Financial Jungle

Little did he know, the modest condo Warren bought 8 years ago would pave the way for a lucrative ride along the surging Vancouver market. I became intrigued with Warren’s story when he started posting regularly on Financial Jungle, so I requested an interview.

1) Back in 1999, when all investors were flocking to the technology binge, you made a life changing decision to migrate to the secluded land of real estate investing. Take us back to that time… what was going through your mind? Why didn’t you plunk your money into technology stocks like everyone else?

In 1999 I had little to no experience in the stock market. I saw the rise of tech stocks, but did not have the first idea of how I could be a part of it. I had a desire to move to downtown Vancouver. While looking at various rentals, I realized that the price of a 5% down mortgage payment was the same as rent, so why not buy? I bought a pre-sale about 6 months prior to completion. Its amazing to think how much the market has changed in terms of pre-sale availability and overall price. It was more dumb luck than anything else.

2) I understand you lived in a condo until 2003, but later rented the unit out to other tenants. What prompted you to open the door to strangers and become a tenant yourself? Did you feel home sick afterwards?

My apartment is a studio, and I wanted to move in with my girlfriend, so there wasn’t room for both of us. My goal for the apartment was always to keep it as a rental when I left. I became a tenant myself because we didn’t have any long term goals at the time, and I don’t think I could have handled the risk of another mortgage (if I was even approved). I don’t live too far away now, but I do miss the neighbourhood. My plan is still to purchase again in that area, but prices will have to come way down for it to make any sense. We have an excellent rental suite right now, probably below market rent, so its even harder to leave for an expensive mortgage.

3) Most landlords I know howl about tenants from hell. What process do you have in place to alleviate tenant problems?

I got lucky with my first 2 tenants, that lasted about 3 years. I never did a credit check, but did employment and rental reference checks. I did have a bad tenant, and she had great references from both her employer and a property management company she had rented from for 4 years prior to moving into my suite. She ran into credit problems after moving in. I don’t think there is any foolproof way of judging a person, unfortunately. My advice would be to hang on to a good tenant if you get one, but also don’t be afraid to use the law to its fullest extent to get rid of a bad tenant, or scare them into paying up. Some “scare tactics” worked a little with my bad tenant. The longer you leave a problem, the more money you are missing and/or
hassle you are dealing with.

4) Do you have any plans to expand your real estate empire? If so, please give us a vision of your portfolio. Individual homes? Apartment buildings?

My next real estate purchase will be a primary residence, but I don’t plan to sell my rental property. The Vancouver market is probably the worst in the country (if not the world) for investment yield on rental properties, so my current investment focus is in other areas. I think in general people have too much money tied up in real estate. I’d like to be well diversified in other areas before another RE investment.

Being a landlord is more work that some people assume. I don’t think I’d ever consider a SFH as a rental investment, at least not in any large urban area. Better to have an apartment where a management company takes care of many of the routine details and maintenance. Its well worth the (tax deductible) monthly fee.

5) How does real estate fit into your retirement plan? Do you plan on living off the rental income?

Its tough to argue with cash income every month. My yield has recently gotten a lot better as I now use a specific management
company that handles my unit almost like a hotel, shorter term rentals for corporate clients. There was some initial cost to get it set up and well furnished, and I provide all utilities, but it is really starting to pay off. And the best part is zero hassle, they handle everything. Passive income is really what I’m after from any investment I look at. I think a mixed portfolio of rental properties and dividend payments would be my ideal retirement plan, probably no more than 2 properties though.

6) With 4 or 5-years worth of experience under your belt, what nuggets can you share with us in terms of real estate investing? What were your proud moments? What would you do differently if you have to start all over again?

Proudest moments were probably cashing my first check, and paying the mortgage off a few months ago.

My advice would be: beware! My story looks great because I got in during a bad time for real estate. Good thing I didn’t know anything at the time or I may have scared myself off. I don’t think I would touch RE right now, you just have to do the math, it doesn’t compare to other easier, more secure investments out there. Your local market may vary, of course.

If I could go back and talk to my 1999 self, I think I’d tell him to buy a slightly bigger place. It stretched my 1999 income a lot to get in where I did, but I think I’d push for as much as I could get. Its easy to see in theory how your early income will increase quickly as you get out of school and start your career, but tough to see when you’re at the bottom. My studio is 420 square feet, so pretty small, which can limit your rental opportunities somewhat.

7) Outside of real estate, are you currently experimenting on other types of investment?

I’m just starting to get into dividend investing (DRIPs and others), and I own a few stocks, but nothing major so far, I’m a novice. My girlfriend and I are looking at some business investments that would give us a lot more flexibility than our 9-5 jobs, but nothing solid just yet.

I had a solid goal of paying off my rental apartment so it would become true cashflow, but when it got close I started thinking “what next?”. That’s when I stumbled across Derek Foster’s “Stop Working” book, which solidified my plan to retire early by gradually building up a passive income stream from various sources. I have no desire to retire “rich”, only early…

The finance blogs like yours are a fantastic resource and its encouraging to work towards your goal and see others succeeding at the same time.

Thank you for your kind words, Warren. The cheque is in the mail.

Please stick around as I’m sure other readers will have some questions or comments.

The best time to plant a tree was twenty years ago. The second best time is now.

The Chinese who came up with this proverb sure wasn’t thinking of Vancouver real estate, and certainly not not inflation.

One of the persistent excuses I hear from wannabe investors today is, “I’m in it for the long-haul. Real estate always goes up.” That may be so, but the perseverance required for an overpriced investment may shock you off your seat.

Consider this: Euphoric Vancouverites, who invested near the height of the 1981 bubble, did not recover their original inflation-adjusted principal until 2006! Again, that’s inflation-adjusted; a dollar can buy a lot more Big Macs in 1981. For the unfortunate investors looking for an immediate vengeance, the hiatus turned into a 26-year hibernation. I believe the reality in 1981 was far worse beneath the chart. Devastated by 20%+ interest rates and hefty closing costs, I suspect many of the under-achieving investors were counting their blessings in light of foreclosures and bankruptcies devouring their peers.

CMHC has recently pumped a few more pockets of air into the bloated market by eliminating the down-payment threshold required for investment properties. There’s a big catch. The new CMHC premium is a mammoth 7.25%. Let’s work an example. A potentially insolvent Vancouver investor looking to capitalize on the housing momentum can borrow 100% plus 7.25% on CMHC insurance for a $339k 1-bedroom 580 sqft condo. The monthly mortgage payment on a 6% rate and 25-year amortization is $2,326. Throw in another $400 for condo fee, property tax, insurance and other maintenance, the payments balloon to $2,726. Consider that the suite was previously rented for $1,450, it would be a miracle for anyone with perseverance to hold this property until the first dime is made.

With the glaring agony in US housing, I just don’t see a prosperous long-term outcome with the recent move by CMHC. It’s bad enough to borrow 100% for a primary principal home, but to borrow 100% for an investment property and 7.25% mortgage insurance is preposterous; rent yield is low, and now so too is cash-flow. CMHC just removed the housing air bag. The landing will likely be gruesome.

You know what I love about our recent paid vacation? Beside the privilege of receiving 3 paid cheques while hiking the Great Wall of China, our ever jolly landlady awarded us a rent freeze for being troublefree tenants. Who knew being good citizens could be so profitable?

This shouldn’t come as a surprise for us though. Between my wife and I, we collectively rented 4 separate suites in different occasions, and never had to bear any rent increases! In fact, one landlord even tried to persuade my wife to remain by offering a rent decrease. Perhaps he’s a nut, but more likely a brilliant business man. Having been a landlord myself for 3 years, I can attest that keeping a dependable tenant is much more nourishing to your bottom line than having to endure lost revenues, advertisement fees, lose of personal time, and not to mention the risk of inviting a professional tenant-from-hell to ruin your retirement plan.

Having said that, I can understand that freezing the rent can be a double-edged sword. Keeping a good tenant protects your cash stream, but over time, the investment loses its edge from eroding purchasing power and opportunities lost. To the best of my knowledge, any missed increases can’t be carried forward to future years. In BC, landlords can hike their rents by 4%, max. By forgoing the raise this year, the landlord cannot no longer “catch up” by double-boosting the rent next year. The conclusion? It pays to be good tenants. We’ll save an equivelant of $1,000 pre-tax income, and this saving is repeatable as long as we remain with this landlord.