What you need to know before you buy a condo

What you need to know before you buy a condo

This concept of condominium ownership is relatively simple and has been around for a long time.

Here is what Wikipedia has to say:

A condominium, or condo, is the form of housing tenure and other real property where a specified part of a piece of real estate (usually of an apartment house) is individually owned. Use of land access to common facilities in the piece such as hallways, heating system, elevators, and exterior areas are executed under legal rights associated with the individual ownership. These rights are controlled by the association of owners that jointly represent ownership of the whole piece.

Scholars have traced the concept of selling part of a building to a first century Babylonian first century record.[1] “Condominium” is a legal term used in the United States and in most provinces of Canada. In Australia, New Zealand, and the Canadian province of British Columbia, it is referred to as “strata title“. In Quebec, the term “divided co-property” (French: copropriété divisée) is used, although the colloquial name remains “condominium”. In France, the equivalent is calledcopropriété (co-ownership), usually managed by the syndic. In Italy the equivalent term is “Condominio” (not surprisingly, as “Condominium” comes from Latin). InHispanic regions, the traditional term propiedad horizontal is retained since horizon in this case signifies “defined”. In South Africa, this form of ownership is called “sectional title”.[2]

The difference between an “apartment” complex and condominium is purely legal. There is no way to differentiate a condominium from an apartment simply by looking at or visiting the building. What defines a condominium is the form of ownership. The same building developed as a condominium (and sold in individual units to different owners) could actually be built at another location as an apartment building (the developers would retain ownership and rent individual units to different tenants). As a practical matter, builders tend to build condominiums to higher quality standards than apartment complexes because of the differences between the rental and sale markets.

Technically, a condominium is a collection of individual home units and common areas along with the land upon which they sit. Individual home ownership within a condominium is construed as ownership of only the air space confining the boundaries of the home (Anglo-Saxon law systems; different elsewhere). The boundaries of that space are specified by a legal document known as a Declaration, filed on record with the local governing authority. Typically, these boundaries will include the wall surrounding a condo, allowing the homeowner to make some interior modifications without impacting the common area. Anything outside this boundary is held in an undivided ownership interest by a corporation established at the time of the condominium’s creation. The corporation holds this property in trust on behalf of the homeowners as a group–-it may not have ownership itself.

Condominiums have conditions, covenants, and restrictions, and often additional rules that govern how the individual unit owners are to share the space.

It is also possible for a condominium to consist of single-family dwellings. So-called “detached condominiums” where homeowners do not maintain the exteriors of the dwellings, yards, etc. or “site condominiums” where the owner has more control and possible ownership (as in a “whole lot” or “lot line” condominium) over the exterior appearance. These structures are preferred by some planned neighborhoods and gated communities.

The purpose of this post is to give you some insight on how a condo corporation is run, and some of the pit falls that can occur if you are a condo owner.

I have served time on some condo corporation boards.  This allowed me to learn a lot about how condo corporations work.  It is important for all unit owners to understand the condo laws for the area they are in, also the by-laws for the specific condo corporation.

The most important document you need to see and understand before you buy a condo is called the “reserve fund study”.  In my home province of Nova Scotia, we are quite fortunate since 2002, every condo corporation needs an updated reserve fund study to be signed off on by an engineer.  It is a requirement of the province to have the study updated every five years.

The reserve fund study is basically a guide to the useable life of every major component of the building, and the amount of money that is being saved to allow for the cost to fix the problem.   For example if you are looking at a condo in a building and you notice the shingles are old and worn out on the roof, you can check out the section on roof replacement in the reserve fund.  If it states the roof needs to be replaced within the next year and they only have $10000 saved for a $50000 roof, you need to realize that there are two main ways that a condo corporation will fund a project if they do not have cash.  One is to raise condo fees and the other is to do a special assessment.  There are pros and cons to each.

The unfortunate part of condos in our area is that several condo corporations were formed before 2002, and the unit owners in an effort to keep condo fees low, did not put enough money aside to replace things like windows, doors, siding, roofs, parking lots, etc.  Now many new unit owners are paying large condo fees and special assessments to replace these items.

I want to share a story that was a major learning experience for us.  It took place several years ago, when Shelly and I were flipping a condo.

The condo was a mid-eighties two bedroom, that was in excellent condition, but very dated.  Our plan was to modernize it and sell it.  We looked at the reserve fund study and noticed a couple of flaws, such as they had an upcoming window replacement project that appeared to be under funded.  We figured no big deal, a $5000 special assessment would likely handle any short falls.  The condo was in a nice area and many of the unit owners were retired professionals, plus we also knew that any newer, younger owners could get the amount added on to their mortgage (most lenders are pretty cooperative around special assessments).  The condo corporation was also managed by a well known large property management company, so we figured it would be all good.

We purchased the condo, submitted our renovation plan to the board, had it approved and got to work.  I went to the annual general meeting shortly after the purchase and got on the board.  I will note that most owners do not want to volunteer for the board, so it is usually easy to get elected.  In my opinion all unit owners should serve time on the board of directors.  It is a thankless job, where you get to hear all the complaints from unit owners about everything from a noisy dog to the grass not being cut to the right length.  Most condo boards hire an outside property management company, so you end up working closely with them.  If you are a property manager of a condo corporation your role is more of a mediator between the unit owners, board of directors and vendors doing the work keeping the common areas maintained.

When I joined this particular board I quickly realized they were in a time of turmoil.  Most of the current board members were on the board for a long time and made an effort to keep condo fees low, plus avoid any special assessments.  They seemed to be completely unaware of the pending financial problems, and were quite defensive when I asked about some of the upcoming projects that were clearly underfunded.  Shortly after I joined the board a couple of the long term members quit.  We ended up with a small board and our property manager.

We decided that we would bring the issues to the attention of the unit owners on a one on one basis.  In my head I figured the action needed would be obvious.  We would go over the reserve fund study, talk about the possible options, then hold a general meeting, everyone would agree to a special assessment.

My vision of what I thought would happen and what actually happened were completely different.

When we met with the individual owners they seemed to understand what needed to be done, however, some of the old board members formed an unauthorized committee to contradict everything we were saying.  We miscalculated the human factor in this business deal.

The new unauthorized board appeared to have an intent to defend the point of view that we would not need a special assessment or increased condo fees to deal with the problem.

I was on the board with two other long term owners that were feeling betrayed, so we decided to have a meeting with our property manager to discuss options.  We decided it was counter productive to go against the past board members.  This was due to the legislation in place that would force our condo corporation to have a reserve fund study completed within the next year.

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We all resigned from the board of directors, which forced an emergency owners meeting.  A new board was elected and they ordered a reserve fund study.

The reserve fund study lead to a special assessment of about $5000.

I was happy to see the outcome was exactly as we predicted.  This situation was also an important part of my growth as a businessman.  It was quite stressful at the time, however, I learned some valuable lessons.

Here is what I learned:

Do not forget to calculate the human ego factor:  When I look back I can see how I clearly stepped on toes and did not consider the feelings of the past board members.  They had volunteered countless hours of time trying to do the right thing.  They felt they were working in the best interests of the unit owners.  The unfortunate part of condo boards, is that they are made up of owners who quite often have very little business, and property management experience.  If I could go back in time, I would have consulted with the past board members and got them involved in helping resolve the problems.  At the time I was younger and more stubborn.  I saw a problem with an easy fix and I just flexed my ego and went after the solution.

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Renters mentality:  This is a common problem in most condo corporations.  Many people will buy a condo and do not realize that they are buying part of a building.  They do not understand that making sure the common areas plus roof, windows, siding, doors, hallway carpets etc… are all part of the ownership experience.  When we were meeting people to gain support for a special assessment, many people did not feel it was their problem.  They felt it should be taken care of by “the board”.  Some people had never attended an AGM or volunteered anytime.  It is a challenge getting money for capital projects from people who do not feel they should have to pay.  We ran into many people who figured that if the condo fees did not cover all the costs then a magic fairy should come and pay.  They had no idea that they were part owner of a giant building and they needed to protect and maintain there own investment.

Do not conclude that the property manager will make decisions in the best interests of the owners:  When a condo corporation hires a property manager, they are a customer.  The property management company wants to keep the board happy.  They take on a more neutral role.  The job of the property management company is to make sure all financial reports are accurate and provided.  They also arrange any work and manage contractors and vendors.  They supervise the daily operations of the building.  The condo property manager will also help solve disputes between owners and act as a mediator between the unit owners, board of directors and vendors.

Make sure to question the reserve fund study before you buy:  If you are reviewing a reserve fund study before you purchase a condo, make sure to question any problems.  Make sure the current board has an answer for any areas that appear to be underfunded.  A well run board will be more than happy answer any questions from potential buyers.

Buyer beware:  I will have to admit that after this project was completed, and we got lucky and only lost a few thousand dollars, we became a lot more cautious.  If you decide to buy a condo, no matter how big or small the building is, make sure to get a good understanding of the maintenance record and future capital expense plan.  Now that we own several buildings we realize it takes a lot of cash to keep them operating properly.  Make sure to talk to the current board members, and if possible current unit owners.

Those were the main lessons we learned.  A friend of mine has a great saying, it reads something like this: There are no good experiences or bad experiences, just learning experiences.

Michael P Currie

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Why people hate being landlords

Why people hate being landlords

We have been real estate investors, landlords and property managers for several years.

We do a lot of consulting with new, want to be, or about to be landlords.

We often see a common theme with small landlords.  They like the idea of owing properties, but they do not like being landlords.

We hear all sorts of negative tenant stories, plus stories of property managers not living up to their expectations.  We often feel that the resentment, pain and suffering of being a landlord can be avoided or at least minimized with a slight reality check and expectation evaluation.

The number one question we ask anyone who is or wants to be a landlord is Why?

Why do you want to own a property or several properties?

The next question is what?

What do you want to accomplish in your life by owning a property or several properties?

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You see, it is important to realize that real estate is only one of many ways to build wealth, there are also several ways to get involved with real estate investing.

The most basic form that I want to discuss in this post is when you buy a property and place it for rent.

It sounds simple, and for the most part it really is, so the question is:

How does this simple form of investing get so complicated in the minds of so many small landlords?

Small business realization– When you own an investment property most people do not seem to realize they own a small business.  You bring in revenue, you pay expenses, you pay tax, you pay vendors to help you maintain it, and you have one or more customer.  Small businesses require effort to provide a great product and please your customer (tenant), they are the revenue portion of the business.  When we consult with small landlords this is one of the first things we discuss.  Many people do not have the desire to work a regular full-time job, and then have to look after another business when they are off.

Cash flow myth- Many new landlords are under the impression that you can buy a property with a small amount down, place a long term tenant that is going to pay maximum rent, never have to do any repairs and maintenance and viola they just increased their income by $500 (often less) per month.  I agree you should never buy a property without the intent of cash flow (some people by losing properties for tax reasons, I feel if you are in business the desire should be to make money).  The reality is that even if your property is cash flowing really well, an eviction, major capital project like windows, roof, etc, an emergency issue like a sewer back up etc.. can wipe out a couple of years of cash flow pretty quick.  If you have an investment property it is important to set up a contingency fund and a long term maintenance plan.  A lot of investment books seem to focus only on cash flow.  Cash flow is important, but it is meaning less if you are constantly stressed out about how you are going to pay for maintenance, repairs, vacancy etc…

Not knowing who to call – This can be a major problem and can cause a lot of stress.  Picture this:  It is a nice sunny afternoon in August, you are having a picnic with your family on a beach an hour outside of town, then your phone rings.  It is one of your tenants and there oven is not working.  They tell you a story of how they need the oven fixed right away, because they plan to bake bread to feed the homeless that evening.  What do you do.  You need to have a plan already in place.  If you do not have a plan, it could ruin the rest of your afternoon.  In the customer service business, if you do not have the confidence to get it fixed, or come up with an alternate plan for your tenant, not only will you cause yourself stress by not being able to fix the problem right away, but also the tenant may make you wear their problem.  I will give you an example of how a plan works, this is a true story.  Shelly was away in the Carribean a few months back, she received a text from a tenant about her oven not working, and she was about to make supper.  Shelly sent a text to our appliance repair person, he sent a text back to say he would be on it asap.  She followed up with her tenant to let her know the appliance guy would be coming.  The tenant texted back to say our appliance guy had already been their replaced the oven element and was gone.  I am not suggesting that all our maintenance issues are solve this easily and quickly, however, my point is to have a list of people to call.  Make sure to have a relationship built on integrity.  Do not nickle and dime people on small jobs, pay right away, be glad you did not have to do it, and your customer (tenant) is happy.

Not wanting to spend any money – When you own properties the one thing I can predict is that no matter how great your plan is, you will need to spend money at inconvenient times.  Maybe your car brakes down, a fridge breaks, and a tenant gives notice all in the same week.  It can seem like a hassle, and for the most part it is.  That is ok, it is all part of the business.  It is important to realize that things break, tenants move out.  If you are going to own properties, you need to be willing and prepared to spend money on them.  Real estate investing using the buy and hold strategy is a long term plan, not a get rich quick plan.  A good way to look at your portfolio is to think of it as a big unit, sometimes people feel reluctant to spend money on homes they are not living in.  You need to keep your income properties in good condition to attract and retain tenants, and keep your revenue stream consistent.

Inconvenient timing of tenant calls – We have had several landlords say they cringe when they see a text or email show up on their phone.  They tend to not want to deal with any issue, no matter what it is.  I agree that there is never a perfect time or place to receive a call, but you need to realize the tenants are your customers, your product is the rental.  Whatever the problem is, deal with it immediately.  Customer service  issues that are ignored do not tend to get better with time.  If you are lucky the tenant will keep bugging you to fix the issue.  If you are unlucky they will say nothing and then move out, only to leave you with having to fix the problem before you can rent it again.  Think long term, build a reputation for excellent customer service.

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Not having time or skills to handle repairs – I invest in real estate for several reasons, a couple of big ones are for future financial security, and to design a lifestyle that puts what I value first (it happens to be family).  I would suggest that unless you are a skilled trades person, to hire out your maintenance, and even if you are a skilled trades person, do not get in the habit of working seven days per week.  If you are a landlord and you plan to work your regular day job and a property maintenance and renovation job in your off hours, of course you are going to feel run down.  Hire out the work.  Spend time on a Sunday with your family, not painting an apartment.  I think you get the picture.  The other thing is that if you are a “do it yourself-er” and you are not very good, you are actually taking away value from your properties.  I have seen a lot of really bad renovations over the years.  Do not be cheap, think long term, let the pros do your renovations.

Huge tax benefits- I have met with people who carry under performing properties in there portfolio for several years, and they claim it is for the huge tax benefits.  I will tell you there are some fantastic tax advantages to owning investment properties, however, I would not recommend buying income (notice the term income) properties for the purpose of losing money.  You might lose money, but just do not do it on purpose.  Consider the tax advantages an added bonus.

Expectation of Passive income – Real estate investing is not a good way to get passive income.  I am sorry that even though the government of Canada considers rental income to be passive, it is actually a really active way to make money.  You have to work for it.  Now,  if you have a simple portfolio consisting of one or two properties, it does not have to be hard, but it is still not passive.

Property manager is no good – We have had the experience of dealing with several property managers.  We have had some great experiences and not so good experiences.  What we have come to realize, is that in order for a property manager to be good, they need to understand our goals, values, budget, and what we want out of the property management agreement and our investment properties.  This can mean a lot of different things to many different people.  The property manager needs to be on the same page.  I will say, if you are going to hire one, make sure they are qualified to do the job.  Do not just trust anyone with your properties.

I hope that explains a bit about what you should expect and assume that will happen if you are a landlord.  Shelly and I love properties and providing excellent customer service, I will admit that even we might cringe a bit when a call comes in at an inconvenient time, however, all we need to do is remember and focus on our long term goals.  Be happy when a tenant calls, build a team, have people ready that can solve a problem for you.

Michael P Currie

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Property Manager basic tool box

Property Manager basic tool box

 A property manager tool box, is a crucial piece of equipment for all property managers and landlords.
I cannot tell you the amount of times Shelly and I were grateful to have some basic tools with us.
I do want to point out that we hire out almost all of our maintenance, however, sometimes if there is an emergency or small repair, we want to have some basic items on hand.
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I wanted to write about what you need at all times.The first step is to go to any local hardware store or Canadian Tire and pick up a small to medium size tool box.
It should be large enough to carry the items I am about to suggest, but small enough to fit easily in the trunk of your car.

The items I am about to suggest are the minimum, you can carry more, but do not carry any less.

  1. Lock lubricant / deicer – we have gone to show or inspect many properties and the key sticks in the door.  With a little bit of lubricant, you can avoid a future service call, or frustration from your tenant.  People will not often do this automatically.  I attended a service call one day for a sticky lock and when I arrived to check it out, I noticed a can of WD-40 in the apartment.  The tenants could have easily fixed there own problem, I am still not sure why they even had WD-40.
  2. Appliance touch up paint – Appliance touch up paint is one of my favorite discoveries as a landlord / property manager.  It can make a stove, fridge, bathtub, sink etc.. look awesome, with very minimal effort.  It comes in a small bottle, and can work wonders on chipped appliances or bathroom fixtures.
  3. 60 watt light bulb – this should be self explanatory
  4. Set of screw drivers – When it comes to carrying screwdrivers, it is a good idea to get a decent variety.  If you only want to buy a few, then I would at the very least have a mid-sized Phillips, a small flat head, and a small Robertson.  The Phillips screws are very common in door locks and cupboard hinges.
  5. Vice grips – If you are only going to carry on set, a medium pair will do
  6. Adjustable wrench – medium size
  7. Measuring tape – it will be common for you to have to measure a room, or for blinds, appliances, etc..
  8. Channel lock pliers – these can be used for a variety of things
  9. Needle nose pliers – medium size
  10. Hammer – hammers always come in handy
  11. Nails – I recommend a couple of sizes, and a small variety of screws is good to have also
  12. Duct tape – duct tape can be used to temporarily repair just about anything.  Make sure to buy the higher quality brand name kind.
  13. Pen – you need to always be ready to take notes
  14. Pencil – make sure it is sharpened
  15. Note pad – you can get a small one from a dollar store
  16. Black Marker – a fine point one is best
  17. Plastic tie wraps – these are good to hold just about anything together
  18. Hose clamps – 4″ is good to have for dryer vents, I would also recommend a few small ones, they can come in handy for plumbing repair

That sums up the basic list for a property manager or landlord that just needs enough for emergency repairs, or small repairs.

Michael P Currie
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Should you raise your tenants rent?

Should you raise your tenants rent?

Here is the question:

Should you raise your tenants rent?

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It sounds simple and many books I have read and depending on where you live, many people will say “yes” raise it the maximum allowed for your area every year.

Nova Scotia (where we currently live) does not have rent control.  We do have guidelines and lead time rules that layout when you can levy increases, we also have an annual allowable amount, but other than that, it is market regulated, more details on how it is done in Nova Scotia at:http://www.novascotia.ca/sns/access/land/residential-tenancies/allowable-rent-increase.asp

The question landlords need to ask themselves, is not can I raise the rent? but more Should you raise the rent?

I know a lot of larger companies make it a policy to have annual rent increases.  If a company has 5000 units and they raise all the rents by $1.00 per month, it would definitely have a large impact on the bottom line.

In the small landlord market, there are other factors to consider than just the monthly revenue.

I want to use an example of a person with 100 units or less.

The answer to the question is not simple, because you need to ask yourself some important questions:

  1. What is the real market rent for the unit?
  2. Is the current tenant paying market rent or close to market rent?
  3. What is the vacancy rate in the area (can you fill the unit quickly if the tenant leaves)?
  4. What will it cost to get the unit ready for another tenant (make sure to factor in the cost of advertising and time it takes to show the unit)?
  5. What is the tenants profile (are they a good fit for the unit?  Have they been there for a long time?)
  6. Is it worth the risk of having to find and take a chance with a new tenant, if the current one leaves?

Each question is extremely important to ask yourself.

The reason is this:

What I find to be the key to success in the landlord / property management business is to have happy, long term tenants who pay the rent on time, look after the property and do not call you to complain.

I will agree that most tenants are like this, however, I have also experienced some not so great tenants, so when I get a great tenant I really appreciate them.

I also evaluate the true cost of replacing a tenant.  This is especially important for small landlords, and people operating in competitive rental markets.

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Here is a simple example that should make you think:

Example 1 – Bill  a long term low maintenance tenant has been renting from you for five years.  You inherited him with the building, and he was paying a bit below market when you bought the place five years ago.  You raised the rent when you bought the property, but have not since then.  The other units in the building that have turned over in the past five years are commanding more rent.

Should you be raising Bill’s rent on an annual basis, or at anytime?

What will it cost if he leaves?

If Bill has been renting for a long time, significant upgrades could be required before a new tenant moves in.

If you need to do a kitchen upgrade, paint, some flooring etc.., it could cost between $1000 – $5000.

Lets say it is going to cost $2500.  If you increase the rent $50 per month and he leaves.  If you can now get $100 more per month to bring it up to market value, it will take 25 months, or just over two years to breakeven.  That does not factor that the new tenant may not be as great, also since the average time for tenancy is two years, they could leave and you could be doing another turnover.

In the end, it will be up to you and the regulations in the area.  Just make sure to look at the big picture, before you make your decision.

Michael P Currie

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Should you buy holiday gifts for your tenants?

Should you buy holiday gifts for your tenants?

Should you buy holiday gifts for your tenants?

There are many variables when it comes to buying gifts for your tenants.  This question can be answered with a simple yes, no or maybe.

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When we first started buying rental properties we sent out holiday cards every year.  I think if we stopped now, our long term tenants would find it strange.  As we grew we have hired some outside property managers for some of our properties, so we are distant from the tenants.

We may know some of them to see them from being around the properties for inspections, maintenance and renovations, however, for the most part we do not know them very well.

I do have to say that if you can do it, it is money well spent.  The properties that Shelly and I manage can all expect to get holiday cards with a small thank you.

It is a great time of the year to show appreciation to our customers (tenants).  It is important to show gratitude towards your tenants, because without them you would not have a business, or a property management job.

We also like to slip a gift card from a local coffee shop or restaurant in with the card.  We feel it enhances the tenants experience renting from you.

I know it can seem like a big expense (about $12 per unit), however, the customer service value you will receive with this kind gesture will be worth the expense.

It is not something you have to do, but I urge you to consider it.

Michael P Currie

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