First Rental Property

I first became interested in real estate investment around the year 2003, just after I graduated from The University of Western Ontario.

Before, I begin my story, I would like to thank Stephani Davis for giving me the idea to write this article. Stephani wrote a similar article on the premier real estate social networking site, BiggerPockets.com. I really encourage you to read her article as well.

I made a lot of mistakes when I purchased my first rental property. However, looking back upon my experience I have learned from these mistakes. So much so, that I feel that I will never make these same mistakes again.

Mistake #1

I did not know why I was buying the rental property

When I purchased my first rental property in May of 2005, I did not know why I was purchasing it. I did not know if I was going to live in the property as my principal residence, or if I was going to rent it out. Not being clear on this caused mistake Number #2 to occur.

Mistake #2

I wasn’t sure if the property was going to cash flow

Because I did not have a focus, I had no idea if the property was going to cash flow if I decided to rent it out. I was just so excited at the fact that I was buying a property, that I did not even do my due diligence. At the end of the day, I figured that if it did not cash flow, the worst case scenario would be that I would live in the property for a set period of time and then sell it and buy another property. In my mind, I had things ‘planned’ out. However, as time passed and as I gained more experience and knowledge, I realized that it was not a very good plan.

Mistake #3

I was speculating, not investing

I purchased the property with the hope that the property would go up in value. It was my plan that the property would go up in value, and that I would be able to sell it shortly thereafter in order to make a profit. There is no guarantee that a property will go up in value.

Mistake #4

I took the wrong amortization period

When I purchased this property, I took an amortization period of 25 years. I should have taken an amortization period of 35 years, which was the highest amortization period available in Canada at that time. If I took a 35 year amortization period, this would have resulted in my mortgage payments being much less.

Mistake #5

I got my mortgage through a bank, instead of a mortgage broker

Knowing what I know now, if I could go back in time, I would have got my first mortgage on my rental property through a mortgage broker as opposed to a bank.

The reason for this is because…

…I could have obtained a lower interest rate on my mortgage. Since mortgage brokers deal with many different lenders, they have a variety of interest rates and mortgage terms to chose from. By getting a mortgage from a bank, I was forced to taking the interest rate and the terms of the mortgage from that particular bank.

Despite making these 5 huge blunders, my first rental property has turned out to be the strongest performing property in my portfolio of rental properties.

In 2008, I had a bank appraisal completed, and the value of the rental property came in at $315,000. Bank appraisals are extremely conservative. As such bank appraisals come in well under the market value of what a property would sell for on the market.

As an example, in 2009, there were some comparable homes sold for between $330,000 to $350,000.

I always like to be conservative with my estimates, so even if we assume that the value of the property today is $315,000 as per the bank appraisal, that means that the property has appreciated approximately $65,000 in less than 5 years. If we take a look at what the market value of the property would be as opposed to the appraised value, then the appreciation level would be much higher.

I ended up renting this property out shortly after I took possession of it. For the first 3 years or so, it was a negative cash flow property. In 2008, I re-negotiated the terms of the mortgage. As such, the monthly cash flow on the rental property increased dramatically. This small change enabled me to move forward and purchase additional rental properties. I was able to do this thanks to the great advice of an outstanding mortgage broker, and friend, Kevin Boughen. Kevin specializes in investor mortgages, and works with real estate investors all across Canada.

Here is a short video, and quick tour of my first rental property taken in December 2009.

[youtube]http://www.youtube.com/watch?v=__fESpm7HAw[/youtube]

Hola,

Me Llamo Neil y me gusta real estate. Vivo en Toronto, Ontario, Canada.

Okay…

That is about all the Spanish I can remember from my high school Spanish teacher! (Sorry Miss D)

Unless you have a good working knowledge of the Spanish language, most of you probably read the heading of my article as well as the opening line, and had no idea what it meant.

In English it reads:

Hi,

My name is Neil and I like real estate. I live in Toronto, Ontario, Canada.

Now that I have got your attention, here is the point wholesale lemon tart e liquid flavour concentrate diy vape juice 0mg of this article:

People new to real estate investing often cannot understand the language that experienced real estate investors speak.

There are a lot of terms, and some acronyms that are very confusing to new investors. Sometimes when I am speaking to someone interested in real estate investing, I forget sometimes that they do not know all of the terms that I know, and what happens is that I will use a word or a term that will completely confuse them. This is when they will stare at me with a blank look on their face.

So let’s cut to the chase. I have put together a little glossary of some key terms that I feel that all beginning real estate investors should take the time and learn. Here they are.

Hasta Luego! (See you Later!)

LTV or Loan To Value – When someone says this phrase, they are referring to the ratio of the loan in comparison to the value of a property. For example, if I say, “My rental property has a LTV of 80%” This means that the loan (more specifically the mortgage) is 80% of the value of the home. In this case, if my rental property was valued at $100,000, since my loan (or mortgage) is 80% of the value that means that my mortgage amount is $80,000.

First Mortgage – People generally understand what a mortgage is, however, when you throw the word ‘first’ in front of the word mortgage, this can cause some confusion. Simply put, the first mortgage is usually the largest mortgage (in terms of dollar value) that is placed on a property. A large institution, such as a bank or credit union, often issues the first mortgage. The mortgage is in first position, which means that upon the sale of the rental property, this mortgage has to be paid back FIRST before any other debts are repaid.

Second Mortgage – If you understood the concept of the first mortgage, then you should understand the second mortgage as well. The second mortgage is usually smaller in dollar value than the first mortgage. A private finance company, or a private individual can offer the second mortgage usually. The interest rate of the second mortgage tends to be higher than the interest rate of the first mortgage. This is because vaporesso osmall replacement pod cartridges the lender that offers the second mortgage is taking on more risk that the lender that is offering the first mortgage. There is more risk to the lender because upon the sale of the rental property, the second mortgage lender is in second position. This means that they get paid back after the first mortgage has been paid back. They are lower on the food chain, compared to the first mortgage lender.

Lender – This phrase can refer to any institution or individual who lends funds in the form of a mortgage or loan. Examples of lenders can be major banks, credit unions, private lending companies, or private individuals.

Mortgage Broker – I have noticed that people do not understand the difference between the services offered by a mortgage broker, and the services offered by say, a major bank. A mortgage broker represents their customer (you or I), and deals with many different lenders. When they are working to obtain a mortgage for your rental property, your mortgage broker will speak with many different lenders in order to find the mortgage with the right terms and conditions for you. A mortgage broker has a network of lenders that they deal with.

Amortization or Amortized – This phrase refers to the life of a mortgage. In Canada, it is very common for mortgages to be amortized over 25 years. This means that if you consistently make your payments over the next 25 years, once 25 years is up, you will have paid off the entire balance of your mortgage. Real Estate investors often amortize the life of their mortgages over 25 years in order to maximize their monthly cash flow. Currently, mortgages can be amortized in Canada up to 35 years.

Market Rent – This phrase refers to the estimated rent that a rental property should be able to get. For instance, let’s say that you are looking to rent out a 3 bedroom 2 bathroom townhouse in your hometown. Over the past 6 months, there have been 10 townhouses similar to yours that have rented out between $1250/month and $1350/month. Therefore, the market rent for your townhouse would be between $1250/month to $1350/month. This is because it is the estimated amount that you think your rental property will end up renting for.

Actual Rent – This phrase refers to the actual rent that you collect on your rental property. If you are looking to rent out a rental property and the market rents for your property are between $1250/month and $1350/month, and you end up renting your property for $1200/month, this means that $1200/month is your actual rent.

Cash Flow – This phrase has many definitions, however, in the context of real estate investment, someone might say, “My rental property cash flows.” What they mean by this is that their total expenses on their rental property are lower than their total revenue on the property. This means that they have a surplus of funds available. Real estate investors often refer to the cash flow on their rental properties on a monthly basis. For instance, if real estate investor says, “My first rental property has a cash flow of $500 a month”, this would mean that after subtracting the total monthly expenses on the rental property from the total monthly rent on the property, there would be a surplus of $500/month.