Building a Solid Real Estate Portfolio – Interview

Building a Solid Real Estate Portfolio – Interview

Hey everyone.

As you may already know, I’m a huge fan of diversification. Not just among sectors in our dividend portfolio but in our income streams as well. I really think buying a property and renting it out will be our next move. (Once our tfsa and rrsp accounts are maxed or real estate values in the Gta drop)

I know a couple people who have done incredibly well with their real estate empire – friends, family, clients and even fellow bloggers.

One of my best friend’s actually just got notice that one of his tenants will be leaving in 2 months after being there a long time. While he was a little down losing a great tenant, I pointed out that he could probably get way more for that rental these days. After a little research he realized he can bring in 500 bucks more a month! After placing an ad, he found a great family that would gladly pay that new rate and seem pretty good.

Crazy stuff for sure, but the real estate market in the Greater Toronto Area is insane.

Some of my wife’s cousins have done really well with real estate too. One of which is a follower and supporter of my site as well. I asked if he would be interested in doing a post about real estate for my site, a interview type of post. He said sure and this is it.

I do this to increase our knowledge on the subject and also in hopes that you the reader get something out of it as well.

Interview

Please tell us a bit about yourself. Age/ job etc

I am a 43 year old father of a 15 year old daughter and husband of my high school sweetheart. I have a degree in Aerospace Engineering from the University of Toronto and an MBA from the DeGroote School of Business. With my brothers and cousins, we acquired our first student house in 2001. We bought 2 more then sold and bought 3 more in another city and then we bought an apartment building. We were kind of playing Monopoly!

Real estate was interesting to me and I figured that there is more real estate in space than down here so I am way ahead of the curve. So in 2006, I actively sought a career in real estate. Somewhat odd since most people choose a job and the industry is what it is.  Luckily it didn’t take long and I found myself working in a real estate company managing over $21B. After almost 12 years, I was restructured out of my job. I built up my own assets under management to over $4 Million and did, and still am, participating in private investments. Having this “side gig”, made this transition a positive one. I had something to fall back on and look forward to. I advised everyone I left behind to have a side gig (preferably something you enjoy).

Quite the introduction

We have played the rich dad poor dad board game a couple times (I won the last one) Do you apply the same techniques in the game to real life?

Yes you did! I do apply the same techniques in the game to real life. What is ironic is playing the game mimics how I am in real life. Once you play it often, landing on pay cheque is boring! If I remember correctly, Rob, you paid off your retail credit card debt, student loan and others, my wife does the same thing. I, on the other hand, find more value taking that $1 and using it to purchase an asset that has a return greater than the cost of the debt. The difference is my profit and I would call constructive debt.

If you haven’t played the Rich Dad Poor Dad board game and know a couple people into finances, I highly recommend it. Some people love the game, while others won’t. It’s definitely not a party game.

Generally how do/ did you finance your buildings? Did you put the 20% down on each building?

Yes, I usually put 20% down.  The follow up question is where did you get the 20%. Our first building has an infinite return because we used our stable jobs to earn credit and we used that credit, specifically 2nd mortgages and lines of credit, as the down payment for the apartment building. The building and student houses were making enough money to cover the operating cost, 1st and 2nd mortgage payments and line of credit payments hence the infinite return. The second and third buildings, the down payment was raised through savings and partners.

Using other people’s money. You hear about this in books all the time. If the numbers work, it seems like a great way to go.

What does your portfolio consist of now? How did you move up to these larger units and why did you? vs student rentals etc?

One apartment building with four 2 bedroom and eight 1 bedroom units. One building with ten 2 bedroom units and 4 retail units. Last building with 3 units rented to one commercial tenant and 1 residential loft.

See above for how we moved to larger units.

We moved up to larger units because we chose to. Raising capital, closing costs, due diligence and managing a student house was just as much work as the 12 unit or 14 unit building. We had longer term tenants, more economies of scale and a better relationship with the tenants. Also, the university was building more student residences, the city was threatening to shut down illegal “boarding” houses and the busy times of May for move out and January for lease up were getting tiring.

The City never cracked down, the student population kept growing, off campus housing was still in high demand and real estate values went through the roof! In hindsight, we should not have sold the student houses in 2013. Lesson learned, never sell a positive cash flow producing asset!

That’s quite the portfolio! Congrats. Very interesting to hear your take on student rentals. My friend has the same view. A great tenant in a lot less work.

Which do you prefer residential rentals or commercial?

In my own investing, residential. Easier and I’m more familiar with it and I know our tenants. At work and once I can, I’ll do more commercial. The best thing about commercial is you pass common area maintenance, utility costs and property tax to the tenants!  All that is left is mortgage, repair projects (which are sometimes recoverable from the tenants) and capital expenditures (which you can amortize).

Our first house was a townhouse and I hated the condo fees. It drove me crazy.

Have you had any really bad experiences with your rentals? People destroying the place, fires, people not paying. Please feel free to share your experience and did that turn you off rentals at the time?

No really bad experiences. Keep your tenants happy and they’ll keep you happy. We had one tenant leave and they took all the cupboard handles. Tenants pay late but you give then the N4 three times and then an L1 and they usually comply. Communication is the key. This past August there was a fire while I was on vacation. I contacted my insurance broker and restoration guy and they said don’t bother disrupting your vacation, they’ll will handle it.

No clue what a N4 or L1 is, but I’m sure its some legal papers. I remember that fire, crazy to be so far away from the rental and yet everything is taken care of for you.

When getting a new tenant is there anything specific you like or steer clear from?

Referrals from existing tenants are the best. Who wants to live with someone that they don’t get along with. I pay them $100 as a tenant inducement when they first move in and then another $100 if the new tenant stays a year and is on good standing.

Sounds like a great idea.

How do you budget for upcoming renos for all your units/buildings?

Each month and each refinance, a certain percentage is put away for a capex fund.

What are your favourite real estate investing books that you would recommend?

All of Robert Kiyosaki’s books, Richest Man in Babylon, Science of Getting Rich and all of Napoleon Hill’s books.

I have read most of these books and after reading the richest man in Babylon, it surpassed the wealthy barber as my favourite finance book.

Do you do any other type of investing? and why did you choose real estate over stocks/etfs?

We have stocks including REITs and ETFs. I follow your blog for suggestions. We also own precious metals. I prefer real estate because I can control the value of it. Putting on a new coat of paint allows me to increase rent which increases the value of the property which increases how much I can refinance and pull out. I can’t control what 3M or TD does with the money I gave them. It minimizes my degrees of separation from my money. I also like being able to write things off and build and leverage my rolodex.

Great Points for sure. I have read a lot about buying a rental fixing it up a bit, increasing the rent and also pulling out more money on the refinance.

If you were a new investor in today’s housing climate in Canada (specifically Ontario) would you buy more real estate rentals and are you currently looking? At current prices it’s hard to get the numbers to work and make a profit.

I would not buy off of mls. It’s too late by then. I usually get brokers bringing off market deals to me. They know what I’m looking for.

It’s always about who you know eh?

Do you have a general cash flow / distance rule or formula to follow when deciding on the purchase?

I look for security of capital, security of return and security of exit strategy. I don’t know what distance rule is and every deal is different so there isn’t a simple formula.

Good points. Distance rule, I meant not buying a property to far away. I know we looked at real estate 3 hours away and you advised against it, because of the distance to manage the property.

I asked my twitter followers if they had any questions they would ask you or anything they would like to know involving real estate.

 

1)  What are your thoughts on condo fees? Would you buy rentals with condo fees? or would you stay away.

I haven’t bought condos before. Condo fees are exorbitant and make the pro forma unattractive. Once again, you are relinquishing control when you invest in a condo. I would not buy condos for rentals.

2) What was your worst move out situation? And how did you handle it? What IRR is ideal based on your experience? (I don’t even know what irr is)

When I was doing student rentals, guys were horrible after they moved out but they didn’t contact me the entire school year. Girls were cleaner after they moved out but called very frequently even about a spider in the tub! For my apartment building, a tenant was low income and the unit reflected it. Fortunately, it wasn’t a big deal since we completely renovated the unit anyways and I used contractors familiar to me so I didn’t even have to go into the unit before the work started.

IRR, internal rate of return, is very subjective. Ideally I want an infinite IRR because I want to use OPM. (other people’s money).

3) What is genuinely the worst part of owning real estate in your opinion?

Tenant phone calls. I don’t get phone calls all hours of the night as most people would think but most buildings have that one or two tenants that are the most vocal.  And sometimes people are just never happy. How you address this, as with most things, is through integrity. “Do what you say you’ll do, and by when you say you will do it by” consistently will result in tenants respecting you and ultimately elevating their own character.

4) Do you have a 3 tier corp setup? A holding company, property management company and real estate company?

Not for my existing properties. I only have a corp that owns the property. Once I get bigger then I may adopt this set up but of course I will rely on my accountants and lawyers as they are much smarter than me! What would you use each of the 3 tiers for?

Conclusion

Well this was probably my longest post ever. I hope you learned something from it. I know I’ve gained a little more knowledge from it. This was my first interview type of post and I enjoyed doing it. The best way to grow is to look at the people doing what we want to achieve and learning from them.

As I mentioned he is a follower of the site, so if you have any other real estate questions feel free to ask away. Maybe he will answer them in the comments section.

Do you own any real estate rentals? Would you add any advice or tips for newcomers into the space?

Cheers!