Thursday, December 13, 2007

Some thoughts on real estate investment

I'm finished the year-end accounting on the properties, yay! And god-damned I'm good. :) We bought the triplex in March, had one tenant for April. Two for May-August, and three from September on. Which adds up to 81% of possible income collected in the 9 months we've owned it. One turnover with no vacancy, which is a miracle (usually I end up with a month's vacancy on a turnover, at least), and we increased the rent at that time. Only $25, but still. Our operating income (Revenue - operating expenses + mortgage + insurance, not including renovation expenses) was -$74. That's pretty freaking good. With a full year of occupancy, we'll net a profit on this house. Of course, that doesn't include the $3500 furnace, $2000 basement reno/kitchen installation, or $450 stove.

I can divide people into three groups. First are the people who "get it". Next are the people who don't get it, at all, but say to each his own. The third are the bitter ones. These are the ones who tried and failed, or tried and bailed, or wanted to try but have 100 reasons why they didn't.

I hate the bitter ones. And laugh at them. Which isn't nice, but seriously - it's all about education (yourself and your tenants). I listen to those who failed, and they're going on and on about tenants destroying your house, not paying, or otherwise making your life a living hell. In other words, their failure was not caused by them.

But it was. I am not being cocky or condescending, and I fully appreciate that someday someone will get the better of me. And that day, I will look back on this post and say "Good god, why did I put that in print?" Haha. But anyway - if you're interested in rental investment, here is my list of things you MUST do if you have a hope of success.

1. You make money when you BUY a house. Do not buy a property without at least a little bit of positive operating income, even after your mortgage payment. I have people say all the time "But it's still a good thing if you have to put a couple hundred dollars into it each month." Something about putting money into your retirement savings. Don't listen to this. You will never have 100% occupancy, you will never go a year without repairs, you will never be able to make a significant profit on a property while you're still paying a mortgage, and basically this is forever, in my mind. Twenty-five years is still too far away. This is LONG TERM investment, and it should be relatively sturdy. If something is costing you money at the BEST of times, what is going to happen to you during the bad times?

2. Know the law. Inside out, backwards, and upside down. Have a lawyer you trust and who knows you, and will help you when you need it, not when it's most convenient to them. Someone will try to screw you at some point, whether it be a seller, a real estate agent, an inspector, or one of your tenants. Know your rights, but most of all, know your TENANT'S rights. That way, when they try to say something foolish, you don't freak out.

3. This is a business and you are not their friend. My mentor said to me, "If you cannot evict a single mother on Christmas Eve, you won't make it in this business," and he was right. That was my biggest mistake at the start - liking my tenants and giving them too many chances. Issue an eviction notice as SOON AS they are late, no questions asked. If they pay, it goes away, if they don't, you've already got the process started and are not wasting time (and therefore money). It should never take more than three months to have a tenant evicted for non-payment. Landlords who tell you horror stories of freeloaders staying there for 6 months or more were too lazy or nice to get the process started when they should have.

4. It's your house, but it's their home. Remember this. You will have happy tenants if you stay out of their business, unless they call you about a problem, or someone else notifies you of a problem. And when they do call you - fix the problem right away. Small issues are cheaper than big issues.

5. Still - you want to check on your property. Do every-6-month smoke alarm inspections. This way, they know you're coming, you're not prying, but you can take a cursory look around and make sure things are ship-shape.

6. Keep your neighbours happy. These are the people that will report you to the city and make your life a living hell, if they're not happy with the tenants next door. Face it, multi-unit properties lower property values, no matter which way you look at it. I own in areas where that doesn't make too much difference, but it does matter to the guy who shares a driveway with your tenant. So introduce yourself, give him your card, and make sure you address anything he calls you about.

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