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6 Tips to Make Your House the Ultimate Passive Income Vehicle

WHAT IF by buying a bigger home, you could actually earn regular cash flow every month that would REDUCE your mortgage payment?

You’d be happy, wouldn’t you? Less burden on your monthly expenses, right?

BUT WAIT!

WHAT IF that cash flow FULLY COVERED your mortgage payment?

You’d be jumping with joy, right? Get to live there FOR FREE!

BUT WAIT!

WHAT IF that cash flow FULLY COVERED your mortgage payment AND gave you a PROFIT on top of that?

WHAT??!!! I get PAID TO LIVE THERE???!!! WOO-HOO! YEAH BABY!!!

I’m going to let you in on the secrets of top real estate investors. Actually, it’s not that secret because many people use it, but most people aren’t using it effectively. The secret is the knowledge and ability to MASTER the following strategies

When you upsize and buy a bigger home, not only does it open up your options to letting your family or extended family members stay there to share expenses, you can also rent out additional rooms.

Yah, duh Gary, everyone knows that!

Like I said, everyone knows that, but few are able to MASTER it. You can rent out a basement suite as a mortgage helper but chances are the rent won’t cover your entire mortgage payment.

The key is to be creative now.

Here’s what most people do. They rent out the basement suite and charge below market value rent and utilities are separate.

Here’s what sophisticated real estate investors do. They rent out the basement suite and charge above market value rent.

If you do that, no one will rent from you

Yah, no one will rent from you if you just jack up the price WITHOUT adding any value. First, in order to justify the higher rent, include the utilities. Don’t worry, contrary to popular belief, utilities aren’t that expensive.

TIP #1: Include Utilities in Rent

Landlords think their tenants leave the stove on all night long, crank the heat up in the summer, use the washer and dryer daily.

*beep beep beep* NEWS FLASH! *beep beep beep*

Tenants don’t do that, and if your tenants do, you picked the wrong tenants and you’ve got other problems on your plate.

To jack up your rent even more, try renovating your basement suite.

I’ve seen some really crappy basement suites. Some I’d rather live in a youth hostel than in one of those. No wonder your rent is so cheap! How in the world do you expect to charge normal rent (we’re not even talking higher rent) when your basement suite is a mess?

TIP #2: Renovate and Renovate it Well

If you want people to pay high rent for your place, then renovate it well. People will pay a premium to live in luxury. Look at the Hilton, Shangri-la, Trump, Sheraton and Four Seasons.

Do you think they charge a premium just because they have a brand name? It’s based on quality too! Use high end flooring like hardwood or bamboo instead of laminate, do granite or slate counters, use marble or expensive tile in the washrooms.

Yes, it’s more expensive, but it’s more durable too. Pay the premium but use your brain as well, don’t buy the most expensive hardwood or import your marble from Sicily. Use high quality, but use your common sense.

But I don’t want to use high end finishings, tenants will just trash the place

Back to the same question, what kind of tenants are you choosing? Do you think the Shangri-la or Four Seasons has that problem? NO! Why is that? Because the people who can afford to live in those hotels aren’t typically the people that trash hotel rooms.

Which brings me to a critical point – charging higher rent will bring better tenants.

Ok, to end off the renovation tip, what do hotels have that rooms for rent typically don’t have?

Hotels are furnished. How do you add value to your basement suite for rent? Furnish it.

Tip #3: Furnish Your Suite

Again, furnish it tastefully, without spending a fortune on $10,000 couches and $5000 beds. Yes, not every tenant will want your furnishings, some will pay the higher rent but want to use their own furnishings.

In that case, just put it in storage. There are cheap storage places for about $50 – $100/mo.

Also, remember that when you consider furnishing your suite, think about what kind of tenant you are looking for. Are you trying to rent out to business executives or students? Or are you trying to rent out to families with furniture already?

Lastly, it’s good to furnish your suite and stage it so that when you show your suite to prospective tenants, they can visualize what their home could like. This is the reason why developers of new homes stage their homes to prospective buyers. It not only looks better, but it helps buyers visualize themselves owning the home.

You’re not selling your home, but if you want to charge higher rent, why wouldn’t you make it look as nice as it possible could when showing it to potential tenants?

Tip #4: Offer Flexible Lease Options

Most people just do the 1 year lease. If you want to charge more, you can’t be like everyone else. Offer 3 month or 6 month leases and because you’re adding the flexibility, it’s added value for the tenant and so it’s justified if you charge more.

If you’re looking at flipping the house after the market increases after a few years, you can also try offering a “lease with the option to own”. This is a key strategy that many real estate investors use.

When you lease a car from the dealership, you sometimes put a downpayment and then pay a monthly lease fee and at the end of your 2 to 5 yr lease, you have the option to purchase the car at a pre-agreed price that’s set when at the time of signing.

Well, who says you couldn’t do this in Real Estate?

Sample Case

The tenant doesn’t have to be renting the whole home. They could just be renting the 2 bedroom suite. Let’s just say, you live upstairs with 4 bedroom and your tenants rents the basement 2 bedroom suite.

Market rent for that 2 bedroom suite is $2500/mo and your house is worth $700,000. Your monthly mortgage payment is about $2700.

You implement the first 3 tips above, renovate, include utilities and furnish it and rent the 2 bedroom suite for $3500/mo.

Your offer to the tenant is $4000/mo with a 2 yr fixed lease (penalty for early cancellation) or month to month (your choice) with the option to buy at $750,000. The month to month option is more attractive to clients as it doesn’t lock them to a contract.

Your house, if appreciating 7%/yr would be worth $800,000 in 2 years.

Sounds complicated Gary, how is it beneficial to me?

It’s beneficial for both parties (landlord and tenant) if you understand the numbers and logic behind it.

  1. Because it’s well renovated, your tenant might even solicit you to buy the property which would be a perfect opportunity to implement this strategy.
  2. It’s beneficial for tenants because you’re setting the price of what they CAN purchase the house for before the lease ends meaning if the house goes up in value, they’re going to be buying it at a deal. Can’t say the same thing for cars as they depreciate like crazy the moment they leave the car dealership.
  3. $4000/mo is a little higher than the $3500/mo but THE OPTION is what attracts the tenant. Everyone knows house prices consistently shoot upwards, especially in Vancouver. The tenant basically can rent with no contract, can leave anytime, and at the end of 2 yrs decide to buy it at a deal if the market is hot.
  4. If the market is bad, the tenant doesn’t buy and you renegotiate the lease. But, at least you to live mortgage free AND got paid $31,200 in profit to live upstairs in those 2 years. ($4000 – $2700 = $1300/mo profit x 24 months = $31,200)
  5. Most tenants like to rent because they can’t afford to buy and so if the tenants don’t exercise that option, you get the profit AND you get to keep the house.
  6. If the tenant exercises that option because the market is hot after 2 yrs, you pocketed $31,200 in profit (more if you implement Tip #6 too) , got to live for free for 2 yrs, and you get the option of looking for your next home to do the same thing.
Tip #5: Tailor Advertising to Premium Tenants

Most landlords just advertise in the Vancouver Sun or Craigslist. They write a very simple and cookie cutter ad that they probably got off a template on the internet.

You want those premium tenants to respond, then you better write a personalized ad that specifically targets the people you’re looking for.

If you’re looking for doctors or health professionals, take pictures or emphasize how spotless your place is and how convenient it is to transit to the hospital. Also, try placing ads in a hospital bulletin board or cafes near the hospital where health professionals frequent.

If you’re looking for students, place ads in common student building bulletin boards, cafeterias, university bus stop poles or benches. Emphasize how close the nearest bus stops are and how it is furnished so they don’t have to go through the hassle of buying furniture.

Flexible lease options are great for students who just want to rent for the semester and then move back home with their parents.

Tip #6: It Pays to Homestay

On top of having your basement suite rented, if you have additional rooms, you can host some homestay students and charge them a lot because you’re including 3 meals a day for them. Once again, if you plan on giving your homestay students instant noodles as meals, then you can’t charge them much. If you give quality food, add value, then you can charge more.

In addition, homestay income is considered as a business. See this link from the Canadian Revenue Agency (CRA):

Since it’s a business, make sure you claim all your relevant expenses: utilities, groceries, gas, mortgage, whatever expenses you use for your homestay students, etc… Make sure you check with your accountant for more details.

Ok, to sum up, didn’t I say you could get paid to live there? If you apply the tips above, this is what it could look like:

East Vancouver home with 4 bedrooms upstairs and two 2 bedroom suites in the basement costs about $800,000. In Vancouver, you are only allowed 1 legal authorized suite.

So, the other suite would be unauthorized or illegal. Yes, many people do it, but it’s a hassle when the neighbors complain, the city

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