack of info in your response makes it difficult to comment on your chances of success.

It is extremely common for new investors to believe that there property has positive cash flow when in fact in the long term it is a money pit. Unfortunately a investor can only afford to lose money for a given period of time before they go bankrupt.

Expenses will eat up 30 to 50% of your monthly rental income (usually closer to 50%). This does not include mortgage payments.In addition cash tied up in a property must also earn a income sperate from the property itself to insure you are truly making money not only on the property but also on the cash or equity invested.

Although you do not provide the numbers on your existing property it is difficult to believe it is positive cash flow if it is a single family home worth $350,000 although it is possible if your rent is in the $2500 + range. If your rent is up there or preferably higher you are on the right track. My only advice would be to not invest in single family homes if they have a single tenant income, better if they have multiple income streams.



As far as the duplex is concerned your statement is some what confusing as to what the anticipated income is exactly. You state it will have cash flow plus $1200 per month on the second unit. Does this mean it has a third unit in addition to half the duplex.
 

zarmas01

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Aug 22, 2013
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#7
My property is worth $350000 today. My initial purchase purchase price was $265000 five years ago. I lived in it for four years and it has been year since I rented the property. It's rented for $1950 a month. I bought the property new so it's in great shape and tenants I have are great and keep the property really nice and clean. My monthly mortgage is $1200 +$300 taxes +$75 insurance for a total of $1575. So my positive cash is $375 a month.

Let me be clear on the second property it's duplex I will be living in one unit which 3brm and renting the other unit which is 2brm for $1200 a month.
 

Sherilynn

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#8
Your true cashflow isn't really $375/month.



1) Although this property is relatively new, you should always budget for repairs and maintenance. Even if you don't use the money one year, you may want to consider saving each year's budget as a reserve fund. As the property gets older (or you have a less careful/conscientious tenant), you may find that suddenly you need thousands of dollars for repairs or upgrades. Plus things like painting should be done every five years or so.



2) While you may be self-managing now, you should consider budgeting for property management because most people don't self-manage for long.



3) Also, bookkeeping and accounting should be considered. As well as things like advertising and other occasional expenses.



4) And don't forget to factor in potential vacancy.
 

mortgageman

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Aug 31, 2007
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#9
Have you done anything to re-establish credit?

Lenders are going to want to see that you have ideally two trade lines (eg. a credit card and a car loan) with a two year history of properly managing them.

If you haven't done anything yet, start with a low-limit credit card of $500 or $1000 and start rebuilding.
 

zarmas01

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Aug 22, 2013
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#10
all three excellent points. My current investments portfolio is so small that I manage all aspects of it myself. Perhaps as get grows and becomes hard to manage I will hire someone to manage it and for bookkeeping and accounting but as of now I am fairly comfortable doing it myself. Points well taken.



Thanks,

Mark
 

invst4profit

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#12
Strictly from a business investment perspective (which will measure your chances of success in this business) here is how I view your numbers.



First property valued at $350,000. Return must reflect the present value of the property to capture true investment potential.

Present rental income - $1950 (should be $2500 +)

Expenses (30% - 50%) - $750 - $1250 / month

Mortgage ( $350,000, 3.65%. 30 yr,) - $1595 / month



Resulting investment income of negative $395 (30% expenses) to negative $895 (50% expenses) per month.

Calculations based on tenant paying all utilities



Mortgage rate and term is guestimate and is based on full value to reflect needed return on money tied up in property (opportunity investment).

Expenses include advertising, vacancies, vacant expenses, evictions, legal, accounting, management, taxes, insurance, upkeep, repairs, capitol expenses, etc.



Duplex- Single side value $185,000

Anticipated rental income - $1200/month (should be $1400 +)

Expenses (30% - 50%) -

Mortgage ($185,000, 3.65%, 30 yr) - $843/month

Calculations based on tenant paying all utilities.



Resulting investment income of zero (30% expenses) to negative $243 (50% expenses) on only the rented side of the duplex. This does not include any costs of mortgage or expenses on the duplex you occupy.



Both your rentals are in negative cash flow considering long term investment calculations PLUS both rental levels are below what should be required for properties of that value which means the expenses are likely higher than I have quoted and therefor your negative cash flow will be even greater long term than the numbers I have provided based on historic averages.



Strictly from a business perspective looking long term your properties are not performing well. Your best hope is to speculate on appreciation and as a long term plan support the negative cash flow from your working income. I would suggest you not purchase too many more similar investments or you may find yourself returning to a consumer proposal situation.
 

zarmas01

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Aug 22, 2013
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#13
Thanks Greg for such detailed analysis, your numbers a bit exaggerated but makes sense and a savvy investor with an extensive real estate portfolio should definitely follow your model. For a novice investor such as myself who has only one investment property so far the numbers don't add up in the same manner. As I mentioned in previous note the property I have is in excellent condition so to date had zero maintenance related expenses, my tenants are keeping the property in pristine condition as well.



My mortgage on the property is $260000 not $350000 and my monthly mortgage payment is $1200 not $1595. My other expenses are $375 per month. My monthly profit or cash flow every month is around $350 and the way I look at it the property is making me income not loss.



I know when my real estate portfolio grows in the future and I have mix of older and newer properties and more tenants then I have to factor in those additional costs when calculating cash flows but for now I think I am doing ok.
 

Sherilynn

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#14
Greg's expense estimates aren't as far-off as you might think. I just reviewed my 2012 P&L and my expenses (not including mortgage) averaged $900 per property per month. That's about 40% of gross rent. And that doesn't include capital costs (improvements which are added to building costs rather than expensed.) {All of my properties still have healthy, positive cashflow.}



Another factor is in which province you are located. I agree that your rents sound low. This could be a problem in provinces with rent controls that limit the annual rental increases. If you are in a province such as Alberta, you can fix the issue of low rent quite easily.
 

zarmas01

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Aug 22, 2013
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#15
Yes I know and I wasn't disagreeing with Greg's estimates. I know I need consider all the expenses when deciding on investment properties to make sure the investment will workout in the long run and produce positive results and cash flow. I am not a real estate investor yet but seriously considering getting into it. The one property that I have today was my primary residence and later on converted in to single family rental property so the initial intent wasn't investment rather personal.



I am now looking to buy another house (a duplex) to live in and rent out for generating more income and offsetting my mortgage payments. My long term strategy is to invest in duplex and triplex units that are in good rental area's and that are generating positive cash flows. I aiming to purchase my first duplex in next couple of months and another two or three properties by end of 2014.



I live in Ontario and it has strict rent controls in place so I can't increase the rent to keep up with appreciating property values.



Thanks for your insight and response.
 

invst4profit

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#16
Ontario, too bad, that's where I am too. Worst place in North America to be a landlord.



I just went through evicting one bad tenant, took 2 1/2 years, 12 board hearings and cost me 12 months rent plus legal costs. But she is gone and that is really all that matters in the long run. Unfortunately she could not be bought and I had no legal grounds to evict hence the time and cost to succeed.



Always keep in mind the mandate of Board Adjudicators is to insure tenants do not get evicted. They will do everything within their power and usually beyond to insure they maintain that mandate usually at the expense of both landlords and all other tenants.



PS. you should be saving that positive cash flow you are making because your expenses will ultimately jump up and bite you.
 

Sherilynn

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#17
[quote user=invst4profit]PS. you should be saving that positive cash flow you are making because your expenses will ultimately jump up and bite you.


Yes!



[quote user=invst4profit]Ontario, too bad, that's where I am too. Worst place in North America to be a landlord.


PS. Alberta rocks!
 

invst4profit

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#18
You defiantly have it far better than we do in Ontario.



Unfortunately Ontario is a nanny state where by every rule is fashioned to protect the lowest common denominator. This allows unscrupulous tenants to take advantage of the system and push landlords to bankruptcy. Imagine having to tolerate a tenant in your property for 3 to 6 months not paying rent while you struggle facing a adjudicator bent on protecting the tenant. And when you do finally evict the landlord receives no compensation.



We must be very diligent to avoid renting to any tenant that we can not collect from through small claims court.
 

zarmas01

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Aug 22, 2013
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#19
you are right, we must do all the due diligence when choosing a tenant. I know I did, I must have interviewed over two dozen applicants before making my decision. Knock on wood the tenant turned out to be a good one.
 

invst4profit

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#20
You can only do the best you can when screening. I place a great deal of importance on their credit score as I believe it reflects there moral/financial standards. Others see little value as they assume most "renters" have poor credit. I have not found this to be the case.

Unfortunately even good tenants can turn bad with the loss of a job or break up of a relationship. For this reason I place my priority on long term employment and good credit to insure not only that they can pay their rent but that I can collect when they do not.



Regrettably when choosing tenants I am often forced to violate the Ontario Human Rights Code which all too often allows individuals rights that ultimately can conflict with the realities of our business. As a example landlords are not permitted to base their selection of a tenant on their housing costs being a specific percentage of their income. This is a ridicules right I often violate by rejecting candidates that clearly can not afford my rent. I also reject all candidates receiving Ontario Works which is a clear violation of their Human Rights. Too bad but the welfare of my business and the rest of my tenants comes first.