How To Make Money Investing In Real Estate And Avoid The Major Pitfalls
Welcome to today's show. I'm really excited to get into this one because I'm gonna be talking about a topic that's really dear to me, and that is the benefits of real estate investing. So how to make money in it and how to avoid the major pitfalls. Before we dive into making money in real estate, I want to address a lot of the concerns that I've heard from fellow Canadians and in clients as to what their concerns are with investing in real estate. All the concerns are valid, and they seem like they're big concerns, but once you really dive in and you get to see that the concerns have an easy solution, it takes away the worry and the issues that would come along and the fear with investing in real estate.
Scott Dillingham:One of the things that I have heard my clients tell me is they don't want to invest in real estate because they hear nightmares of bad tenants. Right? They don't want to get late night calls to change the toilets. They don't want to deal with, tenant not paying the rent. They don't want to deal with a tenant damaging the property.
Scott Dillingham:So this one has a super super easy solution. Now it's not 100% effective. However, the solution in most cases eliminates all of these problems. Now the solution is a professional property management company. So they know exactly what to look for in a tenant.
Scott Dillingham:So I'll give you a perfect example. My property manager, when he's interviewing a tenant and he found one that he thinks that he likes, he'll say you know what? He'll randomly call him and say you know what? I got a coffee. I have a quick question for you.
Scott Dillingham:I'm going to meet you at your place, and We'll just quickly chat and then we'll get everything finalized. So that's a strategy he's using to get into their home to see how they live. Do they clean? Do they have pets? And they've said on the application that they don't have pets, right?
Scott Dillingham:So you can check these things out by utilizing that trick. Now they do everything as well beyond doing an inspection and seeing how they live. They look and confirm their employment. They review their bank accounts to make sure that the employment letter that they received is real and that money is going into the account. Also, to eliminate a bad tenant is you want to take a first and last month's rent deposit.
Scott Dillingham:A lot of professional and bad tenants will try to eliminate any deposit needed to rent your place. So by getting the 1st and last month's rent, you do wean out some of those bad people. But really, it all stems from the property management company. They know all of the tricks to filter out and make sure you're getting the best tenant. Plus, they also have a database of bad tenants that they've heard from other property managers.
Scott Dillingham:Like these property managers, they share this with each other. So if someone comes through and they're on that list, they just stop it right there. But as an individual investor, you would not have access to that. So I think a property management company is absolutely necessary whether you own 1 property or 100. It's something that needs to be done.
Scott Dillingham:There is a small cost to it. Usually, it's a percentage of the total rents collected, but it is well worth the time, money, and hassle. I don't get any issues. In fact, in the very next episode that we have, we feature a professional local real estate investor, and we dive into the property manager. And I actually talked about how I had a flood, and the property manager told me about my flood, and it was just a quick simple email, and everything was taken care of.
Scott Dillingham:I didn't have to do anything. So imagine your house flooding, and it was completely carefree, and you didn't have to do anything. So that's what I got to experience, so it's amazing. So property management companies are definitely the way to go. Now, another concern that my clients have faced is they don't want to pay a mortgage payment on a property without a tenant, especially when they buy it.
Scott Dillingham:Because their fear is they're buying it, and it could be vacant for a couple of months before they have time to fill the property with a new tenant, and they don't want that expense. And they also don't want that expense when the tenant moves out, and they've got to find somebody else. So one of the things that I already touched on was getting the 1st and last month's rent deposit. So what I do is when I'm buying a house, I first get the closing date of the property, and I set the closing date to be at least 60 to 90 days out. Now not a lot of sellers like to work with a 90 day closing, but a lot of them are okay with a 60 day closing.
Scott Dillingham:So you choose 60 days to close, and then what you do is you hire your property management company to find you a tenant quickly who has first and last month's rent. And then you line up those days together, so then you're not having a single day of where you're paying your mortgage. Now the key benefit of a property manager again is that they take care of renting your property when it becomes vacant. So if a tenant that you've put in there moved in and you're fearful that when they move out, you're still going to be stuck paying the mortgage, That's wrong because you can with a property manager, they have to give at least a 30 day notice that they're vacating. So the property manager can work in tandem with that and show potential tenants the property while your existing tenants are still living there.
Scott Dillingham:So by doing this, there is ultimately no downtime for you as an investor. Now it is possible that there will be some months where you don't have anybody in your property. But what I personally do is I pool all my money in one bank account and I set a large minimum balance that I want there, and and I keep that as my float. Whatever that figure is for you, everybody's different and it does depend on how many properties you own, right? The more you own, the bigger the float should be.
Scott Dillingham:But you just keep it there. So then if it is vacant, you're really not paying out of pocket. You're paying from your built up float. And then as more rent comes in, it replenishes and then once you're above that cap, then you can start paying yourself the profits. So that's what I do for that.
Scott Dillingham:But again, with a property manager, they have a list of potential tenants looking to rent. So as soon as they get a vacancy, they are very quick at filling it. Now the caveat to this is your property does have to be in a nice location and be in decent to good condition. If it's a dump, everything I'm saying here is is not gonna work because people don't wanna live in a dump. So you need to have a good location and a decent property.
Scott Dillingham:Now the last major risk now there's more risks of course, but these are the major concerns from 10 years of lending and being an investor and working with investors and what everybody's telling me. These are the 3 that I hear all the time. So then the last one is bad property. The buyer or the investor, so you don't want to buy a property, that's bad. That has hidden issues with it that you missed because you're not an expert in this.
Scott Dillingham:And oftentimes, even if you get a home inspection, some of the majors can be missed. Home inspectors are great, but they have clauses in their contracts that say they're not responsible if they've missed something because it's it happens. No one's perfect. What I do is I do the home inspection, but on top of that, I do a walk through with my contractor. So once I found a house that I really want to buy, I'll have my contractor come with me.
Scott Dillingham:And I've made an arrangement with him that goes something like this. You're going to get all my business, my my work that needs to be done for all of my properties. But you've got to come and do these inspections with me and let me know of any inherent risks or damage to the property or things that need to be addressed immediately, as well as a price tag so I can run the numbers and see if this still makes sense for me to move forward with this property. So by having that partnership, that has saved me tons of time and money because some properties needed too much that I missed. I've done this a lot, but I missed these repairs where my contractor caught them and even the contractor was like, yeah, like you pay me a lot.
Scott Dillingham:I want you to pay me a lot, but it's not a good property. So then we'll skip that one and we'll find another one. So I would say do your inspection or walk through with a contractor, and then that will eliminate any of your fears of getting a bad property because you will know from your contractor who's an expert in the field whether it's a good property or not. So that kind of takes care of the biggest risks. So we've addressed the concerns that investors have when they're potentially buying a home.
Scott Dillingham:This doesn't matter if you're a first time investor or this is your 10th property. Those are still concerns that investors have. So we touched on the solutions. Again, nothing's perfect. There can always be issues.
Scott Dillingham:But by utilizing the advice that I'm giving you, your issues will be greatly reduced. And now, we're gonna talk about the how to make money. So there's 3 major ways to make money when you're investing in So ultimately So ultimately, what appreciation is it's your asset value of something that increases over time. So for an example, if you bought an investment 10, 20 years ago and you put an x and you look at it today, it's gonna be worth a lot more because of appreciation. When you hear crazy stories of our grandparents buying houses for $20, and now there are 100 of 1,000, right?
Scott Dillingham:That's because of appreciation. And the Windsor market, after the crash of 2,007, 2008, our market was flat for many years. And then about 4 years ago, maybe 5, we really started to get some solid and massive appreciation. I believe firmly that now is a great time to buy. Yes, the prices are more than 2 or 3 years ago, but from the fundamentals that I see when I look at things, I can continue to see that the market will still go up.
Scott Dillingham:There's still room for it to go up. So I think it's a great time to buy. But with appreciation, right, so you you buy the property, and all you have to do is wait. That's it. You don't have to do anything else.
Scott Dillingham:And over time, it will naturally go up. And there are times during recessions and other things where real estate will go down. But if you look at the overall chart of money and with inflation and everything, it doesn't matter what investment class you're looking at, over time everything has been appreciating in value. I think the same holds true with real estate, right? If the market crashes today, I'm not gonna sell my real estate.
Scott Dillingham:I'm just gonna hold on to it. Because if you sell, you're accepting the loss. Or if you be patient and wait through it, it then will go back up to pre recession levels. And after that, you gain the appreciation again. And this happens in pretty much every market unless it's a market where population is dwindling down, maybe like a coal mining town where coal is no longer profitable and it's not good for the environment.
Scott Dillingham:It's smoky and people don't want to mine coal. Towns that were built around coal mining facilities, they're vacant. So in towns like that, it's not good. So you do want to make sure you're buying in a location where the population is increasing and that will pretty much almost guarantee you appreciation. That's what you need to look for is the population influx.
Scott Dillingham:If it's the same, it's probably okay cause people like if it stays the same and doesn't increase, it's still probably okay. If you see the population decreasing, that's a warning sign. And obviously in the market, if you see the appreciation going or the population going up, that is a huge factor and sign that there's gonna be appreciation in that area. So the next way to make money from real estate is cash flow. So cash flow is when you take your All of your expenses for the property.
Scott Dillingham:So your mortgage, your property taxes. I even factor in things like home insurance, vacancy, repairs and maintenance, and I keep that as part of my buffer. And then from that when a repair comes up, I'm not shocked. And oh no, this happened because I budgeted for that. So your cash flow is the money that you get, so your profit, after all of those expenses are paid.
Scott Dillingham:So in markets where there's heavy appreciation, it is harder to get cash flowing properties. So cash flow to some investors is not super important because they want the appreciation of the property. Right? Because if a property is going up 25% per year and you bought it for 500,000, that means the property went up a 125 grand in a year, which is a huge return, especially when you consider you only needed 20% down to buy this property. So you've only put in a little bit of money and you're getting huge returns, right?
Scott Dillingham:So some people don't like investing for for cash flow. I disagree. I believe that you should get something that cash flows because if the market crashes and goes down and there's no appreciation, then you still have some income from the properties. My thought is buy cash flowing properties, but if you bought a property that did not cash flow, I still think if the fundamentals are there, it's okay. I do see it all the time from my clients, and I see them doing really well.
Scott Dillingham:Not a bad thing, but I just want to bring that up to your attention. In Windsor and Southwestern Ontario, it is possible to still buy cash flowing properties. But somewhere like Toronto, if you're going after a single family house, it's more than likely not gonna cash flow. You're probably gonna be paying a little bit per month actually on the property. But still, people are okay with that because they're happy with the appreciation they're receiving in Toronto.
Scott Dillingham:So every market's different. You have to find out your goals. But for somebody just getting started, I would say absolutely buy for cash flow. Even if that means you have to buy in a location an hour or 2 away from you, that's fine because if you take my beginning point at the beginning of the show where I said you need a property manager to handle all your affairs on your rental properties. If the property is far away from you, it doesn't matter.
Scott Dillingham:If you have a property manager, they have a team of repair people, everything. So you can invest anywhere hands free. But again, I do recommend cash flow as the number one factor to to look at. But again, if there is no cash flow, you're still okay. So the third way that you can make money in real estate that's often overlooked is your mortgage pay down.
Scott Dillingham:So let's say you have a mortgage of 500,000 and over the next couple of years that gets paid down to $450. That was paid down from your tenants paying the rent, not even for you. So now you owe 50 ks less property money on the property, which means your equity and your net worth just increased 50 k all from your tenants because they're paying the debt that you borrowed. So it's a really cool thing. So the longer you own the property as well, the more you start to see these things.
Scott Dillingham:Sometimes in the 1st year or 2, it can be a little tough in the sense that if you're looking for profit, you might not see it. And you might be wondering, is this worth it? But then if you call your realtor up, he's gonna say, yes. It is because your home's worth so much more today. And then when you factor in what the tenant paid out on the mortgage, then you can see dollar and cents.
Scott Dillingham:Okay. This is how much money I made, and you can actually see it. But the beginning, it's tough. So the longer you own the property, the more all of these benefits come into play, which is really neat. Another thing so this is not part of it, but this is just something else to consider, is once you've owned the property for a few years, say you get a 25 year mortgage and you've owned it for 10 years, That means you have a 15 year mortgage left, and if you keep that 15 year mortgage payment, that's great.
Scott Dillingham:You can. However, you can refinance your home and get another 30 year mortgage instead of that 15. So you don't have to necessarily take money out of the property unless you wanted to, but you can extend it. So by extending it again, you're increasing your cash flow. So maybe it didn't cash flow in the beginning, but because now you're taking a longer term, you can get cash flow.
Scott Dillingham:So you have to strategize what's important to you. Are you buying this rental property to replace your income so you can retire early? If so, you wanna focus on getting the mortgage paid down. But if you're a younger person and you're looking to grow your portfolio, then you're gonna wanna refinance your mortgage as frequently as you can so that way you can pull out equity and extend how long it takes you to pay to maximize your cash flow. So you can have those funds and do it again and buy another property and another one, and keep doing it till you reach the satisfied amount of properties.
Scott Dillingham:And that is one thing I'll say, there might not actually be a satisfied amount of properties. It's pretty addicting. I will tell you this. Once you get into investing, and you imagine your job, imagine going to your job, putting in the hard work, getting the paycheck, coming home, repeat and recycle. You keep doing the same thing over and over again, and you might love your job.
Scott Dillingham:So nothing wrong with people having a job. Like I have a job, right? I run Lendly. It's a business, right? And it takes lots of my time.
Scott Dillingham:But there's nothing greater to me from an income standpoint than being able to be anywhere I want, whether I'm on vacation or I am at work. And then, I receive the rent check and the cash flow from my tenants automatically, right? Because my property manager sends it to me. I don't have to do anything. So it's the easiest money you'll ever have to work for because it happens on autopilot if you set up the correct systems.
Scott Dillingham:So I wanna bring all of that to your attention. Now next steps, let's quickly talk next steps. If you are someone that lacks the time to get out there and look at real estate and just does not have the time to do it or you don't want to learn what's needed and you don't want to follow this, you just don't want it done for you. We you're gonna wanna listen to the next episode. So the next episode, we feature Tyler Soulier, and we talk about our done for you real estate platform, where we can help those that have the money to qualify for a mortgage.
Scott Dillingham:Okay? So you do have to qualify, but you lack the time or you lack the knowledge, but you still want to invest, we have the solution for you. But if you're someone who has the time and you wanna learn, develop, discover, and take matters into your own hands and become a full time investor, then you're gonna wanna sign up for our club. So our club URL is invest dot lendcity.ca. So that is INVEST lend, so l e n d, city, c I t y dot c a.
Scott Dillingham:We're giving a 2 week 100% risk free trial of our club. But within the club, we have a full fledged real estate investing course that you can watch. So there's some video, there's some text in there, so you can read and and stuff. It covers everything from a to z, okay. So that will help you to get started on your own.
Scott Dillingham:And again, the membership to the club is free for 2 weeks and then after that, it's 29.95 if you like it. As part of the club, you get to participate in events and any live trainings we do. We can do them over zoom depending on what covid looks like, but that is where I would go to get a full fledged course. There's other courses in there as well that you can, watch and participate in within there, but we do have one about getting started in investing in real estate, and it covers everything. So I think for anybody who's interested, that would be the very next step.
Scott Dillingham:But if you're still unsure, I would definitely wait and listen to the next episode. I think it's gonna be incredibly valuable for you. I've gotta run now, but thanks so much for your time. It was great chatting with you today.