Investing 101 Novice investors took plunge on becoming landlords in small-town British Columbia
Investors: Professional working couple
Investment: Rental condo
Strategy: Buy, rent out, sell
Time frame: 4 years
Bought for: $50,000
Rented for: $400 per month
Sold for: $85,000
First time investing can feel a little intimidating in the beginning. As a young professional couple, we questioned whether investing was a smart idea at all.
We worried about risking our savings and taking out another mortgage. If we had extra finances, why not use it to pay down our current mortgage? We were concerned about finding the right property to invest in. How far would we need to travel to get something in our price range? How would we know if we were getting a good deal? Then we knew we'd have the ordeal of finding good tenants and maintaining a property from afar. With both of us being academics, rather than handy or businesslike, these were real concerns.
Yet , we saw that real estate had the potential of bringing in a better return on our investment than did our measly 2.5 per cent "high-interest" savings account. WE could keep a property short term and bring in a chunk of money to apply to our next real estate purchase or another investment.
Where to start?
To start, you need to decide what to invest in and how much moeny you want to put into it. In our case, as people who generally avoid risk, we decided on finding something we could afford, where the rent would pretty much pay for the mortgage. For us to feel secure, that meant looking for out-of-town older residential apartments.
Finding a property
Finding an area was our first challenge. We looked at small towns with properties in our price range, and tried to locate places where big companies were moving to, growth was projected and residential vacancy rates were low. We choose Kimberley, B.C., which had opened a ski resort and had an airport close by. The only problem.... it was 12 hours away.
This meant we had to get pre-approved with a good mortgage broker who could act from afar if necessary. We also had to check out what had been selling, what the average prices where and what units were renting. And finding a good realtor was essential. We phoned and emailed a couple before settling on one we believed we could trust. By the time we visited, we were in good position to view suites of interest to us and make offers on any good deals we saw.
We wasted some time getting distracted by nicer places rather than what we could afford. On the other hand, it was still important to do the work to find a unit that would be easy to rent at decent rate. So, we spent a lot of time understanding the area, looking for an accessible building with a great location and amneties nearby. After viewing several units, we found the one we wanted to make an offer on. We made sure to do our due diligence: read the strata minutes, walked the suites, got a home inspector in, talked to neighbours and collected as much information as we could. Eventually, we bought a 600- square foot condo on the ground floor of a low-rise building, which was walking distance to town centre and a short drive from the ski hill.
We were surprised by all the costs we hadn't anticipated with our investment property. In the end, the rent we received did not cover our costs and we had to subsidize it by about $100 per month when the suite was rented, and $500 when it was not. Think about how much you are able to put into this at the beginning and throughout. At the outset, consider not only the down payment, mortgage and legal fees, but any potential upgrades you may require to attract a higher rent. On an ongoing basis, remember you'll need to cover strata fees, maintenance, insurance, property taxes (with no homeowner's grant). Also, we found city utilities in a small town astronomical compared with our residence in the city. In addition, don't forget to set aside money for emergencies - months when your unit sits vacant when a tenant bails, replacing appliances, or special levies. And don't forget about capital gains tax when you sell.
To attact a good rental income, you want to make your apartment as appealing as possible to tenants. This can mean getting it properly cleaned, painted and perhaps replacing cupboards or appliances that our outdated to give your suite an edge over others in the building. We lucked out by finding a relaiable person to check our suite between tenants, and a good affordable painter.
Although we could have directly managed the tenants, we decided to get some help as we were so far away. During the four years we owned the suite, we had three different rental experiences - a rental pool and two different proerpty managers. In the rental pool, several units pooled their rents together and then split it proportionally (by square feet), regardless of whether units were rented or not. This allowed for a regular income stream, but in the end felt frustrating to those whose units were always rented.
Finally, we found an excellent solution - an independent property manager. He charged us 10 per cent of the rent, but found us a tenant who never left. He also had excellent relationships with service providers, including a plumber, electrician and carpenter, so repairs could be quickly handled. Having the property manager gave us the peace of mind that our property was being looked after.
Our strata also voted on being able to communicate and vote electronically if necessary. Above all, we found that one of the best methods to ensure that our unit was looked after was to show extra apprecaition to everyone involved.
In the end, no matter how pleasant your situation is, you are still looking to make money on your investment. For us, as we saw prices rising, we allowed our place to sit vacant, got it repainted again and put it on the market. After four years, we decided it was time to liquidate our investment property. We made quite a good profit, something that never could have happened in four years with a savings account.
Overall, buying and selling our first investment property was a scary but exhilarating process. This experience gave us the confidence that we can buy and sell real estate. In the end, we made a chunk of moeny we never would have if we didn't take the risk, and look forward to taking the plunge again.
Article taken from January 2012 Edition of Western Investor (www.westerninvestor.com)