Continue reading »]]> I’m not a big fan of REITs. Many people think that investing in REITs is the same as buying properties without the headaches of having to deal with tenants, banks, etc. The returns seem to be pretty good, when compared to stocks, or GICs but, in reality, the owners of the REITs are making a killing off of you.

Let’s look at a worst case scenario. You decide to buy a property for $100,000 using the method I describe in my book (Total amount invested, $0) and rent it at just enough money to pay the cost on it for 20 years until the building is paid off and you want to retire. Let’s say the bottom falls out of the market and the price of real estate drops by 50%, so you only generated $50,000 out of thin air. Infinite return on investment.

With a REIT, you invest physical cash most of the time, and generate 10–15% return right now. What happens when interest rates increase? The costs to operate the REITs may increase. Do you know if they bought good cash flowing properties originally, or were they cash flow positive because the interest rates are so low? Do you think they are going to cut their MERs? What if the real estate market crashes by that 50%? say goodbye to half your investment.

There are many deductions you can use if you buy real estate to minimize your taxes. With a REIT, the REIT gets the tax benefits, not you. These deductions can significantly increase your returns or, in the case of a REIT, hide your profits from investors.

There is the liquidity factor to consider I suppose, but if the REIT is doing poorly, you’ll still sell at a loss just like owning a house.

Finally, we have to consider the likelihood of fraud. The REIT, especially so-called private REITS, by their nature seem ripe for being a Ponzi scheme. I’ve watched a lot of shows on fraud, and many of them involve private, non-liquid, REIT-type investments. Remember, you are dealing with a lot of money. Suppose you gave me $100,000 and I promised to give you a 10% return, but your money would be hard to return as it was tied up with illiquid real estate. I could give you a 10% return ($10,000/year) using your own money for 10 years before you’d even know I never bought anything. Now imagine how long I could go if you convinced your friends to invest, and I had millions flowing in each year…Ponzi scheme!!!

You may think you’re safe if you stick with publicly traded REITs, but even big publicly traded companies can be fake when it comes to large sums of money…Think ENRON, Worldcom, etc.

Control is the key I think. When you own physical real estate, you are in control of what you do. From what you originally pay, who you have paying for it, what you do with it, etc. You also get the most benefits from all the rules and regulations. Once you give up control, you have to trust others to work in your best interests…something that is unlikely to happen if it conflicts with what is in their best interests.

Lesson: When you give up control, you are likely to pay dearly for the “benefits” of having others do the work for you.

Continue reading »]]> There are many ways you can have your tenants pay rent. In my book, I covered many of the basics but, over the past few years, I’ve developed my new favourite method of payment the INTERAc e-Transfer.

The INTERAC e-Transfer is basically an electronic money order that comes right to your email account for deposit. Anyone who does on-line banking can easily set it up and transfer the money to anyone with an email account. Some banks charge a minimal amount as a “service fee” to do the transfer, but it costs nothing to deposit. The sender enters a password which allows you to deposit the money (I usually have them send it in a separate email or text).

The best part is, unlike a cheque, you know the money is there (the transfer can’t bounce as it can’t be created if there are no funds) and everyone has proof of payment as a receipt is emailed back to the sender once the deposit has been made.

The only drawback is you still need to deposit the money into your account, which can be done from anywhere you can access the web, as opposed to being automatically deposited, so it’s not all that bad.

I’d highly recommend you encourage all your tenants to adopt this method of payment.

Lesson: There are many ways to receive the rent from tenants with more coming out all the time, INTERAC e-Transfers is one of the best to come out in the past few years.

Continue reading »]]> I realize it’s been a while since my last posting, but life has a way of getting in your way. Hopefully, I’ll get back to a more regular posting schedule soon, but then again I may run out of things to say…

Recently, I once again had to go through the eviction process. This was one of the rare ones where I needed to go all the way to a hearing (it usually doesn’t go that far) and it reminded me of the importance of documentation.

The courts love documentation, I swear they live off of paper and, fortunately for them, money is printed on paper. Without proper documentation the landlord, who has very little power in the first place, can find himself unable to prove his case. Here are a few things to document and ways to do it.

1) Document Payments

Set up a spreadsheet which has the date (with year), a description of the payment/charges, the amount, and the total. For example:

Date                     Description                                         Amount                Total Owing

Jan 1, 2013        Rent                                                    $1000                    $1000

Jan 2, 2013        Payment                                             <$1000>              0

2) Document Notices

When ever you need to officially communicate with your tenant, do it in writing. If you own a condo, and they send out notice, you need to duplicate it. The courts don’t recognize notice from a property manager to a tenant as being from you, it is between the property manager and the tenant, not between you and the tenant. So, this means if the tenant does something eviction worthy, but was only notified from the property manager, only the property manager has the evidence to evict (meaning they would have to do the eviction, which is much harder). You producing the notices which were ignored is meaningless to the courts. Remember to also document how you notified the tenant.

3) Document Condition

When you first rent a property, take pictures and write a description of the property in a report (include the pictures). Make sure the tenant signs the report and initials each page. This report will go a long way when trying to prove damages in the future.

4) Document Conversations

Many disputes arise over verbal disagreements. It’s good to keep a log of every correspondence you have with your tenant. For example:

Date                     Time              Description                                                      Action Taken                Resolved Date

Jan 1, 2013        10:00 a.m.     Call from tenant about toilet leak                Will Call Plumber        Jan 4, 2013

Jan 1, 2013        10:07 a.m.     Called Plumber Booked for Jan 4/2013    Inform Tenant              Jan 4, 2013

Jan 1, 2013        10:20 a.m.     Called to inform tenant — no answer                                                  Jan 4, 2013

Jan 1, 2013         11:00 a.m.    Called to inform tenant — no answer                                                  Jan 4, 2013

Jan 1, 2013         3:00 p.m.      Called to inform tenant — no answer                                                  Jan 4, 2013

Jan 2, 2013         11:00 a.m.    Called to inform tenant — informed                                                     Jan 4, 2013

Jan 4, 2013          9:00 a.m.      Met with plumber, issue resolved                                                     Jan 4, 2013

Jan 29, 2013       8:45 p.m.       Tenant sent email — rent will be delayed until Feb 2nd

This kind of detail, though annoying, can show that “unresolved issues” or complaints from your tenant that you never do timely repairs, are false. Remember, when there is a problem, time to resolve it seems to triple. I had one tenant who said I took months to fix an issue, but when we looked at the documentation, it turned out to be a little over a week because of a long weekend.

Now, you should also consider ways in which you can provide notice. The court is very picky on how you can inform people, so lets look at a few common ways.

1) Hand them the notice and get them to sign a receipt or copy/Registered mail

This is technically the best way to do it, as there is no grey area. Of course it’s also the most inconvenient, and annoying.

2) Posting

Technically, you should first attempt to physically deliver them the notice, but posting it or leaving it in their mailbox is usually considered acceptable. Of course, you should document how you delivered the notices.

3) Email

Emails are recognized by the courts rather reluctantly. If the tenant responds to it then the courts prefer it as it proves they read it. Of course, you need to print them off to show the court.

4) Text messages

The courts really don’t like these. Most people don’t know how to print off their text messages in the first case (and few judges are willing to look at a phone), and unless they are printed the courts won’t admit them. Next, even though they are dated, their short postings don’t convey enough information. Don’t rely on this method.

Lesson: Let’s face it, documentation is a pain in the butt. I hate it, you hate it, but the courts love it. You may think it makes you look anal, but doing proper documentation can really save your butt in the long run.

Continue reading »]]> I was having lunch the other day with a friend. We got to talking about our kids and his son, who is about to enter university is contemplating careers. One of the things his son was thinking about was becoming a professional real estate investor.

Ultimately, it sounds like the dream career…not a lot of work, stable income, etc. Except, in reality, it’s not a business you can easily “Break into”, unless you are already wealthy.

Banks won’t lend you money unless you have a track record, and a decent income. The father thought about partnering with his son to get him started, but even still this probably wouldn’t work.

I have friends who managed to start investing right out of high school, all of them had other jobs as well.

To become a professional real estate investor takes time. You should slowly acquire properties to begin with, learning how to pick properties, screen tenants, find contractors, etc. Investing is a skill that needs to be developed. When you start, you need to re-invest the profits to maintain or expand your holdings, you can’t live off them.

If you try to “Go Big” from the start, you can get into a lot of trouble. Let’s say you buy an apartment first thing instead of a small house, condo or apartment suite, do you know anything about boilers? Tar and gravel roofing? Can you afford to replace them if required or are you maxed out on credit? Ever managed large groups of people?

The next issue becomes the “partnership”. The father is probably thinking about retirement soon, the son would be thinking about expansion…one would want the passive income to provide for him, the other would be wanting to reinvest the profits to buy more. If there are other siblings, it can cause issues as well such as hard feeling about favoratism or estate issues. Overall, family and money usually causes hardship, though most of the time it’s unintentional.

So, my advice, go to school, learn something that will provide you with an income, and evolve into a professional investor. At worst, you’ll have something to fall back upon if you find you’re not cut out to be a landlord.

The nice thing about evolving into an investor is that it gives you the freedom to walk away from the job you may be in and hate. Passive income means you get paid regardless of your working.

Lesson: For the most part, being a professional investor is the goal to strive for. However, because of the high entry point, you should invest in an education and find a regular income source first, and evolve into the investor.

Continue reading »]]> Well, we’re getting close to that time of year again where taxes need to be filed and paid. If you own any business or real estate, you don’t really get to keep any more money than if you earned a paycheque. Money doesn’t seem to work that way.

There is one difference though between being an owner and being an employee, you get to control where that money goes. For example, if you are a business owner, you can hire and pay an accountant (let’s say $1,500) to do your taxes instead of giving the government $1,500 in taxes. These are what we call deductible expenses. Either way, you have to give up the $1,500, but one way saves you time and benefits you directly, the other one goes out of your control and the benefits may be harder to see…did your money go to improving the roads, or to someone’s questionable expense account?

I’m not going to cover tax tips for businesses here, there are too many variables depending on the industry, and there many variations in the tax code. For example, if you have a stable for race horses, you are considered a farm and benefit from farm credits, but if you have a stable to teach students to ride horses you are not.

Real estate is much more clear cut, if you want to know what you can deduct, take a look at this page…

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/bt/rprt/xpns/menu-eng.html

Lesson: You never get to keep more money it seems, but it’s probably in your best interest to control where you send your money. If you’re an investor or business owner, you can.

Continue reading »]]> I was having lunch the other day with a friend and we were discussing real estate. He knew a guy who had a high-end place which he rented (furnished) for around $4000/month, I believe he paid somewhere around $500,000 for the place.

It turned out, that this guy has, shockingly, the same problem with tenants that everyone else does…you can have good or bad ones. He’d just had a bad one and had to do $20,000 of repairs to his place.

Now, I’d never buy a $400,000 property to rent out personally. I think it’s too high of a risk. Since we are both investing in the same city, let’s look at renting at the lower end of the scale to compare…

I’ve recently acquired a few places in the $60–75,000 price range. They are renting for about $1,100–1,300 range. So, to bring in the same $4,000 as the other guy, would only cost around half the amount or, given the same resources I could potentially bring in around $8,000.

Next, let’s look at vacancies…when the high end place is empty, revenue stops. The odds of 3–8 places all being vacant at the same time are lower (though it does happen), so you should always have at least partial income.

Then, let’s look at repairs. While you have more places which could be possibly destroyed, the costs to repair would be significantly less.

Finally, let’s look at the impact of the economy. In a good economy, the high end places are usually rented with reliable tenants, while the low end places tend to have the lower quality tenant. If, however, the economy turns south, what happens to the high end renter? They still need to live somewhere, but they tend to downscale…meaning the high end place will be vacant, but the low end places will be in demand from a better quality of tenant (not the high end people, but the ones that downscaled from the mid-level places). All in all, the place will usually be in demand and rented.

This isn’t slum landlording we’re talking about, but I do see the benefits of catering to the people just starting out, on a fixed income, etc. The high end places may make you feel more successful, but the lower end of the scale makes better business sense.

Lesson: Don’t let ego get in the way of business.

Continue reading »]]> The secret to a good relationship is not trying to change someone. People don’t change. Many a marriage have ended because people thought they could change their partner.

The same thing goes for the landlord/tenant relationship. Once you’ve don’t your tenant screening, you have to accept them for who they are. If they are messy, or have bad habits, you won’t be able to change them. Accept them for who they are.

What you always hope for is the “perfect” tenant who will take great care of your place. If this is your expectation going in, you’re sure to be disappointed. While I personally strive to find such tenants, I’ll settle for a tenant who doesn’t destroy the place.

I’ve known other landlords who try to evict their tenants because they don’t live up to their standards, but if their parents couldn’t make them do it, what makes you think you’ll be successful? I’ve got 4 kids of my own, and I can rarely get them to clean up their rooms or even get the dishes to the sink…what chance do I have with someone else’s child?

As long as you don’t have a hoarder, or someone doing damage, you really need to accept their lifestyle. Don’t be surprised if they drink, use illegal drugs recreationally, are messy, or whatever. They are not unique, most people have done the same things.

If you can’t accept people for who they are, you shouldn’t be a landlord. You need to be able to separate your emotions from the business you are in. Your business is providing shelter, not raising tenants. As a businessman, you should plan on the idea that people are not going to treat your property as their own, repairs are going to be needed, painting highly likely. Factor those costs into your rent and don’t be surprised when it happens, if it doesn’t be pleased.

Lesson: Worry about the things you can control. Concentrate on screening, but accept what you’ve got, you won’t be able to change them.

Continue reading »]]> One thing you need to consider when you become a landlord, is the inevitability that one of your tenants is going to die.

This isn’t something that you’ll read about in any book, heck I forgot to mention it in my own book, but with more and more properties, the odds of it happening will increase.

It is not something limited to elderly tenants, a few years back one of my tenants in his early 20’s was killed in a snowmobile accident. Death can happen at any age.

A normal death can cause plenty of headaches for the landlord. Rent won’t be collected on time, stuff has to be stored etc. Not to mention the grief you’ll feel and the grieving relatives you need to deal with.

However there can also be the messy suicides or murders to consider. While these are rare, they are something you may need to deal with as a landlord.

If you are not prepared to deal with death, it may be best to avoid being a landlord and stick to other forms of investing which don’t deal with people.

Lesson: Investing in real estate is not just about profits, it involves real people and that brings some problems associated with people that you don’t get with other forms of investing.

Continue reading »]]> When dealing with renters, it may be tedious, but keep a log. Go pick up a hardcover, spiral bound notebook, one for each property. Organize a shelf for easy access.

Whenever you correspond with a tenant, for whatever reason, note the entry in the log with the date. Then note what action you took.

If you want to be thorough, your log may look like this:

Dec 1, 2011 - placed an add on kijiji
Dec 2, 2011 - Showed to H. Keller — showed up on time, made good impression, filled out application
Dec 2, 2011 — Showed to T. Bundy — was late, nice guy, but something doesn’t feel right, filled out application
Dec 2, 2011 — Showed to H. Lector — Didn’t show up, when called tried to rebook
Dec 3, checked references for H. Keller and T. Bundy, both clear, preferred Keller
Dec. 5 signed Lease with Keller move in date Dec. 15.
Dec. 15 payment received, key exchanged, walkthrough done need to replace a light switch cover.
Dec 16 replaced light cover
Jan 2, payment received
Feb 1, payment received
March 1, called about dripping tap, called plumber had him book an appointment.
March 3, plumber fixed leak
April 1 payment received
April 5 email from Keller — will be going away for a week
April 7 noise complaint from neighbours Alerted Keller by email

For the most part, this log will be quite boring. That being said, reviewing your log can sometimes turn up interesting trends which you may not notice when you start owning a lot of properties.

For example, I tend to have to replace or repair things in my units all the time, when you have a lot of places, things break down and it’s part of the job. One time however, I noticed that my annual repairs, while not actually increasing in number, were mostly being done at a single unit. In a relatively short time I had replaced two appliances, repaired plumbing in both the kitchen and bathroom, called in a furnace repair and a number of other issues. Most of these repairs were done on relatively new equipment. Something was fishy, it’s nearly statistically impossible for all these repairs to have been required under “normal wear and tear”. Seeing this trend alerted me that I needed to be more aware of this tenant, and watch to see if I had a real issue or if this was just a statistical anomaly.

In other instances, a good log will help resolve disputes. If a tenant complains that you are slow on repairs, you can pull out the log book and see when the problem was reported, what action you took, and what the results were. Memory has a funny way of changing when there is stress. I’ve had tenants say “i was waiting days for that repair” when it turns out they reported it late on a thursday, you called the repair company friday, the tenant was at work when the repair people called and didn’t get the message until they got home, which was after hours. The tenant then contacted them on monday, booked the access for thursday, and had the repair done. When you show them the true events, it’s hard to blame you for the delay (though they still will).

Log books can be even more efficient, ledger books are good. Then you can create columns that show quickly if followup is needed, if important dates are coming up etc. It’s not needed, but the more organized you are, the easier life will be when that problem or dispute arises. Also, never erase e-mails, text messages or other forms of communication between tenants. Print them off and paste them into the log book.

Lesson: Log books are great for when there is a problem, a little work today will save you headaches in the future.

Continue reading »]]> Last year, I wrote about how you undergo appealing the tax assessment of your properties in The Appeal of Taxes.

This year, I got my assessment for the two units, and the city raised their values by a staggering 80%. Well, as you can imagine, I was on the phone to the city right away (especially as I expected them to go down a further 20% from the amount we had settled on last year).

Well, I got some good news and some bad news. The good news is, the city realized that the values are way too high unfortunately, they may not get around to readjusting the valuations until after the appeals deadline. This means I need to file an appeal and pay the filing fee.

I usually find it better to negotiate a settlement than to go through the appeals process, even if the assessed value we agree upon is higher than what I’d win at the appeal.

The reason for this is, I have to pay the appeal fee, which isn’t refunded, I need to pay for parking while at the hearing, and I need to pay for my time. In most cases the savings from an agreement are better than filing the appeal.

Here are a few sites which may help you with appealing your evaluations:

Calgary: Free search but only personal assessments, plus paid for search for businesses at assessmentsearch.calgary.ca/login.aspx

Edmonton: General assessment and neighbourhood information is available at edmonton.ca/for_residents/services/service-my-property.aspx

Vancouver: Sale price of similar houses in the immediate area, assessed value and even the number of bedrooms and bathrooms at bcassessment.ca. DEADLINE JANUARY 31, 2013.

I’m hoping that the assessor has time to review my building before the deadline, otherwise I won’t know what their new valuation is and have to file an appeal, meaning I need to get at least the filing fee back on top of an expected reduction (less likely).

I’ve got a list from my realtor of the sold prices for every unit in the building, so I know, and am armed, for getting a good reduction…

Lesson: you may get a bigger reduction by gong to the appeal, but will you really be saving over a negotiation?