Buying an Investment Property
Last week my dad and I were talking about my goals of buying an investment property. I explained, my near term goals of creating what I call my money machine, commercial real estate that I own, and pays me just for waking up – that numbers is $360,000/year.
He looks at me and says- why? Why do you need $360,00/year and to own $6,000,000 in commercial real estate? What are you going to do with that many properties (not realizing this could be, 1 property).
I waited till he was finished and said:
I want to wake up knowing that as long as my properties pay me a 6% cash on cash return, then my family will have $30,000/month in passive income. I want that level of certainty for Kelly and my kids. It’s my insurance policy for them (above my actual policy).
As dad’s do, he pressed me further – but why do you need to build up a nest egg of $6M? What he was getting at, was, he couldn’t understand why I would delay living life now (i.e., saving money to invest) so I could build up a networth of $6M. Thinking that it would take decades and eventually I’d die and have an asset I couldn’t enjoy.
It was an interesting perspective. And, got me thinking, that there are probably not as many people who share the same philosophies on investing and saving as I do.
For context, my parents were both teachers and have pensions.
For me- I’m a business owner and entrepreneur. I’ve never considered that one day, I’d have a pension that would pay me for not working.
I remember my first week working at the City of Calgary as a junior assessor. Our floor was invited down to a ceremony to celebrate a guy who was about to retire having been there for 25 years. The guy who worked next to me, and had been at the city for 20+ years, only a few years away from retirement said, “just 25 years and that could be you“. I think he was serious- but I laughed and said, No, that will not be me.
I was very appreciative for the job and stayed 3 years at the City, but there was no way I was going to hang my hat on a pension as my lot in life. It wasn’t in my DNA.
Back to my dad. I told him it was actually very important for me to leave my family with an asset that can take care of them when I’m gone. And, a $6M investment property would do that.
But, I could sense this was not the real question he was asking. There was something deeper he wanted to know.
To my dad, he thought- if you’re buying an investment property and you need to save for years to do it- then you’re deferring living life now. Meaning, in order to buy a commercial property- I’d have to give up certain things now. I said yes- there are always sacrifices to achieving my goals. But, probably not to the extent you think.
My approach to investing is different.
The goal: to buy an investment property (or properties) with $6,000,000 equity earning 6%/year.
Next question- where does this money come from ? For me- I have 2 options:
- My own savings (discussed below) and,
- Other people who invest with me
To invest in a commercial real estate you do require capital. The better question is – where else can I raise the capital required to invest?
Who else wants to the same thing (own cash flowing commercial real estate) and
doesn’t have the time or knowledge to do it on their own?
There are actually many accredited investors (business owners and professionals) who make good money, but don’t know how or don’t want to learn how to invest safely. For 10 years, I’ve helped these investors make very good returns (one investment, we took from $8.5M in 2011 and sold it in 2014 for $17M).
One of my greatest skills is in identifying good properties to buy. Raising the money to buy them, is, with a good track record and reputation, the easy part.
So long as I have enough money to live, and to control properties (most commercial transactions require $100,000 – $250,000 of equity) just to put under contract and complete due diligence. Then, I could take time out of the equation on how long it would take to build up my portfolio.
As long as I could keep my expenses stable, and grow my income, I’d have enough capital to stay in the game- finding and closing on the best properties. This means, I can still live a good life now and enjoy the opportunity of investing in properties that will allow me to achieve my financial independence.
This is the Club Syndication Model.
Where, a group of accredited investors come together to purchase commercial real estate. Generally, the General Partner would have experience in buying investment properties and take care of the day to day operations of the properties. In exchange for rendering these services, he/she would get a % of profit above a certain threshold (to incentivize finding good properties and making sure they are taken care of).
Let’s say you want to invest in commercial real estate. But you think, well, I don’t have the money to do it.
This is for illustration only- the amounts are lessimportant; it’s the methodology that counts.
- In this example, we’ll say your baseline living costs you $150k/year in after tax dollars.
- Before you can save anything, you need to Gross about $250,000.
- If you can expand your income to $400k or $500k/year, and take the difference to invest.
Let’s now assume your increased income allows you to invest $100,000/year in commercial real estate.
What does $100,000/year allow you to buy?
You find a 12-unit apartment building, priced at $1,200,000 or, 100k/door.
To purchase, you require 25% down (equity required):
- 25% of $1.2M = $300,000
Your options to buy this investment property?
- Save for 3 years and buy it personally (3 years x $100,000/year)
- Syndicate with two friends who have a $100,000. Get in the game now. For finding and structuring this deal, you could earn a small management and syndication fee for time and effort. or,
- Try and negotiate with the seller and ask them to carry a $200,000 VTB (Vendor take back mortgage- assuming the lender in first position agrees to a 2nd mortgage).
Three possibilities- although #3 in a good market is rare.
I started off doing #1, till I ran out of money. Then, I learned, from my father-in-law, how to do #2- doing Club Syndications (pooling together high networth individuals who want to invest in and own commercial real estate).
Next week, I’ll breakdown the returns. Show you what one property could expect to payout each year.