43 BOURBON PLACE, WHITBY
3+1 bedroom, 4 bathroom, finished basement with kitchenette. Detached above grade (only linked underground). Upgrades in every room. Owner is a general contractor and does fabulous work. Crown molding in most rooms. Granite counters, ceramic backsplashes even in laundry room! Master bedroom has custom built in cabinets, his and her closets and 4 piece ensuite. Finished basement with one bedroom, kitchenette (could easily add stove/dishwasher). 2 pc bath and large living and eating area. Laundry on main level.
Open house Sat and Sun Aug 26/27 2-4pm. Offers any time.
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The first step to getting started in real estate investing is finding out if you have what it takes – personally and financially – to own and maintain more than one home or property. You can learn more about this by reading my previous post here.
Obtaining your first income property doesn’t require that you have huge sums of money available upfront. You don’t need to be a business major or a contractor either (although that certainly doesn’t hurt). What you do need to do is to educate yourself and learn the strategies that make income property investments work best for YOU.
Once you’ve decided you’re ready to invest in rental properties, you need to connect with a realtor who knows the local rental/investment property real estate market. A Realtor® such as Michael Dominguez, who owns multiple investment properties in Durham Region and has helped countless other people get into investment property ownership successfully for many years.
Your next key partner is an accountant. Again, preferably one who is a real estate investor themselves or highly knowledgeable in Canadian property tax law who can help you minimize any tax implications from owning properties in addition to your principal residence. Ask people who already own investment properties for recommendations and referrals as to who they use.
Start Organized and Stay Organized
Keep detailed and copious notes and keep all of your paperwork together. All of your expenditures need to be tracked and easily accessible. If you can’t commit to doing that yourself diligently, hire a bookkeeper. It’s an expense that’s well worth it and that you’ll thank yourself for in the long run.
Keep separate bank accounts solely for your real estate “business”. Have deposits, rent checks and expenses flow through that specific account. The greatest benefit to being organized financially is you’ll be able to see at a glance anytime just how great your investments are doing!
If you’re not quite ready to become a full-on landlord quite yet, alternatively, you could consider investing in an REIT (Real Estate Investment Trust). this allows a more arms-length approach to real estate investing.
REITs typically encompass properties such as shopping malls, office buildings and apartment complexes, which are packaged into portfolios and professionally managed (for a fee, of course). Shares in REITs are traded on the stock market and allow casual investors to get into real estate investing. Many REITs have proven to be solid investments with substantial returns year after year.
The Bottom Line
Weather new investors choose to purchase an income property or acquire shares in REITs, having real estate in your investment portfolio can help you build your passive income cash flow.
Talk to a professional who has experience with real estate investment like Michael Dominguez, or contact him to sign up for one of his upcoming Durham Home Investment Properties Tours at 905-728-1600 today. Like The Michael Dominguez Team on Facebook for more investor tips and property listings. Visit www.durhamhome.ca for available properties in Durham Region and surrounding areas.
Michael Dominguez is a full-time, professional Realtor® with RE/Max Jazz Inc., Brokerage and a member in good standing of the Durham Region Association of Realtors® (DRAR), the Toronto Real Estate Board (TREB), the Ontario Real Estate Association (OREA) and the Canadian Real Estate Association (CREA). Michael is an active investor in real estate and owns cash flow generating properties in Durham Region (Oshawa, Whitby) and in Northumberland (Cobourg). Winner of the Canadian Real Estate Wealth Magazine Realtor of the Year & Real Estate Investment Network (REIN) Realtor of the Year. Author of articles in CREW Magazine. Expert speaker for various investment clubs. Hosts cashflow investment tours. Investment coach of how to find and purchase cash flow properties.
Oshawa and the Durham Region is a “perfect storm” for those looking at investing in residential rental properties right now. Several factors are converging that will create continued demand for rental homes. With the anchor being Durham College/UOIT, the expansion of the 407 will bring more people out of the city to the east looking for affordable housing options, including prospective tenants.
Before you rush out and start buying up real estate, there are a few key things you would be wise to consider first.
Here are 10 things you need to know before buying a rental property.
- A rental property with a good, paying tenant, will continue to provide cash flow even if there is a stock market correction. The amount you charge in rent should be based on providing a positive cash flow after all of your costs and mortgage payment (more on that later).
- There is risk in any investment, including real estate. Mitigate some of that risk by working with professional advisors, like your Realtor® and your financial advisor, obtaining a fixed mortgage, and carefully screening your tenants. TIP: When meeting prospective tenants to view a property, try to get a discrete look at the interior of their car… chances are if it’s a mess, their housekeeping skills won’t be much better.
- Study the local economy and market. You can do all the legwork yourself, or, you can work with a professional whose livelihood depends on being on top of these factors. A professional full-time Realtor® like Michael Dominguez, who is also a skilled and successful investment property buyer and landlord himself.
- Know what you have available to invest in time and skill, not just money. This is where being a landlord is vastly different from buying stocks as an investment. If you’re handy, you can take care of many small repairs yourself without having to hire someone else and eating into your profits. Owning an investment property entails a much more hands on approach. Unless you have the means to hire a property management company to oversee everything for you, you’ll be the one rolling up your sleeves and taking care of repairs, maintenance and chasing late rent cheques. All that being said, don’t fall into a fixer-upper trap. Don’t buy the cheapest house out there thinking you’ll get it fixed up quick. You’ll have to factor time and cost into your investment process and things can get out of hand quicker than you think.
- Invest close to home, especially if this is your first investment property purchase. It’s easier and a lot more satisfying, to be able to keep an eye on your investment personally if it’s nearby. Don’t be afraid to make regular visits to the property to ensure your tenants are keeping of the place (with proper notice, of course). Also, look for a neighbourhood with good schools, access to amenities, schools, parks, low crime and good job prospects. Visit the area at night. Does it feel safe? Would you want your child to live here? Better areas will generally attract higher quality tenants. Be prepared to pay for it initially though – the cost of homes in these areas will also be higher.
- Be aware of ALL of the costs. Clearly, your mortgage payment is going to be your largest single fixed expense (remember to ensure you have a fixed mortgage rate!). Property taxes can and will change. Don’t forget insurance. Unexpected repairs and unexpected vacancy can quickly eat into your overall profits.
- Keep your expectations realistic. Choose your property carefully and your tenant even more so and always do the math. This isn’t a “get rich quick” process, but rather “get rich steadily”. Building a portfolio of real estate and its growing value over time is a great way to generate passive income. Just be aware of any tax implications – especially when you sell an investment property. Your accountant will be key to your overall long-term success.
- Before investing in a rental property, make sure that your own financial house is in order. Pay down any high interest debt, make sure you have money for not just the down payment on the new property but also some set aside for unexpected or costly surprises, as we’ve already mentioned. Make sure you don’t have any large expenses on the horizon either – such as college or university tuition.
- Be aware of higher interest rates. The cost of borrowing money today is still at an historic low, but the interest rate on investment properties will be higher. Do the math. Your mortgage payment needs to work within your rental equation or it will eat away at any profits you hoped to gain.
- The bottom line is it’s not rocket science. You can do it! Educate yourself. Work with professionals. Be careful and take the time to learn the ropes. Screen your tenants. Keep an eye on your property regularly. Be firm but respectful with tenants. Save for the repairs you know about, and always set aside a little extra for surprises.
Michael Dominguez is a professional, full-time Realtor® with RE/Max Jazz and owns several investment properties in Durham Region, Cobourg/Port Hope and Orillia. He hosts regular investment property tours in Durham Region, sharing his insight into buying and owning residential rental homes while touring through available properties. To find out more about upcoming tours, call The Michael Dominguez Team at 905-728-1600 or visit www.durhamhome.ca and LIKE The Michael Dominguez Team on Facebook for more information.
Are secondary suites worth the extra expense?
Michael Dominguez discusses why the answer is a resounding yes
There has never been a better time to consider adding properties with (legal) secondary suites to your portfolio. Many make the mistake of referring to these as duplexes, but a duplex is a purpose-built two-unit building; what we’re talking about here is a structure that was built as a single-family home and converted later into a two-dwelling building.
1. They’re becoming increasingly popular
More than ever before, provinces and municipalities are creating legislation that encourages densification of cities. This makes a lot of sense. Creating additional dwelling units in the same location means communities can satisfy the housing needs of a growing population without adding more streets, sidewalks and sewer systems. Municipal desire for these kinds of investments strips away one layer of difficulty.
2. They’re in good locations
Single-family homes that can be converted to have secondary suites are readily available in desirable neighbourhoods, which increases your options and helps you make smarter decisions. Rather than investing in less expensive properties in secondary neighbourhoods, you can take the time to find a location in a respectable residential area that will strengthen your portfolio.
3. The tenant profile is very good
Many investment gurus put too much focus on making money in the buy. Yes, try to get a fair price, but the book that tells you to buy that under-market property doesn’t tell you that in order to truly win on such a deal, you need to rent it out consistently for the next decade. A well-equipped secondary suite in a desirable property may cost more, but it will have lower vacancy than one that was purchased solely because it was cheap.
People will want to live in it, and you’ll have a better chance of not spending your afternoons at the landlord/tenant board trying to fight for your monthly rent.
4. You can charge higher rents
A well-located single-family home can attract a tenant willing to pay top dollar, but the upper unit of a two-unit dwelling can receive up to 80% of that amount, while often attracting a similar quality tenant. And with a secondary suite, you also get to enjoy that lower dwelling’s rent. In total, secondary suite owners often receive 30% to 40% more rent than those who just rent to one tenant.
You may pay more for your property, but you’ll do well while you own it and can sell it for more when the time comes
But what about the multiplex, you ask?
Well, the rent can be attractive as you multiply your tenants, but the tenant profile in most cities falls quickly in multiunit settings.
5. The property will appreciate handsomely
Yes, you will pay more for your asset, but it is in a sought-after neighbourhood, and you plan to maintain it. If you fly your Delorean into the future 10, maybe 20 years, that neighbourhood will still be desirable. If you are looking to sell your property, you will likely have a line of investors ready to pick it up: a young couple who decide to live in one unit and rent out the other in order to cover their mortgage, or possibly a multi-generational
KEEP IT LEGAL
You can build a lot of wealth in this asset class just by doing things the right way – so do not be tempted to obtain or build illegal second suites. There are likely thousands in every city across the country, but they are dangerous on a number of levels. An illegal second suite can get shut down with one phone call from a nosy neighbour or a disgruntled tenant, instantly killing your rental income. You can’t use the rent received in that illegal suite to qualify for future properties, and they lack the appreciation potential or resale desirability of a legal suite. Finally, in the worst possible scenario, if someone gets hurt or dies in your illegal suite, it is very possible that you will face criminal charges.
family who wants to live close to one another while still maintaining a sense of space. You may pay more for your property, but you’ll do well while you own it and can sell it for more when the time comes.
6. You can cushion your cash flow
By receiving more rent for the same building, you can generate better cash flow, helping provide for any unexpected pitfalls. You want your property, at minimum, to support itself and pay for its monthly expenses, including debt financing. But hopefully it will pay dividends on top of that.
Another thing to keep in mind is that, by having a legal two-unit building, you can use both rents to help qualify you for your next investment property. A good cash-flowgenerating property can actually make it easier to keep growing that portfolio.
Taking action sounds easier than it is. You can do the research, build your team, find a property, but the act of preparing an offer and actually getting a property under contract can be frightening. The “What ifs” start to bounce around in your head. There is an expression in the industry known as paralysis by analysis.
My advice to any investor is to first set forth to choose a market or two to invest. This market may or may not be close to where you live. The most important thing I look for in determining a select market to invest is, does that property contain the proper fundamentals making it a good property going forward.
I apologize in advance for this 80’s movie reference, but when I consider buying a property, I imagine taking my Delorean 10 or even 20 years in the future. What will that property and that market look like. If the property is in a thriving market, with a strong economy, I am interested. I also have learned to bypass the questionable locations within that market. I don’t really care how good of a deal I get on the “buy”, but if I need to be in a subpar location and deal with mediocre tenants who likely won’t respect my property, I will take a pass.
I want to help you get over this paralysis.
The exciting thing about Canadian real estate is one can purchase an asset that can generate enough income to support all of the property’s debts, including financing. That is known as a cash flow generating property. What is really cool is that the banks will loan you 80% of the value of that investment at remarkably low interest rates, if you decide to move forward on that purchase. Try to get that loan to value ratio when starting a business, or purchasing stocks or mutual funds. Even better, in order to obtain that 20% down payment, one can use a line of credit secured by another real estate asset. This may not seem like a shock to you. In fact, it may seem like common knowledge. But I can assure you that sophisticated lenders like banks simply don’t loan out funds like that for any other asset class. Even among real estate, good luck getting those kind of terms investing in the Caribbean real estate or most other countries. Banks aren’t offering these terms because they are being nice guys. They are doing it because of the safety of this investment.
I look for markets where the demand for real estate is strong. Areas of good job growth, population increases, strong transit & infrastructure, and has had real estate values rising. I love the Greater Toronto Area because I don’t know of a scenario where Toronto will not be a select place to live going forward. Because I look for properties with some cash flow opportunities, I look at the suburbs. I personally invest in the Durham Region (including Oshawa and Whitby).
No one can guarantee a return on investment, but if the market you have chosen has the right fundamentals, there is no reason to think that values will rise as population increases, as will housing demands. Let’s say you experience a 5% average growth over the time you own your asset. Not bad you state, but my mutual fund got an 8% return last year. But let me share with you the power of leveraging. Because you only used 20% of your own money, this means the real estate asset was worth 5 TIMES your investment (20% down represents 1/5 of the total investment). However, that 5% growth was on the entire value of the asset. Let’s use an example. Let’s say you bought a house for $400K. That meant you needed an $80K down payment. If the value appreciated by 5% over the past year, the property is now worth $420K. That $20K rise in value came from value came from just an $80K investment. That, my friends is a 25% return in the first year. Now, as they say in the game shows, BUT THAT’S NOT ALL. Add in the mortgage pay down and any cash flow the property experienced, and you are looking at a return north of 30% annually.
I tell my investors if you can get your hands on THREE cash flow generating investment assets in a market like the Durham Region, and just manage to hold them for TEN years. As long as they average an appreciation of FIVE percent, you, my friend, are a millionaire, as just those three properties alone will generate a net worth of more than that.
But, will there be a correction at some point, I am sure you are thinking. My answer is ABSOLUTELY. In my adult lifetime, there have been two corrections. But we are buy and hold investors. We are buying properties that support itself and can withstand a down turn. If we bought smart, I am confident that demand will remain or return through a tough time. But we aren’t as concerned about those two years where real estate values dropped 10-15%. Over the next 10 years, don’t expect every year to be exactly a 5% increase. One year it could be a 10% decrease. One year it could be like the past twelve months in Durham (Oct ’15 – Oct ’16) and the values are up 27% year over year.
The other “what ifs” are mostly useless noise.
What if the demand drops?
Unlikely as the population is rising and we Canadians need a place to live – especially in the winter.
What if interest rates rise?
Nearly all top economists are predicting no significant rise in rates over the next few years, but even if the rates are larger than expected, our extra cash flow can cover that short fall.
What if I can’t rent out my place?
If you are in an area of low vacancy (do your research) and your place looks nice and is in a good area, I am confident with some reasonable advertising, you will find a good tenant.
What if something bad happens to my place and expenses will exceed my budget?
Don’t stress out. That WILL happen one year, hopefully not the first one, but even if it does, think of it as short term pain for your ultimate goals.
What if the tenants don’t pay the rent?
Tenant selection can reduce the odds, but it will happen at some point. Again, deal with it.
What if there is a complete market collapse or even a zombie apocalypse?
I think any other investment would also be suffering at this point, and your priority likely isn’t real estate but in fact avoiding the zombies.
I will leave you with this. Build a team in the market you select. See some properties and determine if you can find properties to support the monthly expenses. Speak to other investors who are taking action and having success in that market. I actually conduct investor tours in my market, allowing multiple investors to meet and learn from my team and each other. Then take action. Figure out a way to get it done. I have been the poster child for making mistakes with my properties, and despite that, I have built net wealth I really didn’t think was possible just a few years ago. What separates the most successful people from the others, is simply ACTION! Those who took action, won the day, the week and the year. If you get success, remember to repeat that action and more success will follow.
I would wish you good luck in your journey, but instead I will just say, take action and make your own luck.
Michael is an investor and award winning realtor specializing in cash flow generating properties in the Durham Region. Michael and his team work with new and veteran investors and assist them to learn more about real estate investing and eventually taking action on their real estate journey. You check out the team on their website www.durhamhome.ca or email them directly at firstname.lastname@example.org
When people assess the value of a property, they can use one of two very common methods.
The first one is most used in the residential world. It is the comparison method. If I own a 3 bdrm home with 2 baths in a subdivision, the first thing I should know is what other similar properties have sold for in that area. From there, add or subtract based on key features in the home.
As you can imagine, it is a fair way to evaluate a residential home. If the last three homes all sold for $245K, $252K and $255K, there is a pretty good chance your property is also worth $245K-$255K.
The second method of determining value is based on the revenue it delivers. The most common method of calculating that is by CAP Rates.
The CAP, or Capitalization, Rate is defined as the ratio between the net operating income produced by an asset and its capital cost or alternatively its current market value. The rate calculated in a simple fashion is as follows: Cap Rate = annual net operating income / cost (or value)
For example, if a building is purchased for a $500000 sales price, and produces $30000 in positive net operating income (the amount left over after the fixed and variable costs) during one year, then $30K / $500K = 0.06 or 6%.
With it more and more difficult to find safe investment vehicles out there, investors gravitate to real estate. In 2014, investors in the Greater Toronto Area (GTA) are willing to purchase a property that has a much lower CAP rate then they would have been willing to do in 2010. Specifically, in Toronto, where once 6% was the low number, now I’m seeing deals transpire at rates under 4%. Even in Oshawa, where once 8% was acceptable, I’ve seen a couple deals in the past few months sell for well under 6%. Capitalization rates are an indirect measure of how fast an investment will pay for itself. A property with a CAP% of 10% the payback is 10 years. At 6%, it is 16.6 years.
One point I want to make is that debt repayment is NOT factored in, when determining one’s NOI. If it were included, the CAP rate would be much worse on a building that had a mortgage versus another that is owned free and clear. The owner’s property financing must have nothing to do with a property’s worth.
Now, let me share with you the importance of consistently raising your rental amounts. Besides the obvious answer of making more money, it also raises the value of the building. Let me explain. Let’s say you own a property that can be resold all day long with a 6% CAP rate. If you find a way to increase your rent just $10 a month. That works out to $120 a year. To calculate how $120 a year can increase the value of the property, divide the rental increase by the pre-determined CAP Rate. In this example $120 / 6%. That works out to a value increase of $2000. SOOOO, increasing the rent $10 a month raises the value of the property by $2000. Not bad huh. $100 a month, means a property value increase of $20000. If you have the option of doing a repair to a unit and it would cost you $10000 and by doing it, you can increase the rent by $100 a month, should you do it? My answer is that not only will you receive the extra rental money, but you have built double the equity in your building.
“So what”, you say. “That only comes into play when I sell the property”. Not always true I answer. Once you have built enough equity in the building, you can do a bank refinance and get much of your initial investment and/or renovation costs out of the property, while still maintaining a debt to equity ratio that our very conservative banks will accept. The other, more difficult to measure benefit of doing the reno, is that you have the opportunity to attract a more desirable tenant. There are a lot of benefits to having a good tenant.
Although there are other ways to determine a property’s value, these are, by far the two most common.
The next time you read a prospectus and see a listed CAP Rate, you’ll now know what they mean. But one word of warning. The listing real estate agent or seller may not be including all of the actual expenses OR be using projected rental revenues rather than actual numbers. I can show a 10% CAP in all of my properties if I exclude yard maintenance, property management, basic repairs and waste removal. I can also show a zero percent vacancy rate and tell the buyer it is always rented. However, the fact is that these things exist. My advice I like to offer is, get the numbers they provide, then as you are doing the walkthru, look for renos, repairs, rental items, and services that are not included in the operating expenses provided. It is only after you have actual revenues and actual operating expenses can you determine the CAP Rate offered.