# Where do investment property down payments come from?



## sevenpoint (Jul 31, 2015)

Hi all, I have two rental properties in calgary, each legally suited up/down totaling 4 units. 

Home 1:
Purchase Price: $300000
Mortgage: $922
Tax: $200
Ins: $100
HELOC: $308
Rent up: $1295 + utils
Rent Down: $1075 + Utils
Garage rent: $100

Cash flow: +$940

Home 2:
Purchase Price: $400000
Mortgage: $1468
Tax: $250
Ins: $130
Rent up: $1195 +utils
Rent down: $1100 + utils
Garage rent: $200

Cash flow: +$647

I put some work into the first home and increased the value by about 100k, which is why I have a HELOC on it. I used that HELOC as a down payment for the second home. The second home was turn key and has not yet increased much in value so getting another HELOC on that property isn't an option.

I feel pretty good about the two purchases, both homes are on good sized and zoned land and have redevelopment potential. As rental properties there is decent positive cash flow. Problem is, ideal total cash flow for both homes is $19000 a year, after tax $13000. In order for me to afford a down payment for future investing, it would take me about 6 years to build up enough for another 80k down payment. That seems way too long to wait and I feel that in order to be a successful real estate investor I would have to move faster than that. 

I don't feel I will have a problem getting future mortgages, but is there something I'm missing when it comes to funding a down payment for property 3, 4, 5...?

Any pros want to chime in?


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## Potato (Apr 3, 2009)

6 years is very good! Consider that it accelerates if you use this strategy: 4 years for the next one, 2.5 years to the one after that, then one every other year... Plus you can save from your day job, etc.

I don't see an allowance for vacancy or maintenance in your numbers...

[I will sit on my hands about the wisdom of a one-asset strategy like this.]


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## sevenpoint (Jul 31, 2015)

Potato said:


> 6 years is very good! Consider that it accelerates if you use this strategy: 4 years for the next one, 2.5 years to the one after that, then one every other year... Plus you can save from your day job, etc.
> 
> I don't see an allowance for vacancy or maintenance in your numbers...
> 
> [I will sit on my hands about the wisdom of a one-asset strategy like this.]


Thanks so much for your response. And for not scolding me too much on my strategy.

You're right, I haven't allotted for vacancy or maintenance in those numbers. I've been fairly blessed so far not to have to spend much in those areas, but I should account for about two months lost rent on each unit to account for those things.

As for diversity, the way I see it I've invested about 100k of my own money in RE, if you remove the principal portion I'm currently making about a 15-20% return on my investment. I do have stocks, a small business, a day job and RRSPs. I just like to compartmentalize each investment to make sure each is self sustainable. I like real estate best right now for a few reasons so I'm willing to have that be a heavier part of my portfolio, but I'm not currently willing to take profits from one and put into another, besides savings from my day job. 

Still, to me 6 years seems way too long. I see people on here with 9, 18, 70+ units. I see how the time between purchases decreases each time, but I can't see how even with that time that I could get to 70+ units before I'm 100 years old.


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## OurBigFatWallet (Jan 20, 2014)

Out of curiosity what part of Calgary are the rental units in? What is your strategy assuming the Calgary market starts to go down a bit with the price of oil, I'm assuming a long term hold for both?

You mentioned RRSP, do you have any investments in your TFSA?


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## sevenpoint (Jul 31, 2015)

OurBigFatWallet said:


> Out of curiosity what part of Calgary are the rental units in? What is your strategy assuming the Calgary market starts to go down a bit with the price of oil, I'm assuming a long term hold for both?
> 
> You mentioned RRSP, do you have any investments in your TFSA?


No problem!

One property is in the NW, somewhat close to LRT. The other is central north, lots of redevelopment, right off of proposed Green line LRT. I only intend on holding long term as long as they're making money or if I get an offer I can't refuse, but they are by no means flippers. Turning a single family home into a multi family is generally not a good strategy for short term flips. 

As for TFSA, I do use it a bit but for shorter term plays to avoid capital gains, but don't max it out like I do my RRSP simply because with all my sources of income my personal tax is quite high and I like to max my RRSP to lower it.


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## Just a Guy (Mar 27, 2012)

You may want to take a look at www.easysafemoney.com, he's got some ideas on where to find money from. As stated before, 6 years is not a long time in real estate, heck that's not even the real break even point on most places.

I think your real issue is the price you are paying for properties. For $700k you got 4 doors. That's a pretty hefty price per door. I know Calgary doesn't have a lot of cheap places right now (standard arguement), but that doesn't mean you need to buy in Calgary right now. Getting into the market at any price is never a good investment strategy no matter what you are buying.

There are other possibilities out there. I'm currently working on trying to pick up 6 one bedroom apartments for about $400k, but there seems to be some complications on the seller's end. For the same 80k you need for two more doors, you could have 6 doors making about $1000/month rent each, it's a much better investment in my opinion. 

One of the rules of real estate is you make your profits when you buy. I'm not saying you deals are terrible, but patience is often rewarded in real estate. Wait for the right deal and be able to pounce when it comes up.


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## CalgaryPotato (Mar 7, 2015)

Just a Guy said:


> There are other possibilities out there. I'm currently working on trying to pick up 6 one bedroom apartments for about $400k, but there seems to be some complications on the seller's end. For the same 80k you need for two more doors, you could have 6 doors making about $1000/month rent each, it's a much better investment in my opinion.


That is definitely a landlords dream if you live in a place where you can pick up 1 bedroom apartments for $70K each and rent them out for $1K a month. Where in Canada is that?

But you have to remember that it's not easy to rent out properties in a different part of the country though.


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## jaybee (Nov 28, 2014)

Just a Guy said:


> There are other possibilities out there. I'm currently working on trying to pick up 6 one bedroom apartments for about $400k, but there seems to be some complications on the seller's end. For the same 80k you need for two more doors, you could have 6 doors making about $1000/month rent each, it's a much better investment in my opinion.
> 
> One of the rules of real estate is you make your profits when you buy. I'm not saying you deals are terrible, but patience is often rewarded in real estate. Wait for the right deal and be able to pounce when it comes up.


Those are some nice numbers. When I was a landlord, I found that the best numbers also came with the worst tenant issues. Are these properties in Atlantic Canada by any chance?


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## sevenpoint (Jul 31, 2015)

Just a Guy said:


> You may want to take a look at www.easysafemoney.com, he's got some ideas on where to find money from. As stated before, 6 years is not a long time in real estate, heck that's not even the real break even point on most places.
> 
> I think your real issue is the price you are paying for properties. For $700k you got 4 doors. That's a pretty hefty price per door. I know Calgary doesn't have a lot of cheap places right now (standard arguement), but that doesn't mean you need to buy in Calgary right now. Getting into the market at any price is never a good investment strategy no matter what you are buying.
> 
> ...


What a great reply, and thank you for the suggestions. 

I think I got pretty good deals FOR CALGARY, and because I believe both pieces of land do hold pretty good redevelopment potential I feel ok about them. But you're right, if looking simply as CAP properties, 700k for 4 doors is not that great. And at this point, I'm thinking CAP all the way on my next purchase. 

I've been thinking about getting into small apartment complexes and such out east. Windsor for example has some 700k 12 plexes. While having the highest vacancy of ON, it's still only 5%. Current kijiji averages for the area look around $600-$650. So if we assume at 5% vacancy that approx 10-11 units will be rented at a time, then that's $6000~ a month, or $70k a year which sounds great to me. I would just have to figure out a lot of moving parts, property managers, etc in order to start such an operation. 

Even still, I'd need enough for a downpayment which is where I currently am in the whole thing. I'll check out the site you suggested.


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## Just a Guy (Mar 27, 2012)

I do tend to look around at a lot more areas than the typical guy. These are in a downtown core by a university. The current owner wanted out as a package deal and didn't want to deal with selling individually. They are worth more, but the circumstances of the sale warranted a discount. A win-win scenario.


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## jaybee (Nov 28, 2014)

@Just a Guy. Do you manage your own properties? I tried that and I was dreadful at it. Didn't have the stomach to deal with the tenant issues. I sold out, and made a nice capital gain after a few years. Some major economic announcements were made in my area, and the speculators went nuts.


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## Just a Guy (Mar 27, 2012)

I did initially, and developed a system to deal with tenants. I screen tenants, I design and decorate in a standard way, I had contractors I used regularly, etc. it ran like I run a business. You're right though, being a landlord isn't for everyone...but then again neither is being a day trader. You have to know what kind of investor you are, you rarely make money long term if you're fighting your personality. 

Now a days, I spend more time at the looking, dealing with the banks, making sure the properties are properly run, etc. through my years, I helped someone start a property management company and moved a lot of business their way. In return, they take extra care of my stuff.


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## jaybee (Nov 28, 2014)

I wish I had looked at more than just the numbers. I truly miss the cash flow that my properties provided, but I had no idea how to operate them. Thankfully I made some dough, because it damn near killed me LOL


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## Just a Guy (Mar 27, 2012)

I should also mention that the deal is coming out of a failed partnership...hence the issues with the deal. Nothing is easy, but it's a lot less work than any job I've ever seen.


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## jaybee (Nov 28, 2014)

That's where the opportunities lie. Situations like that. Good luck with it.


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## GPM (Jan 23, 2015)

Landlord Rescue Blog (Ontario not Alberta), has a good cap rate calculator/spreadsheet with many other features like maintenance costs etc


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## Rusty O'Toole (Feb 1, 2012)

If I lived in Calgary I would give you all the down payments you could use. I love real estate as an investment, hate managing it. Maybe you could advertise for investors locally.

A few years ago I suggested this on a real estate forum. Everybody said that is impossible, nobody will give you money to invest - except one person. A doctor chimed in and said he would gladly put a 25% down payment on anything, in return for a 50% ownership stake. 

He only had 2 conditions: the property had to be within 40 minutes of his home, and he had to inspect the property first. I found it interesting that he did not care about the buyer, credit rating, etc. but was mainly concerned about the property.

There are doctors planning for retirement that do not need more income, but could use a safe, secure investment that will pay a big capital gain when they retire in 20 years. There are old guys, and gals, who couldn't sleep at night if their money was in the stock market, but who understand houses since they have lived in them all their lives.

You only need to find a few investors to buy all the houses, or half houses, you want.


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## Rusty O'Toole (Feb 1, 2012)

There are other strategies like rent to own, lease option, vendor take back mortgage etc. that require little or no money down.

As long as you keep on top of management, and have positive cash flow you are in a safe position.


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## Westerly (Dec 26, 2010)

OP, I like that you have a strategy regarding building your portfolio. I'll think about that and maybe look at a new property every 5 years. We're in BC, have 3 properties, one a 5 plex. Because the 5 plex it is more than 4 doors we have to have it professionally appraised for mortgage purposes (even to take a LOC), have higher legal fees, and pay higher mortgage rates. We also are held to lower loan to value and based on cap rate. The cap on the 5 plex is very low and as such we cannot borrow anywhere near its FMV. According to the broker, this is across Canada. 

When purchasing our 3rd property we also had a hard time getting a mortgage with 20% down. The broker was pushing for 30%. They relented but it's seemed apparent that the more successful you are the higher the bar is raised - that is, I'm sure, until you breakthrough middle income.

A little off topic but for future consideration, the broker also told us that as soon as you hit 15 doors you are considered a "commercial operator" and all mortgages are now treated as commercial. Higher down-payment requirements, higher interest, you pay broker fees etc. We didn't discuss it much beyond that so don't know of the caveats etc,but certainly worth being aware of. 

Further to a couple posts above, I would also be factoring in vacancy, R&M, and the dreaded income taxes when looking at cash-flow.

Regarding where do down-payments come from, we will be using the equity in our principle residence for all future DP's.


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## Just a Guy (Mar 27, 2012)

The 15 doors is more a guideline than a rule. Some banks it's 5 properties max. Of course, even banks who quote those limits don't always abide by them. I was originally told 5 doors, went past that. Then I was told no more period... Didn't stop me. Now, with the current guy I've got, he says 15 million in property values (at 80% LTV) will probably be my limit for non-commercial mortgages, unless I buy a commercial property. He likes the cash flow my properties generate and is able to sell it to the underwriters. 

I think not taking "no" for an answer is part of their screening process.


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## Westerly (Dec 26, 2010)

That is good insight JAG, thanks. We're just starting to dig in with mortgages and have much to learn - perhaps the biggest is to understand our leverage with the brokers.


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## Just a Guy (Mar 27, 2012)

You really don't have any leverage with the brokers. It's the "golden rule", he with the gold, makes the rules, and the rules change all the time. 

The trick to remember is, those with the gold always want more. So they may say "no", but, in reality, they want to say "yes". They are greedy, and the only way to make more is to lend it out. I've run into roadblocks, some delays, but I've always kept asking and always found money from the banks. I've never had to go to any secondary lenders, or pay premium rates. Of course, I also find properties which have incredible cash flows compared to most.


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