REIN Veterans Share Their Lessons From The Last Downturn

 

 

At recent REIN™ Workshops across the country, REIN™ invited Senior Investors to share their insights into real estate investing. In this series, veteran members were asked to discuss how the recent recession impacted their businesses, how they overcame the economic downturn and what advice they could share with their fellow members.

 

What lessons did you learn during the last recession and how do you hang on during a downturn in the real estate market?

Denzal Lobo – Denzal is the owner and principal of Properties of Distinction Corporation. He joined REIN in 2002 and has owned over 300 multi-family and single properties in Alberta.

The biggest lessons that we learned, because we’re in multi-family, was keeping up the morale of our staff and the tenants. The more we were able to keep up the morale of our tenants, the more opportunities we had to keep them from taking off and moving away to another property. We realized how valuable they were and our and their positive attitude was key.

 

Arlen Dahlin – Arlen has been investing in Alberta for over 17 years and since 1995 he has transacted over 1000 properties. He currently holds 300 properties. Arlen became a real estate millionaire in his thirties and he is an expert in joint venturing.

Luckily, I didn’t have to wait until this downturn to learn my lessons because when I started in 1995, Edmonton had a vacancy rate of over 10%. So, I bought my first 3 properties and went through the school of hard knocks with those right off the bat. I learned probably the most important thing was to keep my properties in top notch shape and renovated. When we had this last downturn, for example, I owned one apartment building with 75 units. During this downturn, I didn’t even drop my rent at all. I was able to maintain my rent at the levels we saw in 2007-2008 where we peaked out. I didn’t have to drop my rent and it didn’t affect my vacancy either. I find that if you have a slower downturn, the guys with the rough stuff are the ones who experience the big vacancies. I experienced virtually no vacancy. Management and keeping my properties in top notch shape were key during the downturn.

 

David Dunville – David started investing in 2001. He personally manages over 105 doors. His area of expertise is Whitecourt, Edmonton and Fort McMurray.

I would say that I learned to maintain my properties so I stood out above the crowd. In tough times, people are going to start moving around. If they’re going to pay rent, they want the best, so provide them that. When you have that, you’re not going to worry about being vacant. I had zero vacancies. I treat my tenants well, just like REIN teaches you to do. You answer their problems, solve their problems and keep your places in impeccable shape. You’re either going to pay now, or you’ll pay later. You’ll pay through vacancy, or pay through renovation, so you might as well pay through renovation because you never know when you’re going to want to get it appraised and take some money to buy your next property.

 

I always use the phrase “I’m not going to participate.” I didn’t participate in the downturn, (too bad for all of you that did). I was sitting there thinking, “What have I done in this downturn that’s going to make a difference later.” That is what motivated me to buy more properties. While everybody else was sitting around thinking, “Oh, well the world is ending, the sky is falling” I was out buying some property because the recession provided opportunity. Use Warren Buffet’s theory: When people are fearful, be greedy. When people are greedy, be fearful. That’s what I did.

 

Wade Fenner – In his first year, Wade bought over $1 million of real estate on a bicycle while living in Calgary, in the middle of the winter. He now has purchased over 130 properties.

Before I started investing in real estate, I was working for a high-rise development company based out of Vancouver. I had an epileptic seizure, lost my driver’s license and then a couple of months later, I lost my job. Because of this seizure, things were pretty disruptive at work already because there was a couple months lag between the seizure and losing the job.

 

The site superintendent I worked with over while on the job in Nanaimo had done a lot of work in Calgary. I found out he was a real estate investor and I learned about the non-qualifying, assumable mortgage benefit that Alberta had at the time. I had actually bought a plane ticket to come to Calgary for the weekend just to check it out and have a look around. I bought the plane ticket on Wednesday, got fired on Thursday, so when I got on the plane Friday, I didn’t have a job to come home to anyway. Instead of coming home on Sunday, I ended up changing my plane ticket about 3 times. I stayed for two weeks, rented an apartment, came back to Calgary and moved here. A month later I bought a bicycle and a couple weeks after that I did my first house flip. I bought a house, owned it for nine days, made nine grand and quit looking for work. Then I did nine renovation deals (off my bicycle) in my first year: buying, renovating, and selling including riding across town trying to sell a house in 27 below zero weather.

 

It wasn’t a case of the old war analogy of “burn your ships behind you” because then you have no choice but to be victorious. Somebody else burned them for me.

 

In the last downturn, I learned the importance of having goals. I’ve always been a little bit of a wing nut and that’s what made me good at what I was doing. Why would I do nine deals in my first year off a bicycle? I really learned the importance of being organized, not having loose ends, hiring experts to do certain things for you. For years, we were doing things in-house, not with experts, so most things we were doing were getting us by, but they were being done poorly. So, the number one thing is to hire experts to do things for you instead of trying to wing it with Mickey Mouse efforts.

 

Domenic Mandato – You think your life would be busy? Domenic is a committed family man and a real estate investor. He manages a $42 million real estate portfolio in British Columbia, Alberta, Ontario and Quebec and has been investing for 13 years.

The good thing about recession is that you learn not only how to handle a recession, but you learn about yourself. For me, it was a learning experience for both. For one thing, we survived, I’m happy to say that. I’m happy to say that our clients are also with us and continue to be with us, but one of the things we’ve changed was that we’ve also reduced our leverage. We have significantly reduced our leverage because in this business of real estate, leverage is the name of the game and if you leverage, that’s how you get the best return. At the same time, it can go the other way around. As a result, what we’ve learned is that in times of recession, I can remember the deals that were out there. Not even just for real estate, just for everything.

 

If you’re going to buy a car, or if you wanted to buy anything, if you had cash you would have the best deals. The power of negotiation just goes through the roof, if you know what you’re doing, as well. Yes, we did buy during those times as well. We got some of the best deals we’ve ever had. At the same time, I think if I look back, we started in 2008. We started buying properties long before 2008, but during 2008, 2009 and 2010…Even though we still went through that crisis of this recession, we still had properties that we bought in 2008 that unfortunately were flat for about 2 or 3 years.

 

The trouble when you’re buying in those times is you really don’t know how long you’re going to be stuck in that position. That’s why it’s critical that even when you buy in those times you have to make absolutely sure that if it gets worse are you able to sustain that and for how long?

 

Mark Healy – Mark started working with his dad in the early 1970s when his dad was buying properties in Calgary. Mark and his family own a portfolio worth $13 million. They started with the original six properties that they bought and they transitioned that into 60 properties.

I learned during the last downturn the need to take action. We have bought properties pretty much every year since we joined REIN in 2001. As you grow, your perspective changes and you need to be well prepared. I don’t have Plan B, I have Plan Q because I have all the other plans as well. You find bad things are going to happen. As long as you’re prepared for them and you anticipate and you’ve taken some time to think about it in advance, it’s not going to paralyze you. It’s bad, but work through it. It’s not the end. There’s always a solution.

 

Thomas Beyer – Thomas bought his first property in 1997 with a $20,000 investment and is now the owner of Prestigious Properties, which, at its peak, owned 1100 properties.

We own an asset in Dallas which we bought in 2007 just at the peak of the boom. We were about to get a one year mortgage, because it was a 30% vacant building that we wanted to turn around. If we had taken the one year mortgage, which we were seriously thinking about, we would have been immediately trapped into the Lehman Brothers collapse in September 2008. We would have probably lost the asset. We locked in a 10 year mortgage at 6.9%, so not that cheap, but we still own the asset today. The value is up about 20% and the cash flow is $100,000 a year now. The rent is up 30%. The trick is to hold through the recession, which means you’ve got to have a good deal on the mortgage and the expenses, but you also have to have some cash.

 

So, I did trademark the phrase, “Cash is king, cash flow is queen.” Cash flow is absolutely important to hold, but you have to have some reserves as well. We lost money on 2 buildings out of 35 we transacted over there in the decade in smaller markets. There are markets that correct a lot more, but if you buy in good locations in larger cities, the market does not correct nearly as much as if you buy in a small town…and we had some assets in small towns. The risk is much higher, so buy in good cities, keep them well maintained, maybe lower your rents a bit and work on the vacancies and incentives a lot more and have some reserves too. Don’t be overly optimistic. Be positive in life obviously, but don’t be completely unrealistic.

 

Margaret Cowan – Margaret Cowan has been investing in BC since 1987, and then in Alberta in 1997. She has owned rooming houses, single families, list suites, 4-plexes, 5-plexes, 6-plexes, and now owns an 11 unit apartment building. She has been investing for over 20 years.

I was glad that I followed a strategy of having rental properties in the middle to lower-middle of the market. If people have to go down a notch in their accommodations, then I’ve still got product for them. That was key for me. I always keep the properties well maintained.

 

Brent Roberts – Brent started investing at the age of 18 and has owned properties across North America. He bought properties in the States and then became a realtor. He became the rookie of the year as a realtor. Brent has been a REIN™ member for over 20 years.

Thank goodness it was short lived because first of all, you never know when these things come and the press was so bad recently. In 2008, for example, it looked like everything was going down and I’m a realtor. Nothing was being sold and all my investments are in real estate, so it was scary. First of all, it’s nice that it was short lived. You do have to get creative. I think one of the things that’s extraordinarily helpful was to show up at REIN™ meetings because I’ll tell you, it was scary and you really needed to come to a meeting like this and see people that were taking action. Maybe you had to get into joint venture agreements because you needed to get somebody to help out. You really had to buckle down to make sure that the fundamentals that you had been working on for all these years were in place, but it was tough, I have to say.

 

– Don started investing in 1985 with a house purchased in Mission, BC. He is the Founding Partner and Senior Analyst of The Real Estate Investment Network and currently owns over 170 doors in BC and Alberta.

It’s not my first one remember, so I’ve been through this before and this was the great recession. Does anybody know how long the great recession was? 7 months. The great recession. It wasn’t even the worst recession that Canada has had, but of course, it scared the living you know what out of us. As you know, I buy and own upper-lower, lower-middle class rentals. That’s my target market. I don’t go up on the high end, or on the rooming house end. Upper-lower, lower-middle. During the last recession, I found that people had to notch down, and you’ve got the product waiting there already. Although those people have gone farther down, there’s new people that have moved down.

 

Number two is, as painful as it is during the time, keep those properties maintained, but here’s the important bit. Don’t over-renovate during the recession, unless you have a whack of cash and you want to take advantage of lots of really cheap deals on labor etc. that are going on. Always, always, always, focus on keeping those properties full with bodies. Live bodies that are paying you rent. Thomas talked about lowering the rents. What we did is we added an incentive instead. “Stay here and pay every month and you get 150 bucks off” We do it in 6 month chunks to make sure that it ends at some point, so they’re not signing a lease at a lower rent. You really, really get focused when the recession hits, so manage it like a business during that and get clients and customers into your group.