Turning poor cash flow properties into great cash flow properties - part 2

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

Remember: Please share this article if you find it enjoyable

Tip #2

A while back I began a miniseries on how to turn cash flow negative investment wannabes into actual cash flowing investments. The difference can be very small. If, after all expenses of a property over a period of a year (including maintenance fees and other costs for long term care such as saving up for the new roof you will need in 10 or 15 years) are included and you are still making money you are now cash flow positive. Tip #2 will focus on another slight change you can make to a property that may change your property into an investment.

Evaluating the potential of a suite

Every property is different and in some properties you will have difficulty putting in a suite. I personally don't invest in 2 storey houses because of this difficulty. I always want multiple risk covering strategies and putting in a suite is another way to mitigate risk. What are the properties that you can typically suite without too much difficulty? The most obvious properties are types of bungalows. If you don't know the difference between a bungalow, a bi-level, a raised bungalow, or a hillside bungalow... it is time to do some homework. Each of these types of bungalow has advantages and disadvantages. I prefer hillside bungalows and raised bungalows myself because of the variety of options I have. The reason bungalows can make better investments than 2 storeys is that you have the option to suite the property with less change. In a typical bungalow you will have a back entrance with a staircase that goes up the main floor as well as down to the basement (in a bi-level, the difference is that the staircase is in the front of the building). This allows for a separate entrance downstairs which is ideal for a suite. Raised bungalows have room and space for larger windows in the basement and hillside bungalows can even offer a walkout basement for more convenience for the family living in a suite that doesn't feel as much like a basement suite.

What does it cost to renovate a basement and suite it? It depends on your experience and the property, but I know people who have suited a basement for as low as $5,000. Many people starting out will suite a place for as much as $40,000 and there is really no limit to what you can spend. The key is providing a suite that is both safe (for example: think of window sizes for emergency exits that are big enough for a firefighter with full gear to enter and exit the basement and placed in every bedroom in the basement) and comfortable (for example: think about where the kitchen area is in the suite or where the bedrooms are located). Another thing to keep in mind for a suite is whether it is legal and compliant. It must be able to hold two families (this is a zoning issue) to be legal and must conform to codes in order to be compliant.

Its always a numbers game

Just like my first tip, lets take a look at the difference in revenue you can receive versus how much money it will cost to pay for the renovations. With an assumed 3.5-4% interest rate on a HELOC, you could borrow the $20,000 to put in a suite and the cost to you would be an average of $67 each month with an interest only payment. In an average area of Calgary right now a house that rents for $1800 with one family living in it can easily bring in around $1200 for an upstairs suite and another $900 for a downstairs suite that looks and feels good and is safe. In the suited place you are bringing in another $300 each month and your expenses have gone up by a base $67 each month. If you pay the interest  ($67) as well as another $133 each month of principle you will still end up with another $100 at the end of each month which may make that small difference between owning and managing an investment versus a liability.

Summary

When investing, the small changes in the way you think and value a property can make very large differences in the long run. It can even make the difference between keeping a property that cash flows through a downturn in the market and losing it to foreclosure because you can't keep up with the payments. If you need help in understanding the importance of cash flow, please see my earliest blogs which cover the subject in more depth. By purchasing properties that can adapt, you are covering more risk in the future. by thinking about small changes you can make to a property, you are thinking like an investor instead of a gambler whose investment strategy is 'buy, hold, and pray things go up in value' (an idea I first heard from Kiyosaki).


Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

Win/Win/Win for Rent to Own Deal

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

Remember: Please share this article if you find it enjoyable

Mark, What's With This Win/Win/Win Stuff?

I grew up with a father who would rather take a hit himself than cheat someone else out of something. I saw this put into practice multiple times and he has lost tens of thousands of dollars a number of times because of this mindset (I'll call it integrity). About a decade ago I approached him with the idea of renting to own and asked what he thought. He basically told me to stay as far away from rent to own deals as possible. The reason was that "The tenant will always lose out on this kind of deal because the landlord will need to protect his/her own interests". I asked for an example and he gave me a few. I left it at that. I trust my dad and his understanding of real estate in general as well as investing. It has only been in the last 2-3 years I have come across some really interesting ways of doing business and helping people who are cash rich and credit poor own a home that actually does help them.

What Does a Typical Rent to Own Deal Look Like?

Dad believed that rent to own deals all fall into a limited category. And he was right. It is a simple transaction that I will explain here, but it does have some variations that I will share as well. Typically, there is someone with a house they no longer want for various reasons and are willing to sell it within a period of time as long as that period of time is hassle free. On the other side of the deal there is a family who, again for various reasons, wants to own a home but cannot currently obtain financing from a financial institution either because they do not have money for a down payment or because the lender/bank doesn't like the family's credit score. The agreement they both sign comes in two parts

1. The lease agreement

This is basically like any other lease or rental agreement. It details how much rent will be paid each month and what will happen to protect both the tenant and the landlord

2. The option contract

The basics of an option contract are: It gives the right to the tenant to purchase the house within a  certain period of time for a certain amount of money. If the contract time limit runs out before anything is purchase, the contract is now null and void. This contract is typically purchased from the landlord for a price and this money is lost if the tenant will not or cannot purchase the house.

In the typical scenario, the tenant is left on their own to save enough money for a down payment as well as rebuild/improve their credit. The landlord receives higher than normal rent and typically hassle free management because the tenants are treating the house as their own and even does minor fixups themselves. Typically, this type of situation works out about 40% of the time (I've heard lower numbers than this as well), based on investors I have spoken with extensively on the subject. The reason these deals aren't completed is that a typically family that has poor credit also has a difficult time saving a large amount of money and doing everything right for an extended period of time so their credit score jumps. This makes sense to me... how can a family rebuild their credit if they may not even know what they must do to improve this score?

What I'm Doing Differently

The way I do rent to own is different in a few significant ways. I call it a 'tenant focused rent to own program'.

First, I only will get into a deal with tenants who have an excellent chance of qualifying for a mortgage with just a little help. 

Secondly, I only work with tenants who have enough money for a down payment TODAY. This is important because it removes a huge obstacle to home ownership

Thirdly, and possibly most importantly, I help these people all along the way so they know what they need to do in order to rebuild their credit. We work with a credit repair specialist who meets with the family a few times each year to monitor the improvements to credit as well as give homework for future improvements.

Lastly, I structure deals so that tenants can choose where they live in the city as well as the exact home they desire. This is done by finding an investor who wants a good return on her/his investment without a high degree of risk. The investor purchases the house for the tenant/future home owner for now. The tenant pays higher than normal rent to make this a good deal for the investor and at the end of a relatively short term (2-3 years) the tenant purchases the house from the investor. 

So... What's the Win/Win/Win about?

Well, when a family that desperately desire to work toward purchasing home is able to not only buy that home, but also control the house until they are able to purchase and can, in the meant time, live in that house they definitely feel like they are moving on in life (especially when they have help all along the way). 

When an investor who is dissatisfied with 2-6% returns on their investments/future retirements (and that's in a good year) receive much higher than that without any management trouble or headaches that can come with renting to others and another person takes care of the details, they know they are profitting while helping another family in need. 

When I put this deal together and work hard to make sure there are few, if any wrinkles in the deal and take care of a family with the desire to own a home as well as an investor who desires to take care of her/his family in retirement and make a profit along the way for my hard work, I absolutely win.

There it is: a win for a family, for an investor, and myself and my family; win/win/win. I love doing real estate because there are legitimate ways to take care of multiple people simultaneously. 

p.s. this type of rent to own scenario is a success over 90% of the time:)

I hope you both enjoyed and learned something from today's blog. Happy investing!


If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

9th Dimension: Reinvesting with original money

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

Remember: Please share this article if you find it enjoyable. You can also like this article and comment on what was helpful to you. This helps me focus on what you want.

What's the advantage?

When you have a property you have owned for any length of time and want to invest in a new property real estate is unique in that you can refinance your initial property and use that cash to reinvest in other properties. The greatest beauty of this strategy is that if done properly you are not putting your original investment at risk and you can now realize the multidimensional nature of real estate with twice the number of properties.

The higher the percentage of equity in a property, the less you are capitalizing on the many profit centres of real estate. Here's an example: If you own 100% of your property, nobody else is paying off your debt for you which means you aren't capitalizing on the full benefit of hedging against inflation. If you own 50% of your real estate then you are paying back your debt with deflated dollars! Remember my earlier blogs on this topic.

Another example is not realizing leveraged appreciation. When you own 100% of your property and it increases in value by 5%, you gain 5%. If you have only 50% equity in your property and it appreciates at 5% you are actually gaining a 10% return. Again, refer to my earlier blog on this topic for a fuller explanation.

Is there a rule of thumb?

It is important to understand how mortgages work. Should I remortgage or take out a HELOC? There are advantages of both. Two advantages of a HELOC are that I haven't messed around with how my cash flow is working on my investment and I can choose to make interest only payments which decrease the cost of this debt. Two advantages of mortgages are that the bank cannot ever call in my loan as long as I'm making payments and I am paying down principle each and every month rather than potentially leaving outstanding debt stagnant and not getting ahead in another way. You will need to make the decision yourself and I advise you to talk to professionals who you trust when making this decision; both mortgage brokers and other, more experienced, investors are wonderful to bump ideas off of, but make sure these people are competent in their field because it does not take very much time, effort, or money to legitimately claim I am either a mortgage broker or investor.

A note of caution:

I do not recommend anyone but the most experienced of investors to ever take out the maximum amount of equity from properties. You can put your entire portfolio at risk if you are over-leveraging. Remember my earlier blogs on this topic! Cash flow is king and must remain intact in order to manage that largest swaths of risk. Everyone has their own rule of thumb with this, but here is are two questions I ask myself every time I make a decision on refinancing or purchasing another property: What is the worst case scenario? Can I handle this scenario without putting my portfolio at risk? If I can handle it, then it poses far less risk to me. With a first property/investment you may not want to take a ton of equity out but with your 10th or 100th property you have much more to fall back on if something goes wrong. Also, I tend to like keeping a lot of equity in the home my family is currently living in. That way if everything else goes wrong my family isn't affected in the same way. I can lose my entire portfolio and not endanger my family.

Summary

If you are not at least thinking about reinvesting equity in your property you are not taking advantage of all that real estate can offer. The beauty of reinvesting is that you can have a full time job that takes care of your family while reinvesting all money made from real estate investing back into real estate investing. There is a snowball effect to reinvesting which can explode after a couple of decades! Remember the only financial lesson the majority of us learned in school? Compounding interest is almost magical in how it works to an investors advantage. I will leave the final word in today's post with someone who has significantly more pull to his quotes than myself. I've heard it said, though I question whether it was stated in these words, that Einstein stated: "The most powerful force in the universe is compounding interest". As far as I know, a less disputed statement by Einstein is: "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it."

Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html