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

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

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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