Rob – Welcome to Everyday Investor, the hottest investment show in the world. That’s right, I said it. I don’t care who knows it. The show is designed to help us all grow our money. You see, we take our pressure just time. We go to work, we get a paycheck and then we eat, which is a good thing. We go to work, we take our time to go to work. We make money in order to provide. But imagine a life where money could make you money so you could work a little less, spend more time with the things that matter most, whether it’s family, friends, engaging in a benevolent purpose that’s greater than yourself, all that kind of good stuff.
Remember, whenever you’re introduced to any type of investment opportunity, you always want to ask four questions to start. Number one, what is the ROI, the return on investment? Two, when do I get that return on investment along with the money that I put in? Three, what is the minimum investment amount needed? And four, what is the risk? The worst case scenario. Super exciting show for us today. Michael, thanks for being on the show with me.
Rob: Welcome to Everyday Investor, the hottest investment show in the world. That’s right, I said it. I don’t care who knows it. The show is designed to help us all grow our money. You see, we take our pressure just time. We go to work, we get a paycheck and then we eat, which is a good thing. We go to work, we take our time to go to work. We make money in order to provide. But imagine a life where money could make you money so you could work a little less, spend more time with the things that matter most, whether it’s family, friends, engaging in a benevolent purpose that’s greater than yourself, all that kind of good stuff.
Remember, whenever you’re introduced to any type of investment opportunity, you always want to ask four questions to start. Number one, what is the ROI, the return on investment? Two, when do I get that return on investment along with the money that I put in? Three, what is the minimum investment amount needed? And four, what is the risk? The worst case scenario. Super exciting show for us today. Michael, thanks for being on the show with me.
Michael: Thank you very much for having me.
Rob: It’s been a good 35 years or so and done every type of investment opportunity, not opportunity, done every vehicle, never lost it’s the things that get really exciting that I lose in, but not the slow and boring real estate. But sometimes I forget to teach just even kind of the basics of how to get into the game. And I actually forget and probably couldn’t even do a good job. I’m excited that we have you here to teach people how to become the everyday investor and jump into their very first investment property. Why did you kind of decide to kind of niche into that space?
Michael: Well, I’ve been working with investors for a long time, and much like yourself, I’ve been doing it for more years than I’d want to admit to. And the one thing that always drove me was helping that first buyer buy that first property, that second property, and make a real difference in their life. It got to the point where buying that 15th property really wasn’t very passionate anymore. But certainly buying that first property for a new client was a lot of fun. So when I wrote my book, I decided to really focus on getting somebody to buy their 1st, second and third properties. So today we’re really focusing on getting that. Number one.
Rob: That’s great. I really appreciate it. And then you also have a concept of what you call house hacking. What does that mean, house hacking?
Michael: Well, househacking, certainly it’s not a new concept that’s been around for 100 years or more. It’s just been rebranded as house hacking across North America. And basically what that is that I’m a huge advocate of buying two unit and three unit properties. And so we’re going to focus today on your typical two unit bungalow, which is a home with a basement apartment, a legal basement apartment recognised by the local municipality. And the idea is you simply live in one of the two units and you rent out the other, simple as that.
Rob: So Rabb wants to get into the game, and so I would be happy or actually a friend of mine, Scott McGilvrey. I think a lot of people know who that is Scott McGilvrey bought a property and he lived in the legal suite while he rented out the top. And I think he did this for eight or nine years, Michael, while he was buying other properties. But basically the top kind of allowed him to live almost for free. Is that the idea?
Michael: It absolutely is. And certainly when Scott and you and I purchased our first properties, the prices were significantly different than they are today in the GTA. But certainly the concept hasn’t changed. If anything, it’s actually become even more prevalent today because a lot of first time buyers simply don’t have the financial wherewithal to be able to afford the mortgages in the current housing prices. This allows them to get into the house that they want, maybe not their dream home, but it gets them to a house that they want and start building them wealth at an affordable price.
Rob: We can work anywhere, but you predominantly cater where prices are still astronomical, but more reasonable than Toronto, if you will. What kind of cities are those? Ajax, Bowmanville, where do you live?
Michael: Sure. My service area is the Durham region, which includes the vast majority of my properties are in Oshawa, for example, but this could apply for Barrie, Waterloo, London, Ottawa, Hamilton. Prices are all pretty much the same all around the rainbow across the Toronto area. And those classic 1960s bungalows are prevalent in all of those cities.
Rob: And so, Michael, are you looking for properties that have the potential for the suite, or are you looking for ones that are already kind of turnkey for the people that ask for your help?
Michael: Well, obviously, both. This example we’re going to use today is one that’s already legal. Maybe it needs a little bit of TLC, but it doesn’t necessarily need a full renovation. This is something that’s as close to turn key as we want or as we can get, because again, a lot of these younger buyers maybe don’t have the skill or the time to do a full renovation or the money, for that matter. It’s a renovation costs. So for this example, we’re going to take one that’s already been legalised and you’re buying that key. And as the expression goes, it’s a turnkey, you’re buying it and you’re moving in.
Rob: Okay, so explain turnkey. What does turnkey mean?
Michael: It is exactly what I just sort of implied. You buy the house, you receive that key, you turn the key, and it’s ready to rent right now.
Rob: No renovations. I mean, unless it’s emotional maintenance. There’s no real maintenance that I need.
Michael: It’s recognised by the city, the designated city, as having a legal secondary suite. One thing I should share with you, Rap, is that once a property has been legalised by its local city, it remains legal from then on as long as they haven’t done anything to modify legal status. So if I sell it to you, when you sell it to Scott McGilvery, it remains legal, and that’s an important thing. So even if the city in the future changes their legal requirements, that property has got its legal secondary suite designation.
Rob: Would you help me get into a property that’s not legalised and walk me through how to get it legalised, or is that a lot of work? Because then maybe the ceiling height isn’t right or the windows aren’t right or the square footage isn’t right. I mean, what’s your mindset there? Because if we’re going to be honest, Michael, fewer than more properties are legalised in the GTA. What is the cons of having a duplex as an investment? But it not being legalised.
Michael: I think the number one the first one is you’re always one phone call away from having the local city representative knock on your door and shutting you down because you don’t meet the legalised requirements. And that’s important enough from a financial standpoint. The second one, of course, is from a banking standpoint. One thing I was going to mention was, even if you can only qualify for a certain price, if you’re coming to me and sort of say I’m only qualified for X with a legal secondary suite, you can actually use the rental income of one of the two units, which can actually get you to the point where you can actually afford a more expensive property. And that’s simply not the case when it’s not a legal secondary suite. And thirdly, and this, in my opinion, is the most important of all, is that you’re in a situation where if something really bad happens and there’s a basement fire and somebody gets injured or even dies in that apartment, you are potentially criminally negligent and there could be significant fines and prison sentences. So that’s something that from a sleep at night factor. It’s something I would need more to consider taking on.
This is meant to be an investment that’s supposed to build your wealth and build your security. And if one bad incident can turn all that around, it’s not an investment I want to take on.
Rob: I appreciate your mindset. Okay, so where is this property and how much did we pay for?
Michael: Okay, so we’re going to take a property in we’ll take Barrie, Ontario, for example.
Rob: Okay. And purchase price.
Michael: Let’s say it’s $800,000.
Rob: All right, so the buy is 800K. Yes. And this already is a duplex.
Michael: It’s already a legal two unit dwelling. A duplex is considered to be a purpose built building where what we’re talking about, for the most part, is one that was built as a single family home and then an accessory unit or additional dwelling unit was added.
Rob: Okay, so you recall. Sorry. Say that again. The difference between a two unit and a duplex is.
Michael: Yeah, a duplex was a purpose built building by the builder back in the day, whereas a two unit dwelling or an additional dwelling unit is considered to be something that was built as a single family home by the builder. And then in years to come, it was renovated into a legal secondary suite.
Rob: Rab wants to get in his first investment, meets Michael. Michael shows me a property in Barrie. It’s $800,000. And the former owner built a secondary suite legalised. And now what are we doing?
Michael: Absolutely. So we need to come in if we’re looking to purchase it. The cool thing about if you are going to be owner occupied in that home, you can buy it for as little as 5% down on the first $500,000, and then it becomes 10% down on every dollar subsequent to that. I reached out to my mortgage broker yesterday just to verify what would be the minimum amount required. And you could buy that property with as little as $55,000 down payment.
Rob: And that’s because in a sense, this is my principal residence. So I can get in at 5% up to the first 500 and then 10% for the other $300. Yes. Okay, so $15,000.
So I’m in as opposed to if it was an investment property, I’d need 20% down, Michael, and now I would need $160,000. That’s a big difference.
Michael: That’s a significant difference. Yes. Now the one component I do want to share is that there is an insurance fee component because it’s now a high ratio mortgage, which that would be built into the mortgage itself, but it’s not an upfront cost.
Rob: Okay. Yeah. Anytime you’re paying less than 20%, you pay that CMHC cost and that gets added to your mortgage. We’ll go through more costs, then we’ll look at the profit, and then we’ll kind of see what our return on investment is through the house hacking. But we got to take a quick break. I really appreciate you being on the show. Make sure you guys don’t go anywhere. We’re going to learn how we can get into our first investment property with a strategy called house hacking.
Michael: Yeah, we chose Barrie, but this could have been Oshawa just as much, which is where I own most of my properties. But I specifically picked the market that it could be anywhere in the GTA or the outskirts of the GTA. And obviously, the numbers change a little bit in terms of purchase price. If you’re going further and further away from Toronto.
Rob: Let’s find out what our investments amount is. So a down payment of $55,000. What else is out of out of pocket or whatever?
Michael: Yeah, we’re going to have closing costs about 15k.
Rob: What is the breakdown a little bit just verbally, what is our closing cost consist of?
Michael: Well, we’re going to have some land transfer tax fees. We’re going to have some legal fees. Those are the big two. There’s always some miscellaneous fees that come in there. But my mortgage broker there might even be some mortgage broker fees potentially as well.
Rob: And is this it? Is this what I’m in for?
Michael: Those are the big ones. And so with the associated fees, your mortgage winds up being about $775,000 because there is an insurance premium that’s added that actually gets built into the component for sure.
Rob: But to close this property, I’m in for 70K.
Michael: Correct. Okay.
Rob: So now I’m making money because I Rav. I’m going to live in the lower unit. Is that what we’re doing?
Michael: So I’m living in the basement. Heck, you’ve been probably living in a two bedroom basement as a rental. So now we’re just moving into our own place.
Rob: That’s right. Okay, so if I’m moving into the basement, walk me through the numbers here in terms of. There’s some appreciation on this property.
Michael: Absolutely. Yeah, there’ll be some appreciation. There’s going to be a lot of mortgage pay down. The term cash flow will be actually a misnomer because we are going to be having money out of pocket each month. But keep in mind you’re living in one of the two units.
Rob: That’s right. What do we give ourselves in Barrie or in Durham? Appreciation annualised? What’s a number you would use?
Michael: I’m going to take a really conservative number here because I don’t want to throw some high number, but I’m going to put 4% appreciation. I believe we’ve been seeing well.
Since 2000, we’ve been seeing an average about 6% to the GTA. But if we could build it then at 4%, the numbers still work. I think we’ll be pretty happy.
Rob: Okay, so 4% on the 832,000, is that what we have?
Michael: That’s correct. We’ll be seeing $32,000 a year.
Rob: $32,000 a year. I’m making it’s not in my pocket, but it’s in the property and then we’re paying down the mortgage. I have a few bucks going towards it, but a lot of the money is the tenant that I have, that I choose, that I vet, that I qualify, that’s living upstairs in the three, four bedroom. I mean, this purchase price is a three bedroom, four bedroom. What is it?
Michael: Yeah, we’re probably talking about a three bedroom upper and a two bedroom lower located in a good area of your community. I teach my clients to buy quality properties in quality neighbourhoods in markets that are likely to appreciate and have the right market fundamentals. So you can have your really good say on which tenants you select. The days of seeing tenants that are struggling to pay their rents are behind them. We have one of our two unit dwellings where both the upper and lower, believe it or not, are both lawyers and each of them have income levels over $100,000 a year. Yet they’re tenants. So there’s a lot of reason why people rent today. And so the days of the bad tenants can be behind you if you rent properly.
Rob: Love it. What is the actual amount that’s being paid down in the mortgage in the first year? What’s the amount that’s being paid down?
Michael: According to my mortgage broker, it will average out as $26,000 under the current interest rates of annual mortgage pay down per year right now, 26K.
Rob: So the appreciation and the 26 is 58k.
Michael: That’s right. And if we’re renting out that property for $2,000 a month, the monthly cost on this property, the mortgage is about $3,100 per month. The taxes and insurance, let’s say, are about $500 a month. So you’re in the whole about $1,600 per month. If you factor that in on an annualised basis, I’m going to round up and say 20 Kwh. As far as your rent, we’ll call it.
Rob: I’m living in that house. Taxes, insurance, mortgage, all that kind of stuff. I’m out of pocket $1,500 a month on $800,000 property. But I’ve also made $58.
Michael: If you net $38,000 on your initial $70,000 investments, essentially, that works out to about a 54% annualised ROI.
Rob: So 38K. And the way we got that is between it going up and paying down the mortgage, 58. But I’m living there, so I’m paying about 20. The difference is $38,000. I’m in for 70. So we divide that by the 70. That spits me out. An ROI of what, 54%, 54% ROI on investment, property, house hacking. And the biggest difference, I think, Michael, even though for me to live in this property start to create equity for $1,600 a month is fantastic. But it’s this number here, that 55K as opposed to the 160K. If it was just a pure investment. That’s why these numbers are attractive. Now, if I rented out the bottom, I would have to put 20% down, which is $160,000, but I’d be making more. I’m guessing it’s roughly around 35% return you’re bang on.
Michael: Actually, yeah. That’s exactly where it falls into 30% growth. And as I mentioned, the GTA has been seeing a six to 7% growth since 2000. So at 4%, the numbers look very good. At 6%, they’re getting silly.
Rob: So, Michael, listen, I don’t want to. I love the country we’re in. I’ve got a great accountant. He tells me, Rav a cow gets fed, but a pig gets slaughtered. Don’t be a pig about things. It’s okay to be a cow. It’s okay to not break the rules, but maybe bend them. Here’s what comes to my mind. God forgive me if I did this. How long? Because again, this is the attractive part, the $55,000, because it’s a principal residence. I only have to put down 5% for the first 510. How long to fulfil all righteousness? Do I need to live in this before I rent that bottom part out?
Michael: Legally, I would say 24 hours because there is no banking police. Now, if you missed mortgage payments and they determined that you’re not living in one of the two units, then there could be some ramifications as a result of that. But I do know of people and I’m not recommending it. But I’m just telling you that if there have been times where people will live in unit one on day one, and then they say, you know what? I’m going to rent them both out. And you can only play that game really once and sometimes in the case. I do know people that will use this as their purchase number one, and then they get into a second property, and they can also potentially get that at less than 20% down as well because they’re moving into the new unit. You wouldn’t be able to do that on day two, but certainly that’s a possibility.
Rob: Yeah. And obviously, we sleep a lot better when we dot our I’s and cross our t’s when we have a legalised basement. But life happens, too. I know people legitimately have done this and then they get a job change or they have to do this or that. But yeah, CRA is watching. When we sell a property now, whether it’s principal or investment, we report to the CRA. And so they’ll determine whether this is a business, ongoing business, or you really kind of living here and renting out a portion. No, I really love it, Michael. We just have a few minutes left, believe it or not. But what is your kind of not to put you on the spot. What are the top two or three things that either you wish people really knew renters and you wish they knew it because they’re really afraid to get into the game or two. The biggest mistakes you see people make when they’re trying to get into their 1st, 2nd investment property?
Michael: Sure. Well, the first thing that I always like to share is when I bought my first property in the early 90s, I was scared. Like you wouldn’t believe, like throwing up scared. And I can tell you that the one thing I want to share with my clients that I share with your viewers is if you’re buying a quality property, you’re not necessarily finding that piece of crap the in worst street in the town. You’re buying a quality property in a quality neighbourhood, and you have the ability of just holding on that asset for a number of times. I can tell you that according to Andrew Carnegie, more than 100 years ago, 90% of millionaires got there through real estate. I’m not much of a fisherman, but if I were to be a fisherman, I’d want to go fishing where all the fish are. If I want to become a millionaire, if I want to become wealthy, why don’t you go where all the wealthy people are? So I’m a big believer in real estate as a result of that because honestly, I’m not going to be able to throw a 90 miles fastball. I’m not going to create some huge app that’s going to make me gazillions of dollars.
This is something that I can do and do very well. The one thing I will share as well, from a word of warning, is when you get to the point where you’re finding a tenant, my advice is to do your diligence, act like a business. You are a business and a lot of people don’t take their business seriously. You’re bringing in revenue like a business. You have expenses like a business. You are a business and so you have a client and that client is your tenant and you want to make sure you get the best client you can. You do every bit of diligence you can. I can tell you in Ontario there’s a real concern if you get in a bad tenant there could be some real challenges. So do your homework in the front end and get the best tenant you can and you’re going to have a very positive long-term experience and we’re going to throw it up here.
Rob: But you recently wrote a book 30 seconds or less. Tell us about it.
Michael: Yeah, I’m going to do a quick armchair real estate millionaire. It’s actually designed for people to buy their 1st, second and third investment properties. It’s something I’m really proud of. I’ve been in real estate investment world for a long, long time and I really feel that so many of the books talk about making it on to buy. I want to focus on long term hold long term wealth and really making a significant difference in yours and your family’s lives.
Rob: Perfect. Thanks, Michael, so much for being on the show.
Michael: I appreciate it.
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