# Advice for first Real Estate investment



## splatapus (Nov 8, 2015)

I'm looking for a real estate investment opportunity, it will be my first. The city is Ottawa, and the property that matches most closely with the 1% rule (monthly rent is is 1% of property price) is a townhouse condo. I would like to briefly describe the property and the numbers, what I think about the property, and then _*most importantly*_ get the opinons of you seasoned real estate investors.

*The Property:*

3 bed, 2 bath, townhouse style condo built 1978. no garage. 1 dedicated parking spot.
Good location: 20 mins from downtown Ottawa, 5 mins to nearby schools, 10 mins to shopping centers
Mainly hardwood (good I think), electric baseboard heating (I'm concerned about this)
Condo fees: $346 includes home insurance, water, and property management
List Price: $155,000

*The Numbers:*

Current tenant pays $1300/mo, pays own electricity. Plans to stay
Mortgage: 3.69% interest for 20 year amortization period, 20% down ($155k*0.2=$31k), =$730/mo
Property Tax: $2000/year = $167/mo.
Condo Fee: $346/mo.
Add on 10% for vacancy/repairs

*Rent:* $1300
*Expenses:* ($730+$167+$346)*1.10 = $1367

So not cash flow positive. 
This is the best deal I could find in Ottawa so far. Biggest pro is that there is an existing tenant who would like to stay. Biggest con is that it is still not cash flow positive and I don't want to gamble on resale value appreciation years down the road.


Could I get your opinion? As a safe investment, should the cash flow positive rule always apply? In current environment, is it possible to find a cash flow positive opportunity, or is it best to sit on hands and keep looking for better opportunities?


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## Just a Guy (Mar 27, 2012)

Not one I'd take. The numbers don't work, and the numbers are bound to go up...you still have insurance, there may be a special assessment, prices could correct, interest rates will rise, etc. So the amount of money your going to lose will just increase over the years.

There aren't a lot of properties on the market anywhere right now, this is know as a bubble, though some deny it's here. You'd be better off sitting on your hands and waiting for the right property to come along. Of course, if it does, you won't be in a position to ask for advice, if you don't buy it right away, someone else will.

Of course, no one is saying you can't offer less than asking, you never know what will happen. That being said, I'd want to know the corporation's numbers before making an offer...I've seen places with multi-million dollar special assessments, not per unit of course.


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## splatapus (Nov 8, 2015)

Just a Guy said:


> Not one I'd take. The numbers don't work, and the numbers are bound to go up...you still have insurance, there may be a special assessment, prices could correct, interest rates will rise, etc. So the amount of money your going to lose will just increase over the years.
> 
> There aren't a lot of properties on the market anywhere right now, this is know as a bubble, though some deny it's here. You'd be better off sitting on your hands and waiting for the right property to come along. Of course, if it does, you won't be in a position to ask for advice, if you don't buy it right away, someone else will.
> 
> Of course, no one is saying you can't offer less than asking, you never know what will happen. That being said, I'd want to know the corporation's numbers before making an offer...I've seen places with multi-million dollar special assessments, not per unit of course.


Thanks JAG!

For now, I'm doing preparation work so that whenever the times comes, I'll be ready. Wondering what would be the next logical steps you would suggest? I'm thinking:
1. Get pre-approved for mortgage from cheapest local broker
2. Get in touch with real estate agents and let them know that I'm interested in investment property
3. Sign up to get notified for foreclosure listings
4. Of course, keep reading up on real estate investment topics.

Also, I didn't understand what you meant by "_know the corporation's numbers_". Is that the valuation that the condo management company gives to the property?


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## Just a Guy (Mar 27, 2012)

Pre-approval doesn't mean much, banks can still reject you at any point for any reason. Of course it's best to know how much money you have access to beforehand. In a good deal situation, you'll be competing against people like me who'll make an unconditional cash offer, so you're going to be at a disadvantage to start with. It may force you into overpaying which is never good. 

That being said, I expect the market to crash eventually, which would mean plenty of properties to choose from. Of course, if that happens, your also facing tighter lending standards and banks that have been massively burned. Again, people like me will have the advantage. 

As for realtors, that can be tricky. Most don't understand what makes a good investment property. Those who do may pick them up for themselves, but most will talk you into something the truth isn't a very good deal. 

Set up a criteria of what you are looking for in a property. For example 1 bedroom places under $X, 2 bedroom places under $Y and have the realtor send you listings as they are entered into MLS. 

You may want to check out www.easysafemoney.com or the youtube channel by Matt (another forum member). As a good beginner reference to real estate in Canada. 

As for the corporation's numbers, you need to get the financials from the condo, usually there is a reserve fund study (which says what repairs are needed going forward), the meeting minutes, etc. You want to find out as much about how the company (condo) is running and what the plans and conditions are of the building. That way you'll know is there are cash calls are coming. 

You shouldn't worry too much about what others value the property at (except for the bank appraiser), as the only opinion hat matters is your own, everyone else (except the bank appraiser) you want to think it's as low as possible, especially the seller and the tax man.


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## hboy54 (Sep 16, 2016)

I would think long and hard before buying a house with electric heat and hot water in Ontario. I put in a new furnace in the summer and at the time electricity was about 8 times the cost of gas. That is likely about $2000 more annually.


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## Just a Guy (Mar 27, 2012)

As a landlord, this is a factor, but a minor one as you usually don't pay the utilities for long (only when it's vacant under most circumstances, or as part of the condo fees). The main concern is the purchase price and he ongoing condo fees as these are the biggest factors in setting your rent.

If you buy a place cheap enough, you can afford to undercut your competition on the price of rent, so you can compensate for higher utility costs. For example, I just bought a two bedroom place for $70k last month in an area where the next lowest priced two bedroom to sell sold for $95k (different building), the average price is about $130k (a one bedroom sold in the same building for $140k earlier in the year). My competition's base price is significantly higher than mine so, if the economy tanks, I can survive cutting rents a lot more than they can. In the mean time, my profits are much higher. Not exactly sure why his place was so cheap, other than the fact that they needed it sold in less than a week. My tenant moves in today. 

Since the cost of utilities are obviously manipulated by the government (as the latest government scandal showed), what's to say they don't manipulate other forms of heat going forward? In Alberta today, every carbon based fuel just shot up in price thanks to the "carbon tax"...I hear the taxes on natural gas are higher than the actual cost of the gas... not sure how a tax suddenly makes their oil and gas "cleaner", but that's their pitch, and albertans seem fine with this tax grab for now.


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## sags (May 15, 2010)

I am curious about the cost of heating with electric baseboard heating, as several townhouses are for sale in our area for reasonable prices.

Anyone hazard a guess on monthly electric bills on average ?


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## Just a Guy (Mar 27, 2012)

I find the actual cost of utilities to be the smallest number on the bill. The rate riders, municipal access fees, line charges, administrative fees, or whatever the government and companies decide to call these things make up the majority of the monthly bills.


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## sags (May 15, 2010)

I don't know if this is accurate........but $150 per month per baseboard heater...........ouch.

https://www.timminstoday.com/local-...aseboard-heater-can-cost-you-in-a-month-14554

3 bedrooms, living room, dining room, kitchen...........6 baseboard heaters X $150 = $900 a month.

Maybe baseboard heaters work out better in an open 1 bedroom apartment. 

It doesn't look like they are good for a townhouse with many rooms and a finished basement.

Without duct work, window air conditioners would be needed in the summer.

We were offered a beautiful custom made home years ago. The sellers were desperate as they couldn't afford the electric heat.

They begged for an offer.........any offer, to get rid of the place.

The home was very large with vaulted ceilings, and they had closed off the entire house except for the kitchen and living room.

They wouldn't show us the hydro bills and after looking into possible alternative heat sources and finally no practical solution, we declined to buy the home. My dad told me later they practically gave it away.

Given all the hullabaloo over hydro rates, I am thinking it is probably more expensive today than it was back then.


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## OptsyEagle (Nov 29, 2009)

sags said:


> I don't know if this is accurate........but $150 per month per baseboard heater...........ouch.


That is not accurate. I don't have the actual numbers but I know that it is far from accurate. 

The benefits of baseboard heating, that no one ever mentions, is the ability to set each heater for each room and to turn them up and down as you use or don't use each room. It helps to make the properties temperature equal throughout the property. Furnace heating seems to create much larger differences between temperatures, from room to room, where one is entering a new room that is either too hot or too cold and to change it they must change the entire house, messing those rooms up.

Remember humans don't sense temperature. They sense the "rate of heat loss". A one degree difference can make a fairly large difference to an entity demanding a 98.6F body temperature, or it starts to get annoyed.


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## twa2w (Mar 5, 2016)

To the OP, JAG has given you good advice. Stay away from negative cash flow properties. 
FWIW my advice would be, before you buy, to look at lots of properties, do the numbers on them. Get good at this. Get to know the areas of town that you may be interested in. Even if you miss a deal or two, if this is your first property, it is better to be patient. Even if it takes a year or so.
JAG has lots of experience so can likely spot a deal and work the numbers pretty close, in his head.
You will be competing against guys like JAG but there are not many out there like him. And often when a deal looks really good, people get nervous and wonder what is wrong. That is where market knowledge, including comparable sales, local rental rates, cost of reno's etc comes into play in making a quick calculation in whether you want to proceed and investigate further. You can always put in lowball offers to see what comes out of the woodwork - and I mean 20 to 30% lower than what you think market is.
When I am looking, I keep an eye for empty houses where the owner may have been transferred or bought another house, long listings, houses where the closets look 1\2 empty and either no men's or no women's stuff( divorce), or crappy ugly paint jobs or poor looking cosmeticly that can be easily and cheaply changed. Other than in really hot markets, these can dramaticly lower the selling price.
Be aware that just because it is a bargain compared to other houses does not necessarily make it a bargain for rental purposes.


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## splatapus (Nov 8, 2015)

Just a Guy said:


> Pre-approval doesn't mean much, banks can still reject you at any point for any reason. Of course it's best to know how much money you have access to beforehand. In a good deal situation, you'll be competing against people like me who'll make an unconditional cash offer, so you're going to be at a disadvantage to start with. It may force you into overpaying which is never good.
> 
> That being said, I expect the market to crash eventually, which would mean plenty of properties to choose from. Of course, if that happens, your also facing tighter lending standards and banks that have been massively burned. Again, people like me will have the advantage.
> 
> ...


Wondering about the _"unconditional cash offer"_. To get the cheapest price and sign the deal that day, you would be willing to pay the price of the property in full? Wouldn't that tie up your capital for one property? Or would you somehow re-finance and take money out once the deal is done?

Thanks for the links on easysafemoney.com and Matt. Coincidentally, I've read the book _The Simple Solution to Canadian Real Estate Investing Rules for Playing the Real Estate Game to Win_ (need to read again to get more out of it) and currently going through Matt's videos. .

Thanks for all the advice. Greatly appreciated.


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## splatapus (Nov 8, 2015)

twa2w said:


> To the OP, JAG has given you good advice. Stay away from negative cash flow properties.
> FWIW my advice would be, before you buy, to look at lots of properties, do the numbers on them. Get good at this. Get to know the areas of town that you may be interested in. Even if you miss a deal or two, if this is your first property, it is better to be patient. Even if it takes a year or so.
> JAG has lots of experience so can likely spot a deal and work the numbers pretty close, in his head.
> You will be competing against guys like JAG but there are not many out there like him. And often when a deal looks really good, people get nervous and wonder what is wrong. That is where market knowledge, including comparable sales, local rental rates, cost of reno's etc comes into play in making a quick calculation in whether you want to proceed and investigate further. You can always put in lowball offers to see what comes out of the woodwork - and I mean 20 to 30% lower than what you think market is.
> ...


Great advice. I feel very strongly with what you are saying. I think the first property either makes or breaks the potential investor. A good first property would give a solid foundation for the future, whereas a negative cash flow property would only cause fear.

What you said about finding bargains seems the most logical way to make money in real estate. It seems the money is made on the buy. If can find a bargain property that is easy fix-up then the appreciation value speaks for itself rather than leaving it up to the housing market years later. Great points, duly noted.

Thanks.


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## Just a Guy (Mar 27, 2012)

An unconditional cash offer is just the way the seller sees it. I usually never offer list price, I offer my price. The seller has to decide if they want to take my deal, or hope to get more money from someone else who's conditions may allow the deal to fall through. In the case of a foreclosure, where you're dealing with a bank, often protected by cmhc to the downside, not to mention a small price to them in the first place, they usually go with the cash deal.

On my end, I usually finance the deal on something like a line of credit. I can then approach the bank at any time to get a mortgage. There is a side benefit to this as well. When you finance a "clear title" property, they send out an appraiser and often the sale price doesn't play a factor in determining the value. If you get a mortgage as part of the sale, the appraiser almost always comes back with a value of +/- $10k of the sale price, regardless of what it could sell for.

One thing to remember, if you plan to be a a landlord, the value of the house is meaningless after the date of purchase. Since you're never really planning on selling the house, the value of it becomes pretty meaningless, besides it can fluctuate. There are a couple of things you'll also want to remember...

Just because you can get a huge loan, doesn't mean you should. The bank may offer you more money back than you need, this isn't "free money", you still need to pay it back. You also don't need to borrow the whole amount the bank offers, especially if you don't have a need for it. Borrowing more than you need can kill your cash flow. I usually only aim to get my cash back out of the deal, however a little more is okay, since it could cover cash calls, repairs, or my next purchance (but remember, I purchase regularly). In the end, I always keep an eye on my debt. In this environment, even with my cheap properties and high rent, I usually pay down my properties quite aggressively. 

Sometimes a property increases in value to the point where it doesn't make sense to hold onto it anymore, so some landlords sell them, and buy cheaper replacements. That's not my style, but it does work for others.


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## NielsJensen (Dec 19, 2016)

Nice!


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## angusreed (Feb 13, 2017)

splatapus said:


> I'm looking for a real estate investment opportunity, it will be my first. The city is Ottawa, and the property that matches most closely with the 1% rule (monthly rent is is 1% of property price) is a townhouse condo. I would like to briefly describe the property and the numbers, what I think about the property, and then _*most importantly*_ get the opinons of you seasoned real estate investors.
> 
> *The Property:*
> 
> ...


As a real estate expert I think there are plenty of reasons to think that property is a sound investment.
1. Find a good bank or mortgage broker
2. Talk with other investors
3. Pay Down Debt First
4. Calculate Your Margins	
5. Find the Right Location


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