I first became interested in real estate investment around the year 2003, just after I graduated from The University of Western Ontario.
Before, I begin my story, I would like to thank Stephani Davis for giving me the idea to write this article. Stephani wrote a similar article on the premier real estate social networking site, BiggerPockets.com. I really encourage you to read her article as well.
I made a lot of mistakes when I purchased my first rental property. However, looking back upon my experience I have learned from these mistakes. So much so, that I feel that I will never make these same mistakes again.
Mistake #1
I did not know why I was buying the rental property
When I purchased my first rental property in May of 2005, I did not know why I was purchasing it. I did not know if I was going to live in the property as my principal residence, or if I was going to rent it out. Not being clear on this caused mistake Number #2 to occur.
Mistake #2
I wasn’t sure if the property was going to cash flow
Because I did not have a focus, I had no idea if the property was going to cash flow if I decided to rent it out. I was just so excited at the fact that I was buying a property, that I did not even do my due diligence. At the end of the day, I figured that if it did not cash flow, the worst case scenario would be that I would live in the property for a set period of time and then sell it and buy another property. In my mind, I had things ‘planned’ out. However, as time passed and as I gained more experience and knowledge, I realized that it was not a very good plan.
Mistake #3
I was speculating, not investing
I purchased the property with the hope that the property would go up in value. It was my plan that the property would go up in value, and that I would be able to sell it shortly thereafter in order to make a profit. There is no guarantee that a property will go up in value.
Mistake #4
I took the wrong amortization period
When I purchased this property, I took an amortization period of 25 years. I should have taken an amortization period of 35 years, which was the highest amortization period available in Canada at that time. If I took a 35 year amortization period, this would have resulted in my mortgage payments being much less.
Mistake #5
I got my mortgage through a bank, instead of a mortgage broker
Knowing what I know now, if I could go back in time, I would have got my first mortgage on my rental property through a mortgage broker as opposed to a bank.
The reason for this is because…
…I could have obtained a lower interest rate on my mortgage. Since mortgage brokers deal with many different lenders, they have a variety of interest rates and mortgage terms to chose from. By getting a mortgage from a bank, I was forced to taking the interest rate and the terms of the mortgage from that particular bank.
Despite making these 5 huge blunders, my first rental property has turned out to be the strongest performing property in my portfolio of rental properties.
In 2008, I had a bank appraisal completed, and the value of the rental property came in at $315,000. Bank appraisals are extremely conservative. As such bank appraisals come in well under the market value of what a property would sell for on the market.
As an example, in 2009, there were some comparable homes sold for between $330,000 to $350,000.
I always like to be conservative with my estimates, so even if we assume that the value of the property today is $315,000 as per the bank appraisal, that means that the property has appreciated approximately $65,000 in less than 5 years. If we take a look at what the market value of the property would be as opposed to the appraised value, then the appreciation level would be much higher.
I ended up renting this property out shortly after I took possession of it. For the first 3 years or so, it was a negative cash flow property. In 2008, I re-negotiated the terms of the mortgage. As such, the monthly cash flow on the rental property increased dramatically. This small change enabled me to move forward and purchase additional rental properties. I was able to do this thanks to the great advice of an outstanding mortgage broker, and friend, Kevin Boughen. Kevin specializes in investor mortgages, and works with real estate investors all across Canada.
Here is a short video, and quick tour of my first rental property taken in December 2009.
[youtube]http://www.youtube.com/watch?v=__fESpm7HAw[/youtube]
Neil,
Great post! Thanks for putting yourself out there. We can all learn from your examples. The first 3 problems may seem like obvious criteria to consider before you buy, but when you’re new you really just kinda forget to think of those things. You’re too excite and nervous!
Keep it up.
– J. Fed
Thanks J-Fed. I appreciate the comment.
I like putting myself out there with certain articles, because it shows people that I am being real.
All the best. Talk to you soon.
Neil. 🙂
I have never had the nerve to invest in rental property because I am too afraid of having problems with the tenants. Not paying on time, damaging the home,etc. Have you found this to be a problem with your rentals?
Hi SFaith,
You are not alone with your fear. There are many novice and experience real estate investors that have these fears.
The fear of the tenants not paying on time is a common fear. This fear can be combated by spending a lot of time screening potential tenants. You are able to mitigate some risk by exercising due diligence here. A rental property can be damaged by tenants, this is true. However, have regular inspections of the home can help to control this risk. If you are managing the properties yourself, you can inspect the home, or if you have a property manager looking after the property, they can do the inspection.
Personally, thus far I have been fortunate to have all my tenants pay on time. However, I know that as I expand my portfolio and continue to purchase more properties, I will no doubt encounter some tenants who will be late with their payments.
I have had one of my rental properties damaged, but it was minor damage that was easily fixed, and at not too much cost. It was actually the dryer that the tenants had beaten up and damaged. I laughed when I saw the damage, because it was so very random.
The horror stories that people hear about tenants damaging properties, does exist, but I believe that they are rare.
Part of being a landlord is to foster good relationships with your tenants. If you respect them, chances are that they will share the same respect with you. Much of the relationship between tenant and landlord has to be built with time. Show them you care.
Hope this info helps SFaith.
Best Regards,
Neil.
[…] days you feel like an absolute genius, whereas other days you fear that your house of cards just may come crashing down on […]
I am glad you showed that clip I am planning to purchase a property in oakville as well and I was unsure as to how many upgrades I should invest in. In your experience shoul I keep everything including appliances basic ie white appliances vs stainless steet carpet vs wood… what are your thoughts?
Hi JP,
Thanks for your comment, and I am glad you found the video helpful.
Oakville generally is a booming market, so it is good that you are buying there.
Whether or not you put in upgrades in the home depends upon your long term objectives with the home.
For instance, are you planning on keeping this property as a rental for 3 years, 5 years, or more?
What do other similar homes that are rented out look like? For instance, do any of these homes have upgrades? If so, how many, and what was completed?
What are the market rents of these properties versus the market rents of properties with no upgrades?
In my experience with my Oakville property, I had absolutely no upgrades. The appliances were basic, i had carpet throughout…. absolutely no upgrades were made. To this day, I have made no upgrades to the home. (5 years later). A lot of the home surrounding my rental property were upgraded. As a result, they were able to get a slightly higher monthly rent.
[…] Uttamsingh presents How I made over $65,000 on my first rental property by doing everything wrong posted at First Rental […]