I used to think that they were trying to make me mad…
Now when I look back, I realize that they were just trying to help me.
I used to have conversations with people who were investing in real estate. These people were business owners and more experienced at investing in real estate than I was at the time.
I would ask them which cities they were purchasing properties in. They would tell me right away. It almost felt like they were showing off. It felt like they knew something that the rest of the world did not know. Now when I look back, I think they did know more than the average Joe.
After they told me where they were investing, I now felt that it was my turn. On almost every occasion, as soon I would tell them where I was investing, I would get the same reaction…
It felt like they were disappointed!
The first few times I was confused by their feelings of disappointment, but as time went on my feeling changed.
I would no longer be confused, rather, I would get mad.
As soon as I told these experienced investors where I was investing, they would all pretty much tell me the same thing.
And this was….“Focus on location.”
None of these people ever directly came out and said, “Your City is not a good one, buy properties elsewhere”. Rather, I would be told that, “The City probably won’t appreciate at the same levels when compared to other cities.
The cities that they were comparing things to were of course, the cities they they were investing in.
To date, I have invested in 3 different Cities. 2 of these Cities have been outstanding. The appreciation of the properties has been very good and the tenant profile has been reliable and low maintenance.
One of the cities however, has posed many challenges. In this city, I have dealt with numerous repairs and maintenance of properties, little to no appreciation over the past 3 years, dealt with one eviction and have had challenges finding quality tenants for a vacant property.
It took me about 3 years to realize that what some of these critical real estate investors were saying to me was true. What they were saying was the city that I was investing in was… ‘No Good’.
So now, I have started the process of selling the properties that I have in this city. I have one listed for sale, and based on the success or failure of the sale, will probably look at selling another 2 properties that I own in this city.
An experienced investor once told me that you have to sell your ‘dog properties’. What he meant by this was the following:
If a property is not performing to your standards, you have to sell it and reinvest your money somewhere else.
For instance, if the property is not producing your desired cash flow, coupled with the fact that the property is not appreciating at a good level, you must consider selling it.
It never helps when you are incurring high repairs and maintenance costs on the property along with dealing with non paying tenants.
I used to think that during these tough times one should hang on and not give up.
What I have learned is that you get to a breaking point. If you have properties that are not performing, some event in your life triggers you to take action.
Once you are triggered to take action, you can finally get rid of some properties that have not been performing to your standard.
At the end of the day, if you can maintain properties in your portfolio that are low maintenance, produce cash flow and have good appreciation, this is the best situation that you can have.
In summary, we all get to a point in time where we realize that we have to get rid of under performing properties. If we hold on to these and never get rid of them, they will burn you out, and the probability would remain high that you would throw in the towel altogether as a real estate investor.
Be smart, and get rid of your garbage properties.
Until next time…
Neil.
Neil,
You are so right! Getting rid of “dog properties” and focusing in “performing” properties is so very important.
I am sure you have so much more to share going forward.
T.
Thanks Todor. Dog property is almost sold. Fingers crossed of course. I will of course keep everyone posted on the sale.
Thanks for the comment.
Best Regards,
Neil.
Thanks so much for all your posts. Find them all very valuable and insightful!
Thank you Loise.
Best Regards,
Neil.
What type of analysis do you do to determine a “good” vs “bad” city and do you dig deeper into the neighborhood level. For instance a “good” neighborhood may exist in a “bad” city. Are there specific KPI’s that you are looking for in easily accessible data?
Hi Matt,
Thanks for the comment.
One can do a lot of analysis, or very little analysis in determining a ‘good’ vs ‘bad’ city. It depends on where you are located. For myself, since I am in Canada, Stats Can, is a great starting point. You are able to find out pretty much anything about a given city or town via Stats Can.
However, bottom line in my books, the work I put into determining which is a ‘good’ vs ‘bad’ city comes from the trenches. I go to communities and I watch the real estate markets. I investigate and compare sales prices in order to see what is happening in the market. I want to see how the town or city is appreciating (real estate values) relative to other comparable towns and cities.
Nothing beats good old ‘on the ground’ research.
All the best,
Neil.
Neil,
What Todor said. Your experience is the same as I’ve heard from several town house condo investors and that is part of the reason why I only do deals on freehold properties. They appreciate great and no condo fees to eat up cash flow.
Good luck in freeing up your cash and investing in something that works!
Best,
Mr. H
Hi Erwin,
Thanks for the comment. I would love to have you do a post on some of the deals you are working on. Keep in touch and talk to you soon.
Regards,
Neil.
Hello Neil,
I have to agree with Erwin 100% on this one. My observation is that there are not only a lot of town homes available but there are also a lot of investors willing to rent them for less than what is required to achieve positive cash flow — assuming that you held a new mortgage at 80% LTV (Loan-to-Value).
It’s not the location but rather an issue of supply vs. demand.
My experience for the Hamilton area can be summarized as follows:
You have 3 possible generations that you’re going to rent to:
1. Younger generation (i.e. 20-somethings, new couples, working professionals, no kids)
2. Middle-aged families with kids
3. Older +50 (no kids, often living off fixed income, government pension, ODSP, etc.)
Keep in mind that Hamilton is a low-middle income City. So, when you consider what each of these groups is looking to rent you’ll see that:
1. Younger generation – Often lower income, does not have kids, 50% chance of them having a personal vehicle so a 1 or 2-bedroom apartment (Rent = $700 – $975 + hydro) is all they need AND all they can afford. I’d guesstimate that this makes up 40% of the rental population.
2. Middle-aged families with kids – Financial troubles, average to poor credit, saving to buy their new home. Will have 1-2 vehicles (possibly 3 if Cousin, Aunt, Uncle or Grandparent will be living with them). Need 3-4 bedrooms (don’t forget that extra family member), WANT 2 FULL-BATHROOMS, prefer semi-detached or fully detached, nice town home will suffice. Rent = $1,275 – $1,525. Make-up 30% of rental population.
3. Older +50 – Again, no kids, often living off fixed income, government pension, ODSP, etc. so they only need 1 or 2-bedroom apartment (Rent = $700 – $975 + hydro) AND that is all they can afford. Make-up 30% of rental population.
Assuming you agree with my general assumptions then this tells us that if you are offering a generic town home you are only attracting 30% of the rental population. But let’s go further… of that 30% most want 2 parking spots and 2-FULL bathrooms. The interior and exterior should be modern and appealing — unique features will help the property standout from the sea of generic town homes.
If you are unable to offer all of these features then you are only attracting a portion of that 30%. Unfortunately that 30% will be those that cannot afford (or do not appreciate) the little extras that an “ideal tenant” is looking for.
Most Hamilton town homes are 3-bedrooms, 1.5 bathrooms, partially finished basement, 1 parking space and may be a garage that is too small to actually park a car in. Therefore, you “get what you give”. Or, re-phrased, a semi-desirable property will attract a semi-desirable tenant.
We’ll compound this problem by saying that
1. Many investors will rent these property types for $1,150 + utilities.
2. Families do not like to move in the winter as it involves tracking through the cold & snow to look for a new home. And,
3. The issue of having to move the kids school mid way through the school year (this point alone drastically reduces demand in the winter time).
All these forces combined make “generic” town home (not all TH’s are created equal) investing difficult in the “off season”.
My final point, and perhaps one of the most over-looked factors, is the currently low interest rates or low costs of borrowing. The current cost to borrow (5-year @ 4%, 25-year amortization) is approx. $5.25 for every $1,000 borrowed.
Let’s say that your average investment town home purchase looks as follows:
Purchase Price: $185,000
Condo Fee: $250/month
Insurance: $60/month
Mortgage Cost = [($185,000-20%)/1000] x $5.25 = $777
Monthly Carrying Cost = 250 + 60 + 777 = $1,087
The average semi-detached home that offers what most tenants are looking for:
Purchase Price: $235,000
Condo Fee: $0/month
Insurance: $100/month
Mortgage Cost = [($235,000-20%)/1000] x $5.25 = $987
Monthly Carrying Cost = 100 + 987 = $1,087
NOTE: For simplicity, property taxes (~$250/month) have been excluded from both property calculations. I too was also surprised to see that both “monthly carrying costs” were exactly the same. This was not planned but I knew they’d be very close.
My conclusion is that “most”, “generic” town homes are no longer a sensible investment option when compared to the fact that you can get a semi-detached for the same cost per month. Furthermore, your appreciation will be greater on the detached as 3% of $185k is $5,550/year compared to $6,900/year for a comparable semi-detached.
Neil – You bought in the right location but the lending market changed the rules and took the wind out of the proverbial sails of the common town home investment. I commend you for grabbing an oar, paddling your way out of troubled waters and doing what you need to do to actively management your investment portfolio.
Happy Investing,
Jeff V.
Hi Jeff,
This was a fantastic comment and the length of some blog posts!
Thank you so much for your well thought out response.
I would love to have you or someone from your company do some ongoing guest posts, on topics exactly like this one.
All the best Jeff. I will be in touch.
Regards,
Neil.
Couldn’t agree more! I recently attended a real estate investment seminar in my local area and I was surprised to find that of this small group of successful, each had a different area of town they were focusing upon. There’s nothing wrong with that; they know their neighborhoods, and I know mine. But every successful person at the table had a fairly small, defined area of geographic focus. In a sense, they were experts in their area.
I have had excellent success in the area I have selected. The sales folks running the seminar were pushing hard to get me to diversify, but they didn’t have any listings in my focus area. I can see their point – they want to sell property; to them, the numbers work and they think they are selling a decent product. Your post confirms my gut which is: stick with what works! Not only should you not hesitate to sell a “dog” — you shouldn’t let greed or lack of a better option tempt you to buy one, either.
Some things to consider re. geography. There is a bit of risk in being highly concentrated (if something happens to the school district or taxes, your whole portfolio could take a hit.) But some upsides for me are knowledge and efficiency — it’s close to home, I can keep tools and supplies together, I know what amenities to add for max ROI in terms of both rent and resale, I have reliable building contractors and lawn and snow removal service in this area, I can check on multiple properties in a short amount of time, and I know what the market will bear in terms of rental and resale.
Thank you for this post, because just as greed was tempting me to look outside my sweet spot, you are reminding me WHY I have a sweet spot, and why it works. Location matters. While I wait for the right deal to come along, I’m going to remember that patience is a virtue!
Good luck everyone!
Hi Karen,
Thank you for your comment. Through trial and error sometimes we eventually dicover that ‘sweet spot’.
I totally agree with you. Stick to what you know, and focuss on the area you know best!
Thanks again for the comment.
Regards,
Neil.
Hi Neil,
I have an upcoming post of my client’s West Hamilton Mountain semi detached home that Jeff V beautifully renovated and currently renting out asking $1425. It’s the bomb!
By the way, I found this post that I wrote almost exactly one year ago: http://www.mrhamilton.ca/2011/02/the-secret-about-hamilton-townhouse-condos/
I noticed in my example we were buying for around 215k. Today we’re in the 235-240k range including renos so how is that for appreciation? Hamilton is hot as well! Competing offers on semis and detached.
Cheers,
Erwin
For real estate firms location is a must since people desire to spent themselves on buying condos or apartments in close proximity to the city and the services.