Real Estate

Getting Started With Investment Real Estate – Part 4

To start at the beginning – please see part 1 of this series.

When we last left off, I’d identified an area of town I wanted to buy in, and had toured all the 2 bedroom units in 3 buildings. I’d put in a lowball offer on each of them (12 units I think) and was turned down by each of them. I was upfront to my agent that I was going to keep raising the amount and re-offering on each unit in tern (according to my ranking of their “desirability”).

I actually started getting the feeling that my agent wasn’t presenting the offers. She told me that the listing agents were getting angry at the offers, but when I asked her for more details about the conversations, she got vague in a hurry and couldn’t provide any specifics. Finally, in an effort to get her to present the offers, I offered to fax them to the listing agents myself to save her the effort (since I was making A LOT of offers), which she declined, saying this was part of her job.

What got her going again was I told her that I thought after the current round of offers maybe I’d target another, more affordable, area of town. I think she decided that presenting offers was easier then showing me more units and got to work. Again, this is my speculation, I *HOPE* she was presenting offers and doing her best to get me a good price, but you never know for sure.

It actually got to the point where she was suggesting I talk to the listing agents directly. She diplomatically presented this as wanting to help me get the best possible price, even if it meant her losing out on her commission. I think the reality may have been that she was thinking I was too much work for the expected commission (which I can totally understand, I’d drop clients if they weren’t profitable from a payment-per-hour-of-work perspective too). Amusingly, right when we were having this conversation, one of my offers was accepted (outright) and I got a 2-bedroom condo in rough shape for $126,000.

My original plan was to do the renovation work myself. I had approached buying the condo (which are known to be one of the least profitable forms of rental housing) as a learning exercise, and even if I just broke even I was reviewing it as more then an investment. Doing the reno work was supposed to be a chance to learn about painting and laying down flooring.

My father had offered to come help me do the work, and I’d refused (I don’t like the idea of dragging in friends and family as free labour on money-making ventures). Faced with a fairly daunting job ahead of me, I reconsidered and asked him if he was still willing to help teach me how to do it. In the interim, he’d reconsidered as well ( we’re an indecisive bunch), but he suggested I get the unit professionally worked on in order to get it in rentable shape ASAP, and generously offered $5K towards the renos.

I debated about trying to do it myself, and got to the point where I was losing sleep worrying about doing the work. At that point, I decided to bite-the-bullet, get advice and hire contractors to do the painting and flooring for me.

(Continue to part 5).

Real Estate

Getting Started With Investment Real Estate – Part 3

To start at the beginning – please see part 1 of this series.

My agent was actually very useful in targetting areas of town to look in. After repeatedly telling her my criteria (very affordable, near a subway, possible to rent) she focused on two areas of town. One wasn’t on the subway and so we quickly stopped looking there. I got her to show me two other areas that I didn’t believe her when she said they wouldn’t be the best locations to target, but after seeing some units and becoming more familiar with the area in the end I agreed with her.

If you want to be a total jerk, at this point you could dump your agent and put in offers yourself (which would be quite a bit more attractive without the buying agents 2.5% cut). I did NOT do this and view it as a pretty scummy trick to pull (and this is the main reason buyers’ agents get the signed contract, to prevent people from doing this). My agent had very real knowledge of the city and was able to help me quickly cut through the enormous number of listings and find the right area for me to target, this was VERY valuable, and for it she definitely deserved to be compensated. I’m a believer in “statistical karma”, and if you behave badly towards people enough, eventually you’re going to do it to the wrong person and get majorly burned.

With the area targetted (there were three buildings that were very similar in the area I liked), it is then worthwhile to view EVERY unit available that meets your criteria (a 2 bedroom condo or a very cheap 1 bedroom was mine). The advantage you have as an investor is that you aren’t going to fall in love with any unit. When a buyer loves something, the seller can get top dollar out of them. Conversely, when a buyer is willing to accept multiple properties, it becomes like an auction where the seller who’ll agree to the lowest price gets to sell first. Don’t fall in love. You can’t afford to as an investor. Its expensive, but permissable as a home-owner, but not if you’re looking to make money.

One thing I didn’t do which I should have is factor in the quality differences in the unit. They aren’t interchangeable, so viewing them all as acceptable/unacceptable then putting in equal bids on each in order of desirability (which is what I did) is a mistake. Instead you want to come up with a very low offer price, consider that the price for a unit in good repair, and discount this price by what you think it would cost to bring each unit up “good repair condition”.

E.g. I bought my condo (sorry to skip ahead to the end of the story 🙂 ) for $126K. I had to put $6K of repairs into it (supplies and labour) and it took 2 months before I was able to rent it out (at $500 / month in condo fees, +100 / month in property taxes + interest on the mortage). So basically, I should have offered $134K to a similar unit that didn’t need repairs and they would have been equal offers (instead I offered $126K to the units in better repair, and unsurprisingly the roughest unit was the first to accept). Live and learn.

Your agent is going to hate you (mine got to the point where if the offer that was accepted hadn’t been she was going to cut me loose), but you put in offers on ALL the properties, with the repair adjusted prices. Let your agent tell the selling agents that you’re looking to buy one of X units, and that you’ll be back with another offer if all of the others say no. This will scare the heck out of the selling agents (all it takes is one of the others to say yes and you’re gone) and they’ll champion you to the seller (I’ll discuss motivations and incentives as it relates to real estate agents in a future post).

If one of your first round of offers is accepted, you probably paid too much. Tough luck, try to be cheaper in the future. My first offer on the place I bought was $122K which was rejected. Clearly the minimum price the seller would have accepted was somewhere between $122-126K, which I’m very happy with as a small range (I’d be depressed if I paid $126K to a seller who would have accepted $110K).

Your agent will try to get you to let them handle the negotiations or will provide advice. Don’t take it. Unfortuately your objectives at this point in the process are not in line, so you have to set the offer price yourself.

Each round when everyone rejects your offer (which should happen at least once so all of the sellers had a chance to give you a low price), you up your offer and go through them again. Agents will try to scare you with the idea that you’ll “offend” the sellers and they won’t listen to future offers. Malarkey! An offer is just that, an offer. Which is an option the seller didn’t have before. They can say no, in which case they’re no worse off then before they heard the it. If their time is so valuable that spending 30 seconds hearing the offer is a huge inconvience they have some sort of mental illness. If someone is such a child that they won’t listen to future offers because I don’t worship their property the way they do, I’ll happily buy from one of the other 11 people I’m offering to.

Even if someone SAYS they’re offended and won’t listen to future offers, they still will.

The only time I wouldn’t follow this advice is if I found my dream house and fell in love with it (again, this is the high price of falling in love with a property). In that case, you’ll want to keep the lines of communication open and stay on good terms with the sellers, in which case low-balling isn’t in your best interest. If someone has just listed a property at a good price in a hot area, you’re wasting everyones time with low-ball offers. HOWEVER, if there are multiple property in the area that have been available for an extended period (the condo I bought had been vacant for 7 months), you should get a good deal.

(continue to part 4)

Real Estate

Getting Started With Investment Real Estate – Part 2

To start at the beginning – please see part 1 of this series.

My strategy was to find a condo that I felt I could afford and be happy living in (this basically meant quite economical and on the Toronto subway line as I don’t own a car and don’t want to have to buy one). I intended to try and rent it out, and if I couldn’t find a tenant, decided I didn’t want to be a landlord, or couldn’t charge enough rent to make it worthwhile, I’d move in myself (I was hedging my bets).

I met with a Real Estate Agent, and early in the relationship caught her in a few lies. I debated whether it was better to stay “with the devil I knew” or find one I didn’t. In the end I figured I didn’t think I was going to find any saints working as Real Estate Agents and stayed with her.

I met with her and she kept pushing me to get pre-approved for a mortgage and to buy a pricier condo in a “hot” area of Toronto. I kept repeating that I wanted to buy something for a low price near a subway line, and that I wasn’t looking for appreciation (since my intention was to hold the unit for a long time). I think RE Agents are used to selling speculation to clients and it took a while for her to get that my interests were in a different direction, but eventually she got it.

Once she realized that I wasn’t going to stretch my budget, a pre-approval wasn’t necessary any more (I had 25% down for the price range I was targeting). She tried to get me to sign a “buyers agreement”, which would have locked me in with her for a set period of time (if I bought property without her I would have had to pay her commission). I was willing to sign for short periods, but in the end once we’d talked a bit she didn’t bring up the agreement again and neither did I. It kind of bugged me that she tried to tell me the “buyers agreement” was for my benefit (it was clearly for her’s). I’m a pretty straightforward guy, and it bothers me when people try to deceive me.

With an agent to work with, we were ready to start seeing units!

(continue to part 3)

Real Estate

Getting Started with Investment Real Estate

In Fall 2006 I was flipping through “The Automatic Millionaire Homeowner” by David Bach and it forced me to re-think my perspective on real estate as an investment vehicle.

Previously I’d always viewed real estate as intensely speculative. You hear about the areas where properties go up in value 36% in a year, but when you view it as a whole, I was very unimpressed with the returns (I don’t buy 11% average returns, I suspect 3-4% is more realistic). Bach gives a list of the 5 ways you get income from real estate, and taken as a whole it seemed a lot more appealing. The one that really convinced me was the idea of leverage. If you can get a property that’s cash-flow positive (makes money every month after all expenses are paid), the apprication is basically increased the lower your downpayment.

E.g.: You buy a house that’s worth $100,000. You make a downpayment of $10,000 and the income equals the expenses. After a year if it goes up in value by 3% and you sell it (for $103,000), you now have $3000 more then you started with, a 30% return.

Obviously this is an overly simplistic example (in real life the transaction fees to buy and sell would cost far more than the $3,000). This concept is the core of “other people’s money” that the get-rich-quick low-lifes love to chant about. Leverage is a very powerful concept, and although it can be dangerous, real estate is one of the easiest ways for normal people to use it (trading on margin would be the other I guess).

My plan was to start small. Instead of getting a 93 unit building, I decided to get a condo near the Subway line. I would get the cheapest place I could find, rent it out if I could, and live there myself if I couldn’t. It seemed like the best way to “hedge my bets” if landlording didn’t work out for me (be willing to live there myself so I wouldn’t have to turn around and start trying to sell a couple of months after buying. I realized from a strictly dollars-and-cents perspective, condos aren’t the best investment, but they have a lower price tag, and it seemed like a good way to learn (with training wheels firmly attached).

Luckily I had a friend who owned multiple buildings (from Condo townhouses up to a recently aquired 8-Plex) and he was a great source of information. I also spent tons of time in Chapters/Indigo reading the Real Estate Investing books (for free).

By chance, my girlfriend got a notice under her door for a free seminar for first time buyers (clearly a sales presentation for a Real Estate Agent). I went to that, connected with an agent, and started my house hunt…

(continue to part 2)