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How do you do it? Move on to your 2nd property?

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hainguyen99992

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I was wondering how it is done? I have read stories of new investors that have bought 4 or more investment properties in one year. I'm in the proses of reading real estate investing in canada and thinking of joining REIN but I only have $20-30,000 to invest. I live in alberta so that is where I would want to invest. Most properties are out of my price range, when from what I understand you need 20% down. I could do a JV and that would not be a bad thing, but after that all my money is tied up in one property. So how do you get past the the first property with all your money tied up in it?? Maybe the book will tell me as I finish reading it, or maybe I should wait a bit to join REIN and real estate investing until I have more money to invest. What do you think?

Thanks
 

Sherilynn

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We had $80k, but we didn't want only one property. So we bought a house with 5% down, and lived in it while we had a suite added to the basement. The cost of the suite was built in to the purchase price of the house and the sellers paid for the construction. (This worked because we were in a booming market and the property appraised well.)

We always watched for the next opportunity and soon found a suitable suited house. We again paid 5% down but we got a "purchase plus improvements" mortgage to upgrade the basement suite. Yes, we moved again...with a toddler and preschooler in tow.

Another opportunity came soon. We bought that with zero down and used our down payment money to upgrade the basement suite. Yup, another move.

Then we sold our first property for a huge profit and bought a 4th property (a condo) with 25% down.

About a year after moving in to our third suited house, we bought our personal residence and stopped moving (for now). However, before my eldest daughter's 5th birthday she said: "Well, I guess we're moving again." When I asked why she thought that, she replied, "because we always move on my birthday."

On the one hand, total "mom fail;" but on the other, she has a kick-arse college fund. ;)
 

Thomas Beyer

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Real estate is a very cash intensive business. Cash come from two sources: your own, or from others.

As such cultivate both sides: your own savings or earnings potential, and that of credit or JVs with others.

Of course you cannot buy multiple houses if you have only $20,000 and no experience, in fact even buying one is a stretch, unless an owner-occupied house with 5% down. However many REIN member have hundreds of thousands in cash and/or available borrowing capacity in their house that they might have acquired 15 or 20 years ago.

You'll get there, in time. Patience, young man ( or woman ? ) patience .. and of course hard work, savings, expertise, excellent credit and salesmanship are all required ! REIN provides a wonderful education and incubation environment for you to nurture all these required attributes.
 

Matt Crowley

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Real Estate Investing in Canada is a fine start to general familiarity that real estate is very locally driven and that over the long term you can safely make money at it.

As you learn more from first hand experience, I think you will find that a lot of the "real estate investing" books out there are built on the concept of information a mile wide and an inch deep.

I have read stories of new investors that have bought 4 or more investment properties in one year.

The question I always have for these guys is the sort of yield they are actually making. (Yield = NOI / property value) I'm not sure of where you are in Alberta, but in Edmonton, this is between 4 and 6% if you are looking at apartment or SFH. If you are promising an investor a return greater than that 4 - 6% range you are in a negative leverage situation where you pay your investor more than the productive ability of the property to make money. If you do an equity position without a set percentage split then you are promising some overall % profit position which is based on whatever appreciation number you want to pull out of the sky...just none of it is guaranteed. This is where you get guys like Brad Lamb advertising a 24.3% return on the new Jasper House condos where 3/4 of the profit comes from property appreciation and you live with negative cash flow for 5 years. (Details on the Jasper House condo "returns" here). Because if the market does not appreciate the yield is what you will make. That is the cash you can take home.

Where I have seen people run into trouble is when their newfound real estate confidence is so money hungry that all they have is the confidence to sell people on "real estate always goes up" and have little operational or investment experience. Selling friends on a better retirement is not difficult.

The other point that really irks me about some get rich quick communities is that the focus is on the number of doors you own. What would you rather have: 5 properties that cash flow $1,000 / month each or 20 that yield $50 / month? (The answer here is not black and white either) You need to have patience to learn how to execute and then you can grow your portfolio from there. If you can't survive a 25 bps increase in real estate, you are living with too much stress in my books.

Finally, this is a business with ongoing client care and concern. Long term relationships are not going to be fooled by gift baskets or birthday cards, although both may be good touches. You need to deliver quality housing at the right price, to the right market, in the right mix. If you are not customer focused then why real estate? Unlimited ways to get rich. Why choose this avenue?
 

Dave Martin

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THANK YOU FOR ASKING THIS QUESTION!!
no, the book does not answer this one. i've had the same question on my mind, also wondering how people are acquiring all of these investments within the first 1-3 years. where do the down payments come from?? i guess we now know. not sure how i'm going to convince my wife to pack up and move so many times...
 
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Dave Martin

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yeah, caught it the first time. it's the one sentence missing from the book. if by "others" you're insinuating borrowing against current equity, that's possible, but a lot of debt to service. if you're talking about jv, as a newbie here i'll be the first to admit that a jv gives me an uneasy feeling. at least when considering it among people i don't know at all.
20% down isn't totally out of the realm of possibility, but it would sure make it tough to gain traction for a newbie like myself. gonna have to get creative.
 

Matt Crowley

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What are the returns you can achieve? What is the margin?

Debt creates zero value. Absolutely nothing. Destroys value actually. My honest advice is to take a look at what the assets out there perform as a whole before worrying about creative ways of financing. If you can defend a 15% return with reasonable expectation, you will find the money for it.

Development margin = Project value after liquidation costs - Total project cost after renovations and interest
* (this is the total gross amount of cash earned from development...is there enough cash to pay an investor?)
Yield = NOI / Total project cost after renovations and interest

Answering these above questions will answer whether the strategy makes any money at all.

Then take a look at the debt question and creative financing.
 

Thomas Beyer

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yeah, caught it the first time. it's the one sentence missing from the book. ...

Fair enough .. I do mention you need two sources: cash and a mortgage.

In general cash comes from two sources: yours, or others.

"Others" comes in two forms: equity, i.e. a share of (unknow future, potential) profit or debt, i.e. a fixed %. Sometimes a blend is used, i.e. a minimum % plus a share of upside.

if by "others" you're insinuating borrowing against current equity, that's possible, but a lot of debt to service.

Well, a LOC is at 2.7 to 3.2%, or a new, increased mortgage on an existing house is 2.0 to 2.7%. That is THE cheapest form of cash by "others" around.
 

Thomas Beyer

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Debt creates zero value. Absolutely nothing. Destroys value actually.

Well, we could (or actually, we should) debate that. Debt in isolation, of course, costs money, and as such is an expense that has to be minimized.

However, debt is the #1 way to create wealth if applied properly. You borrow, say from a bank or your uncle or your parents or a JV partner, money at 2-6%, and invest it at 5-35%. That is how wealth is created if you know how to invest money at a significant % above your borrowing cost.
 

Matt Crowley

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^ Hah yes, I am in total agreement there and with comment above. Debt enables us to develop, purchase, and hold real estate. The bank has confidence that renters will continue to continue to pay well above lending costs which is why lenders allow us to borrow at 2-3% when cap rates are 3.5 - 6%.

My point (and I'm sure you will agree) is that financing never makes a bad deal a good deal. Financing never contributes to profit. No matter how creatively a deal is structured, you need to have enough margin to pay back your lenders.

My point is to focus on the customers' product: the rent they will pay and the expenses required to achieve, maintain, and improve that rent. If you are redeveloping an older product then the developer's responsibility is to understand consumer demands in the marketplace. The bare minimum you will need to develop to compete in the marketplace and what you are doing on top of the minimum to ensure you are not the first suites vacant in a downturn...whether that is the number of bathrooms or balconies actual market knowledge is revealed over time.

Well, we could (or actually, we should) debate that.

Well here is my side, such as it is. The benefit of debt only exists due to positive leverage. I don't want to get too cumbersome or academic here. I certainly agree that without debt, our maximum purchasing power would be reached well before our productive abilities in the marketplace are maxed out. I'll further admit that terms and rates in debt change over time, and this can create a relative competitive advantage when it comes to resale and future purchases depending on the duration changes in interest rates. That being said, debt carries systematic portfolio risk which is avoidable if you purchased all-cash. Open or closed mortgage question aside, if cash flow becomes under pressure due to a high LTV you will need to raise more capital for the project to pay down the mortgage (which is a really hard sell) or sell the asset and suffer the liquidation charges (which are very expensive in real estate). This is the risk of taking on debt. Risk has a price and always increases cost and decreases expected equity value. In addition, the tax advantage of debt is really nothing because you pay tax on the PPD when you add it to taxable income or you can deduct the interest expense * tax rate from taxable income; the interest expense is no better than any other property expenditure only the product to the customer is not enhanced by taking on interest payments like it would be with a utility rebate, upgraded suite options, or amenity upgrades.

And your counter? :)
 

alaas1977

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Hey everyone

I'm going to add my two cents here.

DEBT in NOT a bad word if used correctly. I always joke that most people would dream to win in the lottery what we owe to the banks. However taking on GOOD debt has allowed us to accelerate our wealth creation must faster, and we have found that the more you owe the more the banks want to throw at you (extremely cheap money), hence other peoples money. The key is using it wisely, otherwise you just accumulate more debt and it wont reflect positively on your net worth.

For us the key has been to study our market, know the deals, add value/ refinance most if not all of our money invested out, rent and keep for 5 plus years. The numbers to me are everything, numbers never lie, many people overestimate values, rents and cash-flow and underestimate expenses. Real Estate is not sexy, it is however a safe and attractive way to longterm wealth creation if down correctly.

Lisa
 

Dave Martin

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What are the returns you can achieve? What is the margin?

Debt creates zero value. Absolutely nothing. Destroys value actually. My honest advice is to take a look at what the assets out there perform as a whole before worrying about creative ways of financing. If you can defend a 15% return with reasonable expectation, you will find the money for it.

Development margin = Project value after liquidation costs - Total project cost after renovations and interest
* (this is the total gross amount of cash earned from development...is there enough cash to pay an investor?)
Yield = NOI / Total project cost after renovations and interest

Answering these above questions will answer whether the strategy makes any money at all.

Then take a look at the debt question and creative financing.

just to be clear, are you talking about a fix and flip type investment here? kinda sounds like it, unless i'm missing something.
 

Dave Martin

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Well, a LOC is at 2.7 to 3.2%, or a new, increased mortgage on an existing house is 2.0 to 2.7%. That is THE cheapest form of cash by "others" around.

the 20% downpayment is still a requirement though, right? i couldn't just increase my current mortgage to cover 100% of the purchase price of another house, right?
 

Dave Martin

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thanks for all the replies everyone. great things to consider. however, i think the discussion is missing the point of the original topic. i think it's safe to assume that we all know that if the potential returns on an investment are greater than the cost of the debt on that investment, we can consider the debt, "good debt". i think we can move past that. however, the question is- how does a new investor get qualified for that debt? so far the answers as i understand them, are
a: save up 5%, and do the owner occupied route every year.
b: save up a 20% down payment. buy. repeat.
c: finance the 20% down payment by some other means.

the concern i was trying to express earlier with option c, is that the potential returns (and/or the purchase price) would have to be really awesome to justify doing this, right? i'm thinking this investment would be somewhat of a needle in a haystack.
 

Matt Crowley

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^ Thanks for putting the thread back on track Dave.

just to be clear, are you talking about a fix and flip type investment here? kinda sounds like it, unless i'm missing something.

Development margin should exist any time you make substantial improvements to a property. It doesn't matter if you are renovating to hold, sell to an investor, refinance, or buy and hold in your own portfolio. You measure the development margin against what it would cost for you to buy a similar product on the marketplace without needing to perform renovations.

Development margin = total project value after renovations (after liquidation costs) - total project cost

When you run the pro forma, you need to ensure this margin is positive...otherwise, buy from the stock that is already out there in the marketplace. You are only new once and the premium for new fades very fast.

the concern i was trying to express earlier with option c, is that the potential returns (and/or the purchase price) would have to be really awesome to justify doing this, right? i'm thinking this investment would be somewhat of a needle in a haystack.

^ EXACTLY. You have identified the whole problem. The "creative financing" options out there AFS, VTB, JV can act as a bit of a slight of hand in deceiving the new investor that the challenge is hustling up the capital structure. This is eventually going to reveal itself as a house of cards. At the end of the day, you need to have a development margin if you plan to renovate. The property needs to have a competitive cap rate vs. the other properties on the market. You need to determine the LTV that provides sufficient cash flow to meet the ongoing capital expenses requirements.

The higher the leverage, the greater the risk, the lower the gross asset return, the lower the margin for error. It should strike you as strange then, that the most novice of investors use the highest degree of leverage.
 

Dave Martin

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thanks again guys! this is slowly coming into focus.
yesterday, the wife and i met with an acquaintance i made years ago while snowmobiling- kinda forgot that he happened to be a realtor, but as it turns out, he also owns the agency office that he works out of, is a mortgage broker, and has be investing for over 20 years now! what a great contact.
this same topic came up yesterday, and between him and you guys, this is starting to make sense.

You can increase a mortgage on an existing house, yes.

my one remaining questions is: assuming that you've found an investment that can justify 100% financing, using current home equity, what does the resulting debt look like on paper?

do you just have a single mortgage, that is made up of your remaining mortgage debt, and the purchase price of the new investment combined?

or do you have some visible division between the 2 debts? and if so, what would the balances look like? for example, does the original home mortgage stay the same, or does it increase by the amount of the 20% down payment, with the balance of the investment in another compartment?

or are they completely separate? -aside from either the home mortgage or line of credit increasing by the amount of the down payment.
 

Matt Crowley

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or are they completely separate? -aside from either the home mortgage or line of credit increasing by the amount of the down payment.

They are completely separate. The bank will evaluate your home equity and determine if the LTV is suitable for a HELOC. That HELOC is registered against your personal residence. The mortgage for the new property is a separate instrument registered against the title of the other home. The two sources of financing are separate by legal title but are joined by tax considerations. The interest on the HELOC is tax deductible. It gains tax deductibility as the financing is used for an investment property.

Obviously, the debt cost for the mortgage and HELOC need to be considered on the pro forma and cash flow analysis for the new home. Most often, the margin for the investment property will not have sufficient cash flow with that high of an LTV to cover the debt costs. This kind of leverage can get you into trouble if large repairs come up.
 
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