8th Dimension: Instant and Forced Equity

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

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What is the Difference?

Instant equity is, quite simply, purchasing a property for less than the open market would pay for that same property. Instant equity is not, as is reported at times, purchasing a house that was at one time worth $400,000 for $200,000. In an extreme downturn in the market such as 2008 in the US, many properties lost half their value. A property previously worth $400,000 may be worth even less than $200,000 in this kind of downturn. To truly realize instant equity an investor must spend less than a property is currently worth. Meaning that a property is, today, worth $400,000 on the open market and the investor purchases this property for less than $400,000. While some believe this impossible and others believe it in some way deceitful or wrong, it is neither... I will explain later in my tips section.

Forced equity is when by the end of effecting some degree of change, small or large, to a property that property is worth more than before the change. An example is if you have a house that has had a lady with 30 cats who has lived in the house for some time without cleaning or having enough kitty litter and the investor purchases that house and cleans it up by simply shoveling out the mess, pulling up and redoing the flooring, and repainting the interior. That investor has probably spent less than 10-15k on the clean up but can probably sell the property for at least 30k more than what s/he bought the property for because people are now willing to live in it and it looks and smells good without any extra effort. In this example using imaginary numbers pulled from a hat the forced equity would be 30k with 15k of that being out of your own pocket.

Tips on Instant/Forced Equity

I'll give a quick tip for each category of equity. There are many more, but these are tips anyone can use instantly in their investing. For instant equity the best tip I can give is to meet the sellers and get to know them. Once you have an in depth understanding of why someone is selling and what that individual or couple most needs you can often meet those needs and receive income (a drop in purchase price) for doing your job well. An example is when an older person wants to downsize and needs help moving because s/he doesn't have any family in town. By simply offering to help move this individual the seller will both trust you more and may be willing to lower the sale price of the property. Is this taking advantage of the individual? In my opinion you are doing quite the opposite of something deceitful or underhanded. You have offered a service very few others would be willing to offer (giving this individual what they believe they most need) for a price. This is simply good business, but the secret to doing great business is listening well. If you don't know how to truly listen to someone, you can never fully meet their needs.

The second tip is for forced equity. I already mentioned the cat lady previously in this post (it happens more often than you think) and how new paint and flooring can greatly help with reselling a property. Another way to force equity is doing other quick cosmetic touch-ups. Cosmetics in a house are often the biggest selling point for families who do not want to deal with anything that may require someone who is 'handy'. Other ideas: add a suite to the property, add parking stalls for a multi-unit property or add laundry or storage space all of which can bring in more money month to month as well. These ideas are off the top of my head but hopefully start everyone thinking on how to plan property acquisition in a different way. What types of property will I be looking to purchase myself? Properties that need simple cosmetic upgrades and can easily profit from upgrades that also bring in cash flow. While extremely simply, don't overlook these ways to manage risk by building equity in your property.

A quick summary of this dimension is that if you purchase a property with low demand and, for just a few dollars, transform it into a property in higher demand, you are forcing equity. If you listen to people's hearts and perceive their needs and then meet those needs, you will also be paid more for your services in the form of lower purchase prices for properties. Put in this way, rather than being deceitful or underhanded you are actually simply providing better quality business and being paid for that service.

'You Can't Touch This'

Please bring another investment class that can do what real estate can do. I actually implore anyone to find something similar because I would love to diversify in other investment classes. Yes, purchasing and selling businesses does have the same benefit, but other than business I don't know of anything else. This is an area where real estate really does start leaving other investment classes in the dust. So far I have covered 8 dimensions of real estate and, if you remember my original premise, while some investment classes can appear to compete in some of these dimensions there really isn't anything that an 'average joe' can get into with just a little bit of cash and knowledge and set up a retirement that will outdo all of their colleague's and friends' retirements by touching on each one of the 8 dimensions covered so far. This isn't even the end! We haven't covered another three that immediately jump to mind and there may be more before I'm finished this series. Stay tuned for the last few blogs in this series and go back to previous dimensions if you've missed something.


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

Vacany Insurance: The Product You've Never Heard of

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

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What is Vacancy Insurance?

When purchasing in any area part of due diligence is always to find out what typical vacancy rates are in that area. If the rates are high it means there is a saturation of supply with low demand and it may be a good idea to rethink the area you are purchasing in. Having said that, sometimes that type of area can also be a source of the best deals. If you are a really good property manager, or have one working for you, and are willing to make the property more appealing than those around it, you may have a great opportunity on your hands. In Canada the best way to check up on vacancy rates is by looking it up on CMHC. This website has a TON of information that is useful, but you'll need to learn to find and sift through a lot in order to get the most out of the site. There are some other quick checks you can do on how much of an area is purchased for rental vs. owner occupied dwellings. One app I would recommend for the quickest of checks is CIBC's "Home Advisor". This app is free for the iphone, but isn't the absolute most reliable in information. So, use it for a quick preliminary check and then do your proper due diligence on the area.

The reason you've never heard of vacancy insurance is that it isn't purchased all that often. To tell you the truth, I have no idea whether it even exists in the form other insurance plans exist. I would never purchase this for myself however, because I self-insure for vacancy risk. When a property sits empty for even one month the expense can be enormous. I'll give a typical example:

You have done your homework and have purchased a suited single family detached house that brings in about $2,300 each month and only costs you $2,100 in expenses (including vacancy self-insurance and all other expenses I've previously discussed in my blogs). Great deal, right?! It absolutely is a great deal, better than almost all investors in Canada. If this property sits empty for even one month, however, you have just gone in the whole $2,100! With an average of $200 each month in cash flow it will take almost an entire year to make that up. The way to insure yourself against this risk is by taking out a little bit of money each month so that when it happens (not if... when) you will be covered and it won't affect cash flow at all. Is this possible? Yes.

An Alternative to Self Insurance

There is always the option of simply raising rent... Isn't that a great idea? This way you will make more when the property is filled and the hit when it is empty doesn't feel so bad. FORGET YOU EVER HEARD OF THIS OPTION! The reason this is an absolutely crazy idea is that by keeping rents higher then the average in your market will guarantee you will have more vacancies. While I don't advocate charging less than market rent under normal circumstances (again, this is a topic for another blog), there is a better way ta take care of vacancies.

Two Legitimate Ways to Manage Vacancies

The first, and best, way to manage vacancies is not to have them. If the average vacancy rate in your area is 4%, you should always have a less than 4% vacancy rate, period. This should be the case if you self manage and if you hire a property manager. Demand this of your manager and then pay out bonuses for reaching that rate year after year or, conversely, penalize the manager for not reaching that rate. I believe I've mentioned this in a previous blog but it should be repeated often. I know a manager who has a better than 4 year average on a tenant turnover. Not only that, but I believe this individual rarely has vacancies when the turnover takes place. What this means for you, the property owner, is that you don't deal with as many headaches (putting new tenants into a property), as much payout with turnover (each time a new tenant comes in there is risk of more damage to the property than what the security deposit covers), or as much expense cost and loss of cash flow when there is a vacancy of one month or more. Again, this is subject matter for another blog, but there are great ways to reduce the chances of vacancies and length of vacancies. Bottom line... beat the average.

The second way to manage vacancies is to build them into your expenses. If the average vacancy rate in your area is 4%, then take out 4% of the rent for vacancy expenses. For the same $2,300 in rent that was used as the example above, $92 can be taken out each month to become your vacancy insurance. Every 2 years (25 months to be exact) you will have enough in the account to cover one month of vacancy. The way I take care of and build expenses into my evaluation of any property has 2 great advantages. The first is that I never purchase a property I can't afford. The second is that if every thing goes wrong that typically can go wrong in a property it doesn't affect me negatively because I was expecting it. On the other hand, when something doesn't go wrong (if I have 10 years of owning a property without one month of vacancy) I now have cash sitting in an account that I can use for whatever I want. This is now my bonus for managing a place well and it isn't difficult to beat the average.

A Teaser

I'll give one really quick tip on filling a property quickly and avoiding vacancies. In your lease contract you can offer an incentive for letting you know at least 30 days in advance when your tenant is leaving. If your tenants gives you more than 30 days notice you will give a discount of some kind off the last month's rent. It should be clear that your tenant must still pay the last month's rent and that this discount will not come out of the damage deposit. You can also set the date at 45 days if you would like to do so. What this does is give you, under normal circumstances, more than 4 week's notice and allows you to find a really good next tenant. It costs you nothing if the tenant doesn't give you notice (without penalizing the tenant either) and really doesn't hurt if you find an excellent tenant well before the vacancy. Also, many responsible tenants look ahead of time for a property. Finding these people early can snowball into having better tenants that do less damage, pay on time, and let you know well in advance when they are planning anything like moving out.


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

Property Management: DIY? Are You Sure?

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

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To Self-Manage or not to Self-Manage, That is the Question!

In a post earlier this week I wrote about evaluating a property with a realistic view of what actual expenses are. One of those expenses is property management and I suggested any investor always calculate what these will be and add them to your evaluation regardless of whether or not you intend to self-manage. There are a couple of reasons for this. The first is that if the property doesn't cash flow unless you self manage, it isn't a very good deal in the first place nor something you probably want in your portfolio. Secondly, and the reason you don't want the property in your portfolio, is that there will be a time in your investing career when you don't particularly want to self-manage. You may get older and want to go to Phoenix for half the year. You may get sick or have some sort of mishap and not be able to self-manage for an extended period of time (even one week can be detrimental to your property if its the wrong week), you may have so many properties in your portfolio that it is now too difficult to self-manage, or you may simply value your time more than at a few dollars per hour at some point in time. Property management can be very rewarding, but it is difficult to do properly. Let's look at the numbers and reasons you may or may not want to self-manage.

The Costs

Generally speaking the cheapest you will find a manager for a single family home is around 10% of the monthly rent without extra fees, but this is difficult to find at times. For a multi-unit property you can get as low as 4% of the monthly rent per door. The reason it is less expensive per door for a property with many doors is that the manager finds it easier to manage 30 doors within one buildng than 30 houses scattered all over the city. Know that there will most likely be expenses on top of this base price. The two most common are: 1. A fee every time tenants leave and new tenants need to be found and 2. A fee whenever the manager is called in to do anything (fix something, call someone to fix something, evicting a tenant, dealing with any difficulty at all in any way, etc.). When looking for a property manager always ask lots of questions regarding the contract and know that everything is open to negotiation. Also, have a lawyer that specifically works with real estate look over any documentation before you sign it. In summary: When you charge $2,200 in monthly rent, you will most likely pay at least $220 per month to a property manager. Sometimes this amount seems huge. For example, when the same good tenant stays in a property for 4 years in a row and never complains about anything it looks like the manage isn't doing anything, but they are still collecting rent and looking over the property, both inside and out (if they're doing their job properly). However, if you find a good property manager s/he is worth her/his weight in gold! Think about this for a moment. For a very small sum of money a person is willing to fix all your problems, deal with volatile situations, and spend hours each time a tenant leaves fielding calls. On top of that the manager is on call 24/7. That's not an ideal job in many ways. The way I see it is that if I have a terrible manager, this manager will be costing me a lot of money in my expenses because more tenants will go through the property and I'll pay more in expenses. If I find a great property manager I will gladly pay more than 10% because I will have tenants that don't cost me as much money in repairs or vacancy. One month of vacancy every year easily eats up any savings I would recognize with a 10% property manager.

Positives and Negatives

The strengths of either doing things yourself or having someone do them for you usually comes down to lifestyle. If you have the mindset that you have a ton of time and your time isn't worth very much or you simply love managing tenants (there are a few who do, myself included) then self-managing might be worth while. If you want your property to basically run itself and simply want a cheque each month, then it will be worthwhile to find a good property manager. Keep in mind that it is difficult to find a good one. Would you want to be paid a few hundred dollars each month to be on call at any hour of the day or night and deal with headaches and angry people each and every day? I respect good property managers! I know a manager whose average tenant stays in a property for over 4 years! This individual has also never had someone cost them thousands of dollars by destroying property. That's what I call a great manager. Often the biggest reason an investor is self-managing is that the property simply isn't a good investment and doesn't cash flow without self-management. This is a terrible reason to self-manage. My advice is to sell the property and use the money to purchase a good investment. If you don't know how to do that, send me an email and I'd be happy to walk you through the process no matter where you live in Canada or even in North America. One more positive of having a property manager is that if the tenant knows you are the landlord, there are ways to ask for favors. When no landlord is communicating directly with the tenant, there is a degree of separation that allows the property manager to often have a better relationship with the tenant because there is a different understanding of expectations and the property manager can always play the "I'll see what I can do for you. I'll talk to the landlord and see what s/he says".

The Final Question

The question you want to ask yourself, in the end, is this: Do you want worry free investing, or do you want a little more money in your pocket at the end of each month? If you don't believe me... own 4-5 rental properties for a few years and you'll understand what I mean. Only the best of landlords are able to do the job properly. There are often positives to managing your first property for a while to understand everything involved. Regardless of what you choose to do, make sure you are consistently purchasing property that can support a manager if needed.

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

How to Properly Evaluate Property Expenses

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

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Why is Calculating Expenses so Important?

I often mention cash flow in my teaching and writing about real estate investment (or investment of any kind) because of how greatly this one concept can reduce risk for any investor. By simply having a recommended amount of cash flow: at least $100/door, you are now in a place to weather an economic storm that hits any market. I live in Calgary where we have a very typical wave-like real estate market (sometimes called a bubble market) where house prices will rise for a few years and then fall for a couple of years with each high peak typically higher than the last. If you purchase a property just before the market falls, you will be paying money out of pocket for your investment which isn't all that much fun. If you lose your job at the same time or money is tight you may even lose your investment property. With healthy cash flow you can virtually eliminate the risk of ever losing your investment property. Each down turn in the market has hundreds of 'investors' losing their properties. While this isn't good for them, it is fantastic for me because I am able to purchase those properties at a discount and then make money from them on a consistent basis with very little risk. A key to investing in real estate is understanding cash flow and a key to understanding cash flow is understanding how to calculate real expenses (how much the property will cost, not how much you want it to cost).

One More Note on Cash Flow

There are ways to manipulate cash flow because you can affect cash flow so greatly simply by how high your mortgage payments are each month. There are realtors and investors who promote investment properties claiming they will cash flow, but once your read the fine print you find that they haven't properly calculated expenses AND that you may need to put a 30% down payment toward the property to make things work. This isn't a good deal! Yes, you can have more cash flow if you simply put up a higher down payment, but is that what you really want? Do you really want to tie up another $30,000-$50,000? Would you not rather purchase another property with that money and then have two cash flowing properties? Well... there are actually times when putting in more money up front can make sense. If you are already retired, don't need as much money, and aren't willing or able to look for a really good deal in an investment property but still want the relative safety of having a property that cash flows well, then it may be time to put 50% down on a property and make cash flow easy no matter what happens. This decision must be based on what you want from an investment property. Personally, I always want to put less money into each property so my money goes further, so it is important for me to get a good deal and have a cash flowing investment.

Expenses Most Investors Calculate

There is an acronym most investors use for the basic, more fixed expenses, every property has (unless you are buying with cash and won't have even a penny of debt). The acronym is PITI: Principle payment on your mortgage, Interest payment on mortgage, Taxes, and Insurance. These are extremely easy to calculate because you pay the same amount month after month or year after year for these costs.

Expenses Savvy Investors Calculate 

(and most investors forget about until its too late)

What happens if you are self managing your property and you get sick/injured and can't manage for a year? What if there is an unexpected expense that you can't afford like a new roof or furnace or siding after a storm? What if the rental market falls a little and your tenants leave? What if you can't fill your property again for 3 months? What if you have tenants that are rough on your property before they moves out? Is the only choice to sell the place for whatever you can get or have the bank foreclose? Pretty much every decade in Calgary sees a fall in the market. There are different reasons for this and it will be good to cover it in another blog post some time, but the fact is that when these down turns take place there are many investors that lose their properties because they haven't covered their risk. When the market is rising everyone gets excited about real estate because its a 'can't miss' investment and then when the market falls real estate becomes a 'high risk' investment. I have news for you: real estate is never a can't miss investment but, if done properly, can be very low risk. You simply need to do your homework and invest properly. The three expenses many investors forget about until its too late are: Maintenance/repairs, property management, and vacancy insurance. If you consistently save for these three expenses in a bank account set apart for your investment properties this account will act as a reserve fund that you can always dip into in order to cover the expected costs you knew would come up even before you purchased your property. I will be writing blogs throughout the week covering each of these three expenses in further detail including how to calculate these expenses accurately, so stay posted.

A Reserve Fund?

Yes. A reserve fund. If you always have a reserve fund you won't be worrying or losing sleep because of the current local economy or a tenant leaving in the middle of a busy time for you (remember Murphy's law). The beauty of a reserve fund is that, once you own a few properties over a few years, you will get to know how much you need for each property as well as for your entire portfolio and the amount you need will go down (on a percentage basis) the more doors you own. For example, many experienced investors encourage new investors to set aside1% of the cost of every property they purchase while others may set aside $10,000 for one property, another $5,000 for the next property, and maybe just $1,000-3,000 for future properties or they may even stop putting new money into the reserve fund when it reaches a certain amount.

When Should you Calculate Expenses?

At the end of each year in anticipation for the following year? What about after you've purchased the property and want to know how much you will need to run this like a business? I suggest, actually implore you, to calculate these numbers (even if its simply an estimate) before you even put in an offer to purchase on the property. The reason I strongly suggest this due diligence is that if you don't have a good idea of your expenses before you purchase the property you also will have no clue as to whether it even comes close to cash flowing. This is part of due diligence on the purchase of a property and is called property evaluation. Once you are good at this you will only need about 30 seconds to to a quick evaluation in your mind to know the basic expenses. If you know the area you are investing in fairly well, it will take another 2 minutes to evaluate whether or not this property will cash flow with the rent it will bring in. When I come across a property in Calgary, even without knowing a particular area intimately, I can use my computer and figure out a basic idea of how much it can cash flow for within 10 min. If it looks good I move to the next step in the process. If the numbers don't work I move on to evaluate the next deal and don't waste any more time.

Here's to a profitable year in real estate investing for 2014!

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

Entering a New Year

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

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What is Success?

Many successful real estate investors and business people with tell you the number one secret to success is simply pushing through and striving for your goals when it's most difficult. I've heard it said by an individual who studied the most successful business people in the US for 25 years that often the difference between success and failure is a few steps and that many unsuccessful individuals would have succeeded if they would have pushed through just one more barrier (Napoleon Hill). True failure is not having an unsuccessful attempt, or even many, but rather getting to a place where you no longer try. True success is not a certain dollar figure or attaining anything else of status, but rather accomplishing what you have set out to accomplish.

An Example of Success

The person I am going to talk about here was truly incredible (yes, incredible means hard to believe). He grew up in Eastern Europe in the late 19th century at a time when electricity, while understood on some level by academics, wasn't accessible to the general public (there was no electric lights at night). When very young he dreamed of an entire city being powered by electricity coming from an unlimited source and worked toward this in his younger years. I would recommend anyone watch the documentary "Nikola Tesla - Master of Lightning". It is older, but fantastic at showing many of the struggles Tesla encountered that would have stopped almost anyone else, but he pushed through and became one of the greatest investors in history. Alternating Current energy, Radio, and the dream of offering free or, at least, extremely inexpensive power to the entire world was Tesla's dream. So great was his desire to help people that he saw Radio waves as an opportunity to give energy to others rather than simply information. You could also Google Tesla's inventions to see some of his other ideas. The main point I would like to bring across in this blog is what Tesla had to go through in order to reach his dreams; succeed. He was called names, cheated by Thomas Edison (who also spent a great amount of money lying about Tesla and his invention of AC electricity to the public in anticipation of the first world fair that would be lit up at night), and generally seen as a nut job by many. At the end of my life I would gladly be commonly called completely crazy if that meant I thought outside the box enough to help others and become successful (which is definitely outside the norm). Tesla was crazy because he didn't fit the paradigm of most other people. Anyone who isn't 'normal' (people who spend more than they earn, have broken relationships everywhere around them, and consistently fail to meet their own expectations of themselves to the point where they give up having exciting goals and something to look forward to in the future) tends to be looked at with disdain for reasons I won't go into here. I delight in the fact that I'm different than the norm and would encourage you to start thinking differently as well.

What Can I Do This Year?

I'm not big on New Year's resolutions and never have been. Something about doing the same thing as everyone around me has always contained an element of normalcy I desperately attempt to steer clear of. Being the same as those around me or thinking the same as those around me isn't what I've ever wanted. I've always wanted to be different. However, I've always set goals for myself and worked toward those goals. I do this throughout the year and really take my time thinking through them. Below is an idea to help anyone wanting to begin working on having a different mindset start this year in a different way.

If you want to think differently you must ask yourself: Who am I spending most of my time with and what is the effect of being around those types of mindsets? Who in my life should I be spending more time with? Who is successful in some way and has a positive mindset that can rub off on me? It is true that we are influenced by those we spend our time with whether it is our spouse, our best friends, or our coworkers. To find someone positive it is a good rule of thumb to look for someone who knows who and invests in you without judgement. If it is a person who makes you feel terrible, that's not the right person. On the other hand, if there is someone who simply tells you want you want to hear every day and you know it's false, that person isn't the right type either.

Next, attempt to spend more time with that individual or those individuals. To make room for this in your schedule you most likely will need to also ask yourself: Who should I spend less time with? Who is the constant downer whose negativity always drains you of energy?

Don't get me wrong here. I'm not telling you to stop spending time with people that can learn from you or you can help. There should always be a balance of people who invest in us and those we invest in, but make sure it is balanced rather than sacrificing yourself, which ultimately hurts everyone around you (think about the flight take off spiel "always put the oxygen mask on yourself first so you can help others). We are less helpful to others if we are extremely unhealthy ourselves. I'm simply suggesting you change one significant relationship in your life and see what happens (It's magical!). After you notice the difference, imagine if there were 4-5 positive people in your life!

Happy New Year!

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