Hidden Cost

Submitted by francois.lanthier@live.ca on Thu, 02/11/2021 - 14:29

Question from our January 27th - The REITE Experience Event

What is a "HIDDEN" cost or blind spot that most ppl miss?

- June 20, 2021

I have seen clients not being properly advised on the different fees in the case of private mortgages (borrower legal fees, lender legal fees, lender fee, broker fee, etc.). This is avoided by working with a good broker though!

Another few that tend to be last minute surprises on sales are the HST on the real estate agent commission and the discharge fee charged by the lender.

- June 21, 2021

100% agree! Working with an experienced mortgage broker/agent who specializes in real estate investing is key. Plus having an experienced lawyer helps a great deal too. And a real estate broker/agent who has a lot of experience with real estate investors is invaluable also - they can let you know about items long before the actual transaction occurs.

- July 22, 2021

When we bought our first triplex we refinanced our primary residence and used that money for the DP and closing costs. Nothing out of the ordinary. We knew about all the fees. Pretty much in line with buying our primary residence.

When we bought our second triplex we used OPM. We used someone's RRSP money for the DP and some closing costs. We were able to come up with the difference as we knew roughly what we needed from our first triplex purchase.

This is what we hadn't factored in up front as a "HIDDEN" cost. That RRSP money we used, we have to make sure we have enough to cover the final amount.

We opened up Excel (wonderful tool!) and started plugging in numbers. First was adding it as an expense (it sort of is) in our cash flow calculator for the property we used the RRSP money for (If you've borrowed RRSP money you know how much of the interest you MUST pay yearly (We hope you went yearly)). The property still cash flowed. Good!

But what about when the debt comes due? Again. We opened up Excel and started plugging in numbers. We put the numbers for the RRSP loan. Then we put in the numbers for the mortgages pay down to line up with the RRSP due date. With the pay downs we saw that we can cover the loan. Good again! Even if property values don't increase at all in the next 5 years we are good. As long as the properties cash flow enough we are good.

Our lesson for future JVs is to factor that expense in our calculations against our current properties and the new ones.

We are learning that there are hidden costs that extend beyond the usual lawyer fees, closing costs, yearly accounting fees, etc. and that are not buried in fine print or some convoluted fee that no one but a Theoretical Physicist would understand. You will either know it up front as you research and start putting 2 and 2 together or live through it. Hopefully it'll be fine.

We hope this helped.

Ken, Lorraine, Bryson, and Kody