Searching for Answers to Current Economic Conditions & Basic Real Estate Investment Questions

[VicInvest]

Greetings to you all.

I am new to property investment and I was told that this blog is a great place to get answers. I am looking for the where’s and what’s for finding investment properties.

A bit about me;

At present I am working in Alberta and I should qualify for a mortgage of around $360,000. I have around $100,000 that is liquid and I own a house on Southern Vancouver Island that is paid for worth around $600,000. I plan on resigning from my job in the New Year and moving back to BC. I have ambitions of acquiring a rental a property before I leave my job because I’m guessing that once I resign I will not qualify for a mortgage?



Here are my questions;

1. Should I wait another year to buy a rental property when I am back in BC and working again or should I jump on buying a property now?

2. For the amount of money that I have to work with what kind of property would be best? Duplex, Condo, etc.?

2. What towns or cities offer the best ROI? I know Alberta was a hot spot but given the unemployment turmoil created by the fall in oil prices are Alberta towns still the best place? I am open to investment in BC, Alberta, and Sask..

3. Is MLS.CA a good place to find good cash flowing listings?

4. What mathematical formula should I use to measure the profit on a potential income property that I might want to buy? ROI? Cash on Cash? etc??

5. What % of profit should I expect on the cash flow and or return on cash invested?





I realize that this is a lot of questions to ask, so thank you very much in advance!



Best Regards

VicInvest

 

[Thomas Beyer]

Cash flow is a function of net operating income of the property (NOI) and the amount of mortgage or leverage. As such, decide what you want: cash-flow or higher 5 year ROI. More on this here on a fictional $1M invested: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

A thread on a similar topic "how to get started" is here: http://myreinspace.com/threads/to-buy-my-first-home-or-buy-investment-property.33109/

Condos generall make a poorer investment choice than houses, duplexes, apartment buildings or mobile home parks as they have less upside potential and higher and less controllable costs (aka condo fees). As such, I'd start with a small house, townhouse or duplex in any city with upside and in any neighborhood that is desirable. MLS might give you some ideas of price points, but of course there are other sources. Are you a REIN member ? REIN provides you with the basic education (for property selection, area selection, property management, tenant selection, financing, smart renovation techniques ..) and motivational environment for success !

Assuming you live in BC soon I'd start there, and not further afield such as volatile AB, such as Nanaimo, Surrey, Maple Ridge, Abbotsford, Langley, Delta or some interior towns. Of course you can also buy dividend paying stocks, REITs or invest with others that have expertise. Many options exist too numerous to mention in a short blog post.

Start now. Prices will be somewhat higher next year, but don't rush as it won't be all that much. Many folks have lost a ton in the rushing mentality. I elaborate on that - and many other topics such as how to get started - in my book.

 

[RyP]

I'd suggest first investing in Edmonton's ACRE event happening in October. It opened my eyes to a whole new world of real estate investing and brought clarity to my investing goals. I hope it does for you what it did for me.

http://s.reincanada.com/www/store/detail/Edmonton-ACRE-Live-Program

 

[bb2]

I have been investing in Alberta since 1982 and have been through many ups and downs. This is the kind of market we have here. I invest in Edmonton and it's been very good to me.
My advice:
- buy for cash flow at least in the beginning (ie suited properties) not condos
- keep active with your REIN membership
- don't be afraid to take action
- ask for help (if you find a deal run it by the REIN office or message me)
- I agree with Thomas - start now but do your homework

 

[Matt Crowley]

Greetings to you all.
4. What mathematical formula should I use to measure the profit on a potential income property that I might want to buy? ROI? Cash on Cash? etc??

^^ Great answer above.

I'll just approach #4 that you identified here. The short answer is that you shouldn't use any one formula to measure profit. Any one formula used alone is extremely dangerous. Personally, I think ROI is probably the worst measure of return.

ROI = cash returned / cash invested

If I lever my property up to 95% financed (eg. personal property, lived in for a year, turned into a rental). Now I take my LOC and pay myself back so I am only $100 invested in to the property. My property cash flows $10 / month. That is $120 / year and only $100 invested. Looks like a 120% return. Except that when the hot water tank ($1,500) goes I have shot my next 12.5 years of cash flow. And I don't look so smart any more. Clearly I am in a negative-leverage situation.

A much better measure is yield, which ignores debt completely.

Yield = NOI / property value

Here, I can see that my property yields 3%, 6%, or 10%. I target 6%. In today's real estate market, there are a lot of maybe's:
- maybe property values increase
- maybe I get my initial deposit back
- maybe rents increase...more likely decrease in Edmonton and AB right now
It is an excellent time to buy for cash-conscious investors right now but only for those of us who have tamed down our growth expectations. Buy for the cash yield of the property. Over time, a lot of those maybe's are very likely to increase but who knows on what time table that will be on.

At bare minimum yield > debt rate. Bare minimum. If not you are headed for negative cash flow.

As your NOI increases your property value increases as well so you will always be able to compare the return on the property across time. (Value = NOI / yield)

Yield is a good measure but it isn't the whole story. It is extremely worthwhile to look at after tax cash on cash equity returns. My formula for this is that after tax cash flows pays down the cash equity invested. Thus the after tax equity return in a year is

After tax equity return = (after tax cash flow, year "t") / (after tax cash equity invested, year "t-1")

If you are in a positive leverage, cash flow position then your after tax equity return should ramp up in the 6 - 9 year range. If you start at 5-7%, then by year 7-8 you may get to 10%-12%. This is real cash. Not speculative property appreciation. Makes this measure useful as well.

A final point I would make is on the general discipline of calculating total returns from a project. If you plan to sell, you must include liquidation costs (Realtor, lawyer, accountant). Returns need to be calculated after-tax. I don't get to spend before-tax dollars. For smaller asset purchases, try and nail down actual costs for maintenance. The quality of your property is the quality of your tenants. Direct inverse relationship between property quality and property management time commitment as well. Using flat numbers like $450 - 800 / suite / year is probably not specific enough. Use the inspection document and prepare a 5-year budget for all repairs. That amount divided by 5 years is your annual R&M budget. Bring the property up to an easily maintainable standard before beginning to rent. Fix all known problems.

My two cents on the financials!

 

[BaiJiang]

Great answers above. I will answer one of the other questions.

"I have ambitions of acquiring a rental a property before I leave my job because I’m guessing that once I resign I will not qualify for a mortgage?"

Having regular income makes it easier to qualify for a mortgage. However, qualifying without a job can be done. It just depends on your financial situation and what your future plans are. I just helped a client get financing for a rental property in Surrey with 35% down payment and her variable rate was only 3.1% given she had no income to show. She had enough liquid assets to show that she can make 5 years of mortgage payments. Each person is different, so I would suggest that you talk with your mortgage professional to understand what options are available to you.

Good luck with your investing!

 

[VicInvest]

Cash flow is a function of net operating income of the property (NOI) and the amount of mortgage or leverage. As such, decide what you want: cash-flow or higher 5 year ROI. More on this here on a fictional $1M invested: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

A thread on a similar topic "how to get started" is here: http://myreinspace.com/threads/to-buy-my-first-home-or-buy-investment-property.33109/

Condos generall make a poorer investment choice than houses, duplexes, apartment buildings or mobile home parks as they have less upside potential and higher and less controllable costs (aka condo fees). As such, I'd start with a small house, townhouse or duplex in any city with upside and in any neighborhood that is desirable. MLS might give you some ideas of price points, but of course there are other sources. Are you a REIN member ? REIN provides you with the basic education (for property selection, area selection, property management, tenant selection, financing, smart renovation techniques ..) and motivational environment for success !

Assuming you live in BC soon I'd start there, and not further afield such as volatile AB, such as Nanaimo, Surrey, Maple Ridge, Abbotsford, Langley, Delta or some interior towns. Of course you can also buy dividend paying stocks, REITs or invest with others that have expertise. Many options exist too numerous to mention in a short blog post.

Start now. Prices will be somewhat higher next year, but don't rush as it won't be all that much. Many folks have lost a ton in the rushing mentality. I elaborate on that - and many other topics such as how to get started - in my book.

Cash flow is a function of net operating income of the property (NOI) and the amount of mortgage or leverage. As such, decide what you want: cash-flow or higher 5 year ROI. More on this here on a fictional $1M invested: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

A thread on a similar topic "how to get started" is here: http://myreinspace.com/threads/to-buy-my-first-home-or-buy-investment-property.33109/

Condos generall make a poorer investment choice than houses, duplexes, apartment buildings or mobile home parks as they have less upside potential and higher and less controllable costs (aka condo fees). As such, I'd start with a small house, townhouse or duplex in any city with upside and in any neighborhood that is desirable. MLS might give you some ideas of price points, but of course there are other sources. Are you a REIN member ? REIN provides you with the basic education (for property selection, area selection, property management, tenant selection, financing, smart renovation techniques ..) and motivational environment for success !

Assuming you live in BC soon I'd start there, and not further afield such as volatile AB, such as Nanaimo, Surrey, Maple Ridge, Abbotsford, Langley, Delta or some interior towns. Of course you can also buy dividend paying stocks, REITs or invest with others that have expertise. Many options exist too numerous to mention in a short blog post.

Start now. Prices will be somewhat higher next year, but don't rush as it won't be all that much. Many folks have lost a ton in the rushing mentality. I elaborate on that - and many other topics such as how to get started - in my book.

 

[VicInvest]

Thank you for your insight Thomas. It is very much appreciated!

 

[VicInvest]

I'd suggest first investing in Edmonton's ACRE event happening in October. It opened my eyes to a whole new world of real estate investing and brought clarity to my investing goals. I hope it does for you what it did for me.

http://s.reincanada.com/www/store/detail/Edmonton-ACRE-Live-Program

Thanks for the tip. I will look into the Edmonton ACRE show

 

[VicInvest]

I have been investing in Alberta since 1982 and have been through many ups and downs. This is the kind of market we have here. I invest in Edmonton and it's been very good to me.
My advice:
- buy for cash flow at least in the beginning (ie suited properties) not condos
- keep active with your REIN membership
- don't be afraid to take action
- ask for help (if you find a deal run it by the REIN office or message me)
- I agree with Thomas - start now but do your homework

Thanks bb2. I appreciate the advise and support. I may just take you up on it as I need more answers.

 

[VicInvest]

^^ Great answer above.

I'll just approach #4 that you identified here. The short answer is that you shouldn't use any one formula to measure profit. Any one formula used alone is extremely dangerous. Personally, I think ROI is probably the worst measure of return.

ROI = cash returned / cash invested

If I lever my property up to 95% financed (eg. personal property, lived in for a year, turned into a rental). Now I take my LOC and pay myself back so I am only $100 invested in to the property. My property cash flows $10 / month. That is $120 / year and only $100 invested. Looks like a 120% return. Except that when the hot water tank ($1,500) goes I have shot my next 12.5 years of cash flow. And I don't look so smart any more. Clearly I am in a negative-leverage situation.

A much better measure is yield, which ignores debt completely.

Yield = NOI / property value

Here, I can see that my property yields 3%, 6%, or 10%. I target 6%. In today's real estate market, there are a lot of maybe's:
- maybe property values increase
- maybe I get my initial deposit back
- maybe rents increase...more likely decrease in Edmonton and AB right now
It is an excellent time to buy for cash-conscious investors right now but only for those of us who have tamed down our growth expectations. Buy for the cash yield of the property. Over time, a lot of those maybe's are very likely to increase but who knows on what time table that will be on.

At bare minimum yield > debt rate. Bare minimum. If not you are headed for negative cash flow.

As your NOI increases your property value increases as well so you will always be able to compare the return on the property across time. (Value = NOI / yield)

Yield is a good measure but it isn't the whole story. It is extremely worthwhile to look at after tax cash on cash equity returns. My formula for this is that after tax cash flows pays down the cash equity invested. Thus the after tax equity return in a year is

After tax equity return = (after tax cash flow, year "t") / (after tax cash equity invested, year "t-1")

If you are in a positive leverage, cash flow position then your after tax equity return should ramp up in the 6 - 9 year range. If you start at 5-7%, then by year 7-8 you may get to 10%-12%. This is real cash. Not speculative property appreciation. Makes this measure useful as well.

A final point I would make is on the general discipline of calculating total returns from a project. If you plan to sell, you must include liquidation costs (Realtor, lawyer, accountant). Returns need to be calculated after-tax. I don't get to spend before-tax dollars. For smaller asset purchases, try and nail down actual costs for maintenance. The quality of your property is the quality of your tenants. Direct inverse relationship between property quality and property management time commitment as well. Using flat numbers like $450 - 800 / suite / year is probably not specific enough. Use the inspection document and prepare a 5-year budget for all repairs. That amount divided by 5 years is your annual R&M budget. Bring the property up to an easily maintainable standard before beginning to rent. Fix all known problems.

My two cents on the financials!

^^ Great answer above.

I'll just approach #4 that you identified here. The short answer is that you shouldn't use any one formula to measure profit. Any one formula used alone is extremely dangerous. Personally, I think ROI is probably the worst measure of return.

ROI = cash returned / cash invested

If I lever my property up to 95% financed (eg. personal property, lived in for a year, turned into a rental). Now I take my LOC and pay myself back so I am only $100 invested in to the property. My property cash flows $10 / month. That is $120 / year and only $100 invested. Looks like a 120% return. Except that when the hot water tank ($1,500) goes I have shot my next 12.5 years of cash flow. And I don't look so smart any more. Clearly I am in a negative-leverage situation.

A much better measure is yield, which ignores debt completely.

Yield = NOI / property value

Here, I can see that my property yields 3%, 6%, or 10%. I target 6%. In today's real estate market, there are a lot of maybe's:
- maybe property values increase
- maybe I get my initial deposit back
- maybe rents increase...more likely decrease in Edmonton and AB right now
It is an excellent time to buy for cash-conscious investors right now but only for those of us who have tamed down our growth expectations. Buy for the cash yield of the property. Over time, a lot of those maybe's are very likely to increase but who knows on what time table that will be on.

At bare minimum yield > debt rate. Bare minimum. If not you are headed for negative cash flow.

As your NOI increases your property value increases as well so you will always be able to compare the return on the property across time. (Value = NOI / yield)

Yield is a good measure but it isn't the whole story. It is extremely worthwhile to look at after tax cash on cash equity returns. My formula for this is that after tax cash flows pays down the cash equity invested. Thus the after tax equity return in a year is

After tax equity return = (after tax cash flow, year "t") / (after tax cash equity invested, year "t-1")

If you are in a positive leverage, cash flow position then your after tax equity return should ramp up in the 6 - 9 year range. If you start at 5-7%, then by year 7-8 you may get to 10%-12%. This is real cash. Not speculative property appreciation. Makes this measure useful as well.

A final point I would make is on the general discipline of calculating total returns from a project. If you plan to sell, you must include liquidation costs (Realtor, lawyer, accountant). Returns need to be calculated after-tax. I don't get to spend before-tax dollars. For smaller asset purchases, try and nail down actual costs for maintenance. The quality of your property is the quality of your tenants. Direct inverse relationship between property quality and property management time commitment as well. Using flat numbers like $450 - 800 / suite / year is probably not specific enough. Use the inspection document and prepare a 5-year budget for all repairs. That amount divided by 5 years is your annual R&M budget. Bring the property up to an easily maintainable standard before beginning to rent. Fix all known problems.

My two cents on the financials!

Thanks! I will try using theses formulas.

 

[VicInvest]

Great answers above. I will answer one of the other questions.

"I have ambitions of acquiring a rental a property before I leave my job because I’m guessing that once I resign I will not qualify for a mortgage?"

Having regular income makes it easier to qualify for a mortgage. However, qualifying without a job can be done. It just depends on your financial situation and what your future plans are. I just helped a client get financing for a rental property in Surrey with 35% down payment and her variable rate was only 3.1% given she had no income to show. She had enough liquid assets to show that she can make 5 years of mortgage payments. Each person is different, so I would suggest that you talk with your mortgage professional to understand what options are available to you.

Good luck with your investing!

That's great advice. This is all great knowledge.