Wednesday, June 24, 2015

[VIDEO] My life as a real estate investor. Tri-plexes, Four-plex and a rental house over six years.

I tell the story of my life as a real estate investor.  I tell you about the mistakes I made and the realizations that finally came to me.  I tell the story of how I first came to see Liquidity Risk first hand and transactional friction.  Also, my first big case of 'Buyer Fever.' Cheers.

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Hello everyone. 

Last week I had asked you to submit ‘just one question’ and I received an avalanche, Thank You.

Several of the questions surrounded my background.  People wanted to know about my experiences and where I picked up my small business and investing knowledge.

Last week I also moved.  This brought back lots of memories of my days as a real estate investor. I spent a lot of time in empty apartments, showing empty apartments and cleaning dirty empty apartments.

At its height, my real estate portfolio included two triplexes, a fourplex and a rental house.

It all started at the end of 2004. I happened to read Rich Dad's Cash Flow Quadrants.

I believe it was Robert Kiyosaki’s second book where he explains the cash flow quadrants and starts talking about leveraging.  Leveraging means borrowing money to enhance your own returns. 

I had reached the point where I knew that I wanted to leave my career with the Yellow Pages and I actually started to make a list of the things that I needed to do before I quit my job.  

One of those things was getting mortgages. Obviously, if you don't have a regular income it's hard qualifying for a mortgage.

I had been very successful at the Yellow Pages and I was earning over hundred thousand dollars a year and I had bought my first house in 2001.  Real estate prices here are not that high and this was before they became inflated by the 2000s real estate bubble.

I bought an old war-time storey and a half home. It was a two-bedroom home, but it had a nice loft above the garage which became my office. I bought that place in 2001 for 67 or $68,000 and I made extra payments all the time and so by the fall of 2004 I had actually paid off that mortgage.

I went to the bank and I got a home equity line of credit and I went out and I started looking for rental properties to buy and I bought two triplexes within a two-week period using the equity line of credit to make my down payments.

I was putting down 25% on each building that I bought and I believe I bought one for about $130,000 and one for about $139,000.

So that’s two triplexes. I had six units at that time and I went to work as a landlord and I started to rent apartments and I started to learn the ins and outs of collecting from tenants and the legalities of kicking someone out.  I started to learn the best practices as far as renting apartments and writing leases.

It was also one of the first times in my life that I experienced buyer fever.

When I examined the sale information about one of my triplexes there was no expense there for electricity and I assumed that the tenants paid for their own electricity.  

Just before closing my realtor informed me that there were four electrical accounts at the building. Every apartment paid for their own electricity, but there was a 'house account,' as they call it, for the hallways and the hot water heater.

Now I was so happy about the deal I had made I didn't think to look into it any further. I figured, “well hot water heater and a couple of lights, how bad could it be?”

Well I'll tell you how bad it was, here where I live the electrical utility is regulated by the province and is owned by the province and so there are different electrical rates based upon who you are.

Residences pay a much better rate than businesses and since there are three apartments in the apartment building, the power company will only allow 3 of the accounts to be qualified for the residential rate.

So my account, which had the hot water heater, had to be covered under the business rate which was two and a half times higher than the power rate for residences. I was getting power bills for hot water and the lights in the hallway and the coin-op washer and dryer.  Sometimes this would be $300 a month. Basically this electric bill almostate up all the cash flow

Now the other thing that I did wrong about being a landlord is I fooled myself into subsidizing the buildings with my own labour. I would go and mow the lawns, I would go do handyman things, I would go and do minor fix up and repairs.

I would go and make sure that nobody left trash out behind the building and what this meant was that I was losing hours of my life to get that cash flow every month and fooling myself into thinking that was profit.

Later on, after a couple of years when I had children, I didn't have time anymore for that kind of thing.  I hired a property management firm and when I had to pay their bills it gave me a truer picture of what the cash flow scenarios was like for those buildings.

Two years after I bought the triplexes I then bought a fourplex. I paid $137,000 because it needed work. Now I had 10 apartments and then eventually when, after my first daughter was born, we moved to a larger home and I rented out my old house. The old one I had bought for $68,000 and I sold that one on a lease option deal. I did a different video on that (See my Blog).

By now we’re starting to talk about getting into 2008, 9, 10. 
In 2009 I sold my first building. This was when interest rates were getting really low and the value of these properties were starting to go up way more than what I would have ever paid to own them. I started to sell and this was when I started to come face-to-face with liquidity risk. I talk a little bit about liquidity risk in my book Invest Local.

When you're a real estate investor and you read all these books about real estate investing and you watch the gurus on the Internet and things, you start to think about equity as though it’s real money. As far as my biggest building, I knew that I could probably sell it for about $180,000, and at that time I think I owed about $130,000.

So it's very easy to fool yourself into thinking, hey, I have $50,000 tied up into that building. In 2011 my business brokerage wasn't doing so well and I needed to get my hands on cash. It was the same year that I decided to get out of business brokerage and I had to sell one of my buildings rather quickly.

I was faced with paying a realtor.

I was faced with the legal fees.

I was faced with the mortgage adjustment penalty, because I had signed a term contract at a certain interest rate and the prevailing rate had gone down below that.

I remember one of my buildings I sold that I believed to have had $50,000 of equity in. I think I walked away with $31,000 or $32,000, and it was a real eye-opener to the fact that there's incredible friction in the market when you decide to sell one of your properties.

This was a huge learning experience for me. 

As interest rates went down and the property values went up, I eventually sold all 3 of the buildings and the people who were doing the lease option on my old home eventually exercised that option as well, and I got completely out of real estate. 

If I look back at those years I realize that it was exciting. It was an adventure. We never really got the appreciation in prices here that people experience in other places. From a cash flow point of view, investing $30,000 or $40,000 as a down payment and then borrowing another $100,000 or $120,000 of leverage to produce a cash flow of a couple hundred dollars a month seemed silly.

I began to realize it just wasn't worth it. It was too much to put on the line to produce a couple hundred dollars of cash flow and it was around that same time that I was starting to perfect my own methodology for doing loans and leases.   

I realized that with far less money at a good rate of return I could produce the same kind of cash flow with truly a more manageable scenario. When I lend someone money in a small business investment loan I'm not getting calls about toilets. I'm not getting calls about broken doors. I'm not getting calls about noisy neighbours or anything like that.

It's very easy straightforward. I collect a payment every month, and if something goes wrong I have to manage it, but apart from one second mortgage deal, I haven't had any of these small loans or investments go bad.

So that is my experience as a real estate investor. I bought my first buildings in 2005, got out of the last one in 2011. So, over a six-year period I was a landlord and it truly was a formative experience.

I think that if I ever get back into real estate, I will want to do it from a much stronger equity position and I will want to make sure that I have a manager in place.

What I mean by that is having 50% down to put on one of these buildings. I think that that day is going to come when interest rates start to move back up.

When interest rates move up and the value of these buildings moves down, I believe that a lot of them are going to get foreclosed on by banks.  Many of the late buyers are overextended.  This will be when real opportunity will arrise to get into these rental properties again.

Anyway, if you enjoyed my articles and videos, please make sure that you visit and check out my stuff and maybe even buy my books.

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If you want to learn how to do small local investment deals you should buy my book, Invest Local or you should take the course, How to do small local Investment Deals from A to Z (includes a copy of Invest Local) which is also available from my blog My courses come with a 30 day money back satisfaction guarantee. Thanks, we’ll talk to you later.
David C Barnett

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