The single most critical factor to being a successful Real Estate Investor is the ability to properly and thoroughly screen tenants. Unfortunately, there are times when you inherit bad tenants or when good tenants turn into bad tenants. Either way, bad tenants cost you both TIME and MONEY ... and inevitably alot of STRESS.
On average it now takes over 4 months to evict a tenant in Ontario, and that's only if you start the process a day after the first payment was missed. For most novice investors the average is closer to over 6 months. Factor in your time and potential damages (and every tenant I have ever evicted has damaged his/her unit) and you're talking thousands of dollars.
I recently had to evict a tenant from an apartment building in the Greater Toronto Area. This was a tenant that was inherited when the building was purchased. They paid their rent on time, but the problem was that their apartment was an absolute MESS as you will see from the pictures below. This created several problems. The apartment became a fire and safety hazard AND attracted pests to the building. It took a few months but I eventually got the eviction based on the tenant's failure to maintain the apartment in a good state of repair and cleanliness.
The pictures below were taken in the apartment just before the tenant was evicted.
BEFORE
After several weeks of work to the apartment and a few thousand dollars, the renovations to the apartment were completed. The final product was a stunning NEW1 bedroom apartment.
AFTER
THE NUMBERS
The Good news is that there is a silver lining if you find yourself in this predicament, especially during this period of rising rents.
The apartment renovation cost approx. $8,000 for materials and labour. No one likes to shell out that kind of money, especially when you are working with tight margins to begin with. However, in most cases this type of investment shows an immediate and favorable ROI.
Pre-Eviction Rent: $875/month
Post-Eviction Rent: $1,150/month
Difference: $275/month OR $3,300/year
Many tend to think the payback period is the most important consideration when making this type of investment. In this case payback would be just under 3 years. I can appreciate that thinking because cash flow is very important in this business. However, there is an even more important metric that is often overlooked. That metric is the VALUE that this type of renovation adds to the property.
Based on a cap rate of 5% (which is pretty typical for this type of apartment building), the annual addition of $3,300 to the bottom line adds $66,000 in value to the property. The effective ROI is 825%! Not bad for 3 weeks work.
Why is this important?
-Your building is now worth an additional $66,000
-Your net worth and balance sheet just grew by $66,000
-When it comes time to renew/refinance, you now have the ability to borrow up to 75% of the newly created value. In essence, the investment of $8,000 now gives you access to approx. $50,000 to be used towards other investments/projects
Keep in mind that is just ONE unit in an apartment building. Make the same upgrades across all the units over time and you can see how quickly your wealth can build through real estate investment.
Author: Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor