Investment Stories: In my experience, I have discovered that listening to other real estate investor’s experiences to be a great resource to learn about real estate investing. I am hoping that through these interviews we can learn about the different strategies that real estate investors use, expected ROIs and how a passive real estate investor can invest in these types of opportunities.
Our 4th Investment Story is provided by our featured guest who is a full-time active real estate investor/coach, Andrew Brennan. I have no financial relationship with Andrew to disclose.
If you are interested in learning about Joint Venture or Private Mortgage investment opportunities with Andrew, then he can be reached at: andrew@BPIrealestate.ca
I heard Andrew speak on Breakthrough REI podcast, and I thought that he would be an excellent guest who would be able to educate and enlighten us about his real estate investment experiences in the Simcoe county area. Thank you Andrew for taking the time to share your story with us!
1) Please tell us a bit about your background. How old are you? How did you get into real estate investing? How long have you been investing in real estate? Are you an active or passive (or both) real estate investor? What/where do you invest in?
I have been investing in real estate for 10 years. I was 35 years old when I first started. Today I am a full time investor and also coach other investors to help them build their portfolio. I invest in most of the Simcoe County area, which is 60-90 minutes north of Toronto. This area includes Barrie, north to Orillia, and West to include Collingwood.
I got into real estate investing after a conversation with a local realtor. We needed a bigger family home. He suggested not selling our current residence and to convert it to a rental property. At the time I knew nothing about real estate investing. After our discussion I sat down and ran some figures. I quickly realized real estate was a great way to create wealth so I started buying as many properties as I could.
During my time investing I have benefitted by using joint venture partners. Using partners has allowed me to build the portfolio to over 250 units. I specialize in properties that are 2 to 4 units. Most of the purchases have been acquired using either the fix and refinance strategy or the vendor take back strategy.
2) Please describe one of your real estate investments (past or present). (i.e. REIT, MIC, Crowdfunding, Private Mortgage Loan, Private Equity, Joint Venture or other)
We purchased a 1,000 square foot, 3 bedroom detached bungalow early in 2017. The property was purchased using a joint venture partner. The property was run down but in a great area with high demand for properties.
We converted the property into a legal 2 unit dwelling with each unit having 3 bedrooms and 1 bath.
3) Where is the property located (city/province/state)?
The property is located in Midland, Ontario
4) Are you the active or passive investor in this investment? How did you/partner find this investment?
I am the active investor that works with several joint venture partners. My investors remain passive for the life of the investment.
I found this property from a rental application we received. A prospective tenant for another one of our properties listed on their application they were moving because the landlord planned on selling the house. I recognized the non profit company name of the landlord and called them to negotiate a private purchase before they put it on the MLS. It was only a couple weeks before getting the tenant’s application that we added “reason for moving” to our standard rental application. With the tremendous competition for buying properties it was lucky timing, as I would have had to pay approximately $20,000 more via the MLS.
5) What was the risk of this investment? What was the security?
I didn’t see any risk with this particular property. The condition of the property wasn’t good but we already owned the house two properties over and it performed very well for us. The property is in an area with a very low vacancy rate. Competition was fierce for buying properties.
Midland, Ontario had been consistently overlooked by other investors and prices remained low compared to the surrounding area. Rental yields were very high compared to most areas in Canada. Purchase prices in Midland were approximately 20% lower compared to the surrounding area with rental rates higher than the most of Simcoe County. In fact we found that only Barrie’s rental rates were slightly higher but the same property would cost you about $120,000 more in Barrie creating lower cash flow.
There continues to be a shortage of properties available in Midland and I could have easily flipped the property after fixing it up or sold the purchase contract to another investor for an approximate profit of $10,000.
6) How much was the original investment? What is the breakdown of your/partner’s investment?
The original investment was $101,000. With a purchase price of $215,000, the down payment was $43,000. The balance was needed for closing costs and renovations to convert the property to a 2 unit property.
7) What was the annualized ROI? What is the breakdown of the ROI?
After fixing up the property and adding the 2nd unit we refinanced the property. The property was appraised for $340,000. This allowed us to withdrawal the full $101,000 investment plus an extra $4,000 after legal fees. This gives us an infinite return on investment so you can’t calculate an ROI percentage.
For properties, please fill in:
- Cash Flow/yr = $4,680 after property management and allowances for vacancy and repairs
- Mortgage Paydown/yr = $5,520
- Appreciation/yr = $13,600 based on 4% appreciation per year.
- If applicable, Forced Appreciation/yr = With cosmetic repairs and adding the 2nd unit we were able to increase the value $125,000 and a net of $80,000 after renovation costs of $45,000
- TOTAL $ Increase/yr = With spreading the forced $80,0000 appreciation over 5 years the annual profit is $39,800.
- OVERALL ROI in first year = Infinite return because we received all our funds back.
(Editor’s note: I agree with Andrew that he and his partner’s ROI is technically “infinite” since they have none of their original money left in the property. However, let’s calculate the property’s ROI after refinance based on 20% ($68,000) left in the property with new appraised value of $340,000. Total $ increase/yr = cash flow + mortgage paydown + 4% appreciation = $23,800. Based on the 20% that is left in the property after refinance, then the property’s ROI is $23,800/$68,000 x 100% = 35%. As you can see from previous Investment Stories, the >30% ROI is a number that sophisticated real estate investors look for in properties that they want to invest in.)
8) When do you/partner get the original investment back?
My partner received all of their funds back within the first year. We usually refinance the property after about 3 months of owning it. Now we will continue to hold the property for several years and perhaps withdrawal some of the equity in a few years.
9) What did you like or didn’t like about this particular investment? What did you learn from this investment? Would you recommend this investment to your friends/family members? Any advice to give to the readers?
I like this type of investment for several reasons. There are lots of single family homes available to purchase and convert into 2 units. This allows the investor to be actively purchasing properties and can avoid some of the frustration with finding an investment property. Two unit properties fall under the residential mortgage program with the banks. This makes it easier for lending purposes and getting mortgages. These properties are also easy to sell when needed and can often be sold fairly quickly, due to the higher amount of investors looking to purchase properties in this niche. The costs are also low when refinancing to withdrawal equity so you can move onto the next purchase.
I would highly recommend this type of investment to anyone considering investing in real estate. Part of being a successful investor is taking a property from its current use and/or state and maximizing the best use for the property. Often this includes adding a 2nd unit to a single family home. For this investment we were also able to get an extra lift in the property value with cosmetic repairs to what would become the upper unit.
With refinancing the property you can greatly increase your ROI. I set minimum annual ROI goals for our properties at 30%. It can be a challenge to achieve this with the standard buy and hold. The fix and refi strategy greatly increases the availability of properties to consider as an investment but also drives up your ROI with refinancing shortly after renovations. I use this strategy time and time again to maximize our ability to purchase additional properties by recycling the funds.
You can get advice, information and tips on this strategy from my book, The Ultimate Wealth Strategy, which specializes in buying, renovating and refinancing properties. To highlight some of the more important tips for a conversion project:
Make sure you select a flexible mortgage for your original purchase. This way you can avoid any penalties by refinancing the property after a few months.
To shorten the timeline to refinance the property, have a clause in your purchase contract stating the seller will grant you permission to apply for a building permit in their name. This way you can have the permit issued before closing on the property, start the renovation process right away and not wait for permits to be issued.
Make sure you know or hire someone that knows what is involved for meeting the building and fire protection requirements for adding a 2nd unit. Different cities demand different requirements to be met. What is acceptable in one city may not meet the minimum requirement set by another city. This ends up causing confusion or adding unnecessary costs to meet the higher requirements of another city instead of the one you are currently working in.
10) If any reader wants to contact you, what is the best way to contact you? (Please ignore if you wish to remain anonymous).
Readers can get in touch with me at andrew@BPIrealestate.ca.