The 5 Things I Should Have Done Differently on my First Deal

JoeRagona

Frequent Forum Member
Registered
Jan 10, 2008
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Oakville, ON
engagedinvestor.com
#1
Most first time Real Estate investors 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:

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 that 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.
 

mcilroy

New Forum Member
Registered
Sep 15, 2008
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Sherwood Park
#2
Great post! Thank you. I have a property which I would like to turn into a rent to own but now find that I might be "over screening" tenants. So I have had a 6 month vacancy because no one is good enough. Feeling frustrated and losing confidence. Any advice?
 

JoeRagona

Frequent Forum Member
Registered
Jan 10, 2008
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Oakville, ON
engagedinvestor.com
#3
Thanks Kelly,



I definitely 'feel your pain' and you are more than likely 'over-screening'. It's what I did also. What are you doing to attract tenants?



The way I found my way out of my slump was to alter my approach to attract what I need as tenants. I still have a high threshold but I changed my advertising to only have those that would meet that threshold call to action in the first place.



What this means is, my advertisements are strictly 'speaking' to my profile tenant and it filters out anyone who doesn't fit automatically ... they don't even bother to call.



I also went over every piece of my acceptance system and then had third party teammates look at the tenants from their professional view. Such as Chris Bradnam over at Credit Info of Canada and my Realtor when they show the place.



Both other sets of eyes told me a different opinion on someone I had already 'let through' as a potential. It comes down to how well you trust your system.



Bear in mind this is not a fail safe solution and there will always be adjustments...but six months vacancy should tell us something. Rent to high, screening to tight, wrong property in wrong neighbourhood, whatever that is...



If you are specifically trying to turn it into rent to own, you NEED professional people on your team to screen tenants for you in my opinion. Try chatting with your mortgage broker to get you solid leads...on a close, you can pay them for their referral.



Most of the work will be done for you as the people they send you should be just on the cusp of not being able to qualify for a mortgage yet...



I hope this helps you out a bit...feel free to holla-back!
 

kfort

Senior Forum Member
REIN Member
Sep 1, 2010
1,464
246
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#4
Joey, any tips/tricks on how you streamlined your advertising system to screen tenants? Was it simply where you advertised? The rental price itself? Location of rental? I recently used a bandit sign which resulted in a ton of calls, however given that my rental is in a neighbourhood that is still transitioning I received a lot of calls from folks who simply did not meet my standards. I think next time I will post an information bulletin beside my bandit. Thanks
 

JoeRagona

Frequent Forum Member
Registered
Jan 10, 2008
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Oakville, ON
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#5
Kris, I basically streamlined my advertising by sitting back and figuring out what my ideal tenant looked like, what they thought like and what would appeal to them. I then literally wrote a story about my home touching on all the trigger points I knew would grab their attention.



By looking at your advertising from the customers point of view, it helps you attract the ones your are looking for (if you first know who they are) and secondly filter out the ones who are not appealing to you because you are not speaking their language. Does this make sense?



So, back to my ad. My kijiji post was more than 500 words, it was quite long and by the time you got to the end of it, you were already 'pre-approved' because you had lasted that long. At the same time, my pricing was over market but I sold everything the steak
AND
the sizzle.



Obviously the location of the rental is very important so you should first know your customer (tenant) then go to an area that will serve them and make sense to your investment criteria. THEN you structure your advertising around that.



I'm not familiar with a 'bandit' sign but if it brought you people who did not meet your standards, I'm sure you get what I'm talking about here. Don't use the bandit sign with a secondary notice because all your doing is wasting people's time including yours when they choose not to read the secondary information and STILL call you.



I hope that helps out a bit Kris...let me know if there is anything else you need.
 

mcilroy

New Forum Member
Registered
Sep 15, 2008
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Sherwood Park
#6
Thank you Joe for your advice and encouragement. Just what I needed - a fresh set of eyes really can make a difference. Great suggestion to talk to Chris again - I have him pull credit on all my applicants. My unit which I had advertised as a "rental" has had only losers apply. My rent is not any higher than others in the area - which is a great area and the unit is clean and only 6 years old. Can't understand. As a Rent to own I have had more interest in the last week on this. Now I am re-reading Mark L.'s book to try to learn this approach quickly. I have looked at other websites for rent to own in Edmonton and it seems that the monthly rents are much lower than suggested in Mark's book. Not sure how to decide on lease rate, deposit amount and appreciation rate. Thanks again for the suggestions. I will send an email to my mortgage broker as well. Take care.
 

JoeRagona

Frequent Forum Member
Registered
Jan 10, 2008
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Oakville, ON
engagedinvestor.com
#7
You bet Kelly!!



I'm sure it will all come together for you. Studying the RTO material will help you avoid mistakes. When you are deciding on the lease rate,deposit and appreciation, make sure it is in line with your system and always analyze as if it's a straight rental!



If you do continue to 'rental' route, why not increase your rent to filter out the 'losers'? Some are afraid to be outside the norm but isn't that what you want, the 'selected' tenant?



Good luck with everything Kelly. Send me an email to let me know when things are all sewn up! :)
 

ShannonMurree

Inspired Forum Member
REIN Member
#8
Oh Lord...Trillium. The property from hell.

Hey, I agree with you. As your Realtor and Property Manager it was truly a growth experience for you. You also tried to give them an opportunity for home ownership and they had the big cash downpayment which is also what "sucked you in" and overlook your gut instinct.

Have definitely come along way friend and still even more yet to come! :)