250k Profit in a Calender Year and Everything I’ve Learned About Real Estate

Matt Whitteker

As I write this at age 29 I’ve had a few run ins with real estate. I’ve had exposure in the low end of the housing market, rented to tenants, done a flip, bought a condo and bought at the high end/luxury end of the market. This is what I’ve learned so far.

House 1:

This house was a co-purchase with a friend and my first home. It was classified as a 4 bedroom but the house was split on levels and had a large den that could easily be a bed room and the basement was converted so there was:

3 bed rooms – main floor

2 bed rooms – third level

1 bed room – basement

The purchase price of the house was $250 000 with a 5% down payment.

During my residency the rooms in the house except one of the small up level rooms (used as our office) were rented or occupied by the owners. This meant that after mortgage and property taxes there was a small profit of $100 used for beer.

Lesson 1: Start early. During high school and university I always worked and was trying business ideas. To save $6250 (5% of 250k/2) wouldn’t have been that hard. I could have replicated this process a couple times by now if I started first or second year university.

We held this property and lived, expense free for 4 years. Over the 4 years there was 0 upkeep and the house was basically a frat house. Dozens of massive parties, hundreds of smaller ones. Again 0$ upkeep. When it came time to sell, the house was in shambles. We set a $20 000 budget for reno’s and having never completely renovated a house before this was in itself a learning experience. Here is the exact spreadsheet I used:

Lesson 2 Renovations can be done on the cheap and still look great (which is more like 2-6)

-          As dilapidated as something looks fixing it up isn’t that hard

-          If you get good workers you might pay a bit more but save in efficiencies and  quality

-          Jobs, of course will always take longer (This wasn’t by a huge margin but a bit)

-          If you are price conscious a little can go a long way in the renovation world.

I found the main renovation team through a handy man service I had used to fix a leak at the boxing gym. My dad and a friend painted. I did put in lots of hours doing junk removal and errands myself.

Next came selecting a real estate agent. This was essentially a fire sale because of a baby (not mine) that was on the way. Since we were under pressure we decided to go with an agent.  I strongly advise going through grape vine kijiji, and all other free/low cost avenues before using an agent. As long as you have your property listed on MLS or the main real estate listing site that represents that largest share of traffic you will save a ton of money and get the same results. I can’t stress this point enough. I found almost 0 value in having an agent which ended up costing $17 000.

This could have been the down payment on another property.

The math in the end:

Final Sale Price: $340 000.00

Purchase Price: $250 000.00

Principle on Mortgage: $200 000.00

Renovation Costs: $24 000.00

Agent: $17 000.00

Original Down payment: $ 13 000

Total Profit: $86 000.00.

Profit on Annualized Basis: $21 500.00

Summary: I was able to live expense free for 4 years in a party house during my mid 20’s.  During that time, since I had no rent or mortgage to pay I was able to focus on starting/growing businesses and was able to live off drawing very little if any salary. I would strongly recommend doing this for any university student or parent with students starting university. A note on tenants … don’t worry too much. As my own worst tenant I can attest that the renos will have to happen if your tenants are 8/10 or 2/10. The incremental cost will be marginal unless (this was done before at another rental I know of) they do something catastrophic like import 3 tons of sand into the living room for a beach party. Use common sense when screening.

Other Notes:

Market timing: It was sold in 2010. The Ottawa housing market was largely unaffected by 2008-09 recession.

Geography: The house was not close to any major learning institution or employment hub. It was on the outskirts of the city but before what would be considered suburbs. It was close to a major road and was “regular” as far as the housing in the area.

Tenants:

We were always able to rent to friends. I imagine renting to 3-5 independent people might be more difficult. We were god awful tenants from a landlord perspective though, this can’t be emphasised enough.

Part 2

Condo 1 (Personal) Condo 2 (Flip)

The bulk of my learning curve came with project number 1 but again some lessons were definitely learned. When I first walked into my condo I made the classic mistake of showing my cards in front of the sellers’ agent. I loved the place and I said it. I even made the ridiculous mistake of saying out loud “I love this place”. This took away almost all my negotiating power. I ended up paying full price because I wanted it that bad and wanted to make sure no one else got it but in hindsight that was most likely a $5-10k mistake.

Lesson 3:

In negotiations I’ve learned always act indifferent. To quote a mentor of mine “Soon as you let the other side see that they are the “hot girl” at the dance … you become one of those chumps waiting to have a shot.” I’m firmly of the mind if I took a look around, pointed out some flaws (no AC, students lived there before, small bath room, not a lot of closet space, only room for one person) and then gave my agent the green light to make an offer 10k lower while pointing out all these issues again. I would have saved 10k.

Condo 2 Flip:

At the same time I bought my condo, the penthouse in the same building was for sale. The condo I bought was $340 000.00 and was 900 square feet making it $377/sq ft. The penthouse at the time was for sale for $500 000.00 and was 1700 square feet making it $294/sq ft. My business partner and I made an offer (note lesson 3) at $370 000.00 and eventually got the property for $400 000. Which was a bargain at $235/sq foot. This was almost a 40% discount from the place that I had just bought and was the penthouse!

This discount however was not for nothing. The place was unlivable and very dilapidated. The place was also on foreclosure by the bank, so I don’t believe they truly played hardball. In any case, timing and chance was on our side.

Having just done a large scale renovation of a property with larger square footage we already had the template for renovations. This particular project for reasons out of our control ended up taking much longer but the final results were as follows:

Total Purchase Price: $400 000.00

Total Renovation Costs: $80 000.00

Condo Reappraisal: $650 000.00

Total Time From Purchase to Re-Appraisal: 5months.

Total Profit Based on Appraisal: $170 000.00

There were 2 months carrying costs as well but my business partner ended up moving into the unit month 3. It is now without a doubt one of the nicest condos in our city having been featured on the cover of magazines and served as the set for movies.

Lesson 4:

Everything comes down to math. I just validated the price per sq foot in the building at $377/sq ft. We were able to buy a unit that’s base square foot should have been higher but it was $235/sq ft. 40% less. If the math works, jump on it!

Part 3 – Luxury Home:

As our businesses have matured we’ve been able to set aside money for personal investments. This time we stumbled upon a house where we knew we would be able to get a tenant for the full mortgage and property tax cost. Partners from both the previous housing projects joined on this property. The house was originally listed for 1.3MM. We used several tricks in this negotiation:

-          In our city higher end homes south of 1MM are fairly difficult to move. The house had just been reprised from 1.3MM to 1.1MM showing some desperation on the side of the seller. When we went for our first showing the house was completely empty showing that the seller was also paying for carrying costs. Always a positive for a buyer.

           We choose to go unrepresented, meaning we didn’t hire a real estate agent. Agents will always tell you “the seller pays” but in reality both the buyer and the seller are paying in some shape or form.  By going unrepresented we discovered a hack that was new to us. Get the agent that is representing the seller to represent you at the last minute. This creates a conflict of interest for the agent and they will do whatever it takes to get the deal done since they get 1-2% more commission.

We made an offer of $900 000.00 and eventually closed on the property for $950 000.00 an almost 30% discount from the original price.

Lessons Distilled:

1. Start as early as you can in real estate and trade up as you go.
2. Renovations can be done very cost effectively if done right. So don’t lose too much sleep about rental property upkeep.
3. Negotiate with a demeanor of indifference. Don’t show your cards.
4. If the math works jump on the opportunity. Calculate price/sq foot for comparable. If you’re getting 30-40% discount note lesson 2 and go for it.
5. Whenever possible do not use real-estate agents especially when selling
6. When buying use lack of real estate agent to negotiate a better price directly with the seller or create a conflict of interest getting the agent on your side to force your deal.

Notes:

-          I could write a long post about dealing with mortgage brokers, banks and lawyers. Message me if you have questions on that front.

-          The Ottawa market is very stable. For lesson 3 “if the math works” if your overall market is in a bubble be weary. I’d be very careful doing any short term investments in markets like Vancouver, Toronto and in the luxury market in Ottawa