Our 3rd Investment Story is provided by our first featured guest who is both an active and passive real estate investor, Nicole Edmonds. I have no financial relationship with Nicole to disclose.
If you are interested in learning about Joint Venture investment opportunities with Nicole, then she can be reached at: www.investwithnicole.com
I have seen/heard her speak about her real estate investments on a couple of platforms, such as on Everyday Investor and Breakthrough REI. I thought that she would be an excellent guest who would be able to educate and enlighten us about her real estate investment experiences. I sent her an e-mail for a request, and she graciously accepted and spent the time to answer the questionnaire. Thank you Nicole!
I am hoping that Nicole will be the first of many more guest real estate investors who will be featured on Investment Stories. Please feel free to contact me if you want to be featured on Investment Stories.
1) Please tell us about your background.
My name is Nicole Edmonds and I began investing in real estate 4 years ago when I was 23. I first got involved in investing after attending a free 2 hr seminar on the topic at which most of the real estate terms were like a foreign language to me. I had graduated the year prior with a degree in Biology from the University of Western Ontario where none of my elective courses included finance or business. While the ideas were new, I was really excited by the concept of buying a rental property, ensuring the incoming rent was enough to pay the mortgage, pay all the expenses associated with the property, PLUS put extra in my pocket each month (“cash flow”). I thought, if I buy a positive cash-flowing property and repeat it over and over again, I will be able to live on the passive income and not have to work. If I achieve this, I can choose to work, or choose to start a charity or raise a family but the point is, I’d have the choice.
After getting more education, I began investing shortly thereafter. I started with 5 bedroom student rentals but now invest in both passive and active real estate deals with the majority of my focus on purchasing and holding cash-flowing multi-family rental properties which I purchase with Joint Venture Partners. My properties are all over Ontario in smaller cities/towns where it is possible to purchase at low enough prices and still bring in high enough rents to cover all cost plus bring in positive cash flow.
2) Please describe one of your successful real estate investments (past or present).
This deal is a property I purchased in the Fall of 2016. It is a purpose-built 4-plex that was purchased for $300,000. (“Purpose-built” meaning it was not a house that was later converted to a 4-plex, it was originally built as a 4-plex). This particular deal was not purchased with a partner but in the questions below I’ll describe what the return would be if I had taken on a partner for this deal. The property consists of two 1-bedroom apartments, one 2-bedroom apartment, and one 4-bedroom apartment. It is a low to middle-end rental with mostly young families living here.
3) Where is the property located (city/province/state)?
St. Catharines, Ontario
4) Are you the active or passive investor in this investment? How did you find this investment?
I am an active investor but I often take on passive partners who are responsible for investing the down payment for the property, sometimes qualifying for the mortgage, and aside from that, typically have no other obligations. As the active partner, I find the property, run the numbers, negotiate the deal, organize financing, attend inspections, manage closing and manage the property going forward. In a situation where I do have a partner in the deal, we typically split the return 50/50.
I found this property from the MLS. It was listed by a realtor and I contacted them directly to request the financials and run the numbers on the property before going to see it.
5) What was the risk of this investment? What was the security?
What I love about the buy and hold model with high cash-flowing properties is that regardless of market fluctuations, as long as we’re still bringing in rent, we’re still making money. With this model, I never feel we’re at the mercy of the market – depending on the market to go up in order to make money. When I invest in a deal I want to be able to look at the numbers and say, “even if this property doesn’t appreciate in the next 10 years, I’m still happy with my return”. Any market appreciation is just a bonus. I prefer this strategy as I feel it is one of the least risky ways to invest in real estate.
This method has multiple streams of income; cash flow, mortgage pay down (which your tenants are paying down each month), passive/market appreciation, and if you do a renovation; forced/active appreciation. Another popular real estate investing strategy is flipping, however, this strategy only brings in income based on forced appreciation. I feel it is much less risky to be making money 4 different ways rather than just one.
Of course, no investment goes without risk so I would say the risk in purchasing this property is if the tenant pool severely decreases/vacancy rates drastically increase, our risk would be a reduction in income. The other risk is that a significant and prolonged downturn in the market would result in eventually having to take a loss if we needed to sell for some reason. Both of these risks can be mitigated by ensuring you’re investing in an area with a diversified tenant pool (ex, ensuring all of your tenants in an area don’t work at the same factory/plant causing you to depend on that company to stay open for you to have tenants), and ensuring you and your investor are comfortable leaving their funds invested for a longer period of time, say 5-10 years instead of 2-3 years.
For deals where I do take on a partner, their security is the property itself. They go on title of the property.
6) How much was your original investment?
In the deal above, the downpayment required was 20% of the purchase price (300K), so $60K plus $4K closing costs (legal fees, inspection, etc.) Total cash required for this deal was $64,000.
7) What was the annualized ROI? What is the breakdown of the ROI?
- Cash Flow/yr = $10,800
- Mortgage Paydown/yr = $5,100
- Appreciation/yr = $9,000 (using a 3% appreciation rate)’ If applicable, Forced Appreciation/yr = $0, no renovation was done on this property
- TOTAL $ Increase/yr = 24,900
- OVERALL ROI in first year = 39% TOTAL ROI (TOTAL / Investment x 100 %)
8) When do you get your funds back?
Typically I structure my JV deals to run a minimum of 5 years unless both parties agree to sell prior to that. At year 5, these are the possible strategies:
1) We refinance the property to pull out equity. We split the new equity withdrawal and continue owning/running the property as before.
2) One investor chooses to buy the other out (typically a shotgun clause to determine price)
3) We can both decide to sell the property: after paying the financial investor back their initial investment (64K in the example above), paying all transaction costs, both partners then split the remaining proceeds.
9) What do you like or don’t like about this particular investment? Would you recommend this investment to your family members? Any advice to give to the readers?
I like this type of investment. It is low maintenance as it doesn’t require a reno and has very high cash flow. Depending on what you are looking for, this property won’t give you quick cash from a reno & refinance as no reno was required. If you’re looking to pull some equity out fast, this deal might not be right for you. You may be better off looking for a rental that needs some upgrades and can quickly be refinanced to give you some equity to help you get your next deal.
I’m constantly learning as I purchase new properties and deal with new tenants. At one point, unbeknownst to me, a tenant at this property had moved out, sublet the unit to another person, stopped paying rent to me and continued to collect rent from the subletter – a professional tenant move that even my paralegal was shocked to learn about. I ended up successfully evicting the tenants in that unit and the loss of rent was covered in what I had and always calculate into my numbers as a “vacancy allowance”, but these new experiences contribute to constant learning and tweaking of my strategies and processes.
I would absolutely recommend this deal to friends and family if it fit what they were looking for in an investment. Joint venturing on a deal like this would give both parties a 20% ROI, a return most people aren’t currently getting. Being a JV Money partner on a deal like this makes a lot of sense for someone who doesn’t have the experience/knowledge and doesn’t have the time or desire to manage a rental property. For someone in that boat, investing their money at 20% is great. For someone who is willing to put in that time and effort, then it might make more sense for them to do the whole deal on their own. It really depends on the needs of the investor and where they see value.
My biggest piece of advice for purchasing properties like the example above, or any income property, is be sure to run the numbers and be conservative in doing so. If you don’t already know the appropriate formulas to analyze cash flow and overall ROI then learn them. Then, when you apply them, never fudge the numbers to make the deal look better than it is. Purchase the property if you are happy with the numbers in the worst case scenario, not the best case scenario. When I calculate cash flow, I include a 5% vacancy allowance in my expenses, I include maintenance and repair and I account for hiring property management even if I plan to manage the property myself. If the numbers look good with all these taken into account, then, in reality, the property will likely perform better. I feel confident making my decision to purchase under these circumstances.
10) If any reader wants to contact you, what is the best way to contact you?
Readers are welcome to contact me through my website at www.investwithnicole.com
Special thanks to Nicole for taking the time to share us the details of her investment property. I especially liked her honesty about sharing her learning experience with us about the tenant eviction. I have heard similar “learning experiences” from other active real estate investors that gave me enough reasons to pursue passive real estate investing via Joint Venture, rather than learn to become an active real estate investor myself I have a lot of respect for others who take the time and effort to become a sophisticated active real estate investor, but for the busy professional, such as a physician or dentist, a Joint Venture in my opinion is the most efficient use of one’s time and money to invest in a multiplex rental property.