Renovations, a key to Profit and Cash Flow by Murray Wood

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1 Renovations, a key to Profit and Cash Flow by Murray Wood Before August of 2008, investing in cash flow was relatively easy. Yes, one needed to do their due diligence, but if the community economics were right and the numbers worked then it came down to financing and mortgages were fairly easy to obtain. Things have changed. It is still critical to choose a community with the right economics and select properties that will cash flow, however, financing is very difficult to obtain. If a person has decided that real estate is the best way to build a retirement income and increase their equity, then how can they make it all work with tough financing? To answer this question I have created a four part series on How to Buy Cash Flow Property in the New Financial Landscape This series will show you how to: 1. Article 1; Build your cash position and equity position through renovations and flips. 2. Article 2; In depth look at mortgages, what s available and how to best use them. Also, how you can use your RRSP to invest in property. 3. Article 3; Provide a number of strategies for investor with different financial situations and goals. 4. Article 4; How to choose a community that has the economics to support your real estate goals. The Art of the Flip I use a Plan A and Plan B approach to flipping cash flow real estate: Plan A; involves buying a property at least 15% below market, do the appropriate renovations to increase the value and then sell the house to an investor or to the public as a turnkey cash flow property. Plan B; Any property that I buy must cash flow once the renovations are completed. Once the renovations are completed, the property is refinanced and kept as part of the cash flow portfolio. My Advantage Currently I am working on projects in Edmonton ( Why Edmonton will be covered in Article 4) and I find that the market is back into multiple offers and short closing times. Most investors want a rent-ready property without any work involved. I have determined that buying a property that needs work gives me an edge on the other buyers as well as the ability to create immediate equity after the renovation. This model can apply to townhomes, single family with suite potential and small multi-family buildings. This model also applies anywhere in Western Canada.

Things have changed. It is still critical to choose a community with the right economics and select properties that will cash flow, however, financing is very difficult to obtain.

2 The Plans in Action: Plan A 1. Buy with all cash. 2. Renovate to create a much more valuable property that will cash flow. 3. Order an appraisal 4. Sell to an investor or the public. Plan B 1 Buy with all cash 2. Renovate to create a much more valuable property that will cash flow. The renovated property will often bring in above market rents. 3. Rent the property. 4. Order an appraisal 5. Re-finance the property at the new value and pull out most or all of the cash 6. If the property is financed, I make sure the new financing does not create a negative cash flow 7. Hold for 5 years or until the market dictates an earlier sale. The Plan Benefits: Buy with all cash makes the offer more competitive. Buying with cash saves brokerage costs and carrying costs. Why pay financing costs twice; once upon purchase and then again on the renovated value? Create 20% to 30% equity immediately with the renovation. Creates the ability to use the same money over and over again to build a cash flow portfolio. A hedge Against Market Fluctuations: This method can create an immediate 20% to 30% equity. If and when the market fluctuates this provides a built in hedge against any loss in value. Potential Pre-sale of a Project I have been working with James Knull, a Re/Max realtor and investor in Edmonton. By combining our skills we are able to bring more projects to the investor market. Right now in Edmonton, the most desired type of residential property for investors is basement suited houses with a garage. Typically, a well renovated, well laid out basement suited houses in the $300,000- $350,000 price range sells within 2 weeks. Often faster. The demand for this inventory is fueled by the high cash flow that these types of properties provide. The challenge for buyers is that many of these properties have suites in them that are not well thought out. The layouts are awkward and put in as an afterthought, or the suites themselves have not been designed in a way that meets fire and safety codes. A properly renovated and designed suite will sell quickly because to the savvy investor, these properties are easy to manage, attract quality tenants, and ultimately produce secure and high cash flows. I have personally been purchasing basement suited homes and managing them since 2007 and have been a realtor working with investors who buy these properties since I represent a great number of buyers who choose to focus on basement suited properties and the demand for them is much higher than the current supply. A business model that produces these properties reliably and consistently would have

Order an appraisal 5. Re-finance the property at the new value and pull out most or all of the cash 6.

3 no trouble finding end buyers and I am confident that the inventory of basement suited homes would cycle quickly. - James Knull, (780) Project Management and Renovations In addition to investing in real estate for the last 30 years I owned a renovation company through most of the 90s and have built and renovated many houses. I am on site and do a lot of the work myself. This keeps the projects on budget. Is there an opportunity here for you? Plan A, Renovate and sell; this approach may work for investors: 1. Who have a line of credit (LOC) and want a short term investment, using their LOC, to build capital. 2. Have investment capital but can t get a mortgage for their own deals. 3. Who are looking for short term investments. 4. Have RRSP funds that are under performing. Plan B, Renovate and hold; this approach may work for investors: 1. Who are looking for turnkey cash flow property for their portfolio. 2. Who have mortgage capabilities but little cash. 3. Who can provide a combination of cash and financing. 5. Have RRSP funds that are under performing. There are many ways that you can participate in this method of real estate investing. If you would like to join me in this method of building a portfolio please give me a call at Murray Wood murray@buyhomesbc.ca Project Examples I have attached four examples of past projects. Two are flips and two have been kept as cash flow properties. Murray Wood Real Estate Portfolios for Retirement Cell: Fax: Click to receive real estate investing and retirement strategy updates

renovated many houses. I am on site and do a lot of the work myself. This keeps the projects on budget. Is there an opportunity here for you?

4 Only persons who are exempt from the prospectus requirements of the Securities Act are eligible to participate. Each Venturer acknowledges that real estate developments and investments are generally subject to varying degrees of risk depending on the nature of the property. Such risks include changes in general economic conditions (such as the availability and cost of mortgage funds), local conditions (such as the supply of competing lands in the area), government regulations (such as taxation of property and environmental legislation) and the attractiveness of properties to potential purchasers. In addition, each segment in the real estate development industry is capital intensive and is typically sensitive to interest rates. Flips Mobile home (Okanagan, BC) (See attached photos) Project: Full renovation Investment: $49,995 Duration: 213 days Sale price: $76,700 Costs: $60,531 (Includes Investment repayment, carrying costs & realty fees) Profit: $16,169 Return: 32.3%, ($16,169/$49,995 x 100) Annualized 55.3% (32.8%/213 days x 365 days) Bungalow (Devon, near Edmonton, AB) (See attached photos) Project: Full renovation Investment: $184,000 Duration: 133 days Sale price: $222,000 Costs: $194,000 (Includes Investment repayment, carrying costs & realty fees) Profit: $28,000 Return: 15.2%, ($28,000/$184,000 x 100) Annualized 42% (15.2%/133 days x 365 days) Buy, Renovate and Hold 3 bedroom rancher with unfinished basement (Okanagan, BC) (See attached photos) This home was purchased, cleaned up and rented with an unfinished basement. Suiting the basement can be done at anytime to increase the cash flow. The current tenant has been there for 6 years and wants the basement included thus we obtain a higher rent without the capital investment of renovating the basement. Project: Buy, renovate and hold Years held: 9 Purchase: $218,000 Current Value: $369,000 Reno: $5,000 Cash flow: $520/mo.

Such risks include changes in general economic conditions (such as the availability and cost of mortgage funds), local conditions (such as the supply of competing lands in the area), government

5 2 bedroom home with unfinished basement (Coquitlam, BC) (See attached photos) This home was purchased, cleaned up and a one bedroom craftsman style suite built in the basement. Project: Buy, renovate and hold Years held: 5 Purchase: $365,000 Current Value: $632,000 Reno: $35,000 Cash flow: $630/mo.

6 Mobile Home, Okanagan, BC

9 Bungalow, Devon, Alberta

11 Coquitlam, BC Suited house

13 Three Bedroom Home with basement, Okanagan, BC

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