What happens if things go bad?

by Steve DeVoe
(Mississauga, Ontario, Canada)

After reading your book I'm more intrigued than ever. But I'm curious, particularly since a lot of this comes from the U.S., what happens if/when the market makes a correction.

I can't help but envision owning x number of homes, the market drops by 10% or more(if we are in a bubble not an outlandish possibility)and all your rent to own tenants realize the house is worth substantially less then they have it optioned for. They no longer are willing to pay a higher rent since they know they likely are not buying the house at the agreed price any longer. Further, it seems conceivable to me that if they know they are going to loose their deposit anyway if they opt not to buy at an over market price at the end of the lease they will just walk away.

Is it not a possibility that in a down turn (Similar to the U.S. today) that you could end up with a substantial part of ones portfolio vacant and thus a real problem with cash flow to cover the mortgage payments?

What has happened to your U.S. members where the values have dropped by huge percentages?

Comments for What happens if things go bad?

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Sep 03, 2010
If Things Go Bad
by: Scott

Hi Steve,
Just to add some advice to Tom's comments.
It's always a good idea to factor in the worst case scenarios when looking at a property so you can be fully prepared.
Here's what I have found works well for me when investing in rental properties.

1. Do your research to understand how much rent you can get for a property. Kijiji and the local papers are great resources.
2. Use an online mortgage calculator to figure out what your monthly expenses will be for the property. Remember to estimate property taxes and insurance.
3. Run the numbers again using a 2-3% higher mortgage rate to ensure that you can still make the property profit or at least break even.

This process will help you feel more comfortable about your decision to purchase the property and will give you some peace of mind knowing that if the mortgage rates jump up a bit, you are still going to be fine.

I hope that helps.

Good luck,
Scott.

Jan 05, 2010
Ah, great real estate risk assessment question
by: Tom Karadza

Hi Steve,

Great question.

It's important to set context before with this one. Risk with real estate applies to every category and every strategy.

Student rentals may have a University put up a massive new residence building.

Apartment buildings may have $250,000 in unexpected underground parking repairs.

You get the idea.

With single family homes you need to be comfortable that you'll be able to rent out your property for acceptable cash flow in any environment.

Once you've established that then you can get advanced and implement lease/option strategies on them.

Property and community fundamentals come first. Always.

That way if property values change (up/down) you always feel good because you bought a property that you know you can rent out anytime (there are always people looking to rent).

And if the current tenant doesn't pay you your rent you can move on and get a new one (by the way, in your example, tenants must pay the higher than average rent that you mention because it's in their lease - they can't decide not to).

Also, for lease/options there are always two sides. We know investors who are had to give up equity because the property appreciated past the set buy out price. We know others that had to agreed to reduce their price (although they didn't have to) to sell their property but still made a profit b/c of accumulated monthly cash flow and equity build-up.

As for U.S. investors, we know some who got carried away and bought "not so nice properties" because they were good deals and they've seen their prices drop. Interestingly they can still find tenants for them. We know others who bought in good areas and have had stable prices. So it's case buy case. Once nice thing about lease/options is that you as the investor are in control.

To summarize quickly, it all starts with the property.

Find a property that you like. Focus on a good area.

And if you decide through your own education that you'll rent out that property for an acceptable amount in any economic environment - then chances are you've found a winner.

Hope that helps a little!

Tom.

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