Any downside to my strategy?

[Dejavu]

Hi,

I am 33 years old, with a stable job and good income. This may seem strange but I first purchased my first rental property and only then started researching the matter and educating myself about RE investing. Although this may sound like a disaster scenario, luckily it turned out quite well. The property nets around $100 in positive cash/flow. I have been managing it myself for ~1.5 years (since Dec 2006) and quite enjoyed learning the ropes of landlording and dealing with tenants. I would like to continue with RE investing and over a number of years work myself out of the day job and into RE full time. I would appreciate if experienced investors on this board could take a critical look at my current strategy and steps to date and share your thoughts on any most obvious pitfalls you may note. Any other thoughts and/or advice would also be much appreciated.

Since the first purchase, I bought a preconstruction condo in downtown core (Toronto) in June 2007 that will be completed in 2010. As of today, it is up around 25% (of the total price). If the prices hold out in the next couple of years, I should be netting around $60,000 which I plan to either refinance to put down on another property while renting the condo out or sell the condo and reinvest my down payment + the appreciation into 2 new properties.

Before the condo is ready, I am looking to purchase another property in Brampton with a legal basement suite. From my analysis, it should be able to produce around 8% of the purchase price in gross rents and should cash flow around $50-$100/month.

All properties are purchased with 20% down. I am hoping to continue with this strategy until I have 5-6 properties that are cash flow positive. Once I reach this target, I am hoping to be able to refinance all these properties every two years or as required to take out the equity built up by tenants and purchase new properties without putting any or minimul amounts of my own money down. Then continue this process until such time that the properties are able to generate enough passive cash flow to replace the day job. If all stars line up (real estate market, tenant turnover, interest rates etc) I estimate in 10 years or so, I should be able to achieve my objective. Although, this is very high level and not providing the full picture in terms of $$$, I would appreciates your thoughts in principle on how realistic this plan seems and if you note any glaring faults in it.

Thanks! and apologies for a lengthy message

 

[RedlineBrett]

Sounds like you have a very good grip on the basics. Nice job! I really like your grip on the fundamentals so far!

some quick pointers

- Join REIN. You have a great vision and path ahead of you but becoming a member will take you to new heights. Even just being around other investors will get you going...well worth the $$. Success in real estate depends on your knowledge and implementation of successful business systems - analysing deals, property management, tax planning, raising capital - all of these things and more have to come together in order to minimise stress and get you to your end game ASAP. REIN really helps fill in the blanks. I think this is the single biggest piece of advice anyone can give you right now.

- Be mindful of the pre-construction market... Would these units actually sell for that value today? How many other complexes will be completed around that time? What is the rental market like in that area right now? This area of real estate is generally quite speculative and lots of people can get caught up in it... Just make sure you can close and that it will rent well when you look to take possession otherwise you may want to dump it like you mention.

- I would reccomend you start doing some research on joint ventures/partnerships. You will always be able to put your own money to work and maximise that... but I guarantee people will take note of what you`re doing and your friends and family may want to partner with you on a few deals which will help enhance your portfolio.

Good luck!



QUOTE (Dejavu @ Mar 11 2008, 07:27 PM) Hi,

I am 33 years old, with a stable job and good income. This may seem strange but I first purchased my first rental property and only then started researching the matter and educating myself about RE investing. Although this may sound like a disaster scenario, luckily it turned out quite well. The property nets around $100 in positive cash/flow. I have been managing it myself for ~1.5 years (since Dec 2006) and quite enjoyed learning the ropes of landlording and dealing with tenants. I would like to continue with RE investing and over a number of years work myself out of the day job and into RE full time. I would appreciate if experienced investors on this board could take a critical look at my current strategy and steps to date and share your thoughts on any most obvious pitfalls you may note. Any other thoughts and/or advice would also be much appreciated.

Since the first purchase, I bought a preconstruction condo in downtown core (Toronto) in June 2007 that will be completed in 2010. As of today, it is up around 25% (of the total price). If the prices hold out in the next couple of years, I should be netting around $60,000 which I plan to either refinance to put down on another property while renting the condo out or sell the condo and reinvest my down payment + the appreciation into 2 new properties.

Before the condo is ready, I am looking to purchase another property in Brampton with a legal basement suite. From my analysis, it should be able to produce around 8% of the purchase price in gross rents and should cash flow around $50-$100/month.

All properties are purchased with 20% down. I am hoping to continue with this strategy until I have 5-6 properties that are cash flow positive. Once I reach this target, I am hoping to be able to refinance all these properties every two years or as required to take out the equity built up by tenants and purchase new properties without putting any or minimul amounts of my own money down. Then continue this process until such time that the properties are able to generate enough passive cash flow to replace the day job. If all stars line up (real estate market, tenant turnover, interest rates etc) I estimate in 10 years or so, I should be able to achieve my objective. Although, this is very high level and not providing the full picture in terms of $$, I would appreciates your thoughts in principle on how realistic this plan seems and if you note any glaring faults in it.

Thanks! and apologies for a lengthy message

 

[invst4profit]

The basics of your plan does appear solid. You have the knowledge to move forward on your own and staying on here as a forum member won`t hurt. If interested there is a American based site, Biggerpockets, that also may be of benifit to you.
My only advice would be to check and double check your cash flow.
Expences will cut into 50% of your rental income (before debt service). Many will dispute these numbers, regarding there own properties, however it will be the case with a buy and hold stratagy.
Good luck.

 

[Dejavu]

Thank you both for your input, its much appreciated. Its always good to get someone elses perspective. Otherwise, I am just too close to it and its hard to see the bigger pictures being so involved in details.

Yes, condo is a more risky investment, although the location is good (Toronto Financial District, next to UofT & Hospital) so I am cautiously optimistic. Plan A is to hold and rent out, if it does not carry itself well, dump it and move to Single Family Homes with positive cash flow.

Thanks for the link to Bigpockets, I can see spending quite a few productive hours there.

 

[Nir]

Dear Dejavu,

How about focusing more on cash flow? $50 is too close to zero. Why not search for the right properties in other cities? The following tip might shorten the time till you`re free like a bird from 10 years to 5 years: look for properties (regardless of type - single family, triplex, etc.) with a minimum of 13% annual rent to purchase price ratio, in Ontario, where appreciation is still expected to be as high as in Toronto. I wouldn`t be as specific had I not known such properties exist.

Cheers!
Neil

 

[Thomas Beyer]

sounds like a decent plan. Buy AS MANY as you can afford with break even cash-flow .. and you`ll come out OK in a few years as we are in an INFLATIONARY environment where hard assets appreciate .. so load up on cheap money (i.e. a mortgage) to buy as much hard assets a you can .. with cash-flow or at least break even ..

do NOT count the appreciation of pre-sales condos as markets can (and have !!) changed rapidly. Sell the pre-sale condo (now or just before closing or shortly after closing) as lilely you will be UNABLE to get enough cash-flow from rent to carry a mortgage, condo fees and taxes ..

Also look at TAXES: in Canada: no taxes on your own home ! So, consider buying as large as you can afford and sub-let a room or 3 for ad`l income while you hold .. the money is always in the equity .. as cash-flow is usually tight ... so focus on areas that have upside !

in RE you need tiome, money and expertise ! so, join REIN, get educated, find money partners, find deals, work on your network ..

 

[mar]

QUOTE (thomasbeyer2000 @ Mar 12 2008, 10:49 PM) sounds like a decent plan. Buy AS MANY as you can afford with break even cash-flow .. and you`ll come out OK in a few years as we are in an INFLATIONARY environment where hard assets appreciate .. so load up on cheap money (i.e. a mortgage) to buy as much hard assets a you can .. with cash-flow or at least break even ..

do NOT count the appreciation of pre-sales condos as markets can (and have !!) changed rapidly. Sell the pre-sale condo (now or just before closing or shortly after closing) as lilely you will be UNABLE to get enough cash-flow from rent to carry a mortgage, condo fees and taxes ..

Also look at TAXES: in Canada: no taxes on your own home ! So, consider buying as large as you can afford and sub-let a room or 3 for ad`l income while you hold .. the money is always in the equity .. as cash-flow is usually tight ... so focus on areas that have upside !

in RE you need tiome, money and expertise ! so, join REIN, get educated, find money partners, find deals, work on your network ..

I too am a novice RE investor and have been sometimes nervous of my strategy of accumulating as many townhouse/semis as possible as quickly as possible. I currently have 3 properties and am looking to finance several more @ 100% using CMHC program. All deals have or will have break even/small positive cash flow. Does everyone agree with the 1st paragraph above, to buy as many props as possible as inflation should further increase RE values? I`m in the Ottawa area. Thanks in advance for your replies.

 

[JohnS]

QUOTE (mar @ Mar 13 2008, 12:47 AM) I too am a novice RE investor and have been sometimes nervous of my strategy of accumulating as many townhouse/semis as possible as quickly as possible. I currently have 3 properties and am looking to finance several more @ 100% using CMHC program. All deals have or will have break even/small positive cash flow. Does everyone agree with the 1st paragraph above, to buy as many props as possible as inflation should further increase RE values? I`m in the Ottawa area. Thanks in advance for your replies.

There was the implied caveat to his statement, that was to buy as many properties as you can in areas of growth. Buying lots of properties in an area with poor economic fundamentals is a recipe for failure. That`s why so many people here, when asked for advice, automatically say to join REIN. REIN teaches people how to accurately evaluate the economic fundamentals of an area.

Have a good day!

JohnS

 

[invst4profit]

If you concentrate on cash flow and leave Appreciation to the speculators you should work out fine.
Small or breakeven cash flow is what usually contributes to burnt out landlords. Too much work, not
enough reward. Your goal should be minimum $100 per door per month true positive cash flow.
Appreciation has historicly been in the 4-5% range and long term will likley remain the same.
Although appreciation has been high of late it may be at a peak now which could flat line or drop. In the past there have been 5-7 years no growth periods following high appreciation spurts.

 

[dwb]

QUOTE (mar @ Mar 12 2008, 11:47 PM) Does everyone agree with the 1st paragraph above, to buy as many props as possible as inflation should further increase RE values? I`m in the Ottawa area. Thanks in advance for your replies.

I absolutely agree with Thomas.

There is a theory going around that we are actually in very high inflationary times, and also the most underreported inflation times as well too. Basically, the theory is that the way inflation is measured (where they say it is hovering around 2%) isn`t providing the true picture of actual inflation.

So the Bank of Canada keeps rates low and the money is cheap to borrow. But inflation is in actuality quite large. Borrowing at these very low rates and investing in hard assets, specifically Real Estate is a wise move in this case. Certainly interesting times... If you look at hard assets like oil, gold, real estate etc... and other hard assets, they have been going gangbusters so draw your own conclusion.

 

[Dejavu]

Thanks everyone for your great input. Valuable ideas and food for thought.

Hi Neil, I would be glad to look at potential opportunities in other cities. Up to this point my preference has been for the properties to be located closer to home so I can keep an eye on them, but I know its a "comfort zone" thing and it`ll likely change as I gain more experience. If someone could point me in the right direction, I`d be more than happy to start moving that way. If you are located in the GTA or within driving distance and would not mind to talk about RE with a newbie over a coffee or three, I will welcome an opportunity to buy you lunch too

The more I read this board and think about it, as many of you had suggested, I realize the need to join REIN to gain access to the body of knowledge it has accumulated. I know it has been discussed here a lot, but will try to chance it one more time, if I could... If you don`t mind sharing, what was the one most valuable thing you got out of your REIN membership and how did it help you in your quest for personal financial freedom. If you are able to share some examples, that`d be much appreciated.

Thanks again for all your input!

 

[billybonks]

QUOTE (mar @ Mar 12 2008, 11:47 PM) I too am a novice RE investor and have been sometimes nervous of my strategy of accumulating as many townhouse/semis as possible as quickly as possible. I currently have 3 properties and am looking to finance several more @ 100% using CMHC program. All deals have or will have break even/small positive cash flow. Does everyone agree with the 1st paragraph above, to buy as many props as possible as inflation should further increase RE values? I`m in the Ottawa area. Thanks in advance for your replies.


Hey, I am wondering how you are using CMHC program to finance 100%, what program is it. I am always looking for more knowledge in real estate. Right now I have two properties that I want to take a LOC out on them.

Thanks for any help.

 

[PeterKinchMortgageTeam]

QUOTE (mar @ Mar 12 2008, 11:47 PM) I too am a novice RE investor and have been sometimes nervous of my strategy of accumulating as many townhouse/semis as possible as quickly as possible. I currently have 3 properties and am looking to finance several more @ 100% using CMHC program. All deals have or will have break even/small positive cash flow. Does everyone agree with the 1st paragraph above, to buy as many props as possible as inflation should further increase RE values? I`m in the Ottawa area. Thanks in advance for your replies.

Be cautious when you`re financing at 100%. Make sure that your banker or broker knows your long term real estate plan up front and the financing that you get works within it. It doesn`t take many negative cash flow, high ratio mortgages to impede your ability to get any future financing.

 

[willy]

http://www.cmhc-schl.gc.ca/en/hoficlincl/m...0Properties.pdf

7.25% seems a bit high to me.

 

[Leo]

QUOTE (invst4profit @ Mar 13 2008, 05:55 AM) If you concentrate on cash flow and leave Appreciation to the speculators you should work out fine.
Small or breakeven cash flow is what usually contributes to burnt out landlords. Too much work, not
enough reward. Your goal should be minimum $100 per door per month true positive cash flow.
Appreciation has historicly been in the 4-5% range and long term will likley remain the same.
Although appreciation has been high of late it may be at a peak now which could flat line or drop. In the past there have been 5-7 years no growth periods following high appreciation spurts.

This is my first post. Great discussion. I am new to REIN, just completed the Quick Start in Vancouver in February. I have put a few offers on town homes in Edmonton - but was low balling trying to get "a deal." I think I learned my first lesson - and missed out on a couple of good quality properties. I think that if I can put as little as possible down I will be able to buy more properties than if I put enough down on each to get a positive cash flow. However, Don Campbell and the above individual I have quoted seem to be telling us - put down enough to make it a positive cash flow period. Am I correct?

Leo

 

[invst4profit]

That is not exactly as I see cash flow.

The amount you pay down is not part of the calculations to figure
your cash flow. When a property requires the morgage to be paid down
to realise positive cash flow (or increase cash flow) what you are really
doing is tricking yourself into believing it is positive when in fact it is not.
This is what I call "forcing cash flow". Remember any cash you put down
is money that could be invested and earning income elsewhere. You can
play with things like ROI, to generate a warm fuzzy feeling, but the only
thing that really matters to me is how much cash is in my pocket at the
end of the month. I have not yet figured out how to pay my monthly bills
with equity. Keeping in mind I am a small investor with a family to support
not some huge corporation.

I always calculate a properties cash flow based on the cost of dept
servicing assuming the property is financed at 100%. I evaluate a
potential property purchase from that perspective.
Assume 50% monthly expences, financing 100% what would the cash flow be.
Assuming I see $100/door/month I investigate the property.

 

[brad]

QUOTE (invst4profit @ Mar 19 2008, 08:05 AM) That is not exactly as I see cash flow.

The amount you pay down is not part of the calculations to figure
your cash flow. When a property requires the morgage to be paid down
to realise positive cash flow (or increase cash flow) what you are really
doing is tricking yourself into believing it is positive when in fact it is not.
This is what I call "forcing cash flow". Remember any cash you put down
is money that could be invested and earning income elsewhere. You can
play with things like ROI, to generate a warm fuzzy feeling, but the only
thing that really matters to me is how much cash is in my pocket at the
end of the month. I have not yet figured out how to pay my monthly bills
with equity. Keeping in mind I am a small investor with a family to support
not some huge corporation.

I always calculate a properties cash flow based on the cost of dept
servicing assuming the property is financed at 100%. I evaluate a
potential property purchase from that perspective.
Assume 50% monthly expences, financing 100% what would the cash flow be.
Assuming I see $100/door/month I investigate the property.



If you can find a property that cash flows $100/door when it is 100% financed, jump on that hard and fast. Those are some fantastic numbers!!! Just my 2 cents.

Brad Hamilton

 

[dwb]

Fantastic points.If I could add, similarily using up cash that could be invested to make lump sum payments to mortgages is NOT a particularily wise thing to do in creating wealth.

Much like the person "forcing cash flow" (as `invst4profit` so perfectly describes it) those that make big lumpsum payments to try and get out of their mortgages are in fact decreasing THE BANKS risk not THEIR risk, contrary to widespread public opinion.

Why? If God forbid if the bank has to foreclose on that property, then by making large extra payments they have built up a comfortable cusion of equity thanks to the responsible client. But the responsible client loses this hard earned and hard worked for equity in the foreclosure process. Also, if there is a high mortgage on the property the bank would be more willing to work with the client to resolve the situation as they the bank is in a risky position.

Furthermore, for investment properties, why not have as much tax-deductible mortgage on the property and concentrate efforts instead on reducing non-deductible debt like principle residence mortgage or further investing that extra cash?

Every dollar that is sunk into a mortgage is a dollar returned to the bank and thus a dollar that could have instead been invested for wealth creation.

So add the lumpsum payment/extra payment idea to invst4profits "forcing cashflow" points in that putting down a ton of downpayment as a faulty strategy in wealth creation. Even though the public generally thinks of it as a wonderful strategy.

And don`t get me wrong there`s an awful lot of people that believe its a great strategy... responsible behaviour as a mortgage holder, yes, but a great way to generate wealth? NO!:
http://www.globeinvestor.com/servlet/story...hc0319/GIStory/

 

[PeterKinchMortgageTeam]

QUOTE (brad @ Mar 19 2008, 07:20 AM) If you can find a property that cash flows $100/door when it is 100% financed, jump on that hard and fast. Those are some fantastic numbers!!! Just my 2 cents.

Brad Hamilton


Depending on your 5 plan and your personal financial picture - there may be room for a couple of high ratio, negative cash flow properties - but before you do committ to those, make sure that your application has been evaluated by your banker or broker to ensure that your income is sufficient to not only support properties with negative cashflow, but that you will still be able to continue purhasing and getting financing. Its important to understand the implications of negative cashflow and how it will affect your abiltiy to continue to qualify.

 

[invst4profit]

Good cash flow properties are hard to find but as a small investor I concentrated on smaller
towns and semi rural areas around where I live looking for 3 and 4 plex units. I managed them personally to keep costs low and usually concentrate on buildings I can add value to.
That was in the past, I have resently sold all and moved on to rentals with less demand- I only rent
out the land now, the renter is responsible for the home and there rented lot upkeep.