“The inspector cannot get into the bedrooms because the tenants are refusing access and there are crack pipes in the living room.”  Wow: that is a scary statement when you are almost ready to buy your very first investment property.  This my own true story about my first property, including how I bought it with no cash.

Let me rewind a little bit.  In my late 30s, I had already been immersed for almost 20 years as a co-founder of several startup tech companies including interactive tv, commerce, online gaming and online payments.  I found these environments brutally fast-paced and volatile, and longed for a slower entrepreneurial experience where I could place some investments, sit back, and enjoy the profits for years to come.  I felt that real estate was going to give me that kind of a life.

I joined the Real Estate Investment Network where I had learned about investing in residential properties.  They teach that “if you come up with the down payment, find a property manager, and invest in the right spots, you could enjoy years of passive cash flow.”  I guess I did not listen closely enough when they explained that there would be times where the investment is not so passive and my mettle would be tested.

Invest for Cash Flow

One of the lessons learned was that I should invest for cash flow; I spent lots of time searching.  “Investing for Cash Flow” means that after all rent comes in and all expenses/mortgage are paid, your bank account has more money than the beginning of the month.  In other words, you do not have to “help make the mortgage payments” as some people put it.

It quickly became apparent that cash flow producing properties are difficult to find.  I had selected my geographic market in the city (not rural), and was determined to strike gold.  I kept looking at properties and filling out profitability analysis spreadsheets.  And invariably, my candidate properties would not cash flow positively.  Therefore, my standards dictated that I was not allowed to buy them.

All of a sudden, a small classified ad came to my attention.  There was a property in a midtown location with 4 units that cash flowed at roughly 10%.  This was quite a find!  This means that the property would give 10% Cash Flow, 10% Mortgage pay down, and the bonus would be appreciation.  I found a property that would return between 20% and 30% on my investment.

Due Diligence

I did all the due diligence I could.  I looked at google maps, municipal crime maps, public transit, resale values, jobs, and economic outlook.  Everything seemed to add up.  The only issue I could find was that two of the basement suites were technically non-conforming to municipal by-laws, yet they had passed municipal safety inspection.  Strange but true; this city tells you it is not allowed but it is safe, and turns a blind eye.

So the next step was to take a 5 hour flight and visit the property.  It was middle of February; I put my wife and kids on an airplane to Sunny Florida, and I flew off to Edmonton, determined to build a future for my family.

Physically seeing my first investment property provided me with a whole different perspective.  Every defect, perceived or otherwise, is magnified in my imagination.  The tenants were not the same type of customers I had in Information Technology; this was an adjustment.  They were good people, working hard to make a living, and I am providing them a service.  For me, it was and still is an honour to be a Rental Housing Provider.

Then I visited the neighborhood at night, Saturday night.  I saw some of the underbelly that comes with large cities.  I saw loitering, drug dealers, prostitutes.  They were just 3 blocks on a Main Street from my potential investment property.  I flip flopped on this one.  On the one hand, the property I was buying was across from a school and the neighbourhood seemed fine.  On the other hand, just 3 blocks away was a thoroughfare renowned for illicit activity.    I ultimately remembered that when I lived in Toronto, the line between these sketchy streets and nice neighbourhoods was many times just one block.  I decided to trust my view of the decent hardworking people in the neighbourhood rather than run away from the night time activity.

Determined to Act

So, I went back home, nervous, but still determined to invest.  I had my property manager.  The investment was going to cash flow positively.  The expenses and income all seemed reasonable,  The bank approved the mortgage, and I just needed an inspection, which I commissioned.  

The inspection is where I got another big mental test.  This is where it was told that the property was sound, but there were two problems.  First, the basement windows were missing 1 inch in width. Then, the hammer came down; “The inspector cannot get into the bedrooms because the tenants are refusing access and there are crack pipes and drug paraphernalia in the living room.”

Drug users in the property I am going to buy?  Ouch.  Scary.  Panic.  Fear.  Deal breaker?  The problems that I thought were 3 blocks away actually were in the basement!  So the pressure mounted.  I was faced with a bunch of conflicting emotions.  The ambition to invest in real estate, the fear to lose out on an opportunity, the fear to make a bad investment, the embarrassment of walking away from a deal, the guilt of the sunk costs, the greed of making money, and the most powerful was the fear of the unknown.  All of these conspired to effectively torture myself.

Overcoming Adversity

The emotions surrounding any first venture can be overwhelming, but they need to be overcome.  I started to understand many things. There is always a reason not to do something.  There is no perfect deal.  The real challenge is overcoming my own biases and breaking through into a world of experience.  Just plain old action is the best teacher.  If something goes wrong, I will deal with it later.

So, I bought the property, jumping in with both feet.  The projected return on investment was enough for me to take the risk.  I would learn about owning property and go through the process, and be paid for my education.  I can always sell later.  Even if I sold for a loss, it would be a percent of my investment, since I am buying an actual physical entity.

I overcame my own self-imposed adversity, and I am grateful that I did.

Epilogue

Lots has happened over the years.  My property manager and I focused on the 3 good tenants, and kicked out the drug user.  Over the last 8 years or so, I’ve cash flowed about $1000 per month which I’ve used to renovate the units and pay down the mortgage.  The improvements helped me increase the rents and property value.  Edmonton has now changed its bylaws and the property is now “legal”; this was a luck break.  I refinanced a couple of years ago, and have converted the excess equity to a Line of Credit that I can use to buy another property!  

Buying a House With No Cash

By the way, I bought this property with no cash.  Essentially, I used my own Home Equity Line Of Credit (HELOC) to buy the property, and borrowed the rest from the bank with a mortgage.  The rent pays the mortgage and ALL expenses including the Line of Credit Interest payments.  If I change nothing, I will own this property in about 15 years, having put no money down.  At that point, with a mortgage completely paid off, the cash flow will jump to about $40,000 per year.  That is a good foundation for retirement…

The property has not always been perfect.  With working class tenants and the volatility of an oil-based economy, I have had tenants move out unexpectedly.  The property required some renovations to be compliant.  The roof replacement in year 4 wiped out cash flow.  Cash Flow is not always steady, but in the early years I kept a healthy reserve, and after refinancing, I have a Line of Credit for this property that I can use for unexpected expenses.  With all of my other residential investments, cash calls have occurred, but this one never required a dime of new cash in the property; this is my only “no-cash” property and I am grateful for that.

(Some of) the Life Lessons Learned

1. Action Beats Analysis.  Sometimes just acting is the best teacher.
2. No Deal is perfect.  Recognize that every new venture will be have pros and cons.
3. Calculate your Risk.  Recognize your risk, and decide if the Return is enough for you.
4. Education through Doing.  If you want to learn something, just do it.

(Some of) the Real Estate Lessons Learned

1. No Cash Down.  You can use your Line of Credit as the Down Payment.
2. Property Management for Remote Deals.  A property manager takes care of your property.
3. High Cash Flow means Higher Risk.  This is a complex topic.  Essentially the market recognizes this and prices itself.  A downtown easily rented high end property will have very low cash flow compared to a more difficult place to rent.  Tenants may not be easier as well.
4. Get Rich Slowly.  It can take 10 to 20 years for the investment to really pay off.
5. Passive Cash Flow.  I spend about 2 hours a month on this property, because I structured it as such.
6. It gets easier to act.  Assessing new properties gets easier and less emotional.
7. Lessons never Stop.  The more years I invest, the more lessons I learn.  For example, living through a boom and bust cycle really shows you the practical side.
8. Line of Credit instead of Cash.  When refinancing, take a line of credit in conjunction with your mortgage.  Eliminate cash calls by using it as Reserve, and deduct the interest when you do.

My Subsequent Evolution

Since this first real estate investment, I’ve slowly and deliberately moved into bigger deals.  I bring a bunch of people together and we buy bigger commercial properties.   (I talk about this here Marc’s Everyday Millionaire Podcast Guest Appearance) I am the steward of their money, and I could never have the confidence nor integrity to take on these partners without the lessons I’ve learned along the way.  What a ride it has been!

I wrote this story because many of you have asked me to get more specific.  As a Private Extrovert, it is not always easy.  Please feel free to comment, send me some direct feedback, or share on the Socials.  For you Real Estate Investors out there, I would love to hear one of your unexpected surprises.  I am grateful to have you on this journey with me!