# How to properly evaluate income property



## Berubeland

Income property value determined the same accepted way. 

First you must determine what your Gross Income for the property is. Then you must substract all actual expenses for the property. Then you substract a maintenance allowance. Then you substract the vacancy allowance. Then you substract a management fee.

The result of this is your Net Operating Income or NOI

For Example

200,000 gross income
-20,000 property taxes
-60,000 mortgage payment
- 5,000 insurance
-10,000 vacancy allowance (200,000 x 5% for Toronto)
-10,000 property management (200,000 x 5%)
-20,000 maintenance allowance (200,000 x 10 %)

85000 Net Operating Income or NOI

So capitalization rate or cap rate as usually called is determined by dividing the net operating income by purchase price.

85,000 / 1,700,000 = 5% cap rate. 

So what does a 5% cap rate mean for the investor? For my example above the purchase price being 1,700,000 the down payment is 25% or 425,000. This is the money you actually take out of your pocket to buy the building 

What is your return on that? 85,000/425,000 = 20% this also does not count the mortgage capitalization that you make every year from paying the mortgage.

That's a heck of a lot better than Dundee REIT or any other REIT. 

My example is a 5% so when people start telling me that they wouldn't buy a 14% Cap Rate in Toronto they absolutely don't understand what they are talking about unless they have brain damage and can't add and substract. 

Your cash on cash return in a 14% cap rate would be almost 60%


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## Four Pillars

Great post.

Question - shouldn't you only subtract the interest portion of the mortgage payment? The part going to pay off principal is income I believe.

When you calculate the return you are using the downpayment as the denominator - but shouldn't the equity in the property increase over the years as the mortgage gets paid off? This would mean this number should be increased over time (and the return % might go down).



Berubeland said:


> That's a heck of a lot better than Dundee REIT or any other REIT.


Kind of apples and oranges isn't it? The amount of time involved in shopping around for and caring for a REIT is miniscule compared to an income property.


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## Potato

Berubeland, I'd quibble with just one point: the mortgage. Since part of the payment is principal repayment, I wouldn't consider it an expense (though it is a cash flow issue).

The other point with the mortgage is that I wouldn't use it to find the cap rate, because the mortgage is going to be interest rate sensitive (and sensitive to how much leverage you decide to take on). If you leave it out and find the cap rate without any leverage, then you'll quickly see how high interest rates can go and still be able to stay afloat.

So, if we back out your $60k mortgage figure, the NOI line becomes $145k, for a (cash purchase) cap rate of 8.5%.

Then you can start seeing what happens with leverage. If you can borrow at X%, and leverage 4:1 (25% down), then you make 8.5% on the first 25%, and 8.5-X% on the other 3 quarters, for 8.5+3(8.5-X) return on cash invested. 

So at 6.5% interest (which is my understanding of what multi-unit borrowing costs are based on what the REITs have to pay to borrow), that would be 14.5% after the magnifying effect of leverage. The tolerance limits for interest rate hikes is also apparent: much above 8.5% and the investor starts to hurt.


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## CanadianCapitalist

A 5% cap rate isn't bad at all in this interest rate environment considering rents are likely (hopefully) to keep pace with inflation and 5% is equivalent to a real rate of return (in the long run). I know people who invest in real estate here in Ottawa but they don't get anything like a 5% cap rate. Their gross rental yield is only 6% or 7%. 

I do agree with Potato that I won't count it as a 20% return on my cash investment especially if the mortgage is variable rate and tied to current interest rates. 

While REITs may not be a bargain today, they were trading at attractive prices last year. And who knows? Maybe they'll trade down again in the future


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## furgy

> That's a heck of a lot better than Dundee REIT or any other REIT.


If you had bought Retrocom REIT in March when at alltime lows , your current return on investment would be around 35% , (and in all probability , going higher as unit prices increase) , not to mention 200% in capital gains on unit price.



> Kind of apples and oranges isn't it? The amount of time involved in shopping around for and caring for a REIT is miniscule compared to an income property.


My thoughts exactly 4pillars , not to mention that REITs are probably more liquid.


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## Berubeland

I agree with some of your points about the mortgage and capitalization on the mortgage and the interest rates, however this is still the way income producing real estate is evaluated. This is the standard.

Also income producing real estate is evaluated at today's prices not "potential" income. So vacancy is not included in the purchase price. Commercial tenants also pay taxes, maintenance and insurance so your expenses become very low. 

So if you are a smart buyer you look for some of the things I tell people to look for in a house. Bad management is a sign of opportunity for me. I see dollars where other people see problems. Stinky, peeling, bad repairs and plaster it's all cheap.

I am just absolutely sick of people saying there is no opportunity in real estate in Toronto. There is tons of opportunity. The properties I discuss here are listed on the MLS for crying out loud. I don't have to leave my desk for these. 

I'm not even adding in other opportunities such as turning apartments into condominiums, turning larger industrial space which is vacant into smaller industrial condos, vendor take backs on the down payment (higher cash on cash), properties that are rented undervalue and have rents that can be increased as units turn over

As for the mortgage rates on income properties we just got a 4.5 % fixed mortgage rate for 10 years on a 24 unit townhouse complex in Oshawa. 

*If you had bought Retrocom REIT in March when at alltime lows , your current return on investment would be around 35% , (and in all probability , going higher as unit prices increase) , not to mention 200% in capital gains on unit price.*

Right and if you had bought Huntington REIT instead you would be crying. When you buy stock all you hold is a piece of paper that says it's worth what other people are willing to pay for it. If they are cooking the books or mismanaging their properties you will never know until your share price goes through the floor. If conversely you own a piece of actual real estate a visit will tell you a lot about what is going on and you are the captain of your own ship.

[*B]So, if we back out your $60k mortgage figure, the NOI line becomes $145k, for a (cash purchase) cap rate of 8.5%.*

This is like saying if apples were oranges then x=y. The only person I have ever heard of who thinks that buying real estate with cash is good is Rickson9. No one else does this. If they have extra cash they buy another building and increase their cash flow. 

*So at 6.5% interest (which is my understanding of what multi-unit borrowing costs are based on what the REITs have to pay to borrow), that would be 14.5% after the magnifying effect of leverage. The tolerance limits for interest rate hikes is also apparent: much above 8.5% and the investor starts to hurt.*
[/B]

As mentioned up above a 10 year fixed rate mortgage was negotiated with TD for 4.75% this January on a 24 unit townhouse complex in Oshawa. If the REIT is paying more I wonder who is getting the pay off on it because it isn't you the investor. 

*I know people who invest in real estate here in Ottawa but they don't get anything like a 5% cap rate.*

They need much better advice. 5% cap rate is common here in Toronto. I am not talking about a pie in the sky here. Right now today on the MLS you can get this. 

*Kind of apples and oranges isn't it? The amount of time involved in shopping around for and caring for a REIT is miniscule compared to an income property.
*

Right and so is the return (miniscule) compared to wise investment in actual real estate. 

Let me give you an example a very wise owner in Oshawa hired me a year and a half ago to manage his property. It was on the MLS for $1,900,000 but he told me that he wanted to sell it for $1,700,000. At the time there were 8 of 24 townhouses vacant. We fixed then up and rented them out. We raised the rents $75 on the townhouses we fixed up and rented out some parking spots instead of giving them away. So this month the same building sold for $2,300,000 an increase of $600,000 from one and a half years ago. Plus he got to collect rent for 18 months. Improvements cost about $100,000 and I got him a grant for $60,000. 

You'll never beat that with any REIT. That is just one owner I have worked for. When you factor in the leverage, what improvements will pay off in increased rents, and what that brings you on resale, the profits are just incredible.


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## dogcom

Berubeland you have to understand that people who invest in stocks always try to show that they can do better then people who invest in real estate no matter if they talk about dividend stocks or REIT's. The fact of the matter is people who have invested in real estate over the years have absolutely destroyed stock investors. Of course throwing out the flippers and short term stock and real estate investors. Also their are a few examples where people have done better with stocks but they are gifted and are not the norm by a long shot.

In the end if I had to bet on someone I would bet on you to beat these guys even though I believe they are smart and know what they are doing. 

The thing is the stuff you mention like finding properties easy to fix and so on is from the view of a professional. Could you also spot the problems in automobiles and decide if they are a good price. We do not have the same background as you do so we couldn't spot the opportunities that you do.


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## Berubeland

I feel like I should apologize for some reason. 

I feel very frustrated these days and this happens periodically whenever I get sucked into looking for investment property for investors who can't see a good deal when it hits them in the face. Then they turn around and go buy something absolutely idiotic that does not offer them half the return on investment. 

I on my part cannot manage to scrape up the capital to invest on my own. Partly because I work in property management which pays absolutely crap money. I'll never forget when I started in property management, the guy who was my boss had to put a cardboard under his car to catch the oil. He could not afford to either fix his car or buy a new one. The contractor who worked for him drove a brand new Jag. So that's how it goes. 

Because I work almost exclusively with high vacancy property I seem to find myself working for people so cheap they won't even pay to keep their own property to an acceptable standard. It's unbelievable but most of the work I do consists of arguing with owners to maintain their own property for their own benefit. 

In any case the formula I gave you is the correct one for determining the value of an income property. There is a lot of screwing around with this or that to increase the cap rate mostly by leaving out vacancy rate percentage or maintenance etc. Especially by real estate agents who make hundreds of thousands in commission on these large sales. The point is that you make your own calculation and that's what you use to make your offer. This formula is also the one used by the bank to approve financing. 

If you are investing in real estate this is the cornerstone formula for determining property value.


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## MoneyMaker

excellent post, keep up the good work


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## Dana

Berubeland said:


> I feel like I should apologize for some reason.


Don't apologize, this is a great post. To bridge the gap between stock investors and real estate investors (I am in each category) the cap rate of a property would be the equivalent of a dividend yield on a stock. 



Berubeland said:


> I on my part cannot manage to scrape up the capital to invest on my own. Partly because I work in property management which pays absolutely crap money.


Have you considered joint-venturing? Many novice/retired/semi-retired real estate investors look for experienced partners for JVs. You certainly seem to offer a lot of insight and experience into the market. I have met quite a few investors who started out with no capital, but were able to offer practical knowledge and experience. 

I have a question for you, Berubeland: I don't usually give the cap rate a lot of weight when considering a single unit family residential investment. I usually give cash-on-cash and cash-on-cash-plus more consideration because I assume that when I re-sell the property, the purchaser would likely be an individual owner and not an investor, so they would more likely not be purchasing for the return but for personal/emotional reasons. How important do you think the cap rate is for single-unit-residential investment?


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## furgy

> Right and if you had bought Huntington REIT instead you would be crying. When you buy stock all you hold is a piece of paper that says it's worth what other people are willing to pay for it. If they are cooking the books or mismanaging their properties you will never know until your share price goes through the floor. If conversely you own a piece of actual real estate a visit will tell you a lot about what is going on and you are the captain of your own ship.


I was just pointing out that it doesn't beat "every" REIT.
I have been screwed over on real estate three times , all seemed like real bargains at the time , once thru a messy divoce , once thru bad renters , and once thru a failed local economy.

I had a lot less into them than the example you quote , I shudder to think what could happen if I were to shell out $450,000 as a down payment.



> The fact of the matter is people who have invested in real estate over the years have absolutely destroyed stock investors.


I know from experience that this is not true for everyone , or even for the majority (unless you have some stats to prove me wrong) , I have aquaintances who have lost big time in RE as well , especially during the last crash.

I have however , done very well in REITs , but when it comes to real estate , I am probably a little overly cautious.


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## leslie

Don't care how "everyone else does it". I think basic finance applies to all financial decisions.

I don't think either the principal OR the interest should be factored into the basic equation of profitability. Evaluate the property's rate of return first. Then compare that to the rate you will pay for the debt. Detail.

Very, very few people calculate the return they earn from real estate properly, with all the costs. So of course they think they make a killing. And concluding that the last 5 years is 'normal' is also wrong.


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## CanadianCapitalist

leslie said:


> Don't care how "everyone else does it". I think basic finance applies to all financial decisions.
> 
> I don't think either the principal OR the interest should be factored into the basic equation of profitability. Evaluate the property's rate of return first. Then compare that to the rate you will pay for the debt. Detail.
> 
> Very, very few people calculate the return they earn from real estate properly, with all the costs. So of course they think they make a killing. And concluding that the last 5 years is 'normal' is also wrong.


I was about to comment that mortgage payments should not deducted from the gross rental income to compute the cap rate. My understanding of cap rate is it is the net rental yield from a property owned free and clear. 

In your case, the cap rate is $145K/$1.7M = 8.53%.


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## Berubeland

*Don't care how "everyone else does it". I think basic finance applies to all financial decisions.*

Well you should care how everyone else does it because in income producing real estate if you don't understand this nothing anyone says will make any sense to you. When the real estate agent says this property has a 5% cap rate you had better know what that means and be able to examine their equation and make sure all expenses are accounted for including vacancy allowance and maintenance expense. Otherwise you are being screwed on the price and may end up in hot water. All expenses including the cost of servicing the loan are included. 

Also the link you sent is for homes not income property. This is a formula used in the industry and is information anyone investing in real estate needs to know. 

It is a start like reading financial statements is to buying stock. Some people don't include goodwill or other things they don't like according to their criteria but as a general rule they don't say hey I wish accountants did not include debt servicing charges in their calculations about the worth of the asset.


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## Berubeland

*I have a question for you, Berubeland: I don't usually give the cap rate a lot of weight when considering a single unit family residential investment. I usually give cash-on-cash and cash-on-cash-plus more consideration because I assume that when I re-sell the property, the purchaser would likely be an individual owner and not an investor, so they would more likely not be purchasing for the return but for personal/emotional reasons. How important do you think the cap rate is for single-unit-residential investment?*

When you are buying your own home it is different than if you are buying for income. There are many difference variables that you have to take into account when buying for yourself. For example your spouse and children, work proximity etc. I also believe the mortgage should be paid off as soon as possible on your personal residence in case of illness or lay off etc. 

I'll use myself as an example when I purchased this house I had a construction company. I was very concerned with space I wanted a large lot. I used my garage and shed for extra storage. The house itself was a series of small rooms and there was one kitchen cupboard, the one under the sink. So everything went in a bookshelf. There was also a one bedroom basement apartment which was a great help to pay off the mortgage. 

Now my situation has changed I no longer have the same husband  I have a 2 year old child and I work from home and drive around renting houses for a living. I might want to sacrifice the space for proximity to the downtown core.

Since I bought this house I have moved the laundry room outdoors to allow for a two bedroom apartment instead of a one bedroom apartment, I have removed almost all the walls and made it a open concept. 

If I were to buy again in my current life situation with the hubby I have now and a 2 year old running around I would not be able to buy this house. I would buy at least a 4 bedroom to allow one room for my office instead of being stuck downstairs and room for a family expansion. 

But still I could buy a house that is undesirable to a lot of people. One thing that really affects people on an almost subliminal level is smell. Air it out or paint and the smell is gone. I could buy in a strategic area one that I think is undervalued etc. Having said this I would also have to satisfy my spouse who likes new construction. 

But when you buy income property the whole ball game changes. The whole purpose of buying it is to generate enough rent to pay the cost of the mortgage plus some cash flow plus capital appreciation. 

So here are my criteria in order of things I like to see when buying

1 - Positive cash flow or potential for positive cash flow if there are vacancies due to neglect or bad management. 

2 - Up and coming area, Look where they are putting in big box stores such as Home Depot, Lowes, Loblaws and other types of development.

3 - Building itself is structurally sound. Drywall, paint, bad smells bad kitchens, anything cosmetic. When you start replacing main beams on structures you can kiss your wallet good bye unless of course you know how to do it yourself. 

4 - Bad smells - Air it out and paint it with vapor barrier primer sealer with the exception of mold which is more involved and expensive. 

5 - Neglect and bad management, garbage laying around no landscaping, vacancy. Dirt. 

So basically when you are going out to buy a property use your cognitive mind rather than your emotions. The first thought at the forefront of your mind should be how can I make money off this? It's disgusting well good how many $$ worth of disgusting is it? Feel free to walk away be committed to the money rather than the property. There are a lot of properties and you and your money will live to make a better deal the next day.


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## Smac20

This is not correct.

When evaluating an income property for purchase (Market Value) you must consider the numbers this way:

Gross Income (Annual Base Rent)
Less (allowance for vacany) - say 3% retail, 10% office
Less (Allowance for managment exp) - say 5% retail, 10% office

= NOI

IF you have Triple net or net leases this is the best method. If you have gross leases, or the market uses gross leases, then you would also subtract Property Tax, Insurance, etc.

Most property markets operata in Triple Net Leases so the above is correct.

From there you take your NOI and divide by the cap.

To arrive an an appropriate cap you need to find sales of comparable properties and divide those sale prices by the expected NOI of those properties.

From a market perspective you do not use actual income since some leases may be above or below market rates and when renewed will come in at the actual market rates.

NOI/cap = market value. Obviously market value should technically have a range.


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## gman

Smac, you are more correct then the others but still this is the way it should be calculated:

This is based on a fictious annual income of $20,000, triple net.

Potential Gross Annual Income	$20,000
Less: Vacancy & Collection @ 3%	$ 600
Effective Gross Annual Income	$19,400
Less: Structural Repairs & Maintenance @ 2.5%	$485 (based on the EGAI not the PGAI)
Less: Management @ 3%	$582 (also based on the EGAI not on the PGAI)
Estimated Net Annual Income	$18,333

The vacancy and collections is calculated first then management and repairs/maintenance are caculated off of the Effective Gross Annual Income. You then subtract these for the Net Annual Income and divide this number by the capitilization rate. The appropriate cap rate would be determined by comparable sales that help indicate the appropriate risk associated with the property. The higher the cap rate the higher the inherent risk assoicated with the property usually is.

If you are dealing with gross rents then you have take off all of the other expenses that are not paid by the tenant.

Another way to caculate a value is by using the effective gross annual income and multiplying it by a gross income multiplier or GIM. The relationship between capitalization rates and GIMs is inverse, where the factors that influence one have the opposite effect upon the other. Stated differently, as capitalization rates decrease, GIMs generally increase and vice versa. This can be usefull when you are dealing with gross rents and you don't know what the expenses are.


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## steve_jay33

Interesting thread...some reason this quote came to mind
"To a man/woman with a hammer, everything looks like a nail."-Mark Twain

If you understand real estate stick with it, but don't be giving advice that other investment are inferior, if you don't truly understand it.


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## Berubeland

*If you understand real estate stick with it, but don't be giving advice that other investment are inferior, if you don't truly understand it.*

There is a direct comparison to be drawn between REITs which are Real Estate Investment Trusts such as Dundas REIT and actual real estate in that they are actually exactly the same investment. 

The difference being that in a REIT there is a heck of a lot more people between you and income (CEO's, Accountants, Property Managers, and even the cleaners) All these people get paid first. Where do the dividends come from? They come from the rental income.

In an actual building as the owner you have the control and you also earn a lot more of the income. In a sense you are cutting out the middle man and putting the money in your pocket.

They are in fact the exact same investment REIT's are just one step removed.


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## steve_jay33

We sense a conflict of interest.

A self-proclaimed Toronto Property Manger (Berubeland) advocating the merits of real-estate investment. Advocating earning 20% or more and that is without capital gains.
On the example given:
200K Gross income
10K Property management at 5% 
Works out to $833 a month for the property manager. 

Looks like someone is trying to drum up business. Or better yet just PM Berubeland and she can help you find these incredible deals and give you a great rate on managing your new investment property.

Nope...no conflict of interest here.


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## HaroldCrump

Berubeland said:


> *The difference being that in a REIT there is a heck of a lot more people between you and income (CEO's, Accountants, Property Managers, and even the cleaners) All these people get paid first. Where do the dividends come from? They come from the rental income.
> 
> In an actual building as the owner you have the control and you also earn a lot more of the income. In a sense you are cutting out the middle man and putting the money in your pocket.*


*But these people in the middle provide some value, no?
You may argue that the fees are too much for the value they provide and you would be partially correct.
However, if they weren't doing that work (cleaning, accounting, property management, CEO-ing, etc.) someone else would have to do that, and that someone else is you.
And if you are doing that, it is time away from your own life.
Nominal returns on DIY are always higher than hiring someone to do something for you, but you need to impute the costs as well.
Additionally, REITs provide diversification that you cannot achieve on your own unless you are Donald Trump or sth.

I'm not advocating for REITs exclusively - all I'm saying is that there are pros and cons.
What works for one may not work for another and vice versa.*


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## Berubeland

Stevejay, 

I am not sure you realize what you are talking about. I rent houses and apartments for a living. I charge one month's rent for finding decent tenants for small landlords. Your contention that I am after the $833 in monthly income is laughable. 

Property management is one of the crappiest paying jobs on the planet. For your troubles you get to be on call 24 hours per day, deal with deadbeat tenants and the Landlord and Tenant Board. You also have to keep your owner happy, run around getting multiple quotes for work, know all about building systems and construction, deal with the City, garbage removal and more things than I can even list here. 

I think that Dana had an excellent idea actually of doing a joint venture and I am currently persuing exactly that with this building actually. 

The proposed way it would work is that I take a small equity position and no pay until the building profitable and every one of the owners gets paid right alongside me out of cash flow. 

Would I do a deal with someone on this forum? I guess so but honestly the stars have to align for this kind of deal to work out. There are numerous visits to lawyers and a sound understanding by everyone of what the deal is. Then you have to find an appropriate investment which is a lot of work, I am very picky about the projects I am involved in. There are a lot of dogs out there.

If I were seriously trolling for customers I would get off this forum and go post on Real Estate Boards. I would also link my website from my sig which i do not do precisely because I am not trolling for customers. 

I have been contacted before exactly three times by people from this forum but I have not made a cent off any of them. 

Also I have posted here hundreds of times, it you look at the initial post heading I started the thread because other people were bandying about absolutely ridiculous methods of evaluating property performance in another thread. 

I thought that everybody here in this forum certainly should learn to use the proper formula for evaluating income property. It is very simple and one of the formulas I learned in property management school which I attended for 2 years. The calculation I learned included the debt servicing amount (mortgage) deducted as I initially posted. That was about 15 years ago. Since then it seems there has been a trend to not include the debt servicing amount in the formula which has the effect of increasing the effective cap rate. 

If I was some kind of shyster would it be in my interest to teach people how to evaluate income property? I don't really think so. 

As for your charge of conflict of interest that would apply to lots of people here, we have financial planners, people who sell financial planning software, people with blogs who could use the traffic etc. For myself I do not really consider saying that actual real estate will out perform a REIT as a conflict of interest. This is common sense. The owner of the company that makes golf tees also makes more money than the shareholder. Most of us cannot get into the golf tee business but most of us can buy an income property and benefit from it IF BOUGHT PROPERLY. 

YOU MAKE MONEY IN REAL ESTATE WHEN YOU BUY. I actually love finding property and looking for gems. Do I profit from this? In my entire career I have to this day never been paid a dime by someone for finding them a lucrative property. It is a hobby of mine that I do on a limited basis because I find it to be a lot of work, and very frustrating for me because most people buy property on an emotional level rather than with their intellect. Furthermore I have almost no capital of my own to work with and it kills me to see those deals go by and I see them every single time I start looking. It benefits me far more to concentrate on renting property than to waste time looking for properties that I cannot afford to buy and will not be paid for finding for the people who can buy them. 

I actually like working on distressed property and turning it around. For this I get usually 3% of the income. I don't think you realize how much work is involved in turning a distressed property into something with stable happy tenants that pay their rent. 

The landlords I work for generally have a management style referred to as "suffocating the goose that lays the golden egg" basically they take all the cash out and leave nothing for maintenance or repairs or capital expenses. If you did this for one month it would be fine but these guys do it year after year. Eventually their property becomes unrentable. That's when they call me. I have to without alienating them get them to invest in their own building. I have to prove to them that this is what is good for business. I have to justify every single penny that I spend on improvements and show them that it actually benefits them. 

I have news for you if the guy can't understand why painting a property or why his tenants need kitchen drawers he isn't really forthcoming with the dough. It's much easier for me to rent a house for $1500 then work for 2 month for these owners and be on call 24 hrs a day. It's not challenging but it is much more lucrative. 

I also tell people over and over again how to get a decent deal on real estate once again earlier on in this thread. If you look back to a thread I started a while back about why condo's suck as investments I go into the pitfalls of investing in condos. I tell people how to do it themselves and what to look for. I have absolutely no agenda. Take the information and go.


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## Berubeland

HaroldCrump said:


> But these people in the middle provide some value, no?
> You may argue that the fees are too much for the value they provide and you would be partially correct.
> However, if they weren't doing that work (cleaning, accounting, property management, CEO-ing, etc.) someone else would have to do that, and that someone else is you.
> And if you are doing that, it is time away from your own life.
> Nominal returns on DIY are always higher than hiring someone to do something for you, but you need to impute the costs as well.
> Additionally, REITs provide diversification that you cannot achieve on your own unless you are Donald Trump or sth.
> 
> I'm not advocating for REITs exclusively - all I'm saying is that there are pros and cons.
> What works for one may not work for another and vice versa.


Harold what I have found in my life is that owners of their own property are much more careful with their dough than managers especially managers that have no one to answer to. 

I am not advocating doing all the work yourself far from it. What I am saying is that you as the owner will not overpay for stuff because it is your money. I have long been an advocate of changing the pay structure of property management companies from a percentage of gross monthly income to a percentage of net monthly income. In condominiums some property management companies are paid by a percentage of operating expenses. If they reduce expenses they reduce their own pay. How can this be anything but expensive? How many of you would take a pay cut for your boss? 

The principles of diversification does not exactly jive with my philosophy of how to buy real estate. I am a person that looks for the needle in the haystack rather than a person who seeks average returns. I would much rather have one goose that lays golden eggs then one thousand geese that lay regular eggs.


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## Dana

Berubeland said:


> ...doing a joint venture and I am currently persuing exactly that with this building actually.
> 
> The proposed way it would work is that I take a small equity position and no pay until the building profitable and every one of the owners gets paid right alongside me out of cash flow.


Good luck with your JV...get yourself a great lawyer and iron-clad contracts with your partners. 



Berubeland said:


> I actually love finding property and looking for gems. Do I profit from this? In my entire career I have to this day never been paid a dime by someone for finding them a lucrative property.


Why don't you charge a finder's fee for this valuable service? Or bill by the hour for your research. When you qualify properties for investors, you are effectively acting as a consultant, no? Consultants aren't free. Don't undervalue your knowlegde and abilities.


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## Berubeland

Dana thank you very much for your good ideas for me  You are my new business advisor. I am currently getting my hubby to make a blog for me on my website. 

I should get a fee like I said I am not really sure what to charge and who my potential clients would be. There is no doubt the intellectual property I have developed over the years is worth something.


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## steve_jay33

A quick story

Hey Mr. Barber do you think I need a haircut…Of course son, what a silly question take a seat.

Hey Mrs. Property manager do you think I should invest in Real Estate. Of course you should, let me show you how to make 20% return or 600K in 18 months.

It seems to me that even though Berubeland has an obvious edge in Real Estate, and yet you still are not that profitable. If anything you should be on the forum telling people not to invest in Real Estate and evaluating property is not that easy, rather than saying how unprofitable REITS, stocks, bonds, etc are 

You don’t ask or get paid a finder’s fee. Are you NUTS!!!


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## Berubeland

No I don't ask for or get paid a finder's fee. Not yet anyways.

Most of the work I do or have done is for people who already have existing properties that they have milked dry for years as explained. Or doing collections and evictions. 

I'm sorry I'm doing as well as you'd expect but I started my rental business only three years ago then I immediately got pregnant with my son. I was very ill during my pregnancy. My hubby raises our son while I work. I'm not sure what your expectations for business growth are during a difficult pregnancy and part time maternity leave but they clearly do not parallel mine. I take a lot of time I should be using to grow my business to take my son to the park 

This may seem strange to you but I am really not really bent on world domination with my rental business. I would like to get wealthy one day and I am willing to work for it. I am not willing to trample on a bunch of people to get there. I am a very straightforward person and I kind of resent the implication. 

I don't have anything to prove really but I do have a few abilities that the average joe doesn't have. I can read very fast and process a lot of information quickly. While I am doing this abnormalities kind of stick out to me. This makes it possible to scan webpages such as mls.ca (not too accurate) to find possible good deals. 

I do the exact same process for finding profitable warrants. I look at my stock list which contains every single warrant all 139 of them and look for unusual drops or things that stick out to me. Then I find possible buying opportunities and cross reference the actual stock with itrade technical alerts then I google to see if there unpleasant news then I look up the trading history and pick the most economical price point and set my limit order and wait. I also buy warrant trading at .005 and wait for the volume to go up and sell them. This December I bought CCJ.WT 125 000 shares at .005 and resold them for .03. This made my Christmas. 

I don't mind sharing my knowledge with you or anyone on this forum for free. Everyone else gives me tips and points of view on saving and investing why wouldn't I? When I'm on here it's because I am not out and about renting property making money. 

I can find an income property for you right on this forum for free if you like, most people don't want to buy the most profitable investments because they don't have the stomach for it. It wouldn't be the first time either. I found a whack of interesting potential property in a thread where everyone was arguing the were no opportunities in Toronto and that properties were too expensive. They want already profitable properties that are well managed and safe. That's why there are flippers and flippees. 

It's the same with stocks there are people who buy stuff on $.40 on the dollar and then there are the the guys who buy stuff at $1.10 on the dollar and that's how it goes. The guys who buy stocks at $1.10 on the dollar always seem to think the other guy is lucky. They don't ever think holy moly this other guy is making money and I'm not I could learn. 

That's how I found warrants actually people actually make serious money in the stock market and I was disturbed that my best buy and hold strategies had given me a return of -66%. So I got mad I know people make money in the stock market so I sat down an entire week and figured out how to make a little dough with my small capital. You know who makes money? The banks and you know who buys warrants? Banks and hedge funds. Now I have been shouting this from the rooftops since I discovered this. My parents invest and I have a friend who has stocks and then there's my financial advisor at Investor's Group none of them have even bothered to read about it. They do however tell me frequently that it is very risky. 

It is the same with real estate. The stuff I am saying is not new tons of people say it.


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## gobbler

Berubeland I sympathize with you. As Dana stated you are undervaluing your expertise.

I've met investors that love to find hidden gems. They do the door to door thing and snatch great properties for their clients before anything ever hits MLS. They certainly aren't doing this for free and neither should you. It takes time and dedication and a certain liking for it.

I just stumbled upon this forum and enjoyed your responses and admire your openness. Keep em coming! There is nothing like owning your own hard assets, you get to experience what others only read about.


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## stinsont

Anyone have thoughts on how to place a valuation on self-storage facilities?


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## Berubeland

The evaluation method would be exactly the same Stinstont. 

Net Operating Income/Purchase Price.

Net Operating Income would be evaluated like this.

Gross Income 
- Property Taxes
- Building maintenance percentage
- Salary of Employees
- Advertising Expenses
- Vacancy Turnover percentage
- Professional Expense (accountant, lawyer etc.) 
- Management Expense
- Other expenses I may not have thought of 
- Debt servicing charge (Mortgage)

This will give you an idea if investment is profitable or not. If you do the calculation without the debt servicing you may end up with negative cash flow which is obviously not good.

Fair warning owners are known to fudge and minimize the expenses on their side. You one the other hand will exaggerate the expenses or potential expenses on your side and that's how you enter into the negotiations. 

You can also do a cash on cash analysis. This will give you your return on the cash money that you have to put up to buy the business. 

For instance your net income is $12,000 per year and your down payment was $100,000 then your cash on cash return is 12% 

I urge you not to remove any expenses that you will be doing yourself for instance accounting or management or maintenance. You deserve to be paid for this !!

What I have seen is that buyers get interested in a property and then just want it. Your mind will minimize the negatives and amplify the positives. Let the numbers be your friends. If it works good if not walk away. It is entirely possible to be in business and make less profit than the guy who serves you your Happy Meal. You will have hundreds of thousands coming in, you will pay everyone and then you will cry because you have $200 bucks left over after working 80 hour weeks. 

The numbers are your friends  Don't forget the only illegal offer is an offer with a gun. Make the numbers work for you and you decide what to pay based on that. Thats what the pros do.


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## stinsont

What is the typical factor used for vacancy? Also what is the range considered acceptable for ROI - guess this is typically called the cap rate...


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## Dana

stinsont said:


> What is the typical factor used for vacancy? Also what is the range considered acceptable for ROI - guess this is typically called the cap rate...


The vacancy rate varies from area to area. CMHC tracks this info and records it quarterly. You can go to their website and sign up to receive the report when it comes out. The vacancy rate in the area where we invest is typically around 4%, but we use 5% for our property analysis

The cap rate is also dependant on location and type of property (i.e. commercial, multiplex, single family, etc.) It has been my experience that each investor has their own idea what the cap rate should be. A realtor recently told me that in our area he uses 8.5% as a benchmark while another investor told me he uses 5%. I am always on the lookout for potential real estate investments and I 'run the numbers' for every property that matches our criteria that comes on the market in our area and all the ones that 'are good on paper' seem to have cap rates between 6 -7%. 

For our purposes, we give less consideration to the cap rate and more consideration to cashflow and cash on cash analyses. 

Berubeland can probably answer this question more insightfully than me.


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## Berubeland

One of the owners I work with has storage units in Midland. He is out of town for a couple weeks so I can't ask him directly but I did speak to the manager of his storage facility this morning (she deposits postdated checks and I was asking her to hold one) and I took the opportunity to ask her how it works and if it's a good business. 

She says it is good, all her units are full most of the time, there can be a lot of turnover at times but she says everything rents with in a month. She says they are the cheapest in the area and they are not climate controlled or heated so they get a lot of people who have been evicted and need to store their belongings but they don't really deal with people who have nice stuff. They have no security either and the units get a little damp because there is no heating. Still she has no problem renting them. She says there is very little maintenance and if the people don't pay she double locks the unit after one month and then a month or so after that they throw the stuff out. 

You should be able to get vacancy rates from the owner as well as by going around to lurk other storage facilities in the area to find out prices and competition. Just ask the managers in a kind of cheerful way and let them talk


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## grimace

*CAP rates*

Just want to clarify a few points:

The NOI is before any and all financing - you don't count mortgage payments or the interest portion of these payments.

The CAP rate is simply the NOI divided by the Price, expressed as a percentage (ie times 100) - it equates to what return you would get if you bought the property all cash..

CAP rate is an excellent way to quickly value investment real estate - mainly commercial - not so good for residential.

Cap rates are regional - while properties in Timmins might sell for an 11% CAP they might sell for a 6% CAP in Niagara-on-the-Lake.

So you know the CAP rate in your area is 8%. One property has an NOI of $60000 - It is worth 60000/.08= $750000

What Berubeland said was CAP is actually the cash flow or Cash ON Cash return which will change based on financing. If for the above property I pay $750000 and get a bank mortgage of 65%LTV and put up the rest myself my return is totally different than if I pay $750000, get a bank mortgage of 65%LTV, but the seller holds a 25% second for 6%, my return will be much better.....


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