Several Months Work To Buy Real Estate Investment
Since the fall (2012) when my rentals were stabilized, I had always planned to buy my next real estate investment property. I was actually hoping to acquire the next one before the winter but things didn’t turn out that way.
The first potential target was to get a rent to own property which would have been a condo townhouse in the Hamilton, Ontario area. I wanted to focus on higher cash flow compared to a standard rental for such a property and a rent to own was the way to go. After a few trips into Hamilton to scope out a few possible condo townhouses, my realtor found one that had an existing tenant who wanted to do a rent to own.
This sounded great since both the property and the rent to own tenant was already living there and this tenant was very interested in owning the townhouse someday. We worked out a possible rent to own deal and then it turned out that the tenant failed to qualify. This was a real disappointment so I had to move on.
Exploring Student Housing Rentals
As my next possible targets, I was quite open to student housing rentals near a college or university. After a combination of finding out some potential properties on my own plus some my realtors found, I did some financial analysis on them and narrowed down a short list of the ones I wanted to see.
This was followed by drives back to Hamilton and this time to Kitchener as well. There wasn’t much available near McMaster University in Hamilton, which is a great area for student rentals. The one nice potential property in the area was a small 3 bedroom house about 20 minutes walking distance to Mac. I needed at least 4 students in there to make the financials worthwhile but in the end, the asking price just didn’t even justify the acquisition.
Next stop was in Kitchener near Conestoga College, an area which does not have much official student residences so as a result, much of the residential area surrounding the college has student housing. I drove in about 3 separate trips to see potential properties and was keen on one particular condo townhouse that allowed student rentals.
I was planning to make an offer but my realtor there, actually talked me out of it since there might have been a safety issue with the basement. I would have put a student in the finished rec room down there but there wasn’t any exit to the outside and this would have caused the safety issue. This actually shows the high integrity this agent had as he wasn’t just focused on making the sale but wanted to do the right thing for his client.
No more potential properties in Kitchener were available that suited my criteria so unfortunately, there would be no more additional real estate investment properties in that city for me at this time.
Back To Hamilton To Continue The Search
So although a bit disappointed, my continued my search back to Hamilton and this time I focused on multi-family units in the downtown area. Many of the potential properties in this class of real estate investment would be considered a no-go since they were located in the north part of downtown Hamilton. My financers considered this area a no-fly zone for me so I had to narrow down my search to south of Main Street or at least very close to it.
My realtors in Hamilton found a potential fourplex. It took 3 separate trips back into town to see all of the units since access was not available to each apartment on every trip. I even took one of my contractors to see the property.
This property passed all of my financial analysis and my contractor considered the site quite workable in terms of renovations. So I made an offer on this house and things went back and forth in the negotiation phase – requiring me to sign off each time an offer and counter offer was made.
In the end, the seller and I failed to reach a mutual agreement on the purchase conditions so I decided to drop this potential acquisition. What a waste of time!
Multiple Offer Situation On Hot Real Estate Investment
After going into town to see a few more potential properties, all multi-family units (duplex, triplex, fourplex), we found a nice triplex that was renovated really well. I quickly put in an offer but there were multiple offers on this one and I lost out to another buyer.
I was then interested in another fourplex where the financials also were quite promising. But this time during my viewing of the property, we met a few of the current tenants and they would have turned out to be undesirable. My realtor actually thought that this one lady who lived there (which I would have had to inherit if I bought the place) was on drugs for sure. I think she was right.
Finally A Suitable Real Estate Investment Property
By this time, it was already late February and still no acquisition yet. My realtor suggested a fourplex he had recently listed but was a bit out of my price range since I already knew what I was willing to spend on my next real estate investment property. I went to see it anyway and I was told that if I wanted that one, we could somehow make the numbers work since the sellers were quite flexible.
A proposed deal was drafted with a vendor take back involved and after more number crunching as well as what my mortgage broker could come up with, an offer was made and accepted after some negotiation. Part of the deal was that the sellers was to repair a few current leaks in the house at their expense.
Financing Hurdles To Jump Through
Financing for this property turned out to be trickier than expected. Although my mortgage broker had worked miracles for me in the past few deals, we had to jump through hoops for this one. The financing company kept asking for all sorts of paperwork each week. We even hit a snag with an appraiser which would have caused the deal to fall apart.
This went on for about 2 to 3 weeks and finally, the financing was approved but not before I had to redo my own financials on my own end and free up some extra capital to make the deal work.
The Dreaded Home Inspection
Meanwhile, the home inspection which I was present for of course, revealed many issues with the property but most were minor and cosmetic in nature. Most of these issues would not be repaired until a tenant moves out and currently, all four units were tenanted. I interviewed most of the tenants and they seemed like they were relatively problem free (since I would be inheriting them as part of the purchase).
The roof however, was in need of replacing and having gone through this issue already at one of my other real estate investment properties, I knew I would have to spend another $2000 or so on a new roof for this one. But at least I could delay this until the fall before the winter comes.
The insurance, which I must have in place before the closing date for the property, actually required the roof replacement as a condition within 12 months. This was okay with me but they also added some other conditions related to electrical and plumbing safety certifications. So these would represent extra immediate costs for me.
Time & Money Required In Real Estate Acquisitions
As I am writing this, I’m also preparing new leases which all four sets of tenants will have to sign. Their current leases are not with me so we have to get new ones signed to establish new agreements between my inherited tenants and I. I’ll be meeting with each one individually in the next couple of days as well as pulling together the funds required by my lawyer to close on this deal.
Assuming that the deal closes on April 30, it would have taken me five months to acquire my latest real estate investment. During these five months, there was real time and money involved.
I spend time to search and analyse suitable properties. Then I had to physically travel to both Hamilton and Kitchener to view the properties. Of course, driving involved gas that doesn’t come cheap these days. The time factored in also costs money as well since it’s my time involved here.
All of this points out to what is involved in buying real estate investments. There is real work involved and fortunately for me, my schedule was relatively flexible since I’m pretty much self employed. But the costs and time required were still real.
If you want to invest in real estate, be prepared to spend the time as well as money (gas, inspections, appraisals, etc.) in your search. If you have a full time job, be prepared to spend many evenings and weekends doing this.
Even though I do have time, it still took my five months to actually land my next property. Things never go as quickly as one would wish for. After closing, the work of managing the investment comes in so the story is not ended yet, not even close.
Is This Real Estate Investment Worth It?
Now for all that work, is this real estate investment worth all that work put in as well as the work that will follow in managing it over the next couple of years?
The answer of course is yet. Expected first year rental income will be over $33,000 no matter what the media reported housing price averages are. People need to live somewhere and Hamilton is booming. The tenants will be paying down the mortgage on this property for me.
Joint Venture Partnerships
If you don’t have the time nor real estate investment expertise to do all this, then it’s highly suggested that you take on a joint venture partner who does know what he or she is doing (and has the time to do most of this ground work).
Typically, most joint venture agreements involving an expert/management partner and a money partner (providing the initial capital for closing the deal) have a 50-50 split on profits. Some people who have not been exposed to many joint venture deals might balk at the idea of sharing 50% of profits if they are the ones putting in all the intial capital.
But as you can hopefully see after reading this, the expert partner did have real costs involved in the acquisition. All of this intitial ground work PLUS the management work that will required for the rest of the real estate investment over many years, is worth something. In the real estate investment world, a 50% share of the profits is definitely considered a fair split given the amount of work that the expert partner must do.
I’ll write about some of the work in managing rental properties that will typically be required for real estate investments in another article post.
If you have a full time job and would like a joint venture partner to do most of the ground work, do prepare to offer a 50% split. Otherwise, get ready to do all of this on your own.
