Basement Suites - Do Your Homework!

A few days ago, there was a great article on basement suites in the Globe and Mail.
See the full article “HERE”.

Funny enough, I had planned on writing a blog post on basement suites, but they beat me too it!....so I’ll use their article (with great thanks)….and put my own spin on it!

If you are looking to buy a house with a basement suite (see also: inlaw suite, granny flat, accessory apartment, etc), you need to weigh some pros and cons as mentioned in the Globe article:

1. Consider your privacy.
Can you live with seeing a stranger around your house or using your property outside? Is the extra money worth it?

2. Try to avoid renting to family.
It is best not to rent to family, as it completely changes the relationship and is difficult to use “eviction” or “collection” rules against a non-paying family member without destroying the relationship and having the repercussions ripple out into the rest of the family.

3. Sign a proper written lease.
Always – even with family members – have a properly written lease between you and the tenant that clearly outlines the rules, late rent penalties, expectations, and length of term. It must be signed by every adult who is to reside in the suite.

4. Don’t set your rent too low.
Never be the lowest rent in the market – you will attract the type of renter whose focus is solely on dollars. It will also lead to more rapid turnover as they leave to the next “lowest rent” spot. To set the proper rent for your suite, go online and search for available units in your area. Make sure to look at a number of different sites and be location-specific in your comparisons. Look at the amenities and picture them through the eyes of a potential renter. Then place your price in the middle or higher end of the average comparable.

5. Do your research.
Each province and territory has its own landlord-tenant legislation so make sure to read up on the rules that apply where you live. In addition, make sure to research your local municipal bylaws, which include things like guidelines and standards for fire and building safety. Municipal bylaws also cover issues like zoning and permits. For example, some cities are now looking to shut down secondary suites in specific neighbourhoods. Not conforming to these rules means you could be shut down at a moment’s notice, so check with the city to make sure that your suite is legal. The Canada Housing Mortgage and Housing Corp. has a useful website with many good links.

6. Tell your home insurance company.
When you rent out a unit in your home, you are obliged to inform your home insurance company – something that the vast majority of people fail to do. If anything were to happen, for instance if a fire starts in the rental suite, the insurance company could say they were not informed of the tenant and that the policy is voided.

7. Research the tax repercussions.
Once you have a rental suite in your home, you have to claim that rental income on your tax return. In addition, once you start using the property for revenue, a portion of the capital gain when selling the property could be deemed taxable.

8. Learn from other landlords.
Knowing the tricks of the trade is important and who better to learn from than other landlords? Talk to as many as you can about the pros and cons of basement suites.  If you don’t know any, ask a realtor!

My advice for either developing or purchasing a home with a basement suite?  Do your homework….and then when you are done your homework, do some more.

This past spring, I was almost caught with my pants down when the city inspectors came knocking.  Even though I had done research into basement suites, I had overlooked a few key points….Several months later and some serious stress, I now have a legal two unit dwelling, but I feel like I aged about 10 years during the process!  Don’t let this happen to you!  More on this in a future post!

Something has Gone Wrong With Every Home I Have Purchased….and Have an Exit Strategy!!

Yes, you read that title correctly.  Something has gone wrong with everyone investment that I have made and funny enough, there were warning signs for every problem.  Does this mean I panicked and sold the property?  No, but sometimes I do think about that.  Actually, not a month goes by when I don’t consider selling all of my assets, but I have committed myself to the long haul here and I need to stick with it.

What does this mean for my future investments?  Heed the signs, but don’t think that every investment is going to be perfect.

As always, make sure you are doing due diligence.  It is important to know what you are getting into and have a plan for some of the ‘foreseeable’ issues that are typical of the type of investment you are looking at.

For real estate, I am a firm believer that it is important to have an exit strategy BEFORE making a purchase.  This strategy can change from time to time, but having something in place is very important.

My student rental is one example.  I purchased this property in 2009 and since then, the investment landscape in Kitchener/Waterloo has gone through several changes and fluctuations.  The recent implementation of licensing fees and new regulations for lodging houses has affected me somewhat, but not to the point that I cannot deal with it.  Luckily, 5 bedroom lodging houses were grandfathered into the rental system (going forward, 3 bedrooms is the maximum) so I’m thinking that my property will actually increase in value….once the storm cloud raises around this licensing debacle.  To read more on what changes took place, click HERE.

I personally think it will take a year or two for this licensing issue to ‘blow over’ and KW will start looking like a positive place to invest again, but I digress….back to my exit strategy!

I have 3 separate exit strategies in place for this property.

1.       Keep it as a student rental and sell it as a student rental - My plan here would be to rent it out and sell it several months before the lease is up.  For example, I would sell it in November or December with a lease that runs until April 30^th.  That way, I am offering a “turn-key” investment with tenants already in place that will cash flow for 5 or 6 months before the new owner will have to think about getting new tenants.  No worries about vacancy = simple investment!!

2.       Sell it as a single family home – This house is in a great area and is near schools, shopping, churches and other amenities.  I could always put a little money into renovations and flip it to a family.

3.       Rent to own – As I have mentioned, I do have a couple of rent-to-own properties and this is one way I could keep good cash flow and have a predetermined selling price 2 or 3 years in the future.   Again, I would have to put in some money towards renovations, but this would just be cosmetic.

All of these are options and who knows…I might just keep it forever! J But the most important thing here is to have options.  Life throws curve balls constantly and if the need arose to sell this property, at least I have done some planning ahead of time!

What do you think?  Keep, sell as a rental, sell to a family, RTO?

Another Bathroom Reno

Last August, I went through a bathroom reno to the upstairs unit at my house in Guelph

You can see the before and after pictures of that reno HERE

I swore this would be my last bathroom reno for a long time!  Things seemed to take much longer than expected and It was a very stressful time trying to do it while I had tenants upstairs.

Well fast forward about 6 months….I spoke too soon!

It was mid-March and I was having a bit of trouble re-renting my downstairs unit for the September semester.   I know, I was a bit early, but I wanted to make sure I was planning well in advance…something I would recommend for everyone.

During the showings, I could tell that no one was particularly fond of the bathroom.  It was dated, needed paint and trim, had a pretty scuzzy vanity and smelled a bit “musty”.

The initial plan was to slap on a fresh coat of paint and change the baseboards.  After I popped off the baseboards, I realized I had a small problem.  There was some mould on the drywall behind the baseboard heater and a little bit more near the shower.

No big deal I thought.  It was likely original materials and when you have hot (baseboard heater) meeting cold (drywall) this is usually a recipe for mould.  I wasn’t worried about the mould by the shower either as it was likely just water that had splashed behind the baseboards over several years.

My plan was to cut out the bottom 2 feet of drywall in the area and replace it with mould-resistant “blue board” drywall.  Easy fix right?........

About half way through the project I decided that the caulking around the shower would have to be replaced as it was old and discoloured.  As I ripped up the caulking around the edges, I began to smell the familiar musty aroma…of mould. 

My heart sank as I put my screwdriver in the crack around the shower, which had been previously caulked…..the board that the shower had been sitting on, was completely rotten.  Water must have been leaking around the shower for years!!

I felt a little bit of panic coming over me and decided I needed some advice.  I called a friend in the area who is a contractor and asked his opinion.  He suspected what I did…that the base plywood was rotten.

After taking most of the next day to rip out the shower, our suspicions were confirmed and we would need to replace the entire shower and baseplate.  Doing this would be no easy task as the floor would also need to be ripped up, which was ceramic tile.

I decided that this bathroom needed an overhaul anyway and I decided to replace the vanity as well. 

Luckily I had tiles left over from the previous bathroom reno and Home Depot was having a huge sale on shower stalls and bathroom vanities!!!

I will save you the details of the reno this time, but 5 days later, I had a completely new bathroom just in time for another showing to a prospective tenant.

Funny enough, the first group that saw the place with the new bathroom ended up taking it for September!  Maybe in the long run it was worth it?

Take a look at the pics below!  Comments welcome!

Value of time VS Value of Money

Sorry for not blogging for a while.  Recently I have had the pleasure of overcoming some fairly serious obstacles which have taken up the vast majority of my time (more on this to follow!).

Recently I had a chance to sit down with a large player in the real estate industry (I will call him Joe).  In the last five years, Joe and his brother have grown a small start-up company into a multi-million dollar company with over $100 million in assets.

But this didn’t happen overnight and they started with almost nothing.  And the real kicker is that Joe gave up a seven figure salary to start his own real estate company with his brother.

Read that again…..I said SEVEN figure. 

The real reason for giving a million dollar salary was the value of time.  His wife had recently given birth to their first child and they were expecting another.   His boss and mentor had congratulated him and told him that it was great to have kids, although it was difficult to spend time with his own.  Digging deeper, Joe found that, due to the long hours he put in to become partner, his boss only saw his kids on weekends….if at all.

Instantly something clicked in Joe’s head and he realized that this was not the life for him.  The work was challenging and the pay was fantastic, but nothing was worth more than watching his kids grow up.  On top of this, he always had an entrepreneurial spirit.

Now I am sure he had challenges along the way, and I’m sure there were some long days/weeks/months, but he is doing what he wants to do with his life….on his own terms.   If his kids need him, he is there.

I applaud his efforts and thank him for his inspiration to me. 

More than anything, this reassured me that I am travelling down a path that I want to take, not what everyone else thinks I should be doing.  And it is nice to know that I am not alone with these thoughts. 

For those of you out there who are interested in doing something out of your comfort zone….do it.  Do it because you may not ever get another chance.  Do it because it’s exciting.  Do it because it inspires you. 

I’m not telling you to quit your job and start flipping houses, but if you have always wanted to try something new…at least take the first step.  If it doesn’t work out, at least you tried.  If it does…gravy.

BMO Introduces Teaser Rate??

Last week, an article ran in the Globe and Mail, with limited fanfare, entitled “BMO move spurs rivals to drop mortgage rates”.

Here are the first two paragraphs of the article:

A gimmick by Bank of Montreal (BMO-T58.25-0.41-0.70%) to attract new mortgage customers in a traditionally sluggish month for sales has sparked a mini price war among rival banks.

A day after BMO announced it had dropped the rate on a five-year fixed-rate mortgage to a historic low of 2.99 per cent as part of a two-week promotion, Toronto-Dominion Bank (TD-T77.750.050.06%) and Royal Bank of Canada (RY-T52.09-0.68-1.29%) followed suit with limited-time-offers of their own.

The article goes on to say that this supposed promotional rate may be held over for much longer than the anticipated two week period. 

Now did anyone else notice the types of words used in just two brief paragraphs?

“Gimmick…..promotional……price war”.

So what are they saying here?  Sales are slow enough that there are now “teaser” rates targeting the marginal home buyer .  What does that spell?  Disaster for these fools who jump in head first thinking a 5 yr fixed rate of 2.99% will last forever.  Fast forward five years to renewal time.  If you are a marginal buyer at 2.99%, what does that make you at 7%?  Probably a cash-strapped, paycheck to paycheck, owner of a house worth less than it was five years ago…..Sound familiar?

I’m no economist Mr. Carney, but can someone please do something about this before it is too late?

Here We Go 2012!!!

I can’t believe where the time has gone.  It seems like just yesterday that I was sitting around in my pyjamas waiting for the world to end New Year’s Eve in 1999.  Yikes!

2011 was a great year for my professional life and personal life as well.  I started a blog, took a new position with private REIT in Guelph (awesome company!), purchased a lease-to-own investment property and got engaged!

Yes it was a whirlwind year full of change, opportunity and a ton of stress! 

What’s on the agenda for 2012?  Lately, I have been focusing on attainable goals because I’m sure you all know how it goes when you set too many or unattainable goals.   Nothing ever gets accomplished!

So for 2012 I have set two goals:  Lose 10 pounds (cliché I know, but in the last 6 months, I have been so busy with work and renovations that I have gotten away from my typical healthy routine….but I’ve actually already lost 3 of these pounds since Jan 1^st!).  My second goal is to purchase another investment property.  I’m not sure exactly what type of property, but given my recent rent-to-own deal, I think I am in the market for another!  I have had a couple of interesting of near-miss deals here so I think another one is definitely on the horizon.

So what are your goals for 2012?  If there is one thing I have learned is that keeping them high, yet realistic, will go a long way in attaining them! 

Good luck! J

Fractional Reserve Banking....Legal or Ponzi Scheme?

late September, the U.S. Justice Department filed a civil suit against Full Tilt Poker, an online gambling site.  They claim that thousands of online poker players were defrauded out of more than $300 million that is still owed to them. The government said that, in total, the 23 owners of the site had taken out $444 million in distributions over the years.

According to the Wall Street Journal…..On March 31, 2011, Full Tilt owed approximately $390 million to players around the world, but the company had just $60 million in its bank account, the government said in its filing Tuesday.  (Quick math…this is about 15% money on hand vs what is owed).

Credit: chadelliot.com

Enter “Fractional Reserve Banking”.

For those that do not know, Fractional Reserve Banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction (called the reserve ratio) of the quantity of deposits as reserves.  Typically the reserve ratio is 10%, meaning that for every $1 that the bank has in the system, they can create loans for up to $10. 

Funny how this is legal, yet Full Tilt Poker is a Ponzi Scheme.

Now I know that these examples are different.  The owners of Full Tilt Poker were clearly stealing the money, however if they were intending on putting this money back into the “pool”, should this have been allowed? 

Canadians ought to know that the banking system has their own set of rules.  Sometimes this is a benefit and sometimes it can build a foundation for a catastrophe (see “Lehman Bros.”)

Thoughts?