Further to my blog entitled Finding Good Cash Flow Properties, I thought it would be good to get a bit more granular in this instalment.
Cash Flow
The goal to finding good cash flow properties to is to have the property pay for all the related expenses and still deliver some form of net positive cash flow. In other words, in general, the investor is buying the rental property to have it positive cash flow vs. financially feeding it on a regular basis.
It is incredibly rare for a property to be constantly rented year over year, and providing positive cash flow without an interruption due to vacancy. The only time I have seen a property rent without a vacancy year over year is where the rent is low in comparison to the market and the tenant is getting such a good deal that they don’t want to move.
If the rent remains low and the rent increases don’t keep up with the operating and maintenance costs the property could fall into negative cash flow territory with proper maintenance potentially being deferred. That scenario can easily backfire on the investor.
Also, it is hard to catch up to market rents in certain jurisdiction due to the legislated rent controls in place. Maintaining low rents potentially results in self-inflicted financial harm and poor overall property performance and lasting negative effects. So any property being considered for a buy and hold strategy should cash flow from DAY ONE! Cash flow is the life blood (sustainability) of a rental property, and appreciation is the bonus (wealth creation) aspect.
While we can’t predict the future we can reduce the risks associated with owning a rental property by doing our research upfront and take the appropriate actions within an investor’s control to provide the best opportunity for cash flow and appreciation.
In addition to the cash flow Here are 9 other things to consider when looking at rental properties for a buy and hold strategy.
Average Rents
In my blog, Finding Good Cash Flow Properties, I touched on good resource websites to determine what rentals are charged so that you can determine what would be a good average rent as a basis for a rental property investor to determine the appropriate rent that could be charged based upon the property locations, type, size, and level of quality and associated amenities. Here are a few more resource websites to assist with determining rental rates:
Zolo (Mainly Vancouver and Toronto)
The importance here is to compare so that you have a clearer picture of what is an appropriate rent to expect for your target property in your area/neighbourhood and how it compares to the competition. Be realistic for your rents so that your build in a bit of a conservative vs. overly optimistic mindset and proforma. As mentioned in the cash flow section It is also wise to review the rental tenancy act of that municipality to understand the limitation on the allowable rental increases and the circumstances for such increases.
Property Taxes
This is a key part of determining cash flow, and yet some investors forget to factor it in to their numbers, or they underestimate them. Property Taxes can vary significantly even within the same municipality. Most big cities or municipalities will have a property tax assessment or estimation calculator within their website. Please note that these calculators are generally using the current year’s mill rate, which in most case are displayed on the website. If you are looking at a property towards the end of the year and are doing projections for the next year it it’s wise to incorporate an increase of 5+% in the mill rate.
Even if the property taxes are high, it may be worth it if you’re buying in a good area where you can charge high rent. You always have to look at your profit less all of your expenses to really see the cash flow potential.
Maintenance and or Condo/Strata Fees
Like taxes, many investors forget to include an amount for a repairs and maintenance (R&M) contingency fund for those inevitable R&M items. Whether it is a house, duplex, townhouse or condo there are always things that need to be repaired and or maintained. It is best to do this to avoid the usually expensive emergency repairs due to deferred maintenance. Within a strata/condo corporation, or a Home Owners Association (if in the USA) there is usually some form of contingency fund set up to deal with those larger extraordinary but expected or unexpected expenses.
Within the strata/condo/HOA budget there will also be a component of funding for the ongoing day to day operations that will include the expected regular repairs and maintenance of items such as HVAC, plumbing, elevators, exterior, landscaping etc. The point I am making here is even if there isn’t something formally set out for R&M it is wise to set aside in the proforma at least a 5% of the rental income for an R&M contingency.
In the location section of the Finding Good Cash Flow Properties blog I discuss at a high level some of the influences that can effect where and why an investor should or should invest in the area. Below I detail some of the more granular considerations.
Job Market
As an investor I always believe in and say “Follow the Money”. By that I mean is, when there is larger investment in a city or a region typically through a major employer or undertaking that creates jobs, and jobs create tenants, so make sure there are jobs in that area and that the employment rate is growing, not declining. It is so important to understand why people are moving to the area and if the population is growing or shrinking. Having major employers growing the business in that area increases the likelihood that you’ll have continuous occupancies in your property. To find out how a specific area rates for job availability, check with the economic development offices of the municipalities. Also, it is advisable to research provincial and national websites for economic and labour changes to particular regions.
Is It a Desirable Area/Place to Live?
When I speak with real estate investors, I find it interesting that some can get very wrapped up in price, without necessarily looking the potential problems with demand that may be in the area. Even when there are enticing amenities and the price point is attractive, that won’t help if there’s some major reason that people don’t want to live there, like living on a LRT line or next to train tracks. Is the property close to a freeway or an airport? Are there going to be unwelcome odours wafting in from a nearby garbage dump, recycling plant, factory, or sewage treatment plant etc.? Again, it is important to get to know your neighbourhood to learn if there’s something about the location that is or will be undesirable to prospective renters.
Schools in the area
When considering rental properties that may house family units, buying in a strong school catchment will help drive interest in your property. Millions of families rent, and for many of them, school catchments are the most important consideration. I have experienced this very point many times with my buyers and investors.
Amenities in the Property and Area
Having your boots on the ground is an important part of your research when considering rental properties. There is nothing like getting a feel for the neighbourhood and what it has to offer to renters. Tour the neighborhood with a special eye on the parks, restaurants, gyms, movie theaters, public transportation links, and all the other perks that attract renters. The more amenities an area has the easier it will be to rent. One of the key points in transportation links I would like to point out specifically relates to LRT boarding stations being far more attractive to renters than properties located close to the actual LRT line which usually have a related noise issue. The ideal distance would be within 1000 meters to a LRT station.
Crime in the Area
A lot of areas look safe during the day, but looks can be deceptive and nightfall can reveal a whole different world. If you’re not familiar with the neighbourhood where you’re buying, I strongly suggest that you do your research. In many municipalities there are related crime map websites that you can review and research crime statistics for a given neighbourhood in a given time frame. If you can’t find a website it is always worthwhile to contact city hall and the local law enforcement to learn more about crimes in particular neighbourhoods.
Natural Disasters
If we can learn anything from this past summer, in general there seems to be more weather related natural disasters, including wildfires, droughts, hurricanes, tornados, rain storms, hail storms, earthquakes, etc. with the evolution of climate change, there is a potential for these stronger natural disaster to continue albeit some are more likely than others. A couple of resources to determine what areas could be challenging are insurance companies and municipal website that include zones as they relate to floods and other geo-related issues. Learning what the insurance coverage is like for a particular type of property in a specific area is invaluable. For example it is ill advisable to own a property in a flood zone, because the insurance premium is usually higher assuming is even available for the property. And you want to know this well before putting in an offer as you may not be able to obtain conventional mortgage financing.
With the amount of work and money involved in real estate investing, you want to choose your properties wisely. Investing in real estate is a great way to obtain financial freedom for you and your family and it requires research and then taking the right actions. In my book, “Look Before You Leap , But Leap! an insider’s guide to profitable real estate investing” I walk you through everything that you need to know, so you make the right choices to maximize your profits and reduce your risks. Check it out Here!
