The MrRental Blog Archives

Attracting the right tenants to your property is very important. Once you attract them you need to put them through your screening process, but are you attracting the right people? To do this, write down your ideal tenant. Are they professionals? Students? What is their ideal age? Do they have kids? Are they quiet? Write down everything you can think of that describes your ideal tenant.

Now that you have defined the kind of tenant that you would like to see in your rental property, you have to identify the places where you’ll find your tenant. There are many ways to advertise your vacant unit, however, targeting your ideal tenant may require a different strategy. Perhaps you want to target retirees who are receiving pensions or government cheques because they have a steady stream of income to pay rent. In this case you could advertise at local senior centres, legions, or even churches. Or, maybe you prefer renting to foreign workers, so advertising at local businesses and HR departments may be a good idea.

The point here is to get creative and become proactive. Don’t just sit there and hope that someone will call you from a newspaper ad. Go to them!

1. define your ideal tenant
2. Identify the best marketing strategy for attracting your ideal tenant
3. Execute your marketing strategy!

The capitalization rate, or “cap rate,” is the ratio of net operating income (NOI) to purchase price. To calculate the cap rate, simply divide the NOI (income after all expenses, but does not include any debt service) by the purchase price.

Cap rate = Net Operating Income / Purchase Price

For example, a building with a NOI of $50,000 and a purchase price of $500,000 would have a cap rate of 10.

Cap rate = $50,000 / $500,000 = 0.10 = 10%

You can also work this calculation in reverse. If you are selling a property and your NOI is $65,000, for example, and the going cap rate for your market is 9, what is your property’s value?

Value = NOI / Cap rate
Value = $50,000 / 0.09 = $555,555

Historically, the average cap rate has been ten. If you are a seller, you’d like to get your cap rate below that. If you are a buyer, you want to get above that. Keep in mind, however, that while this valuation method is the measurement for commercial properties, it is rarely, if ever, used for valuing residential properties.

The Gross Rent Multiplier (GRM) formula is an “income” approach of determining the value of a rental property. It’s a formula that measures the gross annual rents relative to the purchase price, and it’s a great way to compare income producing properties. The GRM does not, however, take into consideration any debt servicing, taxes, or operational expenses, but it can help you estimate how much your rental property is worth today, and how much it will be worth if you raise the rents. To calculate the GRM, simply take the purchase price and divide it by the gross scheduled annual rents.

GRM = Purchase Price / Gross scheduled income

So, if a property just sold for $100,000 with annual rents of $10,000, the GRM would be 10. In other words, the purchase price is ten times the annual rents. When you know the GRM you can use it to determine the value of a rental property. In the example earlier, let’s say that we purchased that property for $100,000 and we are getting $10,000 in scheduled gross annual rent. Since we know that the GRM is 10, we can determine how much our property can be worth if the rent were increased. Let’s say our rent increase now gives us $12,000 per year. That slight rental increase can have a huge impact on the value of the property.

Property Value = GRM x Gross scheduled income

Our example shows that a $2,000 increase in annual rent, with a GRM of 10, will increase the value of the property to $120,000! That’s a $20,000 increase!

Determining the GRM for your property is not isolated to that property, you want to find out what the GRM is in *the area* of a given property. Your property might be a 10 however the area average could be higher or lower. The point is that you want to have an accurate GRM for your property and that requires a little due diligence so that you know the GRM rate in *your* area. That being said, the GRM is a great way to compare your rental property to the market. But again, the GRM has limitations so it’s important to know what they are when you are using the GRM formula.

I’m sure this comes as no surprise to many of you, but for the people who are knew to real estate investing, it’s important to understand the basic fundamentals of acquiring rental property. You don’t want to buy a lump of coal, but rather a diamond in the rough, and by applying these three simple rules you can make a lot of money in any market.

Rule 1: Make Money When You Buy
This is easily the most important rule when it comes to real estate investing. You want to profit WHEN you buy, which means you buy the rental property well below market value. These kind of opportunities usually appear when there is turmoil in the life of the property owner. For example, perhaps there was a divorce, a partnership gone bad, foreclosure, or perhaps the owner just wants to get out of the property at any cost. Regardless of the situation, make sure you accurately perform your due diligence and provide an offer that is super low. The better the deal the quicker you will get your return on investment (ROI), so make a low offer and put their motivation to the test.

Rule 2: Make Money While You Own
Your final purchase price and due diligence plays a part here because you need to make sure that your new rental property will cash flow immediately. If your calculations were wrong it could cost you a lot of money and potentially put you in a negative cash flow position, however if you did things right, you will reap the rewards. There is no better feeling than seeing your money work hard for you each and every month; potentially rewarding you for the rest of your life.

Rule 3: Make Money When You Sell
Sometimes it makes sense to sell. Perhaps you want to clear out the low performers and use the cash for more profitable ventures. If you have followed rules 1 and 2 so far you are in a great position, and if the market is up from when you purchased it, the capital gain is a nice bonus for your hard work. There are plenty of options available to sell your property: traditional agent, online websites, or even FSBO. Whatever your choice, decide which method will put the most amount of money in your pocket. Make sure you complete your due diligence for selling your property. Identify all costs, expenses, and taxes up front, and depending on your personal circumstances, decide which option is best for you.

When it comes to real estate investing, renting, and managing your rental properties, you want to make money every step of the way. You don’t want to feed the beast, and sometimes it’s not always possible, but you can always improve your situation by performing thorough due diligence and price negotiations up front. Just remember: keep your emotions under control, understand the motivation of the seller, and always look at the numbers. Your primary objective is to make your money work hard for you.

Are you thinking of moving out of your comfort zone and investing in another province or country? Are you going to hire a property management company? If so here are a few things to keep an eye on when working with a property management company.

Communication
Communication is the most important aspect when dealing with property management companies. Are they quick to return your phone calls or emails? If they aren’t responsive with you as the property owner, they probably aren’t responsive with your tenants, and that can be extremely hazardous to the health of your rental property. As property owners ourselves, we have found that you have to keep a close eye on your property managers. I’m sure to many of you that goes without saying, but if you’re using a property management company for the first time, you need to do some research into the company you are using and definitely shop around. Word-of-mouth is great, but if you don’t know anybody that can recommend a property management company in your area then you have to go with trial and error. Effective and timely communication makes life easy and quickly resolves issues. A communication breakdown is a HUGE issue and can cause all sorts of headaches. In a scenario like this don’t be afraid to fire your existing property management company and seek out a more competent company (you’re probably not the only customer they are screwing over!).

Solution: Establish a communication standard from the very beginning with your property management company and make sure it’s on paper. Hold them to that, and if they stray from the agreement at anytime confront them immediately and get them back on track. If they stick to the agreement it will make life a little easier, but if they continuously break the communication agreement you may want to find a new property management company that is willing to work with you.

Deferred Maintenance
It’s a wise policy to visit your rental properties once in a while, or have someone you know in the area do a quick drive-by and let you know if things are okay or in disarray. Home Owner Associations usually let you know right away if your tenants stray from the local bylaws, but if your property management company ignores the enforcement of the bylaws it can cost you money. In addition, if your property management company chooses to ignore some basic repairs, they will get worse over time and cost you more money down the road. It’s best to kill the monster when it’s small. Also consider your tenants moving out because repairs are not happening. Now you have to make the repairs in addition to paying a tenant placement fee that many property management companies charge to get a new tenant in your rental property. Deferred maintenance can hurt, so keep an eye on the property if you can, and make sure your property management company is doing their job.

Solution: Keep an eye on your property. Whether you occasionally visit the property or have a neighbor check on it, it’s a wise policy to catch any issues while they’re small and resolve them quickly. Your tenants will appreciate it and so will your blood pressure!

Wasteful Expenses
Just because you hired a property management company doesn’t mean you abdicate your responsibilities. If you have experience managing your own property and something needs a quick repair, you can get it done right away with minimal costs. However when using a property management company they typically make a service call to the local serviceman, hire them for the job, and they make a trip to your house and fix the problem. What can typically cost 20 bucks by visiting your local home depot can turn into hundreds of dollars with property management companies. Rule of thumb: service calls are never cheap, just keep in mind that this is the cost of doing business, but be sure to keep an eye on your expenses so they don’t get out of control.

Solution: Like the communication agreement, setup a repair agreement so that you can personally approve any and all expenses. Furthermore, if you happen to know a handy-man in the area that you trust, you can request that he gets the service call for any repairs.

Happy February everyone! Spring is just around the corner, so in the spirit of spring cleaning, we decided to put together 5 easy tips to help fill your vacancies. Some of these tips help market your online MrRental listings, and others are “offline” methods to help drive potential renters to your property. Here we go:

1. Get your rental properties online. People who are moving to your town or city don’t necessarily have access to the local paper, so it’s important to get your properties online, so anyone with an internet connection can see it. Upload pictures and include as much information as possible about your property. Your goal is to be attractive enough that potential renters email or call you.

There are plenty of online listing web sites out there. Most of them charge money but some are free. In this economy it’s wise to save money if you can, and that is why MrRental.com is such a great tool to market your rental listings online for free. Some other free listing web sites are kijiji and Craigslist, but they are very generic and do not specialize in rental properties.

2. Place an Ad in your newspaper. Newspaper ads are expensive, but you can drastically reduce the costs, and increase exposure, by directing readers to your online listing. Rather than spending big bucks to write a big article about your property, write something like: “Beautiful home 2 beds 2 baths only $900/mo. For more info visit www.mrrental.com listing ID: <your lisitng id here>”.

As stated, this method can reduce your advertising costs by keeping the amount of words to a minimum, while still gaining maximum exposure by directing them to your online listing where they can see pictures and a lot more information.

3. Display a FOR RENT sign on your property. Time to dig out that old For Rent sign and try to capture the eye of drive-by traffic. But don’t stop there, get a sign that allows you to write information on it. Like the newspaper strategy, write “www.MrRental.ca Listing ID: <your listing id>” on the For Rent sign. Once again the key is to drive traffic to your online listing so renters can see your property on their own time, and if they’re interested, they will contact you for a showing.

4. Contact local businesses. Call local businesses and see if any of their employees need a place to rent. If you have business cards made up, drop some off for future reference. I know a lot of businesses that are bringing in labor from other countries and landlords are scooping these renters up. Talk to business owners and let them know you have a place for rent.

5. Curb appeal! Curb appeal is huge. You want your property to stand out from the competition, so make sure the inside and outside of your property is clean, organized, and looks like a great place to live. A fresh coat of paint goes a long way. Make sure the place is clean and the lawn is mowed. Remove any clutter throughout. Be sure to take pictures of your nice and clean rental property and upload them to your online listing. Remember: What they see is what you attract.