Re-positioning Properties – Part1
There are plenty of opportunities to make money and real estate is definitely one of them. The trick is to spot a gem amongst a myriad of average properties. A gem may be cleverly disguised as being less desirable.
Gord Lemon helps you spot these investment opportunities.
From Canadian Real Estate Wealth Magazine
Investors will instinctively pass on those deals presented to them wherethe numbers simply don’t work. This is quite understandable, but sometimes a little more digging can uncover a simple reason for the property’s lack of cash flow.
This issue often comes down to incompetent ownership which results in mismanaged rental properties.
Mismanaged properties or properties which are “underperforming” can be a virtual goldmine if you know how to identify and capitalize on the true potential that another investor simply is not realizing.
Owner incompetence typically comes down to six major issues. In most cases these issues can be remedied simply with a combination of good management practices, an understanding of fair market value pricing and rents in your neighbourhood, and of course, injecting a little cash.
The following examples generally pertain to smaller multi-families (2–30 units); however, the principles can also (and should) be applied to larger multi-family properties.
ISSUE #1 – Below market value rent
This common faux pas stems from a lack of knowledge of fair market value in the area, resulting in a cash flow issue.
If a property is at breakeven cash flow at 100% occupancy, a vacancy will result in the property owner having to cover any shortfall.
The solution is clear. Raising the rent by even $50 per unit (depending on the number of units) can turn an apparent cash flow issue around. This can be a more difficult process however, depending on which province the property is in, and the Landlord/Tenant guidelines as to how much of an annual rental increase you are allowed.
By requesting vacant possession, you must abide by provincial laws which clearly state you must be either moving into the property yourself (or a family member is moving in) or you are intending to do significant renovations to the property.
ISSUE #2 – Absence of good property management
Lack of this skill is one of the biggest downfalls of any would-be investor.
This encompasses everything from improper screening during the tenant interview process to the daily aspects of running the property.
Neglecting any of these areas will result in an underperforming property.
Without a rigid system in place to screen the tenants, owners subject themselves to delinquent rents, frequent vacancies and potentially large repair bills. Lack of initial tenant qualification, absence of urgency in collecting rents and not having proper eviction procedures in place are common characteristics of a mismanaged property.
Choosing between property management or self-managing is another factor to consider. The novice investor often self-manages to save money, however, lack of efficiency is typically equated with the lack of time the investor has to dedicate to property management and ultimately the property suffers and becomes an underperformer.
Hiring an incompetent property management company can also create an underperforming property. Property managers have been known to have poor screening procedures because they only get paid when a unit is tenanted. This is more common than you may expect. The bottom line is low rent and high turnover.
Often, property managers outsource repairs and “pad” the bills as extra income. If the owner was in control of the management, they would know exactly what the repair was, board guidelines of the particular province. As the new buyer of a property, you have the option of requesting vacant possession.
This allows you to reset the rental amounts to whatever the market will bear. You are bound by most provincial Landlord and Tenant and the cost of materials and labour to fix the repair, not to mention the names of people in their database to do the repair.
If the property you are looking at is part of a condo corporation or strata, there could also be mismanagement of reserve funds. This results in excessive monthly fees. Being on the condo/strata board and having a hand in how money is being spent can potentially bring down the monthly fees, thus enhancing the bottom line.
Ultimately, by leaving the management to someone else or not managing the manager will often lead to underperformance. Negative results stemming from poor property management is also the main reason why many incompetent investors get out of property ownership.
Check out 4 more major issues you can take advantage of in Part 2 of Re-positioning Properties – Part 2
If you’d like more info, to find out about training/coaching or to learn about how you can participate in cash flow real estate which provide above average returns, schedule a free 15 minute call by filling out the form below. And we assure you, no pressure or sales will accompany the call. Look forward to speaking with you!