4 Things Investors Should Watch Out For

Inspired by the Breakthrough real estate investing podcast hosted by Rob Break and Sandy Mackay

Every real estate investor is bound to experience a few challenges along the journey to financial freedom. The important piece to consider is, how do you deal with these challenges when they arise. We’ve created this handy list of unique scenarios that you may or may not encounter as you grow your investment portfolio.

Real estate investment tips

If you do happen to come across the following situations, these tips could save you hundreds of thousands of dollars. 

  1. Purchasing a property in the path of transportation

If you happen to buy property in the path of a proposed transportation site or other such government-sanctioned projects, there is a chance that your property could get expropriated. Expropriation is the action by the state or the authority of taking property from its owner for public use or benefit.

Expropriation can be quite annoying, especially if you’ve already renovated and have planned for rewards in the form of long term appreciation on your property.

However, If you fail to do your research into the overall growth of the city in which you are investing in, by downloading the city’s expansion plans or the expansion plans of major railways, you may run into this issue. If you’ve received a letter of expropriation, here is what you can do:

  1. Hire an expropriation specialist/lawyer to negotiate on your behalf. These are specialists who understand how to value your investment against any assessments that might try to lower the value of your property. They often cover any upfront fees, which will make it easier for you to work with them.
  2. Understand that if expropriation is going to happen, it’s going to happen. The goal is not to keep your property, it is to get the highest value from it.
  3. Negotiate upfront, do not prolong the process as you may get less than the initial offer. The more time you give the state to determine the value, the more likely, it will find the resources to lower your valuation.
  4. Try to make a profit from the process. You are going to lose your property but you don’t have to lose your investment. If you are strategic, you can actually make more upfront income than you would with a BRR strategy (Buy, Renovate, Refinance).

2. Renovating your home

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Unless you happen to be a general contractor, it is probably best to avoid doing your own renovations. When hiring a professional, it’s no secret, however, that about 90% of the contractors you hire will be frustrating to work with.

Since hiring is unavoidable, we recommend, building a reputation with a general contractor first. Network with contractors who are getting a lot of jobs. If you see a home in construction in your neighborhood, ask the owners about the quality of work and if they stuck to the given budget.

Do not assume that a contractor has your best interests at heart. Always plan for the worst-case scenario and add extra time to the contractor’s quoted timeline. 

If you are only in the buying stage and are considering your renovation costs, bring a contractor with you to showings so you can get an estimate of the cost of the renovations. Here are some questions that you can discuss with your contractor or the appropriate tradesman at the showing:

  • Is the building up to code?
  • Have they done fireproofing?
  • When was the last time the home was waterproofed?
  • How old/new is the furnace?
  • Should you do a full renovation or do enough to get the house rent ready? 
  • Does the home have sufficient electrical panels?
  • Does the home have the correct egress for windows?
  • What is the head height under ducts and beams? Is it high enough?
  • Where are you putting the laundry? This is especially important for multi-family projects. 
  • What is the condition of the roof and the foundations?
  • Are there any weird smells?
  • Are there enough parking spaces?

If you follow these precautions and still manage to have issues during the renovation process or overspend, holding on to your property will help make up for any losses incurred during the renovation.

3. Investing in a student rental:

Student rentals can be attractive because they provide a safety net for your investment during a good or bad economy. When the economy is thriving, students go to school to get placed in good jobs, and in moments when the economy is underperforming, as it is now, education can provide the tools necessary for students to learn new skills to propel them forward. If you decide to invest in a student rental, here are a few tips to help you avoid disaster. 

  • Always think about how you can add value to your property. This could mean adding beds or adding an ensuite washroom. Students talk and if you provide them with a good experience, your property will be where everyone on campus wants to live. 
  • Are you close to a bus stop? Are you four minutes away or less? Are you within walking distance or can you see a bus stop from the front porch? It’s a good idea to purchase a student rental if you are near an arterial road that runs right to the campus.
  • Since banks often won’t approve you for a mortgage on a student rental property, you will need to find private capital. Alternatively, you can try applying for commercial financing. Some commercial lenders will consider you if you have five doors or more. Of course, you will be subject to an annual review, during which, they will look at your profits. You will need to be effective at managing your debt service coverage ratio (DSCR). DSCR is a measure of the cash flow available to pay current debt obligations.
  • Has the property been renovated? Does it have modern wiring? Can you build an addition? If not, can I add value to this property? You are usually looking for a property that you can buy and renovate and refinance. 
  • Know the highest and best use for the property. Do not count on getting a variance unless you are certain that you can get one. 
  • Assess your tenant demographic. Having good tenants will save you a lot of money down the road. Remember to assess tenants individuality and avoid stereotyping.  
  • Understand bylaws in the area
  • Have multiple exit strategies. Plan A – Can I get a variance and improve the property? Plan B – Can I break even and cash flow? Plan C – Can I break even?

Keep these tips in mind when purchasing a student rental property and remember that knowledge and control mitigate risk. A turn key property that is truly hands off doesn’t exist so anticipate issues early and find solutions.

4. Doing a commercial to residential flip:

A commercial to residential flip is a unique situation that likely won’t occur frequently on your real estate investing journey but if you happened to find an abandoned commercial building near a residential zone, where the area seems to be ready to transition and you’ve checked local zoning maps and confirmed that the area is transitioning, than you could have a good investment on your hands. If you are in this unique situation, here are some things to consider:

  • What is the zoning of the property? Can it be rezoned to residential?
  • When converting from commercial to residential, you will need to be mindful of variances. For instance, if a commercial property serves food, when converting it into a residential property, it will likely be considered a “more sensitive use”: In this case, you have to think about the rezoning process. Are you required to get a legal survey and a phase 1 environmental assessment. Do you need a phase 2 environmental assessment? These assessments are going to cost you so you will need to do your research.   It is important to understand how much the planning phase will cost you versus and weigh it against the income potential.
  • The key to success here is in maximizing the rent of your newly renovated property and having a higher appraisal value for its new use. 

If you ever find yourself having to go to the committee of adjustments, think of it as a valuable learning experience and a good opportunity to network with local officials. This will come in handy as you grow your investment portfolio.

What horror stories have you heard of when it comes to real estate investing? We would love to read your thoughts in the comments below. 

Look out for more of our blogs about investing in Hamilton real estate.

At the Mackay Realty Network, we specialize in building generational wealth and would be happy to help you take the next step. Meet our founders:

Sandy MacKay
Sandy Mackay
Adrian Pannozzo
Adrian Pannozzo

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