Coming off almost a decade of rapidly rising home values, real estate investment in Victoria has been considered a winning idea. Spruce speaks to industry experts on whether this is true, and how to invest wisely.
By Shannon Moneo
Whether it’s house flipping or buying multiple properties, there’s one foundational question: “How much can you afford to lose?” asks Chuck McNaughton, PFP, a Senior Wealth Advisor with Scotia Wealth Management, a division of Scotia Capital Inc. “Risk is always the disadvantage, in my opinion.”
Risks could include purchasing the wrong property, surprise expenses, buying with a short- term horizon and rent payments that don’t cover mortgage payments.
“If you can’t afford the mortgage, you can’t keep it,” McNaughton cautions.
Rather sobering advice, but with almost 20 years of experience, McNaughton has seen how people think they can make a quick buck via real estate investment, but sometimes fail. They might not have sufficient capital, experience or time. And unexpected costs, such as a leaky roof, asbestos removal or trash-and-burn tenants, can transform what seemed like a good deal into a money pit.
“In the end, it blows up on them,” McNaughton says from his Sidney office.
Tony Joe agrees. A RE/MAX Camosun realtor in Victoria since 1991, Joe has worked with clients who extract the equity from their own home and use the money to buy rental properties or secure loans to buy a house to upgrade and then flip.
“The successes that come to mind for me are those who held on for a long time,” Joe says, referring to when a 25-year mortgage is paid off, rental income is flowing in and equity in the home is full-fledged.
“That’s when you really see the benefit,” Joe says, adding that he’s always leery when investors think they can make a lot of money in a short time.
Like McNaughton, he’s seen what can happen when the timing is bad or someone overpays on a property, typically an older home with unforeseen problems, even after home inspections. And once renovations start, be very mindful of spending, Joe says. “Fancy faucets and fixtures don’t add a lot of value. Don’t over-renovate.”
There is No Secret Sauce
While TV home shows make it seem easy, renovating is an expensive proposition that requires much oversight. Joe has had clients who went whole hog on the glitz and gloss and lost money because the market flattened or dropped. And in Victoria’s busy market, where tradespeople are going full tilt, it means they are hard to find. With high demand comes top dollar rates.
A secret sauce, to cook up a batch of profit, doesn’t exist, Joe adds.
“Everybody’s out there looking for a deal, but deals are rare indeed, especially in this town,” he says.
For example, when banks or lending companies accept one offer during foreclosure proceedings in court, the judge is obligated to allow other offers.
“There’s almost always a bidding war,” Joe says, where prices usually settle at market value, with the unsettling aspect that a quick sale doesn’t include “subject to” conditions. And in addition to legal, mortgage and appraisal fees, real estate investments can be subject to a land transfer tax, GST, a capital gains tax and B.C.’s new speculation tax.
Because true deals are rare, real estate investing is a speciality that requires hard work, research, smarts and the ability to make savvy use of the bank’s money. Survivors build enough equity, which allows them to pay the minimum amount with their own funds. McNaughton believes, “The people who do it have the time and inclination.”
Putting In The Sweat Equity
The co-owners of Expansion Properties have been learning as they go. Elizabeth Milder and Cole Skelly own six Victoria properties; four are existing rentals, with a total of 11 units, and two are homes, being built from scratch, to be sold.
Expansion’s seed was planted in 2005 when Skelly bought a condo. A year later, he sold it for a profit and bought a Saanich house and added a basement suite that he rented. In 2013, he and Milder joined forces to form Expansion, buying another house to renovate and rent.
“We’ve established our niche,” Milder says. “We look for properties that have the potential to add square footage. We find older homes to take from single-family to multi-unit rentals.”
For two of their real estate investment properties, they excavated the basements, a very labour-intensive endeavour that gives new meaning to sweat equity. Not to mention that Milder continues a full-time job as a health and safety consultant. Only last year did Skelly leave a full-time career, after working in Alberta and B.C. oilfields for 13 years.
Since their launch, when they were very hands-on and doing most of the reno work themselves, they’ve discovered that nurturing good relationships with tradespeople and renters is time and money-saving. Yet things can go wrong. Remediation costs, or even providing sufficient parking for multiple units, can become cost-prohibitive. So, be aware of municipal rules, Skelly advises. And know that the area’s numerous municipalities are inconsistent when interpreting guidelines.
“Understand that you have to go into this expecting the worst,” Milder warns, recalling one of their homes, where the basement had to be dug out, was mostly bedrock. “Have built-in contingencies. You have to be fluid.”
A contingency typically means having extra cash. Milder and Skelly use the BRRRR method (Buy, Renovate, Rent, Refinance, Repeat). When they go to a bank for financing, they explain that their property was renovated to create more square footage, which, in turn, generates more rental income. A reappraisal shows that the property’s value has increased, generating more equity, which then frees money to pay debts and make a down payment for another property investment.
Still, the couple have their share of sleepless nights in the face of fluctuating financial rules like the mortgage stress test, finding suitable homes to buy and renovate via the MLS or door knocking and ferreting out investors.
“It doesn’t come easy,” Skelly says. As McNaughton notes, it comes down to what you can afford to lose.
The Basics of Real Estate Investment
- Cash flow is your safety net. Don’t bank only on property appreciation. Find a property where cash flows — or create one.
- Run the numbers and err on the side of caution, accounting for all expenses, including a minimum three-per-cent vacancy rate, even when vacancy is low. There will always be surprises.
- Build a solid team of property investment experts: real estate agent, accountant, lawyer, insurance broker, mortgage broker and tradespeople. Don’t take them for granted!
- Quality over quantity. Creating quality rentals units that you yourself would happily live in, will come back to you in spades. Your tenants will be happy and maintenance problems will be limited, which all contribute to a greater ROI.
- Avoid problems by screening tenants thoroughly, listening to your gut and always maintaining the mindset that you’re running a business. Do not rent to the wrong person just to fill a vacancy.
Continue Reading: Common Sense for Condo Buyers.