Hi guys it's David Barnett from the investlocalbook.com blog site. As most of you know who are following
this blog, I recently moved from my apartment that I've been in for the last two and half
years to my new surplus military home that I bought in the sealed tender process. You
know, when I was emptying out that apartment, it brought back a lot of memories for me of
the period in my life when I use to be a real estate investor. I used to own several income
properties and I had a whole bunch of apartments. I want to tell that story, because I know
some of you have asked questions about my past and my experiences and things. So here's
the story of David Barnett as a real estate investor, and it started at the end of 2004.
I happend to read Rich Dad's Cash Flow Quadrants. I believe it was Robert Kiyosaki's second
book where he explains the cash flow quadrants and starts talking about leveraging and I
had reached the point where I knew that I wanted to leave my career with the Yellow
Pages and actually started to make a list of the things that I needed to do before I
quit my job and one of those things was getting mortgages because obviously if you don't have
a regular income it's hard qualifying for a mortgage.
So I had been very successful, let me backtrack a little bit here. I had been very successful
at the yellow pages and I was earning over hundred thousand dollars a year and I had
bought my first house in 2001 and real estate prices here are not that high and this was
before they became inflated by the 2000s real estate bubble. So I actually bought an old
war-time storey and a half home. It was a two-bedroom home, but it had a nice loft above
the garage which became my office. I bought that place in 2001 for 67 or $68,000 and I
made extra payments all the time and so by the fall of 2004 I had actually paid off that
mortgage. So I went to the bank and I got a home equity line of credit and I went out
and I started looking for rental properties to buy and I bought two triplexes within a
two-week period using the equity line of credit to make my down payments. So I was putting
down 25% on each building that I bought and I believe I bought one for about 130 and one
for about 139.
So that's two triplexes. So I had six units at that time and I went to work as a landlord
and I started to rent apartments and I started to learn the ins and outs of collecting from
tenants and the legalities of kicking someone out and the best practices as far as, you
know, renting apartments and leases and all that kind of thing. It was also one of the
first times in my life that I experienced buyer fever. One of the two triplexes that
I wanted to buy, when it was originally presented to me, there was no expense there for electricity
and I assumed that the tenants paid for their own electricity, and just before closing my
realtor informed me that there were four electrical accounts at the building. Every apartment
paid for their own electricity, but there was a house account as they call it for the
hallways and the hot water heater. Now I was so happy about the deal I had made I didn't
think to look into it any further. I figured, well hot water heater and a couple of lights,
how bad could it be?
Well I'll tell you how bad it was, here where I live the electrical utility is regulated
by the province and is owned by the province and so there are different electrical rates
based upon who you are. So residences pay a much better rate than businesses and since
there are three apartments in the apartment building, the power company will only allow
3 of the accounts to be qualified for the residential rate. So my account, which had
the hot water heater had to be covered under the business rate which was two and a half
times higher than the power rate for residences. So I was getting power bills for hot water
and the lights in the hallway and the coin-op washer and dryer, sometimes $300 a month.
Basically almost ate up all the cash flow. Now the other thing that I did wrong about
being a landlord is I fool myself into subsidizing the buildings with my own labour. So I would
go and mow the lawns, I would go do handyman things, I would go and do minor fix up and
repairs.
I would go and make sure that nobody left trash out behind the building and what this
meant was that I was losing hours of my life to get that cash flow every month and fooling
myself into thinking that was profit. Later on, after a couple of years when I got children,
when my ex and I were together and we had two children. I didn't have time anymore for
that kind of thing so I outsource that stuff to a property management firm and when I had
to pay their bills it gave me a truer picture of what the cash flow scenarios was like for
those buildings. Now after those two buildings two years later I then bought a fourplex.
I picked out one for like for 137,000 because it needed work. Now I had 10 apartments and
then eventually when, after my first daughter was born, we moved to a larger home and I
rented out my old house that old one I bought for 68 grand and I sold that one on a lease
option deal. I did a different video on that. But now we're starting to talk about getting
into 2008, 9, 10.
In 2009 I sold my first building. This was when interest rate were getting really low
and the value of these properties were starting to go up way more than what I would have ever
paid to own them. So I started to sell and this was when I started to come face-to-face
with liquidity risk, and I talk a little bit about liquidity risk in my book Invest Local,
but when you're a real estate investor and you read all these books about real estate
investing and you watch the gurus on the Internet and things, you start to think about equity
as though it's real money. So my biggest building, I knew that I could probably sell
it for about 180 grand, and at that time I think I owed about 130. So it's very easy
to fool yourself into thinking, hey, I have 50 grand tied up into that building. In 2011
my business brokerage wasn't doing so well and I needed to get my hands on cash, and
it was the same year that I decided to get out of business brokerage and I had to sell
one of my buildings rather quickly, and I was faced with paying a realtor.
I was faced with the legal fees. I was faced with the mortgage adjustment penalty, because
I had signed a term contract at a certain interest rate and the prevailing rate had
gone down below that. So I remember one of my buildings I sold that I believe to have
$50,000 of equity in. I think I walked away with like 31 grand or 32 grand, and it was
a real eye-opener to the fact that there's incredible friction in the market when you
decide to sell one of these properties. Huge learning experience for me as interest rates
went down and the values went up I eventually sold all 3 of the buildings and the people
who are doing the lease option on my old home eventually exercise that option as well, and
I got completely out of real estate, and if I look back at those years are realized that
it was exciting. It was an adventure. We never really got the appreciation in prices here
that people experience in other places, but just from a cash flow point of view you know,
investing 30 or 40 grand as a down payment and then borrowing another 100, 120 grand
of leverage to produce a cash flow of a couple hundred dollars a month.
I began to realize it just wasn't worth it. It was too much to put on the line to produce
a couple hundred dollars of cash flow and it was around that same time that I was starting
to perfect my own methodology for doing loans and leases and things and I realized with
far less money at a good rate of return I could produce the same kind of cash flow with
truly a more manageable scenario. When I lend someone money in a small business investment
loan, you know, I'm not getting calls about toilets. I'm not getting calls about broken
doors, I'm not getting calls about noisy neighbours or anything like that. It's very easy straightforward.
I collect a payment every month, and if something goes wrong I have to manage it, but apart
from one real estate deal, I haven't had any of these small loans or investments go bad.
So that is my experience as a real estate investor. I was in those buildings from 2005,
got out of the last one in 2011. So, over a six-year period I did that and it truly
was a formative experience. I think that if I ever get back into real estate, I will want
to do it from a much stronger equity position and I will want to make sure that I have a
manager in place.
What I mean by that is have like 50% down to put on one of these buildings, and I think
that that day is going to come when interest rates starts to move backup. When interest
rates move up and the value of these buildings moves down, I believe that a lot of them are
going to get foreclosed on by people you know, by banks upon people who are overextended
and that will be when real opportunity will rise to get into these rental properties.
Anyway, if you enjoyed my video and if you enjoy my other videos, please make sure that
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site investlocalbook.com. Thanks, we'll talk to you later.