Find something that works and keep practising.
Patrick: You’ve got a real system. You’ve learned enough about a specific methodology that you could just keep applying in and applying it. What I heard you say earlier and then you talked about student housing. That one unit that you bought student housing that you veered off course, given what you are getting good at. It is interesting.
What did you learn about student housing?
Because I know people listening to this some will have had success in student housing. Some are considering it. What was your lesson around the student housing investment?
Michael: I had two issues. One, is I invested actually in a top 10 REIN market are really Ontario and I like it really. I think it’s a really nice town, but I didn’t have my network there in the same degree. My goal at the time was to buy four or five properties and then really build a base there. That never actually happened. That was number one is, you need to have a good local base if it’s in a market that you’re not currently working. That was one of my lessons. I didn’t want to make a base there because I was doing so well in the Durham region, even eastward towards Northumberland and towards Peterborough.
I’ve done so well there that I didn’t want to divide my time any further. That was number one. Number two is, specifically with student rental is, again, a lot of the times when you see properties that are listed on MLS that have a really, really high cap rate or just simply show a high cash flow. Many times, I tell you, the realtors skew the numbers. I’ll use it as gently as possible. They basically fudged the numbers to make it look as good as possible. If everything goes absolutely perfect, this property could be cash flow positive. The student rental is a good example of that.
There were a number of times where I had vacancies over the summer, or there were other times where I had- I couldn’t get every room filled, or if I did fill one of the rooms by November, December one of the kids dropped out. I had a hard time chasing them down for rent even after they left, and I couldn’t fill the place again. All of a sudden I was only getting 50% or 75% occupancy on my property and the cash flow just simply went away. Not only was it a distance situation, I was having a hard time with my property management team, but I was having a hard time keeping full occupancy and I was doing a lot more repairs.
One more thing is, student rental is all-inclusive primarily. Whereas in my model I have the tenants paying all the utilities. I was covering from internet to cable to all the utilities. I just wasn’t making any cash flow and it just wasn’t fun. I got rid of it.
Investment models vary but they all can be successful
Patrick: What I hear in all of that is a little bit interesting as well as that you veered off your model, because there’s certainly people that we know, I’m sure you know too, that are actually very successful in student housing, but that’s their focus. They’ve tweaked it. They’ve refined it, they put the processes in place. That’s what they’re making work. This for you is more or less than a– Let’s stick to what you’re good at. In that way you want to stay good at. Student housing is a real departure from just a classic buy and hold manage, hang on to forever because it takes a lot.
There’s a lot more movement going on in this case the student housing because the number of tenants you have at any given time?
Michael: 100%. That’s exactly what it is. Again, to your point, the more I’ve learned and, again, I go to a lot of meet-ups certainly more than most. I’m sure you’ve heard the same tales as I’ve heard, where the person who’s speaking says, “I made millions. I lost millions. Then I made millions again,” and everyone applauds at the end. For his or her perseverance, came back and did their thing. I wasn’t quite happy with that answer.
“I like how you made the first couple of million. I like how you bounce back, but what was it in the middle that really happened that made you lose the millions?”
Actually, almost every time it was development deals, it was joint venture deals that went bad. It was taking on risk that they didn’t need to take, then they went back to the original model and they did well with that. That’s the lesson that I’ve learned over and over again to this story is stick to your model. Whether it was student rental, or a development deal, or some big land purchase, I’m nervous about any of that.
I’m sticking with my 1960s brick bungalow in the Ontario market, legalized those basement apartments, cash flow, refinance and repeat.
Patrick: Ultimately, there’s a saying that says, “Anything will work if you work it.” Whether it’s student housing, or single family, or multifamily, or fix and flip, when we get really focused on a model and say, “Okay, I’m going to own this,” then you refine it, you take it and you get all the things, procedures, processes in buying, and you actually take that business model and you work it. That’s really the focus that guys like you that I talked to, I see time and time again the guys who are the most focused and are the most committed to that particular model, whatever that might be, seem to always have the most success.
Patrick: When you’re dealing with new investors, do you see a consistent story that they’re telling themselves, or do you see something that you often see with newer investors that you’re actually able to say, “Okay, hang on, I get where you’re trying to go. Here’s some things to consider.” Is there something consistent that you would share?
Michael: For sure. A lot of people when they approach me, they’re enthused and excited about the potential cash flow that can come from real estate, they assume it’s going to be dead easy, they can borrow something to get 100% loan to value and still see incredible cash flow. One of the things that I try to teach a lot of my students or whatever is, I ask them,
“What’s your number one objective? What are you trying to get?”
We peel down the onion a little bit. It’s really they’re focused on wealth building right now, and long term they’d like to see cash flow, they don’t want to have negative cash flow, but they want to have enough cash flow to at least cover all of their expenses.
Like a Toronto area condo just doesn’t work because they’re having a dip in every single month. Once we get to what their real objectives is, which is in many cases building wealth, that’s when I can find them the right type of property. If they’re going in saying, “I need cash flow, I need it now,” then my model may not be the best one for everyone because we’re not seeing a ton of cash flow. It is covering yourself or making a couple hundred bucks a month, but it’s not like buying a Northern Ontario multiplex that on paper, or even a student rental, or an Airbnb rental, those can see far better cash flow numbers than what this can, but when I peel down the onion, the vast majority of my people and myself included, are more focused on building wealth and this is a venue they can actually do just that.
That’s probably the one thing I teach them more than ever.
I’ll share with you one of the speakers I give honestly it came from REIN, or just simply from just be doing a numbers is, if I bought a property today that just covered itself, paid almost no cash flow and held on to that property for 30 years, the mortgage will get paid off completely and based on an appreciation of a good geographic area, 3 or 4%, that property is going to have over a million dollars in earned equity over the course of that 30 years. In 30 years just buy one property to your portfolio, it won’t change your life that much, adding one property will basically give you a million dollars in 30 years.
But then, if you want to speed that up a little bit, I call this my Triple Crown club, where if you can buy three properties, the Triple Crown, you buy three properties, and then hold on to them for 10 years, that will also generate that million dollars in net wealth between those three alone. Even if you’re getting almost no cash flow, and you think three and a half to 4% appreciation, which a good market area has been growing at that rate. That’s the kind of wealth that we’re talking about here in the Everyday Millionaire.
Be laser focused on your cashflow goals
What I even tell people is, if you’re really focused on cash flow, if you buy two properties, and then hold on to them both for 10 years, you could sell one of those properties, which is something I learned at REIN, sell one of those properties essentially pay off the other one, and have one property free and clear. In 10 years you’re going to own a property free, clear and have a whole lot of cash flow. If you buy a five or six properties you can have three properties free and clear. If you’re focused on cash flow, I can get you cash flow in 10 years and in a great geographic location. If you’re just focused on cash flow today, then this might not be the model for you.
Patrick: It’s such a great conversation to have especially with newer investors. It’s funny that you should bring up that story. I’ll just add a little bit to really bring it to the next level. For me, when I’m hearing you speak is, first off, the question that always investors have to ask themselves to your point is,
“Why am I investing? Am I investing for future wealth or am I investing because I want income today?”
Because ultimately it changes the model. If you want income today you’re going to do assignments, you’re going to do fix and flips. You’re going to do a renovation job. You’re going to do something that generates income quicker and far easier.
If you’re looking for the long term wealth, buy a piece of property, manage it well and hang on to it. It’s a full spot. About 10 years ago when I first became part of the REIN Management team, almost 11 years ago now, I always remember a young lady in Calgary that approached me and said, “Patrick, I’m just starting out and I don’t know what to do.” I said, “With real estate I just know that that’s what I want to get into real estate. Well, what do you do for a living?” I think at the time she had been about 30 something 32-33, and I said, “What do you do for a living?” She says, “I’m a nurse.”I said, “Do you like nursing?” She goes, “I love nursing.” I said,
“What do you want out of real estate?”
She says, “I just want to create a future. I’m not married yet, but I know I’m going to have kids and so on.” She had a whole story around her, which is great. I said, “Here’s what I want you to do. I want you to go buy one property a year for the next three years. Do you think you can do that?” She thought about it for a minute and she said, “Yes, I can do that.” I said, “That’s all I want you to do. Go do that and then just go focus on your career to be an amazing nurse.”
In that same time, I did a little bit math with her, just like you just did, which was to say, “Okay, think about 10,20,30 years down the road.” The reason this story is relevant is that she recently approached me and she lives in Calgary. She actually bought five properties in the first three years, on her own by the way. I think mom and dad chipped in and did all the things that mom and dad’s do. Ultimately she hung onto those properties. She’s got them today. She’s accelerated some payments on them. She’s doing the math on them today and is just ecstatic about what that’s going to look like in year 20, because she just keeps doing the math on it.
That is the power of real estate and finding what methodology works.
I think that if people can really wrap their mind around it’s not a get-rich-quick plan if you’re going to do a buy and hold strategy. You might hit the odd home run, which is I’m going to ask you about in just a minute. Thanks for bringing that story up. As a realtor, you’re probably dealing with it all the time where you’re having those kinds of conversations.
Michael: I am. Actually, I often say this isn’t a get-rich-quick scheme, but it is a get rich for sure scheme. No, I do have that conversation all the time. Honestly, I think I’ve been doing this long enough now where when I’m encountering clients who aren’t happy with the numbers that I could provide, instead of trying to change my model to meet them, I just simply say, “Good luck to you.” I’m okay with moving on to another person. There’s always another person who’s looking to get what I’m offering. I do investor tours, which actually I did one this weekend. In the investor tour, this Saturday we had close to 20 people that came around.
We showed them legal two unit dwellings, as well as a number of bungalows with the ability to create secondary suites. Me and my team, we spend a fair bit of time with them in each of the properties that are for sale. To show them the model of how they can turn that into a property that can really build a lot of wealth. We just– It’s boring talking about the same thing over and over again. They were ignored to something, but I love it, but I can see people saying, “You do the same thing over and over again? What about, as you said, assignments? What about this development deal?” I say, “No, stick with this over and over again.”
You’re asked about home runs and I’m not really swinging for the fences. I’m swinging for those doubles into the gap and my rally’s pretty sustained.
Patrick: I think that’s just a great message because there’s going to be a mix of individuals who take it on differently. They literally are going to swing for the fence that’s their makeup and they’ll probably hit some home runs at doing it and they’ll make some mistakes along the way. That’s okay. What’s interesting for me around this is, that in the space of education, I’m watching all the time people out there talk like, “I’ve done 400 deals, I’ve done 300 deals, follow me, pay me and do this coaching program. I’ll show you how because I’ve done it 300 times.” Yet I sit with a REIN member who actually it’s not like you’re out there, you’re not that public figure to the degree that you’re out there bragging about how many deals you’ve done.
Here you are, as a realtor, just quietly doing what you know works. Teaching specific and guiding people through a specific model. Creating millionaires and creating wealth for people. It’s such an interesting perspective from my point of view, given all of the hype that goes along with social media and the ability to communicate with audiences. The need seems to make it bigger than it really even needs to be. You’ve just been transacting deals as a realtor. You haven’t had nothing to brag about in terms of saying, “I hit it out of the park.” I’ve had a couple of those who were really just lucky, I made a ton of dough and that was great, but that certainly wasn’t the intention when I went into the deal.
Michael: Sure. This might sound like a bit of a canned answer, but there’s been somewhere– Actually, my first attempt at doing a more active joint.– I’ve done joint ventures with partners where we’re both active, but this was the first time I was seeking out someone that was going to come in with most of the cash and qualify. This was back in 2014. I couldn’t find anyone at the time, I was actually disappointed with myself and with everybody else actually, that nobody would take on this deal.
Again, it took a couple of years, but basically, I made a couple of hundred thousand on that over the course of the first couple of years, in terms of appreciation and wealth. I think, “Man, I would have been given up 50% of the equity if I would have just taken somebody else’s down payment money,” which at the time was like 50 grand and down payment money. It just reinforced to me that just stick with my model. I’ve thought about adding more joint ventures and taking on people where I’m the expert and doing that.
We’ve both heard those speeches of the people with 300, 400 properties and many of them like I– I think we both know people personally that have almost gone bankrupt doing that. Just because they have 400 properties doesn’t mean they’ve built any wealth. Me with my one property a year, I’ve done okay with that.
Patrick: I was going to say, you being in Ontario and certainly the past four or five years, five or six years, I mean, there’s been some big run-up in that regard. Let’s talk about a little bit more around the entrepreneurial spirit that you’ve had. You’ve taken it on as a realtor, you build your portfolio, then you go back to work being a realtor, helping people, doing deals and all the things that go along with being a realtor and work in it. When you look at some of the investors that you’re dealing with, who aren’t full-time real estate investors, do you see where they get in their way?
Can people get in their own way, or do you see on a consistent basis where people get in their own way of going, “How do I have time for this?” Because that’s often a comment we get from people is, “I don’t have any time. How do I invest in real estate when I’ve got no time?” Do you have an answer to that question from your learning?
Michael: One thing that I do, which is maybe a little bit more unique than most, is the amount of hands-on approach that our team does with our clients. We provide them with copies of our leases. We provide them with some education as far as how to get the best quality tenants. We’ve worked with them to make sure with different contractors, so they get it legalized. I don’t want to say we’re a one-stop shop, because that’s maybe going a little bit too far, but we want them to be successful.
Then, we have client parties once or twice a year, where it becomes like a– We go to an OHL hockey game, three people watch the game and the other 50 people just talk real estate. I think that success breeds success, and actually very few of my clients are full-time investors. Most of them have their nine to five job, the ability of still qualifying for more properties. Because once you give that nine to five job up, the banks tend to not like you very much.
We just by continually spending time with these guys, bringing them to client parties and bringing them to different networking events. The vast majority of them when they buy one, they do get more and if they start getting overwhelmed– It’s funny. I’m probably the worst realtor in the world because I’ve had probably 20 times where clients that might have said, “I want to sell my property.” Then when I dig deep it’s usually because they’re having tenant issues and they’re saying, “Screw that. I don’t want to deal with these guys anymore,” and I’ve talked about selling and recommending property management or offering them solutions to solve the problems they’ve got right now because again, at the end of the day, I think their goal of building wealth hasn’t changed. I just try to find ways of getting them to that point.