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Hitting a financial road block in RE investing

O

OolloO

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Since 2008 I've been slowly purchasing properties with my last one being purchased in November of 2013. On the last (4th) home, the banks were very reluctant to provide a mortgage loan, although, somehow I managed to find a willing bank through a mortgage broker. My investment style is to buy with usually 20% down, rent and hold. After the 5 year mortgage term is up, I refinance, pay off debts, myself and reinvest.

I have a real estate license and practice part-time. I don't advertise and mainly have the license to purchase property for myself and help the occasional client (acquaintances). The problem I have is I usually find very attractive (appreciation, rental income, etc...) homes when showing clients. They are usually not interested in these homes for reasons they cannot see beyond. I'm interested in purchasing these home at a discounted price, easily correcting these issues and renting it out (cash flow positive). With the minor renos I usually get 10%-15% instant appreciation and I do see further appreciation over the years due to infrastructure and amenity improvements I look for when purchasing. With the last home I got two rental offers the day after I posted the house for rent. I've only lost approximately a month of rent in the 6 years I've been doing this for one house.

I now doubt I can get a home on my own, but I do know individuals who are interested in investing with/in me and I have no idea on how to approach this. I was actually surprised to have people offering me capital for my 'next' venture. What would be the best approach if I were to obtain private investors?

I would like to
  • maintain full control of decision making
  • if possible, exceed the standard 5%-6% property management fee from rental income. The problem is that the houses in Toronto are usually 50+ years old and need a couple years of close attention before they become self sufficient.
  • be compensated for the renos that take quite a bit of effort to manage
  • be compensated for the renos I do myself


From an accounting point of view, should I create a corporation? Limited Partnership? Or purchase the home as tenants-in-common?
What tax advantages/disadvantages are associated with each one?
Do I need to provide personal income when applying for a mortgage when incorporated\limited partnership?
Any advisors I can get in touch with? On this message board?

Essentially, what is the best model when obtaining outside investment for real estate?

Note:
By minor improvements/renos I mean
  • Extremely dated bathrooms
  • Disastrous paint jobs (murals everywhere)
  • Oil furnace conversions
  • etc...

I do read the other threads and I am fully aware of the opinions for an eminent bubble burst. I do, somewhat, look forwards to a burst as it would provide a better opportunity to pick up some more homes at a discount.
 
Where your at, it sounds like you need an accountant... a few of my friends are pursuing this type of activity - though it's been harder for them than it sounds like for you. They haven't reached that many properties, but once they do, they do plan to incorporate under the advice of their CA... that's all I know - so I'd suggest you get a good accountant.
 
Sorry to go slightly off topic but being a newbie, it doesn't seem like I'm able to start a new thread. I just started looking into buying a rental property after buying my first house but am undecided where or in what (house/townhouse/condo) to invest. I'm looking for the highest cap rate (high rent/low property value) in an area within a few hours drive from where I live (North York).

Does anyone have any ideas?
 
TO_Guy said:
Sorry to go slightly off topic but being a newbie, it doesn't seem like I'm able to start a new thread. I just started looking into buying a rental property after buying my first house but am undecided where or in what (house/townhouse/condo) to invest. I'm looking for the highest cap rate (high rent/low property value) in an area within a few hours drive from where I live (North York).

Does anyone have any ideas?
Click to expand...

-What's your price range?
-How long do you want to hold the property? (I don't believe in holding for less than five years in most cases. Refinance if you need monies)
-There are other aspects to consider, but these are at the top of the list.

I'm very much against condos right now as they appreciate no where near as well as a house. And the supply of houses is limited in comparison to condos. Yea, i know, i do have an condo, but purchased it back in 2009 and was delivered late 2011... Not my best investment... Don't get me wrong, i've made money, but not as much as on houses.

Toronto has a lot of savvy investors, you just need a be a little savvier than most. I recommend looking at areas developing instead of developed areas. As houses get pricier, lower income individuals start moving out, starbucks start popping up, and finally condos start appearing. There are more leading indicators, but these are the easiest to spot.

Another major influence to property value is transit improvements. Look at where the eglinton LRT stations will be especially where it intersects with yonge\spadina subway. Generally, these intersections can increase by 30% (there's an article for this somewhere). The underground LRT stops will be better then the above ground stops. Look at where the yonge and spadina subway is extending. Go stations are a good bet as well.

The greatest benefit to purchasing an investment property right now is that renting is extremely easy within Toronto. With property values so high and people waiting on the side lines to purchase, they have no choice but to rent. Don't get an agent to rent it out for you, just post on craigslist\kijiji, etc... If you feel more comfortable getting an agent, use the one that helped you purchase the house and get them help rent it out as part of the condition of working with them in the first place

Some tips
-Make sure you are cash flow positive or are at the very least damn close to breaking even
-Make money off the TOP and BOTTOM (On the purchase of the home and eventually the sale)
-Don't be afraid to crazy low ball an offer. The seller may feel insulted, but that's why your agent is your front man and should bare no shame.
-Off the top means, structure is sound, but paint job is horrid. Or Bath room needs an update. Floors need to be changed. Need an eye for affordable repairs. NOT renovations. I don't believe in flips. Especially with the taxes on flips and the government cracking down on them.
 
Last edited:
OolloO said:
-What's your price range?
-How long do you want to hold the property? (I don't believe in holding for less than five years in most cases. Refinance if you need monies)
-There are other aspects to consider, but these are at the top of the list.

I'm very much against condos right now as they appreciate no where near as well as a house. And the supply of houses is limited in comparison to condos. Yea, i know, i do have an condo, but purchased it back in 2009 and was delivered late 2011... Not my best investment... Don't get me wrong, i've made money, but not as much as on houses.

Toronto has a lot of savvy investors, you just need a be a little savvier than most. I recommend looking at areas developing instead of developed areas. As houses get pricier, lower income individuals start moving out, starbucks start popping up, and finally condos start appearing. There are more leading indicators, but these are the easiest to spot.

Another major influence to property value is transit improvements. Look at where the eglinton LRT stations will be especially where it intersects with yonge\spadina subway. Generally, these intersections can increase by 30% (there's an article for this somewhere). The underground LRT stops will be better then the above ground stops. Look at where the yonge and spadina subway is extending. Go stations are a good bet as well.

The greatest benefit to purchasing an investment property right now is that renting is extremely easy within Toronto. With property values so high and people waiting on the side lines to purchase, they have no choice but to rent. Don't get an agent to rent it out for you, just post on craigslist\kijiji, etc... If you feel more comfortable getting an agent, use the one that helped you purchase the house and get them help rent it out as part of the condition of working with them in the first place

Some tips
-Make sure you are cash flow positive or are at the very least damn close to breaking even
-Make money off the TOP and BOTTOM (On the purchase of the home and eventually the sale)
-Don't be afraid to crazy low ball an offer. The seller may feel insulted, but that's why your agent is your front man and should bare no shame.
-Off the top means, structure is sound, but paint job is horrid. Or Bath room needs an update. Floors need to be changed. Need an eye for affordable repairs. NOT renovations. I don't believe in flips. Especially with the taxes on flips and the government cracking down on them.
Click to expand...

Good advice here.
 
Thanks for the insight.

I am thinking 20% down on around $300K. Cash flow positive is a must. Any areas at the fringes or just outside the GTA you would consider?
 
TO_Guy said:
Thanks for the insight.

I am thinking 20% down on around $300K. Cash flow positive is a must. Any areas at the fringes or just outside the GTA you would consider?
Click to expand...

In that price range it would be tough to find a house with the leading indicators listed above in the areas that 'fringe" Toronto (Mississauga, Vaughan, Richmond Hill, Markham, etc..), let alone in Toronto. You could look at condos, but I feel like it would be hard to find cash flow positive units, and I don't believe that they will appreciate as well as a house.
 
What do you know about Kingston/Hamilton/Kitchener?

I know there is always a demand for student housing and I've seen ads on Kijiji for $350-$600 for a room near the campus or transit line. For a 4BR house, that is rental income of ~$2K. Carrying costs I estimate $1,200 to $1,500 a month but I can lower this amount by making a bigger down payment.

I have not looked into the legality of a rooming house in these areas but do you think this is a viable model?
 
I'll defer to experts on the accounting matters.

But I would advise that before you do anything, take a long hard look at who you will be investing with to know if they really have the financial capacity to do this. Don't get caught up in the excitement of it. Are these people your friends? You may (will) have to ask some uncomfortable questions about their financial solvency. We're talking about a situation where money will be locked in to a rather illiquid investment with high early exit costs. Make sure they really understand they can't back out at the last minute, or that 18 months from now they can't change their mind and ask for their money back. You also need a document that explicitly spells out who makes what decisions, and what estimated revenues and expenses are. Get legal advice to draft it properly. This will prevent any bickering over silly things and, if properly detailed, could save you some future legal issues if someone accuses you of mismanaging things like renovations.
 
Last edited:
Jonny5 said:
I'll defer to experts on the accounting matters.

But I would advise that before you do anything, take a long hard look at who you will be investing with to know if they really have the financial capacity to do this. Don't get caught up in the excitement of it. Are these people your friends? You may (will) have to ask some uncomfortable questions about their financial solvency. We're talking about a situation where money will be locked in to a rather illiquid investment with high early exit costs. Make sure they really understand they can't back out at the last minute, or that 18 months from now they can't change their mind and ask for their money back. You also need a document that explicitly spells out who makes what decisions, and what estimated revenues and expenses are. Get legal advice to draft it properly. This will prevent any bickering over silly things and, if properly detailed, could save you some future legal issues if someone accuses you of mismanaging things like renovations.
Click to expand...

Good point. The "human" aspect of it may cause issues. I may have found another way of financing another property, but may come back to this when I hit the inevitable road block again.
 
Last edited:
TO_Guy said:
What do you know about Kingston/Hamilton/Kitchener?

I know there is always a demand for student housing and I've seen ads on Kijiji for $350-$600 for a room near the campus or transit line. For a 4BR house, that is rental income of ~$2K. Carrying costs I estimate $1,200 to $1,500 a month but I can lower this amount by making a bigger down payment.

I have not looked into the legality of a rooming house in these areas but do you think this is a viable model?
Click to expand...

I have my reservations when renting to students. Mainly due to a students
-Immaturity
-Financial stability
-High tenant turnover rate

When you decide to sell, you'd probably limit your pool of buyers to investors. I prefer a passive income where you don't need to micro manage the rental unit.

I do know a little bit about kitchener\waterloo and their tech park. High income earnrts looking for somewhere to live, may be a viable situation and you avoid dealing with students.

I'm not familiar with the other areas you mentioned, so maybe someone in the forum could chime in...
 
Last edited:
Sounds to me like you need to digest what you have for 5 years. I do what you do, bit bigger scale. Partners are something I have never considered. Why not work on what you have, invest in them, try to get the rents up, the costs down. Build some equity. And when you have another $150,000 to invest do it again. In the meantime, work on real estate brokerage more. I know you probably don't like it as much as investing, but it will pay the bills and let you see more product. Take as little money out of the properties as you can, try to live on brokerage. Next thing you know 10 years have gone by and you have some serious equity.
OolloO said:
Since 2008 I've been slowly purchasing properties with my last one being purchased in November of 2013. On the last (4th) home, the banks were very reluctant to provide a mortgage loan, although, somehow I managed to find a willing bank through a mortgage broker. My investment style is to buy with usually 20% down, rent and hold. After the 5 year mortgage term is up, I refinance, pay off debts, myself and reinvest.

I have a real estate license and practice part-time. I don't advertise and mainly have the license to purchase property for myself and help the occasional client (acquaintances). The problem I have is I usually find very attractive (appreciation, rental income, etc...) homes when showing clients. They are usually not interested in these homes for reasons they cannot see beyond. I'm interested in purchasing these home at a discounted price, easily correcting these issues and renting it out (cash flow positive). With the minor renos I usually get 10%-15% instant appreciation and I do see further appreciation over the years due to infrastructure and amenity improvements I look for when purchasing. With the last home I got two rental offers the day after I posted the house for rent. I've only lost approximately a month of rent in the 6 years I've been doing this for one house.

I now doubt I can get a home on my own, but I do know individuals who are interested in investing with/in me and I have no idea on how to approach this. I was actually surprised to have people offering me capital for my 'next' venture. What would be the best approach if I were to obtain private investors?

I would like to
  • maintain full control of decision making
  • if possible, exceed the standard 5%-6% property management fee from rental income. The problem is that the houses in Toronto are usually 50+ years old and need a couple years of close attention before they become self sufficient.
  • be compensated for the renos that take quite a bit of effort to manage
  • be compensated for the renos I do myself


From an accounting point of view, should I create a corporation? Limited Partnership? Or purchase the home as tenants-in-common?
What tax advantages/disadvantages are associated with each one?
Do I need to provide personal income when applying for a mortgage when incorporated\limited partnership?
Any advisors I can get in touch with? On this message board?

Essentially, what is the best model when obtaining outside investment for real estate?

Note:
By minor improvements/renos I mean
  • Extremely dated bathrooms
  • Disastrous paint jobs (murals everywhere)
  • Oil furnace conversions
  • etc...

I do read the other threads and I am fully aware of the opinions for an eminent bubble burst. I do, somewhat, look forwards to a burst as it would provide a better opportunity to pick up some more homes at a discount.
Click to expand...
 
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