New Construction Properties Work Smart for You
Qualifying real estate investments for the long term is our specialty. This is where the rubber hits the road and we start looking at the individual property numbers. If we presented you with an property that showed a monthly cash flow of $500 per month on the proforma, would you be interested?
Now, what if we said that property was an older re-sale home that may require some repair in the next few years? Things like a furnace replacement, new roof and when the current tenant leaves you will have to repaint the walls and install new flooring before you could re-rent it.
Sounds like it could cost some extra $$ but would you be interested?
What if we said that same older re-sale property was in sound condition and shouldn’t require any short-term repairs, but based on its location and lack of convenient amenities, schools and recreations facilities close by, it might take more time to find a tenant and could be subject to more vacancy.
Would you still be interested?
Let’s dive a little deeper…
We don’t see a lot of financial sense in acquiring a long-term holding property that could earn $500/month (or $6000/year) in cash flow if you’re just going to send that cash out the back door towards repair costs or vacant holding costs. Now if you’re seeking an older property for a short-term flip for profit, that should be analyzed from a completely different perspective, but let’s establish that you are seeking a long-term asset to build your wealth. To get the best ROI possible you must keep your property operating at OPTIMUM PERFORMANCE!
So, what is optimum performance?
Picture it:
(warning: This opening example is completely off topic but, it is a relatable story that will help make sense of what we are trying to explain…)
You’re in the market for a new car strolling around the lot and you see the perfect new ride. You strut up to the window sticker and see the rated fuel consumption performance is 36MPG. Yeah, maybe driving across Saskatchewan on a hot summer day at 95KM/hr with a slight tail wind… Even though the manufacturer rated the vehicle performance at 36MPG we know there are other factors such as speed, wind and hills that negatively affect its optimum rated performance.
The same goes for real estate. When you view a proforma on an opportunity it really is a snapshot of the projected (or optimum) performance of that property. Same as a vehicle, real estate has factors that can negatively affect their performance. Factors such as vacancy, repairs and maintenance and management all need to be considered up front, as they can greatly impact your cash flow and overall ROI.
Vacancy
Every time a tenant leaves it costs you money. You may be subject to cleaning, repairs, re-marketing costs, lease up fees, showings, screening applications, utility hooks up and vacant property holding costs. These items will cost you money and negatively affect your overall ROI, along with the time and stress of dealing with it.
Tenants love renting new properties! Our New Construction properties are the best way to mitigate vacancy!
Repairs & Maintenance
There is undoubtably some basic maintenance costs tied to tenant turnover, but the majority of the costs are usually associated with maintaining the building and property condition. Every property has an effective age or life expectancy and getting on the wrong side of this cycle can be expensive – especially when you start talking mechanical systems and building envelope issues like furnace, roof, windows, siding, cement driveways and walks and fencing, to name a few. These items will cost you money and negatively affect your overall ROI. You don’t want to be stuck sinking more money into a property than what it’s worth.
Our New Construction properties come with a pro-rated 10-Year warranty! Keep your cash flow in your bank account where it belongs!
Management Costs
We’ve been in the business a long time and we have yet to see a Property Management firm offer their services for free. Fees are typically tied to a percentage of the rental income and we agree, this makes sense to have income in return.
There are a couple other things that need to be considered.
Most firms charge additional fees for handling a vacant property or tenant turnover including a monthly vacant property fee, tenant lease up fee and pass along any associated marketing costs. Most PM firms will also charge additional fees for the handling of any repairs, maintenance or renovation projects.
Now to clarify, a property manager is an integral part of one’s team and success, and this is in no way a poke at any PM firm. We are thankful for their services and fully understand they can’t work for free. In our opinion, the above described fees are fully warranted for their efforts! The point we are trying to make is that your management costs can increase if they are handling any vacancy or repair & maintenance issues for you.
Property Managers love receiving the keys to brand new purpose built rental properties and our New Construction properties are the absolute best way for you to streamline your management costs!