By now I’m sure you’ve researched online, you’ve found popular real estate tutorials, or vlogs, and they have recapped the big picture, like; purchase property cheap, rent high, keep the difference. That is the furthest from reality in this industry.
I’m going to section this blog off into the steps I feel are least talked about in becoming a landlord.
Step 1: Build a team
Not in the conventional sense, meaning you don’t need start adding people to payroll, however, you wan’t solid individuals on your side, perhaps even on retainer. I will include a list of people that I have on my team, and note, some of them do charge monthly or annually for their services. This may differ depending what you need them to do, and how much business you’re doing.
- Financial Advisor (daily banking, investing, credit cards, loans and lines of credit)
- Real Estate Advisor/Agent
- Mortgage Broker
- Accountant (monthly reconciliation, tax filing and planning, can aid in financial advising)
All of the above are very crucial to your businesses success. I communicate almost daily with both my Financial Advisor, and Accountant, while ensuring that my Mortgage Broker, and Real Estate agent stay informed, as they go hand in hand.
Step 2: Meet with your Mortgage Broker and Real Estate Agent
Now that you have all these awesome people in place, start talking with your team, explain your goals. There are certain things that you are going to want to discuss with your Mortgage Broker:
- What is the max value I can borrow;
- What is the current rate;
- What is an appropriate down payment;
These are just a few questions, however very important for your next chats with your Real Estate Agent. Here are some questions you should be asking your Real Estate Agent:
- What neighbourhoods should I be looking in;
- What is the trend in that area;
- What are tenancy, crime, and other relevant rates to that area;
This will give you a better idea of what your business will look like when you are operating. It will give you an idea of what sort of tenant to expect, and the growth or potential decline in that area. Remember, this is an investment, and there is risk associated with that. We will chat about risk next.
Step 3: Incorporation
This is a very important step in operating a real estate business. The reality of your life as a real estate investor is that you operate with huge risk. You will be borrowing 100’s of thousands of dollars, which is why you need the protection of a holding company. This is a separate legal entity from your self, passing the liability from yourself and your assets, to the corporation. This will save you in the following scenarios:
- The rental market crashes, and you can’t make mortgage payments;
- A sinkhole opens on your land, destroying the property, and an insurance issue arises;
- A tenant is injured on your property;
In all of the above cases, you personally are not liable, however your corporation is. This means your money, assets, etc. can not be touched to pay of a mortgage gone bad, or a tenant who has taken you to court.
There are several ways to incorporate:
- Using a lawyer;
- Using an online incorporation tool;
- Your accountant may also be able to help, mine did.
Step 4: Analyze Financials
Some people will tell you that buying property is the smartest decision of your life. They are not wrong. However, they are not telling you the whole story. I am going to include a list of expenses that you need to take into consideration before signing anything:
- What is the land transfer tax?
- What is the estimated property tax?
- What kind of utilities are there? How much are they?
- Will your tenant being paying some, none or all of them?
- What will insurance cost? How big is the deductible?
- Will you need to hire landscapers?
- Will you need to complete any repairs before tenants move in?
- What is your strategy if something goes bad, like really bad?
- Do you have savings, or a line of credit? What is your line of credit interest rate?
- Can you see why incorporating is important? If something goes really bad, and you can’t afford it, that means you are on the road to bankruptcy, or taking out more loans. That is where your financial advisor will come into play.
- Corporate bankruptcy has no affect on your personal credit or assets.
I know that this section sounds like I only highlighted the bad, but that is all I need to. You know the good in this business, that is finding a tenant who pays their rent and respects your investment. If you don’t talk about the bad, learn about it, learn how to manage and overcome it, you will be stuck with your pants down if it happens to you.
I think that I have covered a fair amount in this post, but don’t think I’m done. This is just the beginning of being a landlord. You will learn so much more in the next one!
As always, subscribe to the blog, like our Facebook page, and share the heck out of this. This is real, this is coming from my life. This is what you need to know.