Oliver Foote

How to Set up Property Management Systems for your Real Estate Portfolio

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

This post is going to be more of a guide on how to set up a Property Management System. This can work even if you just have 1 property to manage although the payoff is a bit better where you are dealing with more than 1 property. I’m going to assume a few things in the post, that we are mainly talking about property management for residential rentals, this could be any number of rentals, single family, multi-family. I’ll even have a section on short-term rentals like AirBnB or self managed BnBs. I do plan on discussing commercial real estate property management in a later post, but that will be focusing more on people who own retail, industrial, or office spaces.

Property Managers:

So you own a few residential properties and it’s starting to become a bit much to self-manage, or maybe would just rather have someone else handle tenant issues when they come up. The first and most important thing you will need is a property manager. They usually charge between 8-12% of rent in order to look after the property for you. You will still have to pay the expenses to hire the professionals if/when something breaks. But the property manager basically steps into your role and handles the coordination for you. There are different forms of property management. You can hire it out to a larger company who manages multiple properties for multiple landlords. You could try to find someone who operates more independently, small business style where it might just be one person that you sub-contract out the property management to. Finally, you could outright hire your own property manager on a salary, if you have the properties to warrant it.

Regardless which option you choose, it’s important to interview whoever you’re thinking of going with and do some background research on them. Make sure they already have pre-existing systems and a good track record of success in place. I’d also recommend interviewing some other people they manage property for to make sure they are good at what they do. Lastly, I would recommend whoever you work with putting some rules in place for the way that you want problems handled, you are paying them after all. Ask them if they already have standard operating procedures, if they don’t you can always work with them to build a manual of operations dealing with problems that come up at your properties specifically, spend limits on small issues, etc. Building a manual for dealing with problems is a good practice anyway especially if you’re planning to expand and hire your own in house property manager at some point. If you have a smaller number of properties it may be worth asking your Realtor. If you’ve bought an investment property with them in the past there can be some benefits to working with your Realtor. They have access to the MLS for finding tenants, they have worked with many investors and may even have investments of their own, and they may already have a property management wing to their business. From a Realtors perspective its good business to continue working with their past clients in any capacity so down the line you buy or sell your investments or primary residence with them, this can sometimes include property management. Either way they are likely to have some recommendations for you if you are looking for property management and they themselves don’t provide that service.

Tenant Screening:

With the value of properties across Canada continuing to climb, it is important to find great tenants. There are many different ways to screen Tenants, you can add this to your property managers manual. Nowadays the “standard” rental documents are last 3 paystubs or income tax return, Photo ID, landlord reference letter, employer letter, credit report and score, and occasionally bank statements to verify income. That’s a lot of stuff to sort through and depending on the market and the amount of demand in the market, you may not want to be the one doing the background checks and calls to employers. That is where your Realtor or Property Manager comes in. They can do a round of preliminary screening for you, and once they have found a candidate and screened them they can leave the final decision up to you, or you may decide to allow the property manager to handle the entire process. Nowadays it is also prudent to see what you can find from Googling or checking social media platforms to verify what you can about the tenants you are considering. Again, all of the steps of doing this should be added to an manual of operations if you want a property manager to handle everything.

There are many software’s out there nowadays that can do a secondary check, and I would recommend using one of these, the one that I have been using recently to screen tenants is called SingleKey. It costs about $25 per tenant to screen, but it goes in depth and checks criminal records, credit scores, and more. It gives that extra layer of security that makes sure the tenants are who they say they are by doing a deeper dive into databases that the public general doesn’t have access to.

Trusted Tradespeople:

When you are first starting out you many not have a list of tradespeople that you can trust to do a good job if something comes up at your property. Again, if you are unsure where to find someone I would recommend asking your Realtor if they have someone they can recommend. Otherwise if it is your first time using a particular tradesperson I would do a bit of a background check online about their business and see if they are established and legitimate, see if you can talk to past clients about their work. Over time you will build up a list of tradespeople that you know can get the job done right, on time, and at a good price and this would again be something you add to your manual of operations and who to call if something or other breaks, goes wrong, or needs to be repainted after tenants move out. A list of tradespeople that you might want to consider gathering are as follows: painter, plumber, electrician, cleaner, movers or junk removal (to swap appliances etc.), lawyer or paralegal (in case you need to evict a tenant), and Realtor to help find tenants.

Student Rental Property Management:

If you are planning to run a student rental near a University or College campus, the property management of this can get a bit more complicated since you are likely to get calls that maybe working professionals wouldn’t make, like changing lightbulbs, or fixing a hole in the wall. When working with student rentals it’s very very important to factor in the extra expenses that you will come across. This means painting every year if needed, possibly hiring cleaners every quarter to make sure the property stays in a liveable condition, having the correct (more expensive) property insurance, and ensuring the property is above and beyond fire code standards with regards to alarm systems. Student rentals can be a very profitable enterprise, but the management of them also requires more work. The manual of operations for the property manager will likely be different from a traditional rental and take a bit more time to develop. You’ll have to consider getting co-signers on the leases, which is twice the paperwork and twice the screening. You’ll have to make sure that you either come to an agreement with the tenants about garbage, lawn maintenance, and snow removal, or you hire that out as well. You’ll have to consider to a greater extent how you want to manage utility expenses, baking it into your rent, or requiring each tenant to pay a portion (again adding overhead and time to the process). There are many considerations when dealing with student rentals, and you may get charged a bit more by the property management to manage these types of properties, but the one great thing with student rentals is that their rent default rates are extremely low. Parents are supporting them, the government and banks are happy to hand out loans. So it’s more unlikely you’ll be in a situation where someone isn’t paying their rent, but they may forget once in a while so you’ll have to stay on top of things. I will likely make a longer post detailing student rental considerations in the future and how to retrofit and property for it, finding good deals etc.

Medium or Short-Term Rentals (AirBnB):

If you are considering a short term rental business, you will again have different considerations from the other types of rentals I mentioned above. The biggest change is that you will have to have a cleaner basically on call all the time after each persons stay. Many companies exist that specialize in short term rental cleanings, and they will even send pictures after each cleaning, which I would recommend you request no matter the cleaner you work with. This can be even more profitable than the Student Rental business, but it also comes with more risk. If you are considering doing this and hiring a property manager, the fees will likely be closer to 20%. You also have to look into the area you plan to host your AirBnB and see what the rules are for doing so. For example Toronto has tried to crack down on AirBnB’s requiring a license, and only allowing people to rent out their primary residences. There are also many condo corporations in many cities that ban AirBnB or short-term rentals in their bylaws, so if you are looking to purchase a property in a condo specifically for short term renting, you have to confirm whether they allow this.

There are also many many intricacies to getting your AirBnB at the top of the rankings; such as uniqueness of the property, photos of the property, reviews etc. There are websites that can assist in your market research if this is something that you are considering doing. One website that is well known for researching the AirBnB market is called AirDNA. There are also software’s and websites that are built specifically to assist people who are looking to manage or operate their AirBnB’s which can help with managing bookings, cleanings, etc. You also want to make sure that your guests have someone responsive they can contact at all times to deal with their issues in a timely manner since your reputation is everything.

There has been a lot of talk about AirBnB fees becoming a bit excessive in recent years, and while it is a great search engine for posting your short-term rental, once you have more experience and more properties you may want to consider creating your own website, with your own booking system to avoid these fees. This works very well for many kinds of short-term rental operators. For example, there are many “mom and pop” more traditional bed and breakfasts that have minimal websites, a phone number to call, and an email to send an E-transfer to. This can work surprisingly well, and seems to be somewhat more common in rural areas that have been hosting people this way since before AirBnB’s were a thing. Niagara Falls or Niagara on the Lake are great examples of areas where this is more common. But this can also work in more populated areas like Toronto for example. There are some pros and cons to doing things this way, AirBnB has a system of dealing with guest issues that somewhat circumvents you as the host, but if someone is booking directly you don’t have that extra layer of security. But on the flip side, you get a direct line to people, and have more control over their experience and what happens during their stay and depending on the vibe you are going for some people may prefer the feel of a small local booking, compared to booking through AirBnB. Did I mention that this saves on the AirBnB fees? This does come with it’s own host of challenges, where instead of competing on the AirBnB rankings, you are competing on the Google rankings, which could arguably be more difficult. You are also going to have to work harder and operating your business this way will likely require a lot of word of mouth, whereas getting started with AirBnB is very low barrier to entry. Many people choose to do both, or start with AirBnB and then find a way to transition once they have become more established.

Conclusion:

There are many approaches to property management and many different types of rentals out there which is great as an investor because that means you can have a number of strategies for a property that you are considering purchasing, if one doesn’t work out, maybe the other will. Look out for slightly more in depth posts about each of these types of investments in the future. As well as posts about investing in retail or other commercial properties and how to go about evaluating those properties as investments. Hopefully you found this short Property Management overview useful and at the very least it got you thinking about the various ways to property manage and building out your own systems for your portfolio. If you have any comments or questions I’m available by email: oliver.foote@royallepage.ca.

Thank you for reading and have a great day!

Oliver Foote

Newsletter #12: Setting up Property Management Systems, BoC Rate Update, March Market Data

April is here! Hope everyone got to enjoy the Solar Eclipse last week, at the very least peeked outside for the totality. I drove out to Niagara and the drive to Mississauga was a cool 3 hours, I’m not sure there will ever be that much traffic on that stretch of highway again. It was a fun adventure nonetheless. In this weeks blog I discuss how to property manage various types of residential property from long-term to short-term rentals, how to build out systems, and what to know or consider when hiring out property managers. Another reminder that we are approach the tax deadline on April 30. Inflation continues to come down, but the bank of Canada isn’t anticipating it reaching 2% until 2025 with housing being the holdout to inflationary pressures. I’ve personally noticed in grocery stores that the weekly sales and promotions seem to be popping up more and more, grocery bills are still high, but the sales are helping if you are a savvy shopper and I’m noticing a different in the total cost of my cart.

This Weeks Blog Post:

How to Set up Property Management Systems for a Real Estate Portfolio:

What to consider when looking for a property manager
How to find trusted tradespeople
Creating an “operations manual”
Different types of rentals and their different property management considerations (Long Term, Student Rental, AirBnB)

Read the full blog post here: https://oliverfoote.ca/2024/04/14/how-to-set-up-property-management-systems-for-your-real-estate-portfolio/

Housing News:

The Bank of Canada announced on Wednesday April 10 that they will continue to hold their benchmark interest rate at 5%. From my reading of their announcement it does not seem likely to me that they will be lowering rates at the next meeting in June. It does appear that their main concern continues to be how housing is contributing to inflation.
A somewhat significant change that may influence interest rates is the unemployment rate rose form 5.8% in February to 6.1% in March. Since the Bank has a double mandate to keep inflation low and unemployment low, if unemployment continue to climb they may be willing to cut rates sooner than later. This is going to be an important indicator to watch.
Federal Government to Allow 30 Year Mortgages for First Time Buyers: CTV
- This change will come into effect Aug 1
- Affects new build homes and insured mortgages (a.k.a. High ratio mortgages) where buyers put less than 20% down.
- My thoughts: While this may help some buyers enter the market, I think it may just result in even more homes becoming out of reach. This also may just be a targeted approach by the government to revitalize the new-construction industry, since sales of new construction hit decade lows recently due to the higher costs of borrowing.
- From a banks perspective this is likely a good thing for them since they get to collect more interest for a longer period of time. But by that same token this could also allow higher risk borrowers to put themselves in an even longer term debt situation. As a general rule, I don’t think that more borrowing and more leverage should be the way we are approaching our housing needs. Canada already has one of the highest debt to income ratios in the world. So allowing people to take on more debt is not a good thing in my view.
- March housing market data shows that prices increased in the GTA 1.9% to $1,121,615 from this time last year. New listings are up 23.1% from last year to 12,459. While inventory has climbed from last year, the overall inventory to sales ratio is lower than historical averages in some markets, meaning we could see upward pressure on prices here soon.
Condo prices have either declined or stayed flat from this time last year, which is good news for First Time Buyers. The condo market continues to have higher supply than other sectors. This means that buyers have more choice and with fixed rate mortgages slowly coming down, we are likely to see a pickup in activity once buyer realize their increased buying power.
Investors in Condos may also be looking to sell, since low pandemic rate mortgages may be coming up for renewal and could result in renewal scares and no longer make the investment cash flow positive as a result.

Market Performance as of close Friday April 12, 2024:

S&P 500: 5,123.41 (+8.02% YTD)
NASDAQ: 16,175.09 (+9.54% YTD)
S&P/TSX Composite: 21,899.99 (+4.92% YTD)

Canada CPI Inflation Feb 2024: 2.8% (0.1% Decrease from Jan 2024)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: June 5, 2024)
Unemployment Rate Mar 2024: 6.1% (0.3% Increase from Feb 2023)

Hope you have an amazing week! Chat soon!

Best regards, Oliver Foote

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How To Add Secondary Units (or ADUs) in Ontario

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

The New Legislation:

Back in 2019 the Ontario Government introduced a law that allows up to 3 units on a single property without a zoning bylaw amendment. It was up to municipalities to individually change their zoning bylaws and now in 2024, the majority, if not all municipalities across Ontario have implemented some version of this bylaw. Some municipalities are allowing up to 4 units without requiring a zoning bylaw amendment. This may not seem like anything special to an outsider, but this is a very big change in the status quo. If you’ve ever tried to change a zoning bylaw or know someone who has some form of development you’ll understand what I’m talking about.

How Things Used to Work:

Let’s talk about how things would have worked prior to this new law in order to give you a better idea about how these changes make building housing easier. For those who are unaware of how land planning works in Ontario here’s a brief synopsis. The Ontario government administers something called the Planning Act which is the overarching legislation of what Ontario as a province wants to achieve with respect the land use, housing, transportation, environmental concerns etc. The Planning Act provides the basis for each individual municipal government to come up with something known as an Official Plan for their city. This document outlines on a more granular level how the municipal government plans to use all of the land in their municipality. They administer things like building permits and enforce zoning bylaws. A zoning bylaw is effectively a list of requirements for each land use zone. For example you might have agricultural zoning, single family residential zoning, industrial zoning, retail zoning, or mixed commercial and residential zoning. Each of these zones will have rules like maximum building height, minimum setback from the lot lines, maximum buildable areas, parking requirements, etc. Most municipal websites have all of this documented and easily accessible so if you’re curious or you plan to build or develop land, it’s always advisable to get familiar with your zone. You can also find past city council decisions on the municipal website or the Ontario Land Tribunal website to learn what council tends to decide when people want to apply for special exceptions similar to one you might be considering. You can also call up the city and ask a city planner there if your proposed change would fall within the zoning bylaw.

Generally speaking if the change you want to make to your property is within the zoning bylaws rules, even if it’s a teardown and rebuild, you will have no trouble applying for a building permit. However, if you are proposing a change that falls just outside of the zoning bylaws you‘ll have to apply for a minor variance (e.g. taller building height than generally allowed). Depending on how big the change is and how reasonable the city views the change with respect to the surrounding properties you may or may not have your minor variance accepted. This process alone, can sometimes take multiple months depending on how back logged the city is. Then we get into the big scary monster of trying to re-zone a property. All I have to say is best of luck to you if you plan to re-zone something. I hope you have lots of time and lots of money ready to go. Changing zoning bylaws is a system that, in my opinion, was not very well thought out and now leads to significant delays in housing development.

Before this new law allowing up to 3 units on a single lot. If you wanted to change your “single-family residential” property to 3 or more units, that would usually fall well outside the current zoning bylaw and you would have to apply for a re-zoning. When you apply for this re-zoning, you have to hire planners and architects to prepare a proposal for the city, then once the city has received your proposal they put up a big sign on the property explaining the proposed change. Then they mail out a letter to all surrounding properties explaining the proposed change, and set a date allowing people to voice their concerns. Overall, I’m in favour of allowing people who have pre-existing homes to voice their concerns, especially if the proposed change could or would have an impact on the property owners quality of life or impede on their existing properties somehow.

However, like anything, you will get people who will simply disagree for the sake of disagreeing and will not allow ANY change to happen no matter how small. This is where this process falls apart in my opinion (and where the term NIMBY comes from). As cities grow and run out of land, the natural progression is to increase density. So as property values increase you will get developers or homeowners who would like to add a second or third unit legally to their property in order to help pay for the mortgage or simply to add more housing supply to an already suffocating city. But often times this means a re-zoning application. So instead of the city being able to simply approve the building permits and plans like they can now thanks to the updated legislation. There would be a whole rigamarole process that could often take multiple years and could even involve lawyers or paralegals to represent the arguing parties, which adds expense and delays to what often times could be a more simple process.

So effectively your options were, build a unit illegally and hope no one finds out (like a lot of Brampton, sorry Brampton), or spend multiple years and lots of money fighting for a simple change that at most will add a car or two to the street and probably won’t inconvenience your neighbours. I think that two things can be true at once, people having the right to voice their concerns, and the city looking out for the citizenry as a whole. They should consider the needs of the city and make decisions that help solve problems rather than exacerbate them.

Thoughts on a New System of Land Development:

Briefly, I want to discuss very big redevelopment projects and the problem with the way things are currently done. I think that the city requiring developers to submit a plan first and THEN allowing citizens to voice their concerns, and (usually) tear it top bits, is counter-productive and wastes everyone’s time and money. In my opinion a better approach could be allowing citizen to voice their opinions BEFORE tens of thousands of dollars have already been spent (sometimes more). This would allow community groups to consult on how land will be redeveloped alongside developers, architects, and city planners to come up with a plan that considers everyone’s interests BEFORE submitting the application and proposal to the city. I think this would ultimately speed up the city planning process and would make all parties much happier in the end rather than standoffish. With this model all stakeholders were considered and collaborated in the creation of this new development. I’m not sure how practical something like this would be but I think it’s worth considering as a better method of city planning.

What The New Legislation Makes Easier:

As mentioned the new rules allow up to 3 units per lot. Depending on your municipality their implementation of the rules might be a little bit different. For example in Toronto depending on your property you may have access to a laneway, which could allow for the construction of a laneway house or Accessory Dwelling Unit (ADU). There are already companies out there which specialize in developing plans for laneway suites. If you want to find out if your property is suitable for a laneway suite there is a very handy tool called adusearch.ca which allows you to looking up certain cities and determine if your property can have one. In Toronto a majority of the existing land can have an ADU built. There is potential for over 400,000 new units (either attached or accessory to the existing building). The website says that there are currently 126 permitted ADUs in Toronto, I’m not certain I believe that the number is so low. But it could be that most basement apartments in the city do not have permits or maybe don’t fall under their definition of ADU.

In other cities like Mississauga for example you would most likely be looking at building a basement apartment, garden suite, or garage conversion. This was approved very recently in Mississauga in November of 2023. I would recommend looking at proposed bylaw amendments that show how a potential garden suite could be constructed (it’s also just fun to look at the renders). You can find the meeting notes here (pg. 83-134, pg. 112 and beyond are the renders). Depending on the size of your particular lot the allowable garden suite size will vary up to a maximum of around 1000 sq ft. The Region of Peel also has a forgivable loan program which can provide around $20,000 to upgrade a pre-existing basement apartment to a legal basement apartment if certain conditions are met. There might be similar programs in your region or municipality and if you are considering developing a secondary unit I would highly recommend speaking to the city planners at the city and expressing your intentions to see if they might be able to help you with your planning process and make sure that it goes according to plan.

It’s Still Not Enough:

While it’s great that all these changes are being made to add density. Quite honestly, all of these will be a drop in the bucket compared to the actual amount of housing that is needed across the province to help solve our housing crisis. Larger developments and purpose built rental housing will be more likely to put a real dent in the situation. While there is more funding at provincial and municipal levels to speed up development approvals and speed up timelines at the Ontario Land Tribunal we are still quite a ways away from building the housing that is going to be required to improve our current situation. We can’t solely rely on the private sector to develop all the housing the province needs as has become very apparent over the past few decades. There have been improvements to purpose built rental housing over the past few years after an almost 30 year lull in development thanks to different programs that assist larger developers in either redeveloping older properties or providing them HST breaks among other things to make the numbers actually make sense for this type of development. However, I do hope that many people decide to take advantage of the easier development and approval processes across Ontario because any amount of new housing is better than no new housing.

As always thank you for reading, feel free to let me know what you thought in the comments or via email. I’ll see you back here in two weeks.

All the best,

Oliver

Newsletter #11: Adding Secondary Units Legally, Renter Rights, Spring Market Predictions

Happy Easter long weekend! I hope that those of you who are able to take some time off do so. For those who haven’t yet started their taxes, this is your reminder to get on it! This week there is some interesting news articles that came out about the federal government and renters rights. I have a small analysis of what may be to come in this Spring real estate market. Spring is officially here and this is seasonally the busiest time of year for buying and selling homes, it will be interesting to see how many sales happen this Spring and through to the end of the year, many analyst are predict this to be a more active year than 2023 in that regard. Check out the blog post on ADUs and the new laws that Ontario passed allowing up to 3 units on (almost) any pre-existing lot without requiring a zoning change.

This Weeks Blog Post:

How to Add Secondary Units or ADUs in Ontario:

How different municipalities have implemented this legislation
Toronto’s new easy to build “laneway homes” and tool to see if your property is eligible
Some conversation about why this is overall a positive change and how the land planning and use process could be improved by involving the community earlier in the developmental process

Read the full blog post here: https://oliverfoote.ca/2024/03/31/how-to-add-secondary-units-or-adus-in-ontario/

Housing News:

Trudeau government to introduce new measures for Renters: https://globalnews.ca/news/10387043/trudeau-renter-reforms-2024-budget/
- Wants to make it standard to include rent payments into tenants credit scores. Rent tends to be a large payment and showing on time payments could help when looking for a mortgage
- Standardized national lease agreements
- Renters Bill of Rights, crack down on renovictions etc.

Spring Housing Market Discussion:

Some analysts believe that rates could be cut as early as June. Since real estate remains one of the CPI components that is holding inflation higher, I find it unlikely that the Spring market will be conducive to lower rates, since fixed rate mortgage borrowing costs continue to stay somewhat low.
Additionally, with the current stock market Bull Run, some investors may choose to put some of their cash towards purchase other assets (including real estate). This could mean that the real estate market will find itself in short supply once again with upward pressure on prices. There is a well studied psychological effect that an increase in investors assets tends to result in an increase in their overall “consumer sentiment” and thus their spending.
Owners with pandemic low 3-year fixed mortgages are likely to have their mortgages come up for renewal this year, and their cost of homeownership will likely go higher. This could cause people to be forced to sell and lead to increased supply. For others it will untether them from the past mortgage reality into the new one which could see an increased number of people looking to make a move either to downsize or upsize.

Market Performance as of close Thursday March 29, 2024:

S&P 500: 5,254.35 (+10.79% YTD)
NASDAQ: 16,379.46 (+10.93% YTD)
S&P/TSX Composite: 22,167.03 (+6.20% YTD)

Canada CPI Inflation Jan 2024: 2.8% (0.1% Decrease from Jan 2024)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: April 10, 2024)
Unemployment Rate Feb 2024: 5.8% (0.1% Increase from Jan 2023)

Have a Great Week!

Best regards, Oliver Foote

How to Get Started in Real Estate Investing or Flipping

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

People have been buying run down and dilapidated things, then fixing them up and reselling them for a profit for as long as there have been things that break. It has now taken on a style of it’s own when it comes to real estate. Some people might argue that flippers are just investors who take away supply from other potential buyers. But I can tell you from experience, that the majority of people who are in a position to buy a home they plan to live in prefer to have the home at least 90% complete and up to their standards before they move into it. The people who are ok with a home that requires a ton of work, or has been used as a hoarder home, or is a century home that’s half falling apart, are almost exclusively investors who are then competing with other investors. I think that investors and home flippers are doing a service by purchasing homes that no one else is willing to go near, then turning them into something that is liveable and will appeal to the mass market. If they make some money along the way, more power to them. Capitalism at work. Obviously, it has become clear that relying solely on the private market to manage the housing of an entire country is not the most ideal strategy, there are flaws in every system. That’s a discussion for another day.

For todays discussion I’ll focus on how flipping homes works and some things to consider if this sounds interesting to you. Firstly, you need to have a reasonable level of confidence in your abilities or your contractors abilities if you go the route of purchasing a run down home. With home prices where they are now in Toronto and the surrounding area, even a very poorly maintained home can fetch an absurd price because of the land value and other factors. If the move-in ready home is “only” 100,000 more, most people find it a very reasonable trade-off to pay a tad bit more and avoid the hassle of renovations. That leaves a select few people who are willing to pay the high price and take on the risk of doing renovations with the hope of possibly making some money on the sale. Over time as more and more people have learned about home flipping and the real estate market becomes more efficient, the “gaps” in the market become smaller and smaller which makes it more difficult to make a profit as an investor. You pile on a serious supply demand imbalance due to population and other factors and you find yourself in a bizarre situation where people will pay a premium just to simply get ANY home, regardless of condition. This is not an ideal market dynamic in my opinion for investors or end users.

When is a good time to flip homes?

People say that you can’t time the market, while there is some truth to this, I believe that you can absolutely make educated guesses about where the market will likely be headed. Let’s take a look at some recent examples. If you were considering flipping homes from 2020 to 2022 it would have been a good time to do so because the Bank of Canada cut interest rates at the fastest pace in recent history to prop up a potentially failing economy, and alongside the fed they effectively saved the stock market form complete collapse. This led to significant appreciation one year later. Real estate generally lags behind the stock market, and prices take a bit more time to move. But seeing the unprecedentedly low interest rates at which you could borrow money, locking in a 5-year fixed mortgage was a no brainer at the time. Even if your renovation took 1-2 years, with money being so unbelievably cheap, and so few people willing to put their homes on the market, it doesn’t take a rocket scientist to see how that equation would lead to increasing prices. After the development of a vaccine it provided people with the confidence they needed to be around others again and provided a visible pathway to the end of the pandemic. Around this time in late 2020 early 2021 all the stars were really aligning and they were pointing at the fact that the real estate market was going to get a little bit crazy.

Not every shockwave of the pandemic lockdowns could have been predicted. For example, tradespeople became very challenging to find, and this made home renovation projects more expensive and extended their timelines quite a lot. This is where having some backup plans for any risky investment is always a good idea. In the case of the covid real estate market, being willing to do some of the work yourself would have been a very useful backup plan if you were a home flipper as well as planning ahead and being flexible with the materials you used, since it was nearly impossible to find certain items in stores. A good majority of home renovations can be done DIY with YouTube and a small time investment you can learn how to do pretty much anything nowadays. I would only recommend the DIY strategy if you are willing to put a significant time investment into the home, and have some amount of prior experience, because even though it might be quick to learn it can take a lot of time to complete. It’s also important to factor in the carrying costs into your profitability equation and to budget at least 1.5x the amount of time you think it will take you to finish a project, and even then expect it might take longer than that. Hofstadter’s law states that a project always takes longer than expected, even when the law is taken into account. The best way to ensure that you come out ahead is to use a very conservative equation to manage your costs while also baking in some profit as a buffer.

Purchasing in a depreciating market on the other hand can lead to losing money on the renovation, which is why I like to recommend investors have multiple workable strategies for each investment. You can actually come out ahead by making an educated guess during a falling market as to where you think the bottom or near bottom might be. If you take this approach you need to have multiple strategies and be willing to weather a storm if it turns out you were wrong. If you were banking on the appreciating to get you out of a flip profitability and it doesn’t happen there are a few other options. For example you could turn the property into a long-term or short-term rental, you could get creative with the renovation by including a basement suite to turn the property into two units instead of one, which generally increases your potential rent and final sale price. If you do use the rental method as a backup, it’s important to understand that you will likely be leaving equity in the property which might prevent you from doing another deal in the short term and you also have to be ok with the risks and responsibilities of being a landlord. Making sure that a property has multiple workable strategies is very important to prevent you from completely losing your shirt, especially if it’s your first investment and if you’re unsure what the market will do in the short to medium term. It is also important to actively try and avoid risk. With the amount of information out there today it doesn’t take a genius to figure out that eventually the gravy train of appreciation in 2021 was going to come to an end. The actual end date was up for discussion at the time and I think many people assumed the fed and BoC would increase rates sooner than they actually did. This is where being cautious comes into play. It can be hard to think clearly when you get swept up in the FOMO of real estate news stories talking about people making crazy amounts of money. Getting swept up in the hype and not understanding your own risk tolerance (i.e. how you’ll feel deep down if you happen to lose the majority or all of your investment) is often what leads people to making mistakes and losing money. Ensuring that you are thinking clearly, understanding your own tolerance for risk (there’s nothing wrong with the slow and steady approach), and making sure than an investment will work on multiple levels are all great ways to hedge your bets as an investor.

What does the flipping market look like today?

In our current market there are still opportunities to renovate homes and be profitable, you just have to be more certain about your purchase + improvements price than maybe you needed to be in 2020. I’d consider our current market stable with respect to prices and appreciation. The next move from the Bank of Canada is largely anticipated to be an interest rate cut. So if you buy today I would say there is a reasonable probability that interest rates are lower a year from now which means that prices at the very least are likely to stay stable and more likely to appreciate a small amount from today. Don’t expect anything crazy, but if you buy at a great price there is still room out there to make money as an investor. I would say the biggest difference in this market is that carrying costs have increase significantly thanks to the increased mortgage rates. This means that if your project goes over time, it can cause a significant dent in your profitability. So I would highly recommend being even more conservative with timelines or baking in a higher percentage of profitability to make sure that you still come out ahead.

Many professional investors use various marketing strategies to find off-market properties to purchase (i.e. properties that are not listed on the MLS). A common one is sending out mail to houses in a particular area and offering a quick closing to a distressed home owner. There are companies out there who “wholesale” homes. Basically signing a contract with someone with the option to assign the contract to another person, or even with the option to list their home on the MLS. Sometimes these companies will act unethically and a homeowner will sign something without understanding that there is an option to assign in the contract or that this person will be listing their home and doing showings. Without saying too much on this topic, I want to make it clear that I find this approach to business deplorable. Honesty is extremely important with whoever you are doing business with even if that is the only time you will do business with that person. Your reputation is everything, so if you promise a potential homeowner something the expectation is that you follow through with the promise. There are people who wholesale homes and run their business in a very honest and upfront fashion, I have absolutely no problem with that if the homeowner knows all the facts and decides that is their best option. As a homeowner it is important that you read the contract you are signing, and ask around your network for a trusted lawyer to look at the contract if you are doing an off market transaction. To be blunt a big reason people end up working with Realtors is because it is their full-time job to make sure they have your back, and if they mess up you have someone to blame (and sue). But if you’re doing everything yourself you don’t have the level of regulation, expertise, or insurance that Realtors have in order to protect consumers when dealing with what is usually their largest asset. Of course you can just as well come across an unethical Realtor who is only looking out for themselves and does a poor job looking out for you. But at the very least you have some amount of recourse and consumer protections when working with them.

That was a bit of a tangent so let me wrap up here by discussing how to increase the chances of an investment working out. As I mentioned above, trying to find off market deals can be a serious win when it comes to purchasing a property at a great price. There are a myriad of strategies to find people who are willing to sell, whether that’s flyers, door hangers, door knocking and pitching your proposition to them, online marketing methods, networking with friends, family and co-workers. You do have to be somewhat cautious if/when you do find someone willing to sell and I would recommend asking the homeowners if they would be opposed to a home inspection or at the very least doing an inspection yourself. Sometimes the homeowner might be willing to sell you the home, but doesn’t want to have strangers coming through their home. This does make it a bit more challenging from the investors perspective and if you choose to go through with a purchase you have to be ready for pretty much any problem on the books since you couldn’t get an inspector in to see the property. Depending on how many properties you’ve invested in before or how much experience you have with home building or home inspection you may have enough personal expertise or a friend whom you really trust that can give you a reasonable idea of the condition of the home and if it’s worth offering something to the homeowner.

This is again where risk tolerance comes in, making sure your profitability equation bakes in some of these risks, and preparing multiple viable strategies for the end use of the home (e.g. flip, rent, wholesale). You can find potential homes on the MLS to purchase as well, many investors are quite successful through simply purchasing homes that are on the market and negotiating a strategy that works for them. If you are looking for a deal on a publicly listed home here are some tips. First, look for homes that have been on the market for a long time or have been badly mispriced. Beyond 30-60 days is when sellers tend to realize they may have mispriced their home and this can open them up to negotiations.

Second, find out what the sellers situation is. This is where I would recommend getting a Realtor you trust and are willing to work with to call up the listing agent and try to get as much information as they can about the sellers reason for selling, urgency, and what types of things would make the seller more likely to accept an offer or what kinds of offers they might consider. For example, maybe they have to close by a certain date due to starting a new job. Maybe they will only sell if there is a firm cash offer and are just “testing the market” (these types are generally very hard to negotiate with, since they have no urgency and only care about getting their price). Maybe they are willing to consider a Seller-Financing mortgage at a lower rate than the banks can give you. This can serve as an annuity for the seller (e.g. monthly income) and allows you to give them the final higher price they are looking for since the financing could be cheaper than the banks offerings. You would have to coordinate with your agent and have them work with the listing agent to call up a lawyer and write up a contract for the seller to become a lender. The seller would likely be well advised to do some due diligence on your ability to pay the loan, as well as including the usual provisions in a mortgage such as the right to repossess the home if you default. This can be a challenge to pull off, but working with the right partners can make it a possibility. The seller might be ok with an extended closing which gives you time to find more funds or research development or rezoning opportunities that add more value to the property than a simple renovation thereby making the deal possible.

Lastly, the seller might even be willing to come in as a joint venture partner (if you have a proven track record) and allow you to renovate the home while retaining most of the equity and provide a 50/50 split on any profits made on the renovation and sale of the home beyond a certain price after factoring in costs. As you can see there are almost limitless ways to structure an investment that works for both the buyer and the seller, much of it depends on your risk tolerance, skill set, and your team. Which brings me to my final point, regardless of the approach you take it’s important to assemble a team of people that you trust in order to be successful in your investing endeavours, that includes people such as a real estate agent, mortgage broker, lawyer, home inspector, city planner, and various tradespeople that you trust. Having a strong team of advisors can make or break an investment, especially when dealing with one that has so many moving parts. I would highly recommend if you are thinking of getting into real estate as an investment and are considering any of the more complicated strategies that you find an investor who has done what you are thinking about doing and see if they are willing to spend some time talking with you about their experience. Research online, listen to investing podcasts, and most importantly just get started. You can easily overwhelm yourself with information and prepare until your eyes bleed out but nothing beats real world experience. Be prepared that it may not go completely as planned, start small with something just outside your comfort zone then build on your experiences and improve each time.

Hope that you found this information useful or interesting, feel free to leave a comment with your thoughts on this topic. I’ll see you back here in two weeks with another post.

All the best,

Oliver Foote

Newsletter #10: Realtor Lawsuit, House Flipping and Investing, Bank of Canada Holds Rates

Another week another newsletter. This week some interesting news came out about the ongoing lawsuit in the US, it could have an impact here in Canada, only time will tell. It will be interesting to see what kind of impact this will have on the US real estate market and if there will actually be a noticeable change. I wrote a blog post about flipping homes but it sort of turned into a how to invest, when is a good time to buy, and how to avoid risk to make sure you come out alive. Enjoy!

This Weeks Blog Post:

How To Get Started in Real Estate Investing or Flipping:

My take on how to become a real estate investor with a focus on flipping
Understanding the risks, being risk adverse, and different investing strategies
Building a team of professionals to stay safe, and do it well

Read the full blog post here: https://oliverfoote.ca/2024/03/17/how-to-get-started-in-real-estate-investing-or-flipping/

Housing News:

Real estate fees could fall after settlement with US agents: https://www.bbc.com/news/world-us-canada-68582949
- Big settlement just came down where the NAR in the US has stated they will make it easier for buyers to negotiate their fees.
- A similar lawsuit is in the courts in Canada.
House flipping surges in Calgary’s hot real estate market: https://www.cbc.ca/news/canada/calgary/calgary-metropolitan-area-house-flipping-data-1.7143857
Experts are expecting more buying activity this Spring as first time buyers return to the market which could lead to an increase in prices. Helped by the somewhat lower lending rates banks continue to provide.
Bank of Canada Rate held rates on Wednesday March 6, 2024. Citing continued concern for the persistency of underlying (core) Inflation. Housing inflation continues to be elevated and is the largest contributor to inflation. They expect inflation to stay close to 3% during the first half of the year before gradually declining. Real GDP grew 1% in Q4 2023. Employment remains stable. This likely puts a potential rate cut into late Q3 or Q4 of this year, if at all.

Market Performance as of close Friday March 15, 2024:

S&P 500: 5,117.09 (+7.89% YTD)
NASDAQ: 15,973.17 (+8.18% YTD)
S&P/TSX Composite 21,849.15: (+4.68% YTD)

Canada CPI Inflation Jan 2024: 2.9% (0.5% Decrease from Dec 2023)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: April 10, 2024)
Unemployment Rate Feb 2024: 5.8% (0.1% Increase from Jan 2023)
Hope you have an amazing week! Chat soon!

-Oliver Foote