At What Point Does Real Estate Income Actually Start To Flow?

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At recent REIN™ Workshops across the country, REIN™ invited Senior Investors to share their insights into real estate investing. In part three of this series, veteran members were asked if they derived an income from their real estate portfolio.

Russell Westcott – Russell is Director of Product Development at The Real Estate Investment Network. He is a professional real estate investor specializing in joint ventures to purchase single family homes.

Russell: Do you derive an income from your real estate that supports your lifestyle and if you do, let us know how long it took you to get to that point?

Denzal LoboDenzal 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.

Denzal: I certainly subsidize my income through real estate in a fairly significant manner. With the 300 doors that we have, it’s a fair amount of income that is generated. How long did it take to get that way? I have never bought a property that doesn’t give me positive cash flow.

Russell: And you took some of that for yourself all along the way?

Denzal: I always make sure it’s positive, even if it’s a minimum of 100 dollars. Every property we’ve ever bought had to have a minimum of 100 dollar positive cash flow. If it didn’t, I walked away from it.

Russell: Arlen, same question to you. You have a really cool take on this. How long did it take you to get to that point?

Arlen DahlinArlen 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.

Arlen: I bought over 100 properties with a full time job, so I didn’t see any reason to quit my job when I could just keep buying properties anyways. It was over 10 years before I actually started making it a full time job and actually paying myself. It’s not that I couldn’t have before; I was just so dang greedy I wanted to just keep investing and buying more. I was just motivated. I didn’t start putting any money in my pocket for over 10 years, not that I couldn’t have.

Russell: You also had a back-up plan that you told me about once that struck home with me. Didn’t you have some cash in the bank? How much cash in the bank did you have at the same time when you decided to walk away?

Arlen: When I did leave my job, what I did was I sold my personal residence. I had some equity in it and then I bought another personal residence with only 5% down. I can’t remember what it was at the time, $65,000 tax free in my account. At the time, I was working a job that made me about $85,000 a year too. Once I quit the job I was just so motivated. “I’m not quitting my job in vein and I’m not selling my house in vein and starting all over again with 95% financing.” In that calendar year, I bought just over 100 holding properties.

Russell: 100 more?

Arlen: Yeah. I was so scared that I was making a bad decision by quitting my job and selling my home, that I way overcompensated. I didn’t want to go backwards.

Russell: Isn’t that kind of cool? That fear could actually be a pretty good motivator at the same time?

Arlen: That’s exactly what it was.

Russell: Some people it paralyzes and other people it absolutely kicks you in the butt and motivates you. How did you buy 100 properties, how did you get financing and how much money did you put down on each property?

Arlen: I guess that changed a little bit. Early on we had assumable mortgages, so a lot of those properties I was putting between 5% and 10 % down. Sometimes up to 15%. After the change, clearly it was 25% down.

Russell: Did you get money partners to qualify for mortgages?

Arlen: Absolutely. When I started, I didn’t have two cents to rub together. I was rolling quarters out of the couch. Almost all my properties came with joint venture partners. My first 100, I don’t think there was one that I bought on my own. It was all joint venture money.

Russell: For me, it’s a very similar story. I don’t think I’ve ever bought a place except for my own personal residence with less than 20% down. Most of them were 25% down, 25 year amortizations and partners.

Arlen: I started off early, I could do assumables, so you didn’t have to qualify, you just had to have the cash. After that it was a combination. I did some qualifying myself and of course it got difficult for me when you hand in your stuff and they go, “Ok, you have 275 properties. We’re not giving you a loan for a donut. You owe a lot of money.” They forget to look at the equity side, they go, “Holy cats, this guy owes $21,472,000!” They’re forgetting the part that my net worth is into 8 figures. Like Russell said and like I have too, I’ve done some things where I set up companies and I had the partner doing all the qualifying.

Domenic MandatoYou think your life is busy? Domenic is a committed family man and 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.

Domenic: Yeah, absolutely. It took probably the better part of about 9 years. Over the years, you refinance properties and you end up buying more property with it and you end up leveraging that too. Sometimes, you’ll take some of that money. One of my dreams was always to get a grand piano and I got one. 

I guess you’re hearing the same theme. If you’re ready to get into this business and not get paid for the first 4-6 years…If you’re ready give up on a lot of things and sometimes, some of the necessities too then you’re ready for this business. When the time comes and you do get paid, splurge. Splurge, take your wife to the best restaurant. Well, maybe not because then she’ll say, “You never take me to the best restaurants.”

Actually, you know what? Spend the money, spend it wisely of course, take whatever the allotted amount is and go get something nice. Enjoy it, because after all, what are you doing this for? Yes, you’re doing it for retirement. Yes, you’re doing it to create that nest egg, but you’re also doing it because you want to enjoy it. We don’t want to work for 20-30 years only to spend it 20 or 30 years from now. We also want to enjoy it now. If you’re going to refinance a property and you get a whole bunch of cash, don’t spend the whole thing, but decide what it is you want to do. Whether you take your family out for a holiday, or something like that, but spend it and celebrate it.

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.

Brent: Sure, I do. Initially, I didn’t. As you have always said, a job is a good front for a credit reference. It helps too if you have negative cash flow. Just to go back about 25 years ago, I bought my first house in B.C. and I paid $100,000 for my house in Delta but the rate was 14.75% and the place would have rented for $700-800 and I would have had a negative cash flow of $400-500. Ten years ago, the same house was worth about $260,000, but the rates were 6.7% and the rents were 1200 dollars, so you’d have about a $400-$500 negative cash flow. Today, you can get that same house for $450,000 and the rates are 2.99% and rents are about $1700-1800, so you’d have about a $400-500 negative cash flow.

It’s interesting. Back when we started buying in 1984… I’m from Winnipeg, so nobody bought real estate because it never went anywhere. You’d pay your broker fee out of your own pocket when you sold it at the same price you bought it for 5 years earlier. Winnipeg has done well now, but in B.C., people always thought…when we first started buying, you couldn’t find an article this big about real estate. You had no support. You’ve got now the best support that you could possibly ever find. You can come to these kind of meetings and get support and find out that you’re doing the right thing and you’re going the right way. I would rather be an investor starting out today than I would have been previously. I’m excited as heck about this.

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.

Margaret: Yes, I do derive an income from my properties. I’ve had a number of properties, most of them I’ve made sure that they cash flowed. My advice to people wanting to get an income is to stay on top of the property manager. The property manager probably has 300 or 500 other units, you’re just one of them. It’s not a passive activity. Stay on top of the property manager, “What about those rents? When do those leases finish? We can raise the rents.” That’s your job to do. Look at the expenses. How can we control these expenses? The property manager probably isn’t as on the job as you would like them to be. Also, I’ve never had a high ratio mortgage.

I’ve always been more conservative and put more money down. Fortunately, I was always able to do that. My advice would be don’t be overleveraged. Finally, I would like to say that you have to believe that you deserve the income from your real estate. It’s fundamental that you believe that you really deserve it, you deserve the cash flow, you deserve the success in real estate, then you will take the time to crunch your numbers. You will take the time to control the property managers activities.

You will take the time to come to these meetings and get up to date on what’s happening. You will take the time to go on myREINspace and learn from other people on myREINspace and help other people. Being part of the REIN community to me, is fundamental. It’s essential to getting an income from your real estate.

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.

Thomas: The biggest change for me that happened, was that I was in the software/IT consulting business for a long time. When you shift from an income thinking to a net worth thinking… If your net worth goes up by $100,000 in a year, you pay only about 20% taxes on that if you sell it. If you don’t sell it, it’s basically tax free growth. If you get a $100,000 income, you pay almost 35% taxes on that and then every increment of dollars and it’s almost 50% in B.C.

Ideally, you have some kind of other income and you use real estate really for net worth improvement. I put a pulse up on myREINspace a few days ago comparing whether it’s better to buy a 1 million dollar asset mortgage free, or 2 million dollars with 50% mortgage, or a $4 million r asset with 75% mortgage and it showed the different numbers. You see you make more money on average if you have some leverage, but you have a lot less cash flow, or none. You have to decide what you want and I would certainly not recommend to quit your job after your first or second property.

Russell: How many years did it take you before you started getting an income out of your properties?

Thomas: Seven or eight years and it was a pretty aggressive growth and a very, very fast moving market and we were extremely high leverage. If you buy a house for $300,000 and sell for $500,000, you’ve made $200,000. You can live on that for quite some time.

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.

Mark: I do get my income from the real estate now. I had other business interests that were not quite as resilient to the downturn of the economy as real estate. We had a 51 year old family business that I shut down last year because of having people not pay their bills. That left me needing employment. Fortunately, because we had been building up the cash flow within the company, I was able to transition into full time real estate, or actually, part time real estate because I didn’t want to work full time anymore.

One of the things that we’ve found, and this has come as it’s progressed….As your portfolio gets up…If you want to take money from your portfolio, the question that always came to my mind was, “What job are you doing that you’re being paid for?” If you want to be property manager and want the property management dollars, be the property manager. If you want to do maintenance and get their dollars, do that. Then it is sustainable, because you don’t want to eat the goose that’s laying the eggs.

Russell: So, you ask the question: What value do you add and should you get paid to add that value to your portfolio?

Mark: That, and as the portfolio will go on, our goal is to have it sustain the whole family on passive income without doing it. If you want to get some of the money sooner, you’ve got to be doing something to earn it from your portfolio.

Russell: So, the message that I heard from many people here is if you’re thinking about getting into real estate and you’re looking to quit your job tomorrow, have a plan in place. Everyone here on the stage has talked about 6,78,9 plus years into it to start deriving an income from it. Personally, I do not pull any money out of my portfolio whatsoever. I have a very aggressive acquisition strategy and I leave everything into it. Into the maintenance, into the upkeep, into the mortgage pay-down. One day, when it’s time to pull money out, I want to sell a whole bunch, pay off a whole bunch free and clear and I want 20 free and clear houses. That’s my first goal. So until that time, I need to derive an income because of a very aggressive purchase strategy. That’s just my own plan.

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