My Second Investment

It was the winter of 2009. I had long since been sharing my opinion of real estate investing with my colleagues. One colleague in particular decided to purchase a triplex based on my advice. 12 months later, he was ready to sell. He purchased the property with a partner and didn't feel that the distribution of duties and responsibilities was equitable. His Brother and partner was a real estate agent who was able to broker the deal for $330k. The were asking $349,000 but didn't have any offers after having the property on the market for ~1 month. I argued that they would have to pay the buyer's agent 2.5% and that savings made my offer of $330k much more competitive. They accepted and the closing date of 378 Vanier Drive was set as March 31, 2009.

I planned to make a 10% or $33,000 downpayment. I had saved ~$10k personally and hoped to obtain the additional funds by refinancing my mortgage on 116 Rutherford Drive. I was told by my mortgage broker that 116 Rutherford Drive could be financed up to 80% without paying any additional CMHC fees.

I had the property appraised in February of 2009 at $266,250 and increased my mortgage to $213,000 (80% of $266,250).

My mortgage was originally ~$190k (90% of $207,500 + CMHC fees). I had paid it down ~$7,000 over the past 3 years leaving me with a mortgage of $183,000.

Therefore, my increase from $183k to $213k provided me with $30k of cash to apply to my purchase of 378 Vanier Drive. This was reduced by ~$7k due to mortgage break fees (I had a closed mortgage).

Vanier's monthly cash flow statement was:

$ 75 Laundry

$ 700 Rent - Lower Apt. (2bd)

$ 803 Rent - Middle Apt. (3bd)

$ 950 Rent - Upper Apt. (3bd)

$2,528 Rent - Total

($1,340) Mortgage (3.99%, 35yr)

($ 347) Property Taxes

($ 215) Hydro (Baseboard Electric Heat)

($ 100) Maintenance (Snow/Lawn)

($ 125) Insurance

($ 80) Water

($2,207) Expenses - Total

$ 321 Net Cash Flow

While the positive cash flow was great, I saved every penny in a capital reserve to afford major repairs (roof, etc...).

Two months after purchasing the property, the drain in the laundry room backed up and the basement apartment was flooded! Insurance provided ~$17k in relief. I used this money to re-floor the entire apartment with laminate floor and borders so that no future damage from water could occur - the new tile looks great!

That summer and fall two of my three tenants at 378 Vanier moved out. With the remaining insurance money, I renovated the upstairs apartment in September 2009 for ~$7,000 which afforded the following jobs:

Hardwood refinishing (Living Room, Dining Room, and Three Bedrooms);

Tiling of the Kitchen, Hallway, and Bathroom;

New Kitchen counter top and cabinet paint/hardware; and

Paint and lights throughout.

After the renovations, I increased the upstairs rent to $1,000/mo plus utilities.

I painted the downstairs apartment for ~$1,000 and increased the rent to $880/mo.

My current 378 Vanier Drive monthly cash flow looks like:

$ 75 Laundry

$ 713 Rent - Lower Apt. (2bd)

$ 880 Rent - Middle Apt. (3bd)

$1,000 Rent - Upper Apt. (3bd)

$2,668 Rent - Total

($1,340) Mortgage (3.99%, 35yr)

($ 347) Property Taxes

($ 240) Hydro (Baseboard Electric Heat)

($ 100) Maintenance (Snow/Lawn)

($ 200) Insurance - My insurance was cancelled after my claim!!!!!

($ 80) Water

($2,307) Expenses - Total

$ 361 Net Cash Flow

Having purchased the property for $330k and put none of my own equity into the property for additional repairs, I believe to have earned ~$100k in equity over the past 16 months given that comparable triplexes are selling for the low $400s.

Once again - positive cash flow, great appreciation, and the slow pay down of my mortgage by my tenants makes this property a winner!

A quick note on refinancing. Refinancing is a powerful way to increase your leverage and gain access to additional investments when cash is tight. It can be an expensive process given legal, CMHC, and inspection/appraisal fees but can often be the easiest way to access equity vs. painfully saving month by month!

My First Investment - Financials

They asked $215,000. I paid $207,500. I felt that I overpaid, my timing was wrong, and that they cashed out during a hot market. I was wrong.

I had ~$12,000 in my RRSPs along with some very helpful and generous family members. While far from wealthy my family has always been very supportive of "healthy choices." They paid for half of my University education and offered $10,000 towards the down payment and $2,500 towards my air conditioner just because they did the same for my Brother and always keep things even.

My 89 year old Oma (German Grandmother) chipped in another $10k as she did for all of her other 3 Grandkids out of her savings generated from her piecemeal factory work earnings and thrift after immigrating to Canada in the late 1940's.

I owe many things to my Grandparents and Parents. My Oma and Opa taught me the value of a dollar while my subdividing Grandfather demonstrated how to take calculated risks.

Mushy stuff aside, the date was July 2006 and I now had $34,500 burning a hole in my pocket.

$12,000 Personal RRSPs

$12,500 Gift from Parents

$10,000 Gift from Oma (Thanks Oma!)

$34,500

I put 10% ($20,750) down on the property and reluctantly paid CMHC (Canadian Mortgage and Housing Corporation) mortgage insurance fees of ~$3k (1.75%).

I spent ~$20,000 on improvements as listed below.

$ 7,500 Furnace & A/C

$ 5,000 Windows (11)

$ 1,000 Baseboards

$ 1,500 Front Door

$ 1,500 Flooring (Laminate & Hardwood Refinishing)

$ 1,000 Paint supplies

$ 1,500 Washer & Dryer

$ 1,000 Misc. Fixtures (Lights, Plumbing, Window Coverings, etc.)

$20,000

My two friends each paid $525 per month and my girlfriend paid $400.

My total monthly cash flow statement was:

$1,450 Rent

($ 37) Insurance

($1,366) Mortgage (Including Property Taxes of ~$225/mo) (5.4%, 25yr, fixed rate closed mortgage)

($ 425) Utilities (Gas, Water, Hydro, Internet, Phone, TV)

($ 378) Negative cash flow (my rent!)

Only paying $378/mo in rent was a great deal. Better still was that I owned the property and as a result was paying down my mortgage and benefiting from overall market appreciation!

In January of 2007 one of my roommates moved out. If I had been in a family home, it would have been difficult to find another roommate to replace the lost rent who I was willing to co-habitat with. Fortunately, since I lived in a duplex, I simply moved upstairs with my one remaining roommate and advertised the lower apartment in the local newspaper for $260 fee. After no luck during the first run of the ad, I met a wonderful young couple who signed a 1 year lease at $750/mo plus utilities for the downstairs two bedroom apartment. Success! Not only had I replaced my lost rent but in fact I had increased my overall rental income and transferred responsibility for some utilities to the new tenants! This house was really working out great!

With the new tenant I avoided ~$100/mo in Water & Hydro and earned an additional $200/mo in rent resulting in my new monthly personal cash outflow $100/mo - not a bad deal!

In the spring of 2007 my second roommate moved out and I shared the beautifully renovated 3 bedroom upstairs unit with my girlfriend - it was great. After a year of happily living in the unit, my better half moved to Toronto to attend the Schulich School of Business at York University where she earned her MBA. With the three bedroom unit being too much space for a lone bachelor I advertised the upstairs unit (this time for free on Kijiji) and met two young ladies who moved in on August 1, 2008. They paid $1,100/mo including utilities while I lived in my parents' rec room for free. As a full investment property at this time, my new monthly cash flow looked like this:

$1,850 Rent

($1,366) Mortgage & Property Taxes (5.4%, 25yr, fixed rate closed mortgage)

($ 225) Upstairs: Water, Hydro / All: Gas Heat

($ 37) Insurance

($ 75) Lawn & Snow maintenance provided by the tenant in the lower apartment

$ 147 Net positive cash flow!

Things were looking great. My bank balance increased every month, my mortgage decreased, and my property value increased!! All good things.

A critical point is that I have never spent any of my positive cash flow. I put 100% of it into reserves which I use to buffer major repairs. I have since installed two water heaters, a new roof, and a fence at 116 Rutherford Drive which have largely been financed by cash reserves generated by the property itself.

As of August 1, 2010 I have increased my rent by $75/mo and decreased my mortgage by refinancing (see next post) at 3.99%. Therefore, the property continues to generate still more cash than it had in 2008.

In addition, comparable duplexes are now being listed in the low $300s resulting in ~$100,000 in capital appreciation over the past 4 years.

I couldn't be happier with how this property has turned out and you can do the same.

My First Investment - Background

I tripped into my first investment. I didn't even know what a duplex was.

I was 24 years old in the fall of 2005. I worked for a national accounting firm earning $54,000 per year. I had ~$12,000 in my RRSP, wanted to move out of my parents house, and wanted to avoid paying rent. My older brother bought a semi detached house a few years earlier and rented two of the three bedrooms to two of his close friends. They "paid his mortgage" while he built equity. It seemed like a good plan to me.

I lined up two friends to rent from me and went searching for a house. It was a relatively hot market in the Kitchener-Waterloo, Ontario area. Multiple offers were typical and I was concerned that I was buying at the market peak. Despite my fears, I continued searching for a house and after exchanging one of my prospective roommates for another I toured the duplex located at 116 Rutherford Drive in Kitchener.

It was in bad shape. The side door was commercial and had a rainbow beach towel hanging on it to shield the sun. The carpet was flapping and multiple flooring types were used in the same room. The screens were torn and the windows needed replacing. It needed a new roof, the furnace was shot, it had no A/C, and the backyard was paved as the 50 year old building had been a doctor's office at one point in its history. The doors looked as if they had been taken from a dungeon and didn't allow a glimpse of natural light to enter the dark interior. Best of all, there was a subsidized housing project over the backyard fence.

None of the defects above could strip this brown brick beauty of its true potential: two kitchens, two living rooms, and extra bedrooms! My girlfriend and I could live in a self contained unit while my roommates had the 3 bedroom upstairs apartment all to themselves! This was MUCH better than my Brother's situation. We could have the financial benefits of living with roommates while enjoying the privacy of our own self contained living area.

While I lacked any and all construction experience, it seemed obvious that this neglected property just needed some blood sweat and tears to make it a home and it received all three in spades.

Welcome to the Blog!

My name is Steve Welker and I friggen love investing in real estate. I don't like small talk. I like talking about business, running numbers, and doing deals. I'm small time but I plan to grow. I'm not an expert but I have had some success and I hope that this blog can help others experience similar success.

If you're reading this blog, you've likely been contemplating making an investment for a while. The question is, are you willing to take the risk? I know how challenging that it is to start anything and take that first step. Getting off your butt and getting your first deal done is easier said than done. You have to be ready to stop talking about it and start making it happen.

My experiences are not unique. Hundreds of thousands of people have found success through real estate. I'm not talking about the infomercial success stories, but rather the average joes that deferred gratification, took the long term view, and put their hard earned dollars at risk when their friends and family didn't. Millions rent, and the majority of the people cashing those cheques aren't in the business of losing money.

Enough lecturing. I'll walk you through my experience and I truly hope that you find it useful.

Don't hesitate to email any comments or questions to steve@welkerpm.com