Updated: Aug 22, 2018
FULL STOP: How do you know WHICH property is the right property? It takes some simple calculations that will take you less than 5 minutes.
But first, let me give you a little background about how I arrived at the *right* property.
LADIES. (and gentlemen). Here is the back story before we get into the nitty gritty (i.e., math). But I'm talking, simple, grade 2 math. Maybe less? I don't actually remember when you learn addition and subtraction but it's essentially that. And luckily there are lots of tools now that give you the ability to make the math even easier (hello, Biggerpockets.com). I have to give mad shout outs to Bigger Pockets because of their tools, resources, and free webinars but HOLY BP, can you interview a female investor every once in awhile? I religiously listen to their Podcast (which I love) but c'mon, it is primarily made up of successful (white) men interviewing successful (white) men. Let's diversify a little bit, yeah?
Back to the story. "How did I buy my first property at 26?" This is how it starts.
I analyzed every multi-family property that came onto the market. My friend and business partner told me, "Don't fall in love with the property, fall in love with the numbers".
So that's exactly what I did.
We got in touch with a realtor who signed us up to his listserv that emailed us every new multi-family property within a certain area. But we didn't just rely on that - we we're checking MLS every single day. As a side note I will say that one of the biggest things I have learned is not to solely rely on the auto-listings that realtors sign you up for - the majority of the best deals I have found, I have found myself through checking MLS. Sometimes the search parameters that are set don't always capture every thing that you want. And there are tips and tricks to find what you want that might fly under the radar (think: MLS settings + Kijiji). But that's a whole other post.
Back to the point of this post: How to find the RIGHT property. Well, as I write this post I realize the calculations of how to analyze a real estate deal deserve their own post entirely. It's simple math, but you don't want to busy it up with too much other stuff. So let me finish my story of how I found my first income property (or so I thought), and then I will dive right into the actual numbers of the property I ended up buying as my first investment.
For weeks, we used our little Excel spreadsheet of income versus expenses to assess every property. Finally, one glorious day, we found one that made sense. It was an estate sale, 1-day on market, listed for $525,000, a 3-unit property, and in the "rich neighbourhood". We messaged out realtor to see it that day. (Side note - don't be afraid to be a little aggressive with realtors. If you find a good deal, you need to push to see it ASAP because you're not the only one recognizing a good deal when it hits the market).
THE HOUSE: It was beautiful - Stained glass windows, hardwood floors, high ceilings. The main unit was a 2-bed with a grand kitchen, exquisite dining, living room and a bonus upstairs family room with loads of potential. Washer and dryer in the main washroom, I might add. Downstairs was a one-bedroom suite that needed updating (i.e. blood-red carpet) and a small bachelor unit with laminate flooring. The two downstairs rental units shared a common washer/dryer, but each had their own entrance. There were also two driveways for the property as it was a corner lot. All of these things, by the way, are big ticket items you ideally want in a rental property. Separate washer/dryer, off-street parking, and their own entrances are sure to attract higher-end renters. For us, these were non-negotiable items that we needed to have in order to set ourselves up for rental income success.
So, we offered that day, subject to conditions of financing and inspection. We loved the house (and the numbers!) and we were excited about the possibility. When I say possibility, I mean the idea that as is, the house wasn't *exactly* what we wanted. But we knew we could get it to bring in a rent that we wanted (stay tuned for a later post on how to guarantee this rental income before you buy). Needless to say, it had "potential". There was nothing wrong with any of the units, but there were small things we could do to increase the value tremendously. Things like paint, pulling out that blood-red carpeting and installing laminate flooring, an easy ability to convert an attached garage to a second bedroom in one of the units, minimal yard (so minimal maintenance!), etc.
Anyway, this was, what we thought, the closest to a perfect property that we were going to get. We negotiated an accepted offer about 10k below asking ($515,000), which was normal, and we issued an inspection. We also brought in an electrician that we knew who could comment on the amount of knob-and-tube wiring that existed (if you haven't heard about knob-and-tube wiring, this is something you should definitely Google). Basically, we knew because of the age of the house (over 100 years) that knob and tube wiring was likely the case, but we didn't know how much of it existed. Given that it was an estate sale, the seller didn't know either. The house inspector we hired estimated about 10%-15% knob and tube. Our electrician however, estimated 50% knob and tube. This is a huge difference. And for anyone that hasn't had to replace wiring before, this is a HUGE EXPENSE. Based on what we found out from our electrician, we tried to renegotiate $515,000 down to $510,000. Little did we know (and little did our real estate agent mention to tell us) that when you re-negotiate an offer, any back-up offers sitting behind your initial offer must be presented to the seller. So, instead of getting an additional $5,000 off of the sale price, we lost the house entirely. Sitting behind our accepted $515,000 offer was a $525,000 unconditional offer that was quickly scooped up by the seller.
Sadly to say, we missed out on an actually really good opportunity of a house. But like most things in life, there will always be more options :)
And, let me tell you, the next house we offered on, we got it! We learned from our first mistakes and we got our second house. Interested in diving into the numbers finally!?