# Prospective first time real estate buyer



## ChaChing (Sep 16, 2017)

Hi all, I’m a new member to the forum. I realize that there is a similar post regarding the same topic from a different member a few weeks ago, but my questions are some what different. So, I wanted to start a new thread and am looking for advice/comments/suggestions relating to my specific situation.

I’m from the west coast and currently still living with my folks. I’m thinking of purchasing an investment property and I’ll start small with a one bedroom condo. In my area the average price is ~400K.

I have compiled a few questions and they are as follows:

1. Where to go first: agent or the bank?
I’ve been told by some friends that the banks won’t even consider talking to anyone unless they have put a deposit down on a property. Elsewhere, I have heard some suggest that you get a pre-approved mortgage before looking for a property. What is the usual protocol?

2. Who to borrow from?
I don’t have 20% down saved up yet. I know what independent brokers are and I think the big banks won’t lend to me so I’m leaning towards the help from an independent broker. To make things worst, for the past few years I’ve been going from one contract job to another. I’ve found a permanent job now but have only been working for 4 months so far. Doesn’t make me an ideal person to lend to. Are there other lending options that I’m not aware of that’s available out there? 

3. Friend as agent?
A high school classmate of mine is now a realtor. In terms of finding an agent, would it be wise to work with someone you know? I understand that sometimes, it could work against you because they might take advantage of the fact that there’s familiarity.

I understand there are other things that need consideration as well (property tax, utility bills, strata fees, insurance, rent charged etc). But, my focus right now is to find a property and have someone willing to lend to me.

Thanks for reading.


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## nobleea (Oct 11, 2013)

ChaChing said:


> I understand there are other things that need consideration as well (property tax, utility bills, strata fees, insurance, rent charged etc). But, my focus right now is to find a property and have someone willing to lend to me.
> 
> Thanks for reading.


You have it backwards. Look at the other things that need consideration first, along with the rent you can get for it, then if it looks good you can start on the search.

Unless it rents for 3500-4000$ a month, there's no way it's a good investment.


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## Just a Guy (Mar 27, 2012)

First off, you need to know what's involved in owning an investment property. As nobleea pointed out, what you're looking at will most likely lose you money, not make you money.

As for your questions...

1) you won't be a good mortgage candidate. This doesn't mean you won't qualify for a mortgage, just it won't be easy and you'll need a fairly specialized person to help you. I imagine you don't have any relationship with a bank or a mortgage broker, so you'll have a lot of problems.

First thing to realize is, although they'll all claim to be able to help you, that's not true. There are bankers and mortgage brokers who have been around and realize ways to get things done for difficult cases that the average ones won't know about.

The next thing to be aware of is, just because they can get you a deal, doesn't mean it's a good one. Since you don't know a good investment (based on your example of a 400k one bedroom), I fear you may get a mortgage with something like a double digit interest rate as well...

2) you borrow money from people who lend you something with the right terms. Building upon my last answer, if I give you money at 10%, you probably don't want it. If I give you some at 3% it may be worthwhile. Of course mortgages are more than just interest rates, they are complicated contracts, you need to understand everything you are agreeing to and it needs to be good for you.

3) you need a realtor who can help you make the right choices. These tend to be extremely rare...in fact, I've had to train all the ones I use since their motivation is to sell you properties, not sell you good properties. Your agent, for a $400k property is looking at making nearly $15k when you buy...is he really going to tell you you should be buying a 100k property which makes him only $3500?

A final thought are you okay with losing your friend? When business deals go bad, or you think they've gone bad, it usually costs you your friendships.


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## Pluto (Sep 12, 2013)

In addition to what's been pointed out above, I think you need to consider the very high probablility that the RE market in the west is about to enter a a lengthy period of time where RE prices are going to go flat, if not, down. Rising interest rates plus tougher lending rules will negativly impact the RE market. I think you need to look at a long term price graph, say 30 years, to get an idea of how long a RE market can go flat, meaning, no price appreciation. RE can be profitable, but this is the wrong place, and wrong time. The appreciation of RE prices over the last 15 - 20 years is very likely over. I think you can look forward to 5 - 10 years of a flat to declining market.


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## ChaChing (Sep 16, 2017)

I really appreciate the comments and suggestions.

Yes, I really need to crunch the numbers and see if I'll be cash flow positive if I were to decide to do this.

No doubt, I'm a bad candidate for a mortgage. I knew that all along.

Just a Guy - I took a look at the easysafemoney website and it's quite interesting. I remember reading in one of his posts which he claimed to have found 100% financing for one of his rental properties. Am I reading this right? I have no intentions of getting his book or anything like that but 100% financed? Private lenders maybe?

Also, I remember reading one member posting that while they were still in college, he/she was able to find financing for a rental property but at 11%. I'm just curious as to what entity would lend to a student to buy real estate?


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## Just a Guy (Mar 27, 2012)

100% financing is very possible, I do it all the time. I do it by buying undervalued properties outright, renovating them, then getting a mortgage. The increased value of the property is more than the money I put into it. For example (numbers simplified for math), I buy a property for 75k, put 5k into it, its appraised at 100k, an 80% LTV mortgage gives me 80k financing or all the money back. 

The way the book suggests is to get a mortgage for as much as you can and borrow the rest through other means (heloc, unsecured line of credit, etc). 

There are many people who'll lend you money as a student. You're putting a major property up as collateral. You default, they get the property, you pay, they get double digit returns...it's kind of a win win scenario for them. You on the other hand are in a lose lose situation.

The biggest mistake made by investors is getting into the market at any cost. His market is incredibly hard to make money in, it's at or near a peak, there's not much meat left on the bone, people before you ate the steak...it's mostly gone now. Everything you heard about how great the steak is was told by those who already consumed it.


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## Mukhang pera (Feb 26, 2016)

ChaChing said:


> Also, I remember reading one member posting that while they were still in college, he/she was able to find financing for a rental property but at 11%. I'm just curious as to what entity would lend to a student to buy real estate?


I was probably that member. My wife and I bought a triplex in the Kitsilano neighbourhood of Vancouver when at university. Kits covers a large area, so let's narrow it down to West 7th and Dunbar, but not the pricey "north of 4th" area. We had just moved from Ontario where we had been undergrads for a few years. We were both attending grad school at UBC. We had some Ontario student loan money in hand plus some savings we used for a down payment. The "entity" that gave us the loan was the property vendor. She was splitting from her husband and the place had been on the market for a few months. The Vancouver market was soft at that time. The asking price was $74,900 and she agreed to accept $70,000, financing the bulk of it by way of agreement for sale (essentially a mortgage) for 5 years at 11% (which was about the going rate at that time and likely to be that again soon). My parents, in Toronto, thought we were nuts paying $70,000 for a house, having paid $20,000 for their Toronto house and having sold their West Vancouver home before that for $11,500 (purchased 5 years earlier for $8,500). They were no doubt firmly in the camp of Rusty O'Toole, who recently said in another thread, about a triplex being sold for about $1 million:



Rusty O'Toole said:


> In this day of low interest rates the old rules don't hold as much water as they used to. But yes, that is a ridiculous price and the chance of making any money off the rent is nil. Either the buyer is depending on the 'greater fool' theory of selling for an even more ridiculous price in a few years, or doesn't understand the concept of investment returns. In duplexes and triplexes this is not unusual. They usually sell to amateur investors who don't know how to figure their returns or don't care. They see themselves living in one unit and getting cheap rent by using the rent from the other units to pay the mortgage.


Fools that we were, we rented the basement and the top floor, using the larger 2-bedroom main floor for ourselves. Our monthly payment on the A/S was $500.52. The rents covered that and then some. In our ignorance, we were happy with that. The 2017 BC Assessment value of that property is: Land $2,232,000; building $45,500. If we were not amateur investors, stupider than a bag of hammers, imagine how much better we might have fared!

While times have changed, I believe it is still possible to obtain vendor financing. Some older folks cashing out of their houses like to carry paper. They do not want to put the sale proceeds into the stock market or futures trading, etc. They know they can get a higher interest rate than they can get at a bank, they know their properties and are comfortable with the security, etc. But it requires a purchaser who is willing to spend a bit of time shopping around for the right deal.

I know of one couple who sold their Vancouver house and retired to northern Vancouver Is. The house was "dated" as the real estate tv programs like say when any of the interior is more than 5 years old. I handled the conveyance and mortgage back. The purchasers were in the business of flipping, essentially. After they upgraded and sold, the older couple did not want to be cashed out. They were very happy to continue to finance my clients for a number of years, porting the mortgage to each successive property. To top it off, they did not much care that they were providing about 95% financing some of the time. The vendor of our Vancouver triplex was like that. She did not want a large down payment. She wanted as many dollars earning 11% as she could.


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## ChaChing (Sep 16, 2017)

Just a Guy said:


> There are many people who'll lend you money as a student. You're putting a major property up as collateral. You default, they get the property, you pay, they get double digit returns...it's kind of a win win scenario for them. You on the other hand are in a lose lose situation.


This reminds me of a guy I used to work with. He wasn't a student but mid 20's with a contract job. Decided to invest in a one bedroom condo and got his dad to cosign. I haven't spoken to him in a while but I think it'll work out for him.


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## ChaChing (Sep 16, 2017)

Mukhang pera - Thanks for your response and the interesting story behind how you got started.
Kits is a great area and so is Point Grey. At today's prices, I can't afford anything there. But, hey I'll drive by the area every now and then to enjoy the view of the beach on a sunny day. Then again, if a crash were to happen, it won't drop to the price level when you first made your purchase. If those prices were to show up today, I would be all over it.

About vendor financing, I've never knew this option exists until today. Maybe it's not commonly used in Canada? In such a hot market, I'm assuming not a lot of sellers will offer this option. I can say that if I were to sell a property that I owned, I would want my money right away. But then I see your point about some people preference for not putting it in stocks but getting monthly income at a higher rate than putting it in the bank. 

What advice would you give to someone like me? Did you get your MBA at UBC?


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## Pluto (Sep 12, 2013)

https://www.google.ca/search?q=vanc...ICygC&biw=2016&bih=1049#imgrc=ZKbFEQ4k5LVKJM:

That link shows some Long term price graphs for Vancouver to illustrate what I am talking about. Looking at the 1994 peak, its clear there was a substantial decline after that, and it took to about 2003 to nominally break even. You do not want to buy near a peak and wait that long just to break even. 

there is a day of reckoning coming, and my best guess is 2018. it could take 5 years or more to get anywhere close to todays prices. If I was of a mind to get into RE investing again, I wouldn't touch this market. Instead I'd wait and circle like a Vulture keeping an eye out for distressed sellers in one or two years.


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## ChaChing (Sep 16, 2017)

Pluto - thanks for the link. 

Your words of caution reminds me of the famous Buffett quote: "Be fearful when others are greedy. Be greedy when others are fearful". I couldn't agree more.

I spoke with a few elders who have bought investment properties within the last two years and they all give the same reason for the purchase: "There aren't anymore land left", "Real estate always go up", "Even if the market were to crash, it wouldn't dip that much".

No doubt, I would like to find a bargain and buy when it dips. But when that is, no one knows. I hope it comes soon though.

Now, if the market were to dip significantly, a lot of renters who wanted to buy will enter the market. What the interest rate would be at that time, I don't know. But, if some one were to enter the market during that time to buy an investment RE, they would have a hard time finding people to rent would they not?


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## Pluto (Sep 12, 2013)

As you can see from the historical graph, RE does not always go up. A dip is like 5%, and not that big of as deal, but 20 - 25% down is serious, and I think that's what happened in '94 - to the bottom around 1998. So how would you feel if your 400K condo went down to 300K, and then your renters left and you had to rent it out for less money, and then wait years to break even. 

You can find renters in any city. But if you over pay for a place, you will always be under pressure to get high rents and that might not be possible in a downturn. If your tenant loses their job in a downturn, they are gone and you are left trying to rent a high priced condo in a bad economy. Better to wait and buy when times are rotten, then ride the next cycle up.


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## Mukhang pera (Feb 26, 2016)

ChaChing,

Times have changed pricewise, although when I was first in the market I would never have believed we would see interest rates below 10%. 

My guess is that vendor financing is not much more or less common than years ago. It is probably more common when conventional loans from conventional sources are harder to get. Then vendors have to do more to get a sale. More creative financing emerges. But, as I said, there will always be some, who have no plans to put their sale proceeds back into the market, who will actually find it suits them to finance a sale. I was recently asked by someone to finance a sale of a property I own. The property was not even listed for sale, yet he approached me and asked me (i) to sell, and (ii) to finance his purchase. I chose not to sell. That brings up a teaching I wish I had learned earlier in my investing life.

The lesson I learned came from a gentleman that I approached asking him to sell me some land. It was a good quality waterfront parcel on a gulf island, the kind of place that changes hands seldom and sells quickly if listed. So I did some title searches and made some phone calls. It was an interesting conversation with the owner. He told me that he grew up being taught the maxim: “You always _buy_ land; you never _sell_ land.” Words to live by.

I knew that he was right. Back in the 80s, my wife and I bought and sold 7 houses in Vancouver, basically flipping them. We thought we were pretty clever, making maybe $20,000 or so a pop. It did serve to allow us to buy some gulf island waterfront and build a nice vacation home on it, but our big mistake was in not simply retaining even one of those properties. Today the worst of the lot would still be worth well over $1 million. 

I had a law practice in them days and a client was a refrigeration repairman. He drove around in his van all day, calling at homes and repairing refrigerators. He was not even a high-end commercial type of refrigeration expert. He made a decent living, but no more than that. But he saved his pennies and every time he had enuff for a down payment, he bought a house on Vancouver’s west side. When he was about age 35 he came to me for a pre-nup. So I got him to provide me with a complete listing of his assets. He gave me a list of about 8 Vancouver houses. All were then worth about $130,000 - $150,000 and all were mortgaged and rented. If he is still out there and still has those houses, they would be long since paid off and his net worth in those houses alone would be in the range of $20 million. At the time of the pre-nup, the rents were probably just barely covering expenses. But patience has its rewards.

I have made up to some extent for my foolish youth and, since taking to heart the lesson about never selling land, but always buying, I have recouped somewhat. I now own more timberlands than anything else, since that’s the milieu in which I find myself and I have found it interesting and I have learned a lot from some with long experience I lack. I have had a few good years of late, but that might not last. The U.S. might bar anymore Canadian softwood imports for eg. It might take awhile to develop other markets, or should I say develop them more fully. 

I still regret not keeping one Vancouver house. Buy in when you can. I think I would resist trying to time the market. Most here say that Vancouver is now hyper-inflated and you should postpone a purchase for, perhaps, years. Maybe so. I’ll give them all credit for being brighter than I. They probably never did anything so inimical to the accumulation of wealth as to buy a triplex. Maybe JAG can offer some tips on how to buy wholesale as he does, thus insulating you from a price plunge. He also employs what has been called hereabouts the “1% rule”, which ordains that you should not buy a rental property that cannot be rented at a monthly rent less than 1% of the purchase price. A good rule to follow, I am sure.

While the 1% rule is perhaps a fine starting point, I am unsure of what one is to do if the property at hand refuses to live by the rule. Take the Kits property I purchased for $70,000. At the time, it paid obeisance to the 1% rule. Had I not lived in one unit, I could no doubt have rented the whole for $700/mo. or better. But what now? The 2017 price is nudging $2.5 million. I doubt it can today be rented for $25,000 a month. Que faire? Just what, pray tell, is one to do if met by the misfortune of owning a house that ceases to play by the rules? A house that goes up in price faster than the rents. A financial debacle to be sure. I suppose one must endeavour to salvage the situation by selling for $2.5 million and buying 25 houses for $100,000 each. 

My advice to you ChaChing me lad (and I’ll assume you retain some youth, since you say you live with your folks) is to get into the Vancouver market when you can, without overthinking whence goeth the market. At the same time, I am not urging reckless imprudence. Do not buy a property to rent if you will be subsidizing the rent in large amount or for a long time. A brief period of negative cash flow is not the horror that some will say. But, of course, that depends on your situation. If you have surplus cash of $10,000 a month, keeping up a place with a negative cash flow of $100 a month is not the end of the world. If your finances are already marginal, that’s another story. 

The best thing about your situation is that time is on your side. Pluto has cautioned that you can look forward to 5 - 10 years of a flat to declining market. I would not sit on my hands for that 5 -10 years. If I could, I would still buy in, unless you are looking at being sucked dry by the place for 5 - 10 years. But in that time rents will assuredly go up as will your overall income, most likely. When we bought our Kits house, the first year was hardest. I parked my car in the backyard for a year because I did not have the $100 ICBC wanted for insurance and licence. To us, having the house was more important. In short, we sacrificed to get it. Very well worth it, at least for us. 

I’ll go so far as to say that even if you blow it completely and buy at a peak, you are young enough that, in the fullness of time, it won’t matter a lot, particularly for a place that is rented and paying for itself. 

When we sold our Kits house in 1979 for $95,000 and bought in Mackenzie Heights for $110,000 (assuming a B of M first mortgage of $62,000 with 3.5 years left on it at a low 10.25%...yippee!), the market was just taking off. Within a couple of years houses like it were going for $275,000. Then the prime rate soared to 22.75% and Vancouver house prices were literally cut in half. I am not sure the graphs show just how bad it was. I was there. The graphs were not. The house across the street from us (a newer house, estate sale) was listed, just as the market peaked, at $450,000. They turned down $419,000. The place sat empty for 2 years and finally sold for $250,000. 

Before the crash, of west side prices of over $200,000, a colleague said such prices were “just silly”. Perhaps she was right, but we sold that $110,000 house in 1989 for $525,000. So, my point is, even had we bought in about 1981 at the “silly” price of $275,000 and seen the price drop to $140,000 (as it did) by 1983, so what? The place still fetched $525,000 in 1989. It dropped again in the 1990s, as Pluto suggests. A few minutes ago I went to BC Assessment online. It values that property as of July 1, 2016 (don’t know why not 2017) thus: land - $4,021,000; buildings - $1,686,000; total - $5,707,000. When we sold for $525,000 in 1989 that was land value. The 1914 bungalow we lived in has been demolished a monster house now occupies the lot. No more side yard with fruit trees, etc. Progress. But, again, how awful would you feel if you had bought in at the “silly” 1981 price of $275,000 and were now sitting on $4 million? I would not feel too silly. 

I also recall very well of the early 80s crash many, many, lamenting “Oh, that’s it. Vancouver will never, ever see those prices again. Only fools buy real estate. I never will. Blah, blah.” 

For those of us living on the west coast, I regard it as an important part of an investment portfolio to own a house in one of the major Pacific rim gateway cities: Vancouver, Seattle, Portland, San Francisco, Los Angeles, San Diego. They will rise and fall with the economic tide, they will have their “silly” years, but they will always be desirable to a large number. Property in those cities will always be rentable and, over time, rents will rise and there will be capital appreciation.



ChaChing said:


> What advice would you give to someone like me? Did you get your MBA at UBC?


Not sure what more advice I can give, since you have expressed scant details of your own situation.

As for my formal education, I hold bachelor's, master's and doctoral degrees from 3 universities. My master's is not an MBA. Much more rare. I won't say here, because there are probably no more than a couple of dozen people in Canada who hold the unusual combination of degrees I hold and knowing what they are would allow some to recognize me.


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## Just a Guy (Mar 27, 2012)

I must admit I'm much more of a conservative investor than Mukhang pera. While real estate has a tendency to increase in value, I don't have a crystal ball that accurately predicts the future, so I don't ever plan for that to happen. When I buy an investment, it needs to make money for me today and going forward. I don't care about possible future paper gains, if they happen it's a bonus, but then I'd have to sell so I'd be losing my cash flowing investment so it better be worthwhile.

When I started investing, I had no money to lose so that has become part of the foundation of my investment strategy. I could have made more money taking more risks (heck all of my properties are worth more on paper than what I paid for them, had I bought more earlier I'd be worth more today since things have gone up, up, up). However, had things gone differently, (look at the states in 2007/8) I also could have taken a financial bath.

I tend to use a lot of common sense in investing, for example while I like Apple and I don't see any reason for their stock to decline, I also can't see it as the "world's most valuable company". Would I buy in at today's price, probably not, do I think they'll tank, probably not, but the price is just too high in my books.

The same goes for a 400k 1 bedroom place, it just doesn't make any sense that people will continue to pay such a ridiculous amount of money for basically a shoebox with lots of neighbors. Does that mean people won't, not at all. The world is full of stupid people. Sure, if the place goes to a million, you'll probably call me stupid for not getting in when it was 400k, but I also won't feel dumb if it corrects to $200k.

In the end, you'll have to find an investment that you are comfortable making, ignore what others are saying. I remember when I bought my first rental for about $50k. People thought I was nuts even thought it rented at the time for $700/month. Today it rents for $1100/month and is probably worth $250k (which tells me I should probably sell it and buy 2-3 new places, but it's all cash flow), yet I still look for places under 100k to buy (and there aren't many of those in any market, so selling to buy won't work and if I find places I can still get 100% financing so there's no need to sell).


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## ChaChing (Sep 16, 2017)

Thank you all (Pluto, Just a guy, Mukhang pera) for sharing your comments, perspectives and interesting stories.

All of the advice/comments given are worthy of consideration. 

I guess, at this time, I will have to sit on the sideline and wait since I will not be able to obtain financing. However, until that time, I will try to build on my down payment and see what the market will be like then.


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## Mortgage u/w (Feb 6, 2014)

ChaChing said:


> 1. Where to go first: agent or the bank?
> 2. Who to borrow from? I don’t have 20% down saved up yet.
> 3. Friend as agent?


Very quickly, I will answer your questions:

1- first you see what you can get approved for - so the bank. BUT:
2- you cannot buy a single-unit rental with less than 20% down payment. Its one of the latest CMHC rules.
3- depends your relation and outcome....there's is good chance you will no longer be friends.

Rental property should not be your priority. Focus on building your savings. Take advantage while you still live with your parents. I would never advise a rental property to anyone who doesn't currently own a home.


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