How to Figure out Rent Rates

OK: The golden question: "How much do I charge?"

The simplest way to tell is if you have a very similar unit to something you have a comparative value for. Condos and townhomes are easiest in this respect. Houses are a little different, because you can't always just charge by the room, as there are people out there renting whole houses at fixed rates.

Finding comparisons is easy: go to www.househunting.ca and check the local listings in the area. Househunting.ca is a national ammalgamation of all newspaper and online listings and is a fantastic resource for any peoperty baron(ette).

Obviously, you need to figure out how much you need to cover your costs, which should be projected before you even buy the place! Essentially, factor in:

Mortgage

Taxes

Utilities (if any - often tenants pay)

Condo Fees (if in condo)

Insurance (if you own a condo, it is usually already covered, but check the policy!)

20% of rent for repairs and possible vacancies.

Make sure that these will be covered by your projected rent. If a unit is in excellent shape or is in an area that rents well, or there is a noted shortage of them in the community. For example, in Ottawa there is a shortage of Single family townhomes for rent. Therefore, I buy them and rent them at a premium. Finding a discrepancy between sale demand and rental demand is great! Seems there are tons of these townhomes on the market and they turnover quickly,  but they also happen to be 95% owner occupied because they make great starter homes. Renters desire them too, but often cannot buy them. I am therefore making money by absorbing the risk associated with owning the townhome and providing that service to tenants. That's my competitive advantage: access to capital and knowledge of the system.

There are certain time of the year when it is best to rent a unit. Typically it's May and September, as the demand for rental units is enormous, often outstripping supply. This is because many people in the academic and government sectors will shift around in may, before the summer, and most private sector individuals or people will children in school will move for September. I have had nothing but good luck renting for may and sept, and generally had headaches trying for midwinter.

Ensure that your property is in good shape for when prospective tenants come to see it. Making it look as neutral and open as possible will help. A fresh coat of paint, a fantastic cleaning, and some fabreeze will make them that much more willing to sign. For determining rent based on 'niceness' or the quality of the interior, you can charge a premium if the place is indeed quite nice. Conversely, you will need to lower it a bit if it's in poor condition.

There is a certain unique advantage to pricing your unit high and making it a little nicer than others: You don't have to deal with questionable tenants. Harsh but true! A few quick rules for pricing:

1. Always make the unit nicer inside than the competition

2. Always start at the higher end of the price scale, work backwards if you need to.

3. Write the most descriptive rental ad you can. Include a picture online

4. Don't use newspapers; too expensive, readership is declining, and there are plenty of reputable online sites and even free ones like kijiji and craigslist.

5. Never haggle over rents. Your price is your price.

6. ALWAYS sign a lease, typically for at least a year

7. Always collect first and last month's rent, no exceptions.

8. You actually need a license to rent by the room - so you must rent the whole unit to a group of people, not one by one.

I will post more on dealing with tenants later,

AIML.

How to accumulate capital early on

I had this bang-on question from a military friend of mine.

"Hey Alex, how do I accumulate capital early on?"

I'll tell ya, I wish I'd asked someone that question early on, as it's not as simple as it sounds. Here are some points - I'll try not to write a novel this time.

1. Capital is just a sum of small amounts of saved expenditures. Stupid but true. Live below your means, save it.

2. Pay off credit card bills first. Pay off consumer debt in the order of highest interest rate. You'd be amazed how quickly this adds up.

3. Live as far below your means for as long as you can. Tip: A CAR SHOULD NOT BE THE FIRST DAMN THING YOU BUY.

4. If you are saving to build capital, invest in lower risk assets. Stocks are great, but not if you are intending on buying a house. Consider this: average stock return over the last 10 years (given the recent market correction) is 1%. That sucks. Now is likely the time to buy, but technically the market could still go down. I'm not entirely sure why everyone is wondering where the bottom of the market is; I'm pretty sure it's 0.

4.a. all that to say: invest it in laddered GIC's in an RRSP. This is because the RRSP's return is your marginal tax rate. it's a tax savings. If your tax rate is 45%, your rate of return on your RRSP investment is automatcially 45%. Beat that Dow Jones.

4.b. In Canada, your RRSPs can now be used to put on your first downpayment for a house, and you have 10 years to 'pay yourself' back. That's a pretty fantastic deal: 30-50% tax savings when you put it in, AND you can use it to buy a property, that will ALSO appreciate over time.

5. When you buy your house, suck it up and get room mates. As long as they are paying off the mortgage interest, taxes, and some of the utilities, you are living for free. I STILL have room mates, and I own 5 properties.

I will refine some of these ideas later, but I hope this helps anyone wishing to save some capital for a house.

AIML

Three aspects to an investment property

So: Investment properties can be seperated into three distinct factors, in my opinion.

1. You are buying a cashflow.

With this, I mean that there is a price you can put on the sum of all net cashflows after paying all non-mortgage expenses and your taxes. The sum of this series of cashflows is actually called the Net Present Value, and is a fundamental term in real estate. Not surprisingly, the value of many investment properties is determined in a large part (or often completely by) the cashflow generated by the asset.

Cashflow = Rent + Other income - Taxes - Utilities - Management - Average monthly repairs

As you ca see, cashflow can often be quite small! Beware very expensive 'rental' properties that seem at first to have high 'income' but actually have next to no cashflow. Remember that you still have to pay for the interest and principle costs of your mortgage, depending on the level of financing you select.

2. Land Value (appreciates over time)

Land is the only thing that appreciates over time in the whole real estate world; it may not even appreciate - Japan recently left 15 years of depreciating land prices and general deflation. England and the United states are in the throes of massively depreciating asset prices. The interesting thing about land is that it CAN appreciate, simply because: NO ONE IS MAKING ANY MORE OF IT! The old addage of location, location, location is likely the truest thing in detemining the value (or future value) of real estate.

For example, when I see areas that are 5 minutes from downtown with large single-detatched homes on nice little 1950's style streets, I don't care what the neighbourhood is like. Eventually, that location will fetch a premium. This has a high potential for land proce appreciation.

3.  Building (or asset) value.

I think the most ignorant thing I hear in the real estate investing realm is that "Hey dude, my house is, like, totally gonna go up in value." Well cowboy, let's get back on the cool ranch for a sec; as I mentioned before, land is the only appreciating asset. The catch? Houses happen to be on the land! 

The actual real asset in an investment property is simply the means by which you genrate cashflow. It is a net liability, in the grand scheme of things. You buy a property and the asset has a value. It then depreciates over time - the government recognizes this and allows you something called Capital Cost Allowance (CCA), as your house will eventually degrade to being completly useless and condemned. I apologzie for the cynisism, and I know that there are many ways to maintain and perserve assets so they remain functional. The point is that just because you have a nice looking house, doesn't mean that it will appreciate. The rate of appreciation is determined by the land, not the house.

So what does this mean?

In an investment property, you would be best to find the most functional house in the nicest area that generates the best cashflow. In a perfect world, one might show up in your stocking at Christmas. In the real world, you will likely have to pick a combindation of these factors. I typically stay on the side that generates cashflow. I try and maximize the level of net cashflow to the price I am paying. I care little about the appreciation of the actual asset, so long as it's generating consistent and stable returns. These types are like the 'Line infantry' of my real estate army. Half of my portfolio consists of little townhomes that are simple to rent, efficient to maintain, and typically fetch a net annual return of 8% on their original value. Keep in mind that rents go up, wheras your mortgage value doesn't!

My next favourite type would be single family homes that are undervalued for silly reasons. Places close to downtown, places with large lots on quiet streets, places where people say "oh, you don't want to live there, it's a working class neighbourhood' Tell you what, I don't particularly care - I won't be living there anyway! These are the places that are functional AND have a particularly strong potential for land appreciation. Populations are only going up, and one day, these quiet naighbourhoods will be zoned for intensification. Start playing monopoly and collect the whole block!

More to follow, 

AIML

The Basics of Risk

So about Risk.

Risk is not inherently a bad thing; so many people automatically see it a such. Thus the term Risk Aversion. Risk is simply a catch-all term for future uncertainty - both positive and negative.

Risks are always there, but can be dealt with in different ways. You can transfer risk - like getting insurance - someone else pays if your house burns down. You still have to 'pay' for the risk (insurance) but you literally take the uncertainty out of your fiscal dispersment should such an event happen.

You can also mitigate risks. For example, if a fire is likely, you would install a smoke alarm, get a Carbon monoxide detector, and buy a fire extinguisher. You've basically put on a bullet proof vest in terms of risk protection. You'll still take the hit, but you (and your bank account/house/business) will live.

You can accept risks. If a risk of say, managing your own property is that the tenant might call you in the middle of the night and you can't afford a property management service, you simply acept the risk, end of story. You essentially tell yourself - "Hey, this wouldn't be so bad, and the cost of removing the uncertainty of never having to deal with that event would be too much money" It comes out again at this point that risk is uncertainty and costs nothing, certainty is going to cost you money. Plain and simple.

For example, let's say you're worried about mortgage (interest) rate fluctuations. You mitigate the risk (make it better) by doing your research, checking indocators like bond yeild indices, and checking with some knowledgable bankers or investors. You then take out a variable rate loan if you tink you can accept the rate risk (fluctuations) or you lock in at a fixed rate if you are unable or unwilling to accept that risk. The catch/tradeoff? That extra bit of fixed rate certainty can often cost you 2%-3% on your mortgage interest rate; a difference of up to 50% the cost of your interest payments already. You therefore are buying certainty form the person (the bank) who you judge best able to handle the risk.

I hope this helps realign people's use of the word Risk and lets you think just a little more creatively about what exactly people mean when they throw around risky words :) Risk-return is an enormous concept in Finance and business. More on the Return side later today!

AIML

I think the first topic to address will be that which I hear so very often:

"Hey Alex, how do I go about buying a house?"

I'll try and keep it simple, leaving big picture market focus out of it for another slew of posts.

1. Get a buyer's agent for real estate. There is no cost to you and they should work tirelessly (or some proximation thereof) in order to find a suitable house. Remember that the seller pays the real estate commission fees in most Canadian and US jurisdictions; check what the rules or conventions are in your area.

2. Do your own research, find what works for you. Check out www.mls.ca for Canada and www.realtor.com for the United States and check out what's in your area. Agents will try and find you a good fit, but they do have other clients!

3. Look into a good home inspector. Never, ever, ever buy a home without a home inspector. There are far too many laibilities inherent in buying a house to risk it otherwise. It will be the best $300 you ever spent. Ensure that the inspector is accredited with the provincial or state home inspection body. Ask for references if you are unsure, and make sure to ask any and all questions while the inspection actually takes place. Typically hire the inspector for the job only when you have narrowed it down to your last potential house/condo or two.

4. Ensure you have enough cash for a downpayment! In Canada, the minimum you need down is 5%, but it may vary from state to state in the United States.

5. Find a good real estate lawyer. His or her fees should be approximately $600-$1000 plus small dispersements. Any more than that and you are paying on the rather high end, unless you are purchasing some sort multi-unit building.

6. Check out the area for potential value adding or value decreasing factors: these include:

     a. Transportation. Look for adequate transportation into the area or potential augmentations. Check with youe municipality's planning department for planned works in the area. These are usually available online. If it's something close by that will enhance accessibility to a remote region, this is typically a good thing. Should it be a 4-lane express way in front of your prospective property - WATCH OUT! This will decrease value! Be aware of what will run through your new home!

b.     Local Economy: Ensure that there are more than one major employer and that the region or neighbourhood economic outlook is positive. You can check for the median and average incomes and demographic distribution. Ensure that the neighbourhood profile matches what your desired lifestyle will be. You likely would not want to be a single professional in a rural community or raising a family in a low-income urban area with high crime. House prices will reflect the demograhics of the region

c.     Zoning: Check with the municipality if there will be zoning changes to your area or if it has recently undergone such a change. A good realtor will be able to help you with this. A bad one will say they don't have or can't find that data; it's a weak and uneducated cop-out if they do. Find another agent. Zoning regulations stipulate what can be built in the area. If you don't check, you could be stuck beside a 30 storey high rise construction in your nice new single family home.

d.     Amenities: These include, but are not limited to schools, recreation facilities, shopping, and business areas. You want to be able to have most things within a 5 minute drive for maximum convenience and resale value. If there is large planned expansion in things you don't want, don't buy. If there businesses are moving out of the area, there is likely a reason for it.

7. Get a pre-approval for a mortgage and learn about the differnet types of mortgages. Don not ever sign a real estate deal or even progress to the offer stage without knowing how much you can afford. This is not determined by YOUR standards and estimates, but by the bank. They use risk and income factors in determining your elligibility for a large loan. I will post more about the nuances later, but any reputable bank or mortgage broker will be able to tell you what you can and can afford. Since interest rates are abysmally low in the US and Canada, there is nowhere for them to go but up. Try and lock into a fixed rate at between 4.5% and 5.5%. If you do any business already with a bank and have a good credit rating, you will likely be able to negotiate a slightly lower than advertised (or 'posted') rate. Always ask - all they can do is say no!

8. Ensure you save at least 1.5% extra cash for closing costs. These include such items as legal fees (already mentioned: $600-$1000), land transfer taxes (1%-2% of property value, depending on your municipality or any extra taxes in the area/region), heating oil fill-up, and paying back the balance of prepaid property taxes to the seller. Do no be caught short for these expenses! You could run into significant legal trouble if, on the day of closing, you are unable to cut that final cheque to the lawyer for the downpayment + closing costs!

Hopefully, that will give you some ammunition with which to work. Stay tuned for more in-depth posts.

Cheers.

Starting up!

Hi there,

My name is Alexander Leslie and I began investing in real estate at the age of 17. I had no credit card, no equity, not even a drivers' license. What I did have was drive to accumulate wealth and a healthy amount of ambition.

Having battled my way uphill against essentially the whole of society - which tells young people to pay their dues and stay out of the business of the 'Old Boys' - I would like to share my experiences, reach out to those with similar stories, and hopefully add value to my generation.

To those who may read this: I thank you for your support in advance and look forward to a fluid exchange or ideas and a meeting of minds around the oldest form of investment on the planet. Remember:

REAL ESTATE IS NOT THE PRIVELEGE OF THE WEALTHY, BUT A LEGITIMATE PURSUIT OF THE AMBITIOUS

Throughout this financial crisis, which in Canada is actually a localized manufacturing depression, and not a general recession, I have seen some of the best and worst techniques, strategies, and advice for real estate investment. I hope to outline those periodically and share my methods for evaluating the treu potential of real estate. Keep in mind, Real estate is a long term game with persistent and leveraged gains. I cannot stress that enough.