Taking the leap into your first deal as a real estate investor can be daunting. In this article I will share the story and details of mine and Matt's first real estate deal, and the lessons we learned in the process.
Lesson 1: Just get started!
After taking some extensive (and expensive..) real estate investing training, we were revved up and ready to get started. However, we were only 19 at the time, and other than some proceeds from our painting business the year before, we didn't have the funds or lending ability to finance a deal ourselves. On top of that, all of the investors that we talked to in the Toronto area thought we were crazy for considering investing in Windsor!
That didn't stop us from getting started. Right away we started looking through the MLS and kijiji, analyzing deals, viewing properties, networking, and making offers. We were taught in our real estate training that if you get a good deal under contract, the money will come! This was true in a way, but as we quickly found out, first you needed to know the people with the money.
Lesson 2: Start with your network
Many of the good deals and partners can be found through your personal network.
We kept looking for good deals, and after analyzing many cities in Ontario, we found that our home - city of Windsor had some of the best deals to be found. Another thing that turned out to be close to home was our first investors! Although they weren't previously considering investing in real estate, after sliding many good deals across their tables and showing the long term potential of real estate, Matt's parents became our first investing partners by using the equity they held in their primary residence to begin investing.
Lesson 3: Know your criteria and stick to it
Knowing what kind of return you are looking for will help you sift through the multitude of properties available and focus your time and energy on the ones with good ROI potential.
In the fall of 2014, armed with the knowledge from our investment training, we knew we wanted a property with a 10% cap rate and $60,000 or less per unit. With this criteria in mind we were able to narrow down some small multifamily properties and get a couple of them under contract.
We found a large triplex built in 1908, close to the river in the up-and-coming Walkerville neighbourhood. The triplex was vacant and in rough shape, with two spacious 2 bedroom units and one spacious 3 bedroom unit.
Purchase price: $171,000.
Down payment: $42,750 (25%) - This mortgage was held in a arms length RRSP which required 25% down (more on RRSP investing in a future article...).
Lesson 4: Consider your time line for financing
There are many different mortgage products out there, with different rates and different terms. Make sure your mortgage broker knows your long-term plan so that they can find you the best product. In this case, we ended up with a mortgage that has sizable fees to refinance, and does not have the option for a home equity line of credit. Your best bet is to find an investor-friendly mortgage broker who will consider these factors.
Lesson 5: Don't do renovations yourself
Unless you are a contractor and you plan on making flipping your full-time business, leave the renovations to the pros! We hired out a few things, but much of the work was done in-house. We realized that it is worth it to pay contractors to get the job done faster, better, and free up your time to find your next deal.
The renovations were done one unit at a time, so that as soon as the first unit was complete we had it rented out and the rent was covering the carrying costs.
Here are a few "before" photos...
Lesson 6: Get quotes before you buy the house
If your home inspector tells you to "consult a specialist" on something, do it before you remove the inspection condition! We ended up with an extra $10,000 in our renovation cost because of a foundation issue that needed to be fixed. Unfortunately the money you sink into unseen repairs like foundation normally does not have an effect on the rent you can charge. But you've gotta do what you've gotta do! In the end the repair did increase the value of the property.
Lesson 7: Don't fall for the cookies!
We knew from the start that screening your tenants is key to a smooth real estate business. We were off to a good start, screening our applicants diligently to select only qualified people. Also, we knew that spending a little more on renovations to make the units higher than average quality would attract better than average tenants. From the beginning we would always ask ourselves, "would I live here?" - it's a great way to make sure you are keeping your standards high. So we managed to have a good track record.
Until the cookies showed up...
There were a pair of lovely young women who were very nice people and absolutely loved the unit! When we reviewed their application, although their credit was good, they didn't have enough income to support them living in this unit (we want to see income being 3x the monthly rent). We weren't going to offer the unit to them, but then they showed up with a tin of home baked cookies. They really wanted the unit, and they assured us they could cover the rent no problem.
Although they ended up being good tenants in most respects, in the end the money was too tight and they had to move out before their lease was up, after having trouble covering their utility costs.
We learned our lesson: stick to your diligent screening criteria, no matter how nice the people are!
Purchase Price: $171,000
Down payment: $42,750
Total renovation costs: $60,000
Total investment: $102,750
Total rental income: $3,200/month (tenants pay utilities)
Monthly cash flow: $1,100/month
Cash-on-cash return: 12.8%
Today's market value: approx $300,000
Total equity after 3 years: approx $180,000
Equity Gain: approximately $77,000
Total ROI: 37.8% per year
We are currently working on refinancing this property, which will allow us to pull out most or hopefully all of the money invested.
The wonderful thing about investing in real estate, is that it isn't very easy to mess up big-time. You'll make some mistakes here and there, but as long as you have a positive cash flow, you can hang on to your property, have your tenants pay down the equity, and the value of your property will continue to rise over time. And we've come to realize that every "mistake" is another learning opportunity! The best thing to do is start and then keep on going!!
Some photos from after the renovations...