5 year plan

[rogerl]

Hi, I am trying to see what I can accomplished in the next 5 years. The goal is to acquire as much rental units as I can during this time.

Here are the constraints.

1. Start with 2 single units (one at a time), probably row house or semi-detached, freehold. After that I am open to plex under 5 units.

2. I have $100,000k now.

3. I want low risk in terms of leveraging so I suppose 20% down (please validate this).


For this discussion to keep things simple: Ignore current state of cycle and economy and assume flat market with interest rate that begin raising in 2013.



How would you go at this, the plan is to start with a tenant, learn and move on to eventually own 10 doors.



Here is what I came up with, is this all I can do, on my own?

year 1, buy a unit around $180k, cashflow $1400k a year.

year 2, buy same type

year 3 refinance 1st property to 20% and buy a 3rd property (this requires about $6k additional to our original $100k (we have emergency cash on the side throughout this scenario).


Then... I am stuck here for a while as I no longer have enough money to buy anything else...

So, what would you do? or have done differently? I wait for the market to move up (hopefuly), sell with profit and start over?


Thanks.

 

[Thomas Beyer]

Plans mean nothing. Planning is everything.

So the process of thinking through the issues and options is good.

20% down is not low risk. It is high risk. 35-50% down is low risk.

Refi in 2 years makes sense only if you did substantial upgrading to property and/or value is substantially (say 30%) higher. Otherwise, plan no refi until 5 years from now.

Be flexible. A lot can happen in 5 years. The third property could be a combination of your own cash and cash from grannie, dad, uncle or brother. Read my blog entry from Oct 2009 on how to get started.

 

[rogerl]

Thanks for the info.



... so 35 to 50% is low risk.


That simplifies things a lot as it does not leave much room for anything. Buyt 1, maybe 2 properties. So I guess I will use all of the $ on down the down payment(s) and during this time I suppose I would make any additional payments I can to reduce interest.



Without me adding anymore of my money, a new property would only come from selling one or both of these, otherwise I will be sitting on these for years, like 10. I suppose that is what you get for low risk.

 

[invst4profit]

With $100,000 I would start with a multiplex to reduce your risk. The greater the number of doors the less the downside when you have a vacancy. Multiple tenants under one roof is usually less expensive than maintaining multiple buildings. Make sure you only buy a multi with separate metering of utilities. Do not rent inclusive.

Single family homes are the most difficult to cash flow.

You can easily buy a 3-4 plex with $100,000 down that should cash flow nicely if bought right.



What province are you thinking of investing in? Out west I would hope.

Are you looking at investing in a large city or small? Will you self manage or are you a arm chair investor?

 

[Thomas Beyer]

Interest payment is not the biggest issue. The biggest issue is keeping the house occupied and Appreciating. DEpreciation and vacancies is where the biggest risks lie ! You make the most money buying the ugliest assets. So to buy more than 2 houses with 100,000 you must buy ugly in a decent area, then improve the asset, then refinance. This is far more work but will allow you to own more than 2 assets, say 5, in 5 years with 100,000 .. One a year ! Money comes in two flavours: green $s and blue $, also referred to as sweat equity. If you only write green $ cheques but little blue $s you will end up with less real estate.

 

[rogerl]

The location is Ottawa-Gatineau. A triplex was my first choice but I could simply not make sense of these units, turning out to be 4 or 5% cap rate, some worst than that. Also, they are very rare, which probably explains the rediculous prices. So I gave up on these and decided to go for smaller houses.

I would self manage, my father used to own appartments so I can do mostly everything.



You are right for the sweat equity, but there is a limit to the amout of fixup/renos I wanted to do. But you make me realize that I should give it another thought to start off.



It's funny because many books I read talk about the fear factor, or analysis paralisys, and only now do I realize it's true. The state of the economy is holding me back. As well I think we are at the end of the boom, but I'm not sure of this. So I am tempted to wait to see what happens... yet I beleive the area is strong and will continue to grow. And meanwhile I have $100k sleeping, losing value.

 

[invst4profit]

Keep looking. There are always new deals around the corner.

I would not recommend going across the boarder but would suggest you move outside the city to find a deal keeping in mind the lower the rent the lower the quality of tenant. Never rent to anyone on government assistance.

I would also strongly recommend you study up on the RTA before you buy. Sign up on the OLA for Ontario specific advice.

http://ontariolandlords.ca/forum/



The business environment for landlords in Ontario is not promising and will likely only get worse. As a result we are going to have to tighten up our business practices in order to survive. Tenant selection is one area that requires very special attention which once again is why I strongly suggest staying away from single family homes. They are very often targeted by professional tenants. At the very least the prime clientele is usually young families which in our economic environment is most in jeopardy. Consider whether you are up to evicting a young family in the dead of winter with no money and no place to go.



Hold out for a multiplex.

 

[Alvaro Sanchez]

Yes, in Ottawa is very (very) rare to find something greater than 6% unless is really UGLY.... The only place that have such caps is Vanier but you will be dealing with ugly properties and challenging tenants or go outside the city (Rockland, Cumberland, Carleton Place, Cornwall, etc.).



That 100k would work harder for you in Gatineau. I have most of my rentals on that side.

 

[invst4profit]

Alvaro do your tenants work in Ottawa of on the Quebec side.

What is the tenant base like in Gatineau. Are they good tenants or the "I know my rights" types.

 

[Alvaro Sanchez]

Most of my clients work on the Ottawa side about 90% the rest are in Quebec (Government). In general, most of the people in this country are nice and easy to deal with.

 

[TodorYordanov]

[quote user=invst4profit] Never rent to anyone on government assistance.










I am intrigued as why you are saying Never. Can you explain?

In Hamilton a lot of potential clients are on some sort government assistance and some of them are good tenants. But the filtering process must be very good in order to weed out the the potential bad tenants.

 

[2ndstory]

That's also a good question. I don't rent to anyone on assistance at this point, but I haven't ruled it out. Cheques come straight to you from the gov't. I've also heard of some programs where they do all the maintenance and management of the property for you and you just receive the cheques. You don't even deal with the tenants. It is somewhat intriguing.



I value Thomas' experience and wisdom with all things real estate, but 35% to 50% down is just not realistic for most people starting and building a portfolio. I generally do 25% and feel comfortable with that. I also purchase buildings where I can increase their value with some sweat equity.



Nik

 

[MarkHealy]

Just to address those on government assistance. (a little off topic)



We know that there are a variety of reason people need assistance. Some are just down on there luck but others have some serious problems in the past. I'm all for giving someone another chance to get themselves back on there feet and have done so repeatedly. Now government or NGO assistance has some strings attached. We have had organizations place tenants with us and its all rosy at first. Then the tenant has a relapse and the Organization says "they are out of our program you will have to collect rent from them directly." At which point you realize the only reason you rented to them was they were backed by the Organization because the tenant didn't qualify themselves.



Thus I wouldn't say NO to government assistance but ask yourself "does this tenant qualify on there own if they loose the assistance"



You might find yourself trying to collect and then evicting these tenants when things go badly. We have, repeatedly.

 

[invst4profit]

Those on welfare are a extremely unstable group. Realistically there is a certain mentality of those on welfare which contributes to a high risk factor. It's all about the numbers and frankly in Ontario the numbers are very bad. A welfare recipient can milk a landlord for 3-6 months free rent and walk away scott free. Untouchable.



They are supported by a free legal system which works to the disadvantage of any landlord.

Some landlords believe they are guaranteed rent payment directly from the government. This is not true if a tenant cancelled this direct payment there is nothing a landlord can do to reinstate the direct payment.

In addition the government refuses to assist landlords having tenant issues preferring to avoid and deflect responsibility back on the landlord for having not thoroughly screened.



However the biggest reason not to rent to those on welfare (or ODSP) is because there is no way to collect monies owed from them. Legally they are untouchable because you can not garnish there income. Every individual on welfare knows they can never be held responsible for there debts.



In this business the first step in screening is to determine how you are going to get paid rent owed. You can not do this with welfare recipients if they turn bad. In addition the vast majority of recipients have very poor credit.



Obviously if you are renting a low end property you could accept a welfare recipient that had good credit but still there life style is risky and should be avoided by landlords wishing to protect there business interests.



For me it's business first, people second, when it comes to screening. I will not take risks if I do not have to and personally I do not have to.

 

[Rickson9]

Speaking for myself, I find it difficult to make a 5 year plan. However this is because my investing methodology and personality is based upon what the market gives me - not what I want the market to give me. I may want to accumulate Canadian RE or U.S. stocks or whatever, but if the market doesn't give me that opportunity I will do something else.



My opinion and perspective. Only applicable to me.



Best regards.

 

[kfort]

[quote user=invst4profit]. I will not take risks if I do not have to and personally I do not have to.





I like this statement. In general, increased risk should bring increased reward.... is there increased reward here?

 

[invst4profit]

Renting to those on welfare has higher risk, much higher risk, with no greater reward for having taken the risk.

We all know the importance of screening but do we all consider the ability to collect monies owed when a tenant stops paying as part of our screening process. Ask yourself can I collect.

I believe too many landlords have the "it won't happen to me attitude" when renting to this demographic. It does happen, all too often in Ontario, especially in areas such as Barrie and Toronto where Poverty Pimps are manipulating the tenants for there own personal gains. The same welfare recipient tenants are evicted over and over again because landlords are not screening them out as part of there regular business plan.



There are some good reliable individuals on welfare ( there must be at least one) but for me the risks are too high to take a chance on any of them when considering a new tenant.



I have personally screened many applicants on welfare and ODSP and every single one has either lied on the application or lied by omission. Every single one because they all have substandard social standards or life styles or excuses why the world has done them wrong. Headaches I do not need.