First Rental Property

You are defeated and wondering how this all happened to you.  Your tenants have not paid you for 2 months.  They are showing no signs that they will ever pay you again.  You are now out of pocket and paying the mortgage on your rental property from your personal savings.  You are wondering how long this can go on for.  Your ROI is diminishing and so are your spirits.  You are questioning why you ever became a real estate investor…

If this sounds familiar to you, you are not alone.  Any veteran real estate investor has more than likely experienced non payment of rent.  Non payment of rent, whether deliberate or accidental is a reality that real estate investors face.

You might be happy to hear that you can stack the odds in your favour and find tenants who are more likely to pay you on time.

This can be accomplished by following these simple rules:

1) Be strategic in WHERE you buy your first rental property

New real estate investors are guilty of ‘following the crowd’.  As a new real estate investor, you can learn a tremendous amount from experienced real estate investors who are members of real estate investment clubs.  The knowledge that you gain from them is invaluable.  However, do not confuse knowledge with awareness.  Let me explain…

Some real estate investors tend to buy properties located in specific towns, neighbourhoods, and even specific streets.  Areas become well known within real estate investor circles for having a ‘high density’ of rental properties.

Enter Mistake #1 made by new real estate investors

These areas may not have the tenant profile that you personally want to attract.  For instance, located in these areas could exist a transient tenant population that generally pays their rent, however is always late in doing so.  A questions you must ask yourself now is:  Were you aware of this before you invested in this area, or did you just simply follow the crowd because everyone was investing there?

2) Know what type of tenant profile you want to deal with before you buy your first rental property

Sounds simple, right?!  You would think so, but it is not common sense to new real estate investors.  Before you invest in real estate, you have to ask yourself what your comfort level is in dealing with people from different socio-economic backgrounds.  Are you comfortable in dealing with white collar workers, or do you feel more comfortable and relaxed when dealing with blue collar workers?

Knowing what type of tenant profile you prefer dealing with helps.  However, what is most important is to understand the financial stability of that tenant profile before you buy your first rental property is essential.

For example, the first rental property that I bought is located in a middle class area of town in a suburb of Toronto.  In the neighbourhood there lives middle to high income earners.  As such, the renters in this area for the most part are all middle to high income earners. In over 5 years, I have not had any issue with non payment of rent at this property.

For my first rental property, I knew that I wanted to attract a higher income earning tenant profile.  As a result, I bought my property in a nice area, that was experiencing population growth, and where higher income earners were living and wanted to move to…

Finding tenants that pay you on time may seem easier said than done.  However, if you are a self aware individual you will know that the location where you buy your rental property and the tenant profile that you are attracting will determine whether or not you get paid on time consistently or not.

Best Regards,

Neil Uttamsingh

PS:  Do you want your rent paid on time?  Stack the odds in your favour.  Subscribe to my blog today!

What’s up Everybody?

How scary was today, if you are investing in the financial markets?

If you missed all of the fun today…here is what happened…

Dow Jones

As many of you know by now, today the major averages including the Dow Jones saw saw the biggest one day drop since 1987.

The averages have since rebounded, however remain lower by approximately 5%. (As of today’s date — May 6th 2010.)

At today’s low the Dow was down approximately 1000 points as low as 9869, representing a 9.2% decline.

That’s right… a 9.2% decline.

It has since rebounded approximately 600 points to 10,492.

The S&P

The S&P was down approximately 100 points, and eventually rebounded to cut the loss in half at -40 pts at 1121.

After the markets closed today, news stories have been coming out, that have been trying to explain what caused the markets to drop like a stone in water.

Evidence now suggests that a bad trade might be behind the market drop.

Bad trade or not, as real estate investors and as potential real estate investors, we have to learn from this event.

Today’s event shows us how extremely volatile the financial markets can be.

Depending on where in the world you are, you are either still feeling the effects of the Global Economic Crisis that began in late 2008, or you are slowly on the road to recovery.

For the Canadians, we have been fortunate in that we are on the road to recovery from the recent recession.  Our financial markets were battered, just like the rest of the world however, for many (not all) of us real estate investors, our real estate holdings did not experience any decline over the recession.

In fact, through all of the economic turmoil, many rental properties located in strong economic cities and towns in Canada experienced good appreciation over this time period.  A lot of credit needs to be given to Don R. Campbell, President of The Real Estate Investment Network for his education on the economic fundamentals of strong investment cities and towns in Canada.

Personally, I have been very fortunate in that all of my real estate holdings have gone up in value during the unpredictable economic time. In addition, many of my friends who are also fellow real estate investors have done well with their real estate holdings throughout this period of time.

I cannot say the same for many people that I know who are invested in the financial markets.  Many people over this same period of time had lost 30%, 40%, and even up to 50% of the value of their investments.

It has been an observation of mine that the more experienced one becomes with real estate investing, generally speaking, the less they start to believe in the financial markets as a vehicle to create wealth.

Please stop right now. Re-read the statement above.  Let it sink in….

On that note, leave me a comment in the comment section below and let me know what you think of the financial markets.  Do you believe in them?  Why or why not?

If you are not keeping up to date with my blog, please do so by entering your e-mail address on the left hand side of the blog.  Or you can click on the orange RSS button at the top right hand corner of the blog.

In conclusion, I would like to highlight a recent article written by fellow blogger and real estate investor Dineen Jogola. Dineen, a young up and coming real estate entrepreneur published a recent article titled 10+1 Core Success Principles.

I thought that Dineen’s article was a very well thought out and an authentic article worth sharing.

Don’t forget to check out the new video content on my YouTube Chanel.

[youtube]http://www.youtube.com/watch?v=0T2GuSqu3F4[/youtube]

In my mind, it is very clear to me what people are afraid of when it comes to buying their first rental property.  For the purpose of this article, we are going to focus specifically on the ‘number two’ fear that people have.

…In case you are wondering, the picture of the guy with they eye patch is ‘Number Two’ from the Austin Powers movies!

You also might be wondering, why I am focusing on the ‘number two’ fear and not the ‘number one’ fear?

Further, you might also be thinking…’what the heck is the number one fear?’

Well, to answer those two questions, the reason why I am focusing on the ‘number two’ fear instead of the ‘number one fear’ is because I am going to write an article series on the ‘number one’ fear.

The article series will be similar in format to some of my other articles series, such as, How to buy your first rental property and The Evolution of a Real Estate Investor.

Now to the good stuff…

The ‘number two’ fear that potential real estate investors have when buying their first rental property is:

The fear of repairs and maintenance

• This fear is felt so strongly by some people that it scares them from taking any action.

• The fear that they have paralyzes them, and they never end up buying their first rental property.

• This fear is real, and I myself have experienced it before.

• However, as any experienced real estate investor will tell you, this fear becomes less of a fear as time goes on, and you gain more experience.

The fear tends to lessen as time goes on, if you are constantly building a network of people around you that are able to help you with your repairs and maintenance.

For the most part, most people fear the repairs and maintenance that a property may require because they are not ‘handy’ themselves and they do not know how to carry out things such as repairing an air conditioner unit, fixing a broken door, repairing an electrical outlet, etc.

The secret to helping you get past the ‘repairs and maintenance fear’ is knowing that YOU do not need to know how to fix the stuff yourself.

What you do need to know is who to call when repairs and maintenance are required on your property.   That is why, networking, and building a team of people who can help you in a time of need is crucially important.

Key people to have on this team ‘repairs and maintenance team’ would be people such as:

• painters
• handymen
• contractors
• electricians
• an HVAC specialist

The best way to build this ‘repairs and maintenance team’ is through obtaining referrals from friends or family.  For example, if you know someone who recently used a handyman, and they were happy with their services, note this down.  Take the initiative to reach out to this handyman and build some rapport with them.  Tell them who you are, and the typical things that you might be calling the handyman about in the future.

The next time you need the services of a handyman to take care of some work at your rental property, you will have someone that you will be able to call, who will be able to get the job done for you.

What are some of the other fears that you think hold people back from buying their first rental property?

Feel free to place your comments in the comments section below.

Most real estate investors I know are liars.

The number one thing that real estate investors lie about is their reserve fund for their rental properties.

Here is a really funny clip from the movie, Liar Liar.

[youtube]http://www.youtube.com/watch?v=wBeiKpAGXzc[/youtube]

A reserve fund is money that is allocated for each property that an investor might own. A reserve fund is often kept in a bank account that has been set up for that particular rental property. These funds are very important as they come into play whenever there may be a vacancy with the property or if there are any repairs or maintenance that are required. These funds are very important, because in the event of a vacancy, as a real estate investor, you will be drawing upon these funds in order to pay your operating expenses on your property, such as your mortgage, property taxes, insurance, and any other fees that may apply to your rental property.

As a general rule of thumb, it is always a smart idea to have some money put away in this reserve fund, so in the event of a vacancy, you are in a strong position to make payments, and you do not have to look around for other sources of funds so that you can make these payments.

Opinions differ as to how much money should be set aside in the reserve fund. Some investors that I know say that they keep 2 months of expenses in their reserve fund. I have heard others say that they keep 3 months of expenses. Another investor said that he keeps 6 months. The highest that I have ever heard is that one investor said that he keeps $10,000 in the bank for each rental property that he owns. In my opinion, that is a little crazy.

I have noticed that investors lie about the amounts in their reserve fund in order to impress potential joint venture partners. This dishonesty is wrong and I do not support it. However, when I take a step back and examine why these investors are lying to their potential joint venture partners, I understand the psychology behind it.

The number one thing that I have noticed that novice investors are concerned about with regards to purchasing rental properties is the inherent worry that the property will go vacant. Generally speaking, people with no experience as a real estate investor worry to no end at the prospect of a rental property going vacant. They feel that once the property goes vacant, they will not have the money to pay the mortgage on their rental property, they will end up going bankrupt, lose their rental property to the bank, and then their life will be over.

Experienced real estate investors know that vacant properties are a part of the real estate investment game. The goal and objective of real estate investors should be to minimize the vacancy period as much as possible, through a pro-active approach. Pro-activity can take on many forms. It often involves advertising for an upcoming vacancy through multiple online channels, through print media, and often times through a property management company.

However, let’s come full circle and take a look at why some real estate investors continue to lie about the amount of money they have in their reserve fund. If they are working with a joint venture partner that is new to real estate investing, as stated above, one of the fears that the potential joint venture partner may have is the fear of a potential vacancy. If the real estate investor is able to address the joint venture partners concern about vacancies, he or she may lie to them and give them an over inflated number as to how much money they keep in their reserve funds for their existing properties. By giving the potential joint venture partner a false, inflated number, the real estate investor is hoping that they will come off as being more competent to the potential joint venture partner. As such, they are hoping that the joint venture partner will agree to invest their funds with them.

Again, I think that if a real estate investor lies to a joint venture partner about this, it is wrong. A real estate investor must be transparent and honest with their joint venture partners. It is this transparency and honesty that builds trust. Trust has to be earned.

As I have embarked upon my real estate investing career, I have dealt with vacancies on a number of properties. I have often had to inject my personal funds into the reserve fund account so that I could continue to make payments on my rental property. For example, I recently had a vacancy on a 3 bedroom 2 bathroom townhouse. The vacancy lasted 3 months, however, I only had one month of expenses available in my reserve fund. As such, I had to draw upon my personal funds in order to make the payments for the other 2 months that the townhouse was vacant.

Some real estate investors might say that this makes me a bad investor, as I do not keep a ‘sufficient’ amount of funds in my reserve fund. Am I am bad investor? I don’t think so. If there is one thing that is for certain, I am honest.

Moving forward, I have learned from my experiences that I am always going to make sure that I keep 3 months of expenses in my reserve fund account. That way, when my next vacancy comes, I will not have to move money from my personal accounts in order to cover the vacancy.

When you are looking to buy your first rental property, the first step you must take is to find a mortgage broker that you will be able to work with. When it comes to financing your rental property, financing can be obtained either through a mortgage broker or a bank.
I am a fan of doing your financing through a mortgage broker, as good mortgage brokers have an ability to put often times complicated deals together. Sometimes dealing with banks can be restrictive, as they do not have the same flexibility in finding solutions as a mortgage broker might have.

However, not all mortgage brokers are created equal. There are some very good ones, and there are some very bad ones. I have outlined 4 useful tips for you for when you are in the process of selecting your mortgage broker. Here they are:

1) Your mortgage broker should be a real estate investor

You want to be working with someone who is experienced in the field that you yourself are trying to get into. If your mortgage broker is a real estate investor, then he or she has experience in purchasing rental properties, and they have inevitably at some point purchased their first rental property. Since they are investors themselves, they would be able to offer you advice along the way. Make sure that your mortgage broker is a real estate investor. Experience counts!

2) Your mortgage broker must know your five-year investment plan

At the very least, your mortgage broker should know what your investment plans are over the next 5 years. This is very important because you are looking to build a long-term relationship with this individual. They (your mortgage broker) is going to be a very integral part of your real estate investment team. By knowing your five-year plan, they are able to advise you accordingly every step of the way. For instance, if your plan is to only buy one investment property over the next five years, they need to know this. This is because, the terms of the mortgage, would differ if you had plans of purchasing more than one rental property over the next few years. With mortgage financing for rental properties, good mortgage brokers are looking at how you can obtain financing for not just your first rental property, but also your second, third, or maybe even your 20th rental property, if that so happens to be your goal. Your mortgage broker must know your five year investment plan, as such they can set you up with the appropriate financing on your first rental property.

3) Your mortgage broker must keep up to date with what is happening in the mortgage industry

The mortgage financing world is ever changing. Interest rates often times change, and so too do the offerings from Banks and Lending Companies with respect to mortgages. Since there are so many changes, this creates opportunity for an individual looking to purchase their first property. When a good offer comes along from a Bank (such as a nice low interest rate), your mortgage broker should be up to speed of the changes as soon as they happen. That way, they can make you aware right away of all of the competitive offerings in the marketplace.

4) Your mortgage broker must have experience providing financing for other real estate investors

Often times, the more real estate investors that your mortgage broker works with the better for you. This is good for you, because your mortgage broker will have lots of practice in putting together deals for real estate investors. They will be proficient at this task, and will be able to deal with any roadblocks that are thrown in front of them. For instance, the reputation of your mortgage broker goes a long way when they are speaking to and negotiating with the mortgage underwriters at the banks or Lending companies. The mortgage underwriters are essentially the people who would review the particulars of your mortgage application. If the underwriter had any questions or concerns, they would converse directly with the mortgage broker to get the answers. If your mortgage broker has a solid history of putting together good deals, having a good relationship with the underwriters and the banks and Lending companies, then you are in good hands. The reputation of your mortgage broker is significant. They must have a track record of working with and putting together mortgages for other real estate investors.

The Rent to Own System of real estate investing is by far better than the out of date Buy-Hold-Rent method.

Some of you may not have heard of the Rent to Own method before. That is okay. Here is an explanation:

A real estate investor has a rental property that they would like to rent out. They find a tenant who would like to rent the home, with the option to purchase it down the road. (In this scenario, we are going to refer to the tenant as the tenant/buyer). An agreement is established between the investor and the tenant/buyer. Contained in this agreement are a number of things. First, in order for the tenant/buyer to rent the home from the investor, they have to provide a down payment to the investor. This down payment that is provided will be used toward the future purchase of the home by the tenant/buyer. Second, the tenant/buyer agrees to pay the investor their standard monthly rent. In addition to the monthly rent, there is a premium that the tenant/buyer pays over and above their monthly rent to the investor. This monthly premium is credited to the tenant/buyer’s down payment and factored into the final sale price at the time of the purchase. Also, the final sale price of the home is usually established on day one by the investor. The final sale price of the home can be the market value of the property at the time of sale, or there can be a fixed appreciation model in place. For example, if the term of the Rent to Own agreement is 3 years. It can be pre-determined that the property will appreciate in value the first year by 4%, the second year by 5%, and the 3rd year by 5%. Usually, Rent to Own Terms are established for 2 or 3 years. After this term has been completed, the tenant/buyer has the right to exercise their option and purchase the property.

The benefits of the Rent to Own system to the tenant/buyer are plentiful. In my opinion the most important benefit is that the tenant/buyer is able to realize home ownership sooner rather than later. They are able to realize homeownership sooner because the ideal Rent to Own candidate has sufficient income in order to qualify for a mortgage, however their credit may be slightly bruised, and in need of some repair and attention. The tenant/buyer works with the investor over the course of the Rent to Own term, in order to repair their credit, so that they are able to purchase the home at the end of their Rent to Own term.

The benefits of the Rent to Own method to the investor are equally as plentiful. In my opinion, a couple of significant benefits are, 1) the increased monthly cash flow, and 2) significantly reduced repairs and maintenance required on the property.

This is an area where The Rent to Own and Buy-Hold-Strategy differ quite substantially. With the Rent to Own arrangement, the tenant/buyer is often times responsible for all repairs and maintenance on the property. In addition, Rent to Own tenant/buyers generally speaking have a high degree of pride of ownership. With this increased pride of ownership, properties are often treated better by the tenant/buyers, and they are not treated the same way as a straight rental unit.

So why is the Rent to Own Method better than the Buy-Hold-Rent strategy?

Two reasons.

1) As the real estate investor (which you are), you are (or should be) concerned with the cash flow of your investment property. The more cash flow that can be generated by a property, the better.

2) You do not have any repairs and maintenance to worry about. This point should not be underestimated, as many beginning investors are terrified of being a Landlord, and they are terrified of the duties and responsibilities that come along with this new role.

In addition, the Buy-Hold-Rent method of investing is less favourable than the Rent to Own Strategy, due to a number of reasons.

1) You are responsible for repairs and maintenance. No matter if the property is brand new, or many years old, there are repairs and maintenance issues that come up on all properties. If you are not a handy person yourself, then you should be delegating this work out to qualified handymen. This comes with an addition cost though.

2) Not as good cash flow is another reason whey the Buy-Hold-Rent method is less favourable than Rent to Own. Often times with these properties, your profit margins can be thin. Any unexpected repair or maintenance issue that you have to have completed can potentially wipe out your positive cash flow for the month, or even for the entire year.

The Rent to Own Method is gaining more popularity and support among real estate investors due to the clear advantages over the outdated buy-hold-rent strategy.