Interesting Perspective on Negative Cashflow Properties

As I own property in BC, I like to keep an eye on the real estate developments out there.

Actually to be far more accurate I'm more addicted & fascinated with the real estate statistics out there as the market is absolutely fascinating. Why/how do property prices keep increasing when the rent fundamentals are so poor? It now takes something like 65-75% of your household income to service your home's mortgage payments. When the average house price is $715,000 (in Vancouver), that makes sense.

Rob Chipman is a realtor who runs a blog out there with great stats & great debates. I thought I would add it here as it has an interesting - some may say extremely dangerous - perspective on negative cash flow scenarios for the real estate investor. Here's what Rob says:

• I think Jeff (Brown) is saying that a cash flow neg property becomes, in effect, cash flow positive by applying interest expense, maintenance and depreciation deductions to your earned income. You change income tax paid today into capital gains tax deferred until you’re in a lower tax bracket (or never, if you don’t sell). While you may not find cash flow + properties in Vancouver for 10% down, they did exist in Greater Vancouver in the not too distant past (it was a challenge for some investors to get neg/neutral cash flow with past mortgage restrictions), and you can still get them today in other markets.
• Most property investors that I know do assume some sort of appreciation in the long term. Its not critical (you could buy in other areas, and tweak the numbers), but without growth leverage becomes moot.Is that speculation? I don’t think I’d go that far. I assume 5% long term around here. We generally do better than that. But, it is an assumption.
• The broad brush stroke idea is as follows: I pay out $1000 per month on the property (pit, maintenance, mgt, etc). I take in $750. I’m down $250. I write off interest, maintenance, management, taxes, and depreciation. That’s most of the $1000 (a little goes to principal repayment). So, I pay $250/month to my PM (property manager), who uses it to pay whatever shortfall I have. That’s my net loss. I add depreciation to increase it. I reduce my taxable income as a result. Given the right numbers and the right tax bracket, I could come out paying less tax by more than the $250 I’m losing on the property. That doesn’t take into account the potential capital gain, which most assume becomes more assured the longer you hold the property.
• (This is not an argument justifying purchasing a bad, money losing property so that you can write expenses off; rather, buy a good property, and finance it so that you incur expenses).
• I don’t have actual numbers handy, but many of my clients have done this, long term. They re-mortgage the property when interest expense gets too low, and use the borrowed money for other investments. It does work.
• You can even mortgage your revenue properties and use the funds on a principal residence (result of a court case between a lawyer and Rev Can - the judge sided with the lawyer).
• At some point in time you have to either pay tax on free cash flow (you probably don’t want 10 highly leveraged properties with a huge interest expense when you’re 80) or pay some capital gains on sale.
• One solution is to leverage several properties and then, when you approach retirement, sell individual properties and pay off other outstanding mortgages. You go from 10 leveraged properties to 5 free and clear properties and collect, say, $7,000 per month. Not bad if you don't have an indexed pension.

To be honest, this is something I've thought about since I'm quite young and have many years I can hold.

I've found great properties that I couldn't have afforded at the time without incurring neg cash flow. I watched them escape me and rise in value tremendously over the years. I missed the boat because I found that when it came down to making an offer, one simple question arose that I always seemed to ask myself. The question I tell myself: "Since I'm in for the long haul to have a safe & steady investment plan, how safe and steady is this plan if I'm tampering with the idea of paying money out of my pocket each month? Is this not putting my whole plan in jeopardy?". I guess Rob points out that the neg cash flow plan better take a good hard look at the positive offsetting tax consequences.

Did you notice the part about Rev Can allowing you to mortgage your investment properties then applying those funds to your principle residence? It caused quite a stir and some heated exchanges. I'll paste what Rob adds here:

1. It is, or at least was, legal. Its common. (I don’t think its changed, but maybe Rev Can changed the rules last week). Its not a case of incurring interest expense on your home and deducting it from your income. Its a case of borrowing money for some kind of investment, and deducting the interest incurred.
2. Court case example was a lawyer borrowing money from his partnership account, and using it to buy a house free and clear. He then mortgaged the house to replenish the partnership account. He called that a business expense and wrote it off. Rev Can said no way, he took them to court and he won.
3. In real estate what happens is you say “I have rental property with equity in it. It breaks even. I want to buy a house, or reno my existing house. I’ll increase the mortgage on my rental props and use the money to pay for my principal residence. The interest expense is incurred because it allows me to hold the revenue properties. The alternative was to sell them. I borrowed the money to hold them. Therefore the deduction is fair.
4. People sometimes say “Hold it, you’re really using the money for your principal residence”. That’s confusing doing one thing with doing another, and letting an unrelated activity deflect your focus. To hold the investment properties you have to borrow money. The interest is tax deductible. The fact that you are using other money to do other things is immaterial. Do a google search on principal residence interest deduction Canada and you’ll find lots of info on this. Its common.
5. CRA was never happy with losing that case, so your point is well taken. That said, you can still write off interest and run the investment at neg cash flow. People have been doing it for years.
6. And, as you rightly point out, tax advice should come from up to speed professionals.
   Also, I differentiate between investors and flippers.
   

To One Million.... Are We There Yet?

Since I peeked into the future using no appreciation of the real estate, for fun, and for fun only, I thought I would use the CMHC forecast of nationally 6.90% expected price increases for real estate and see what happens.

Again, this is for fun and for fun only.

Using our current Net Worth and Current Asset Value, and using the 6.90% expectation we get the following:

1. Our current assets are valued at $2,229,891. This can be seen here. 6.90% appreciation for 2007 would be $153,862.47 growth. Add this to our current asset value and we get $2,383,753.40.
2. Thus, our current Net Worth of $504,905.30 now becomes $658,767.77 for 2007.
3. But wait! Remember this post? It was figured that we would earn 4.75% by mortgage pay down right? At the end of that post it was determined that we would have $528,911.76, so we need to add this in too. So add $153,862.47 to $528,911.76 and we actually get a true 2007 Net Worth of $682,774.23.

So lets keep going, assuming the 6.90% figure stays constant through 2008 and we reduce our mortgage liabilities by 4.75% again:

1. Our current assets would be valued at $2,383,753.40 in 2008 and at 6.90% growth again it would grow $164,478.98. So by December 31st 2008 our assets would be $2,548,232.30.
2. Thus our Net Worth one year from now of $658,767.77 from 2007 now becomes $823,246.75 in December 31st 2008.
3. But wait! Remember this post? It was figured that we would earn 4.75% by mortgage pay down right & lets use that 4.75% again. So our Net Worth of $658,767.77 times 4.75% is $31,291.47... add that to $823,246.75 for a true Net Worth in December 31st 2008 of $854,538.21.

Lets keep going.... this should be our final one - for 2009:

1. Our current assets are valued at $2,383,753.40 in Dec 2008. 6.90% appreciation for 2009 would be $175,828.02 growth. Add this to our current asset value and we get $2,724,060.30.
2. Thus, the Net Worth of $823,246.75 now becomes $999,074.77 for Dec 31 2009.
3. But wait! Remember this post? It was figured that we would earn 4.75% by mortgage pay down right, so lets use that 4.75% again. Our Net Worth of $823,240.75 times 4.75% is $39,104.22..... add that to $999,074.77 and we get $1,038,178.90 Net Worth.

So our Net Worth in December 31st 2009 should be $1,038,178.90 using the CMHC forecast. But this is just for fun. This is unlikely to happen as we are in the late stages of this real estate cycle and surely the market will downturn, meaning we will have to wait much longer than 2009 to reach our goal. But we are prepared for that as these are all long-term holds.

We're Making Our Home Mortgage Tax Deductible - Thanks to Our Rental Properties

Ok so our biggest mortgage right now is on our home right? And guess which mortgage is NOT tax-deductible.... Our BIGGEST ONE, OUR HOME (AKA Property Number 8)!!!! Arrrggggghhhh. Frustrating isn't it?

I remember reading about the Smith Manouver on Ozzie Jurocks' website and I remembered reading about it in the bookstores. Specifically I recalled it under "ask an expert" on financing who was Harvey McCallum the mortgage broker. Anyways, it never meant much to me because I never really had a home before. I mean, we had a small condo, but we never bothered to implement this 100% tax-deductible & 100% LEGAL tactic because, frankly, we knew we would be moving out... just weren't sure exactly when. So we didn't bother. We just sucked it up, paid the interest to the bank and never claimed the interest as tax-deductible. We took our lumps for a couple of years. Well, that was then and this is now.

Now we have a huge mortgage and a gorgeous home. And we want it to be tax-deductible!
So here's how we've accomplished this:

• 1) We're taking out a 2nd mortgage on Property SIX. There's plenty of equity as the house is valued at $185,000 and the mortgage currently is $126,000. With the help of a private lender through our amazing mortgage broker, we can go all the way up to 85% of the value of the home. We only took $25,000.00. That should do it for now. I'll get back to this $25,000 in a sec.....
• 2) Just to recall, remember how we got Property SIX? We pulled out $60,000 in the form of an inter-alia mortgage that was done by another WestCoast private lender who took equity from both Property One and Property Two. This was our down-payment for This sixth property, Property SIX. This duplex has been zoned as a duplex and has had a long-term tenant in the upstairs unit who pays all cash each month, and now the downstairs tenants pay $1150 a month. Total $1685 monthly. There is no question whatsoever that this is an investment property, right? And the $60,000 was used as a down payment on that INVESTMENT (property) right? Thus, all the interest on this $60,000 private mortgage is 100% tax deductible as it fits the legal parameters for CRA (Revenue Canada). So that one is fine....
• 3) This is where I need to keep organized notes and this post is part of that. Ok, here we go... Harvey McCallum says, "You own a $300,000 home with an existing mortgage of $150,000. You own a rental with a mortgage that pays you $900 a month rent. Each month you receive the $900 rent - pay it on your home mortgage. The $900 will go to reduce the principal - increase your equity - and decrease your mortgage payout. But now how are you going to pay your rental mortgage? Well . . . lets take out a floating 2nd mortgage against your home so you can dip into it when you need money. Which will be every month. By the way the floating 2nd is tax deductible because the money is borrowed for the purpose of paying your rental mortgage not your home mortgage." So how does this relate to our situation? Firstly we are setting this $25,000.00 new money aside that we pulled from Property SIX. We are setting it aside so we can use it, just as Harvey says, to pay our rental mortgage on Property FIVE. Then, we are using the rental income from Property FIVE to service our home mortgage, Property EIGHT. And to correct Harvey's numbers and relate it specifically to ours, our $485,000 home is our Primary Residence (our home) with a mortgage damn near $400,000. Our rental property is $185,000 with a first mortgage $126,000 and now a second of $25,000....
• 4) Once we have enough equity built up in our HOME, then we will do a 2nd MTG (MTG is short for mortgage) there... and payout the original 2nd MTG on Property SIX. We want this 2nd MTG against our HOME (that hasn't been set-up...yet....as there needs to be enough equity) to get bigger and bigger and eventually replace our original 1st postition MTG of currently approx $400,000. Then, at the time when the 2nd MTG fully absorbes the 1st MTG and there only remains a 2nd high interest tax deductible MTG on our home, we will convert it back to a first for the lowest rate & payments possible.... And yes, this would be STILL BE tax-deductible too :)
• 5) More from Harvey, "I can hear the wheels turning . . . why would you want to use a higher interest rate, probably higher but not always, 2nd to pay your rental mortgage. One reason . . . it is better, all most always, to have a higher deductible mortgage then a lower non-deductible mortgage.
  Over time you will have paid off your home 1st mortgage and be left with a floating 2nd that can now be rewritten as a lower first mortgage and still be tax deductible.
  Why an investor should not do this - YOU HAVE SO MUCH MONEY YOU DON'T CARE. I would argue if you have so much money do it anyway and make a charity very very happy . . . oh and you will get a tax receipt."

Ok so that's the plan and that's how it is gonna go down. I'm posting the following below, just in case over time I lose the links as this is good proof for legal requirements:

Who wants to have a tax deductible mortgage in Canada?

The Supreme Court of Canada have paved the way, with proper planning, for mortgage interest to be tax deductible.

Most people do not write off the interest on their mortgage. Yes many homeowners write off a portion of their mortgage payment as it relates to a home office space. But that is not the same as writing off the interest on their mortgage.

Your principal homes mortgage interest is deductible, when the borrowed money is used to earn income from a business or investment that has an expectation of making a profit, even if your home is the pledged security.

How the funds are spent determines interest deductibility of your mortgage, not the collateral. If a direct link can be established between the loan and its business/investment use, it is immaterial that the security for the loan is a mortgage against your principal residence.
Example: You have money invested in the equity market, and you want to buy real estate. Assume you liquidate the equities, buy real estate all cash, then mortgage the real estate and reinvest the borrowed funds in equities. Could you then write off the mortgage interest, arguing the proceeds were used to buy stocks rather than the house?

That was the issue facing the Supreme Court of Canada, in a decision handed down September 28th 2001.

Some background:
On October 27th, 1988, John Singleton had $300,000 in his business capital account. The court noted, he wanted to use $300,000 of his equity to assist in the purchase of a house. He then borrowed that same amount, in the form of a mortgage on the real estate he just purchased, to refinance his partnership capital account. He did all that on the very same day.
When the dust settled, Singleton had a new house,a mortgage on the new house, and $300,000 back in his capital account.

Singleton deducts the mortgage interest on his 1988 and 1989 tax returns.. The government disallows the deduction. Singleton sues - he loses in the Tax Court of Canada - wins the next round in the Federal Court of Appeals.- in October 2001 the Supreme Court of Canada sides with Singleton.

This case boiled down to one issue: were the borrowed funds used to earn income from his law firm, or finance his home purchase? Put another way, should the same day transactions be viewed as a series of connected activities, or each a distinct tranaction? The Supreme Court of Canada ruled they are distinct seperate transactions.

The Honourable Mr. Justice Major said, "It is an error to treat this as one transaction - the transactions must be viewed independently." The direct use of the borrowed funds was to refinance Singleton's capital account. Treating the borrowed funds as used for financing the purchase of the home ignores what Singleton did, ie used the borrowed funds to replace the funds required for his capital account at the firm.
Structuring your affairs to shrink your tax burden is 100% legal, the Courts have ruled that Singleton could write off his mortgage interest.

The way is paved for homeowners, who apply the same principles, to make non-deductible principal mortgage interest tax deductible.

When you are ready to explore the possibility of making your own mortgage tax deductible give me a call. Who should call: everyone self-employed, everyone who owns a business, everyone with investments, and anyone who wants a tax rebate at the end of the year. Best of all it is free.

Proper professional advice before proceeding is a must.

A taxpayer borrows moneyIs the interest deductible? When is borrowed money considered personal use or to earn income? This question was asked in 1988 by John Singleton and answered in September 2001 by the Supreme Court of Canada.
The Loan
In 1988, John Singleton, a partner in a law firm, withdrew $300,000 from his partnership capital account. He used the funds to purchase a house. Singleton then mortgaged the house by borrowing $298,750 from the Bank and deposited the money into his partnership account, along with $1250 of his own money.
The Fun Begins
When time came to do his tax return, Singleton deducted $3,688 of interest on his 1988 tax return and $27,415 on his 1989 return. Singleton believed the borrowed funds, not the withdrawn funds, were used for investment purposes. A required distinction to understand this question and answer. Of course the tax guys disagreed and disallowed his deductions.
Very Appealing Case
Singleton appealed to the Tax Court of Canada, but his case was dismissed. He then appealed to the Federal Court of Appeal which allowed his appeal by a majority decision. Not wanting to be less appealing the Tax Guys look for a friendlier decision from the Supreme Court of Canada.
The Decision
By a five to two decision, the Supreme Court dismissed the Tax
Guys appeal.

The Court held the opinion that Singleton used the borrowed funds to invest in his partnership. Therefore, the direct use of the funds was for the purpose of producing income, making the interest deductible.
Tax Planning Mantra
The Court quoted the mantra of tax planning in making the decision. Taxpayers are entitled to structure their transactions
in a manner that reduces taxes; the fact that the structures may be complex arrangements does not remove the right to do so.

The Court was unequivocal in its view that the funds were borrowed to refinance Singleton's capital account. It stated:

Viewing the transactions as one simultaneous transaction, thereby treating the borrowed funds as used for financing the purchase of the home, ignores what the respondent actually did: he used the borrowed funds to replace the funds required for his capital account at the firm..

Mortgage Financing Options

I picked this off of Harvey McCallum's mortgage site which gives a ton of great information. Since I have a lot of different types of mortgages, I thought I would add this to my online diary to remember the consequences of rates and the choices in financing one has:

Here's the most important parts that I want to highlight. It is so simple, yet I often go chasing new products, rates etc...

• Important point #1: Goal - have the renter pay off your mortgage!
  His suggestion - pay the mortgage off fast, set up the rental property to make your home mortgage tax deductible and apply your tax rebate to the principal.
  Is it worth paying a penalty to get out of the wrong mortgage? Probably! Only one reason to pay a mortgage penalty - to save money.
• Important point #2: Don't Throw Your Money Away On . . . Interest (Non-Deductible Kind)
  The most important quality of any mortgage strategy is how much payment is applied to interest and how much is applied to principal.
• It is obvious that mortgage A, same rate as B and the same payment as C, will pay your mortgage off the fastest, with the least interest, and the most principal. Accomplished without increasing payments above a fixed 5 year rate. If lowest payment is your goal B is for you.
• Mortgage A will take several years off the amortization where as mortgage B will take the full 25 years.
• With mortgage A many lenders allow you to miss a payment giving you credit for the over payments you have made. Mortgage A and B are available as of ( Dec 15/2002).

Cashback is Crazy

Or so it has been said. Not in my opinion and the way we utilize this oft' ignored mortgage feature that the big banks offer.

The reason so many frown upon the cashback mortgage is because of the way it is generally marketed. So many bankers offer it to first-time homebuyers as a means of paying for furniture and start-up expenses for a new home. Is this a terrible idea for the first-time homebuyer to use a cashback mortagage? Yes, 100% agreed! Don't use it for consumer items!!!!

Where it can be useful is for the real estate investor. The good news about cashback mortgages is that it puts cash in your pocket immediately. If you use that money to buy another asset such as dividend producing stocks (ie bank stock that spins off income in the form of dividends-remember always strive for income producing assets AND appreciable assets!) or if you use the cashback money for an RSP contribution, well then it is a remarkable means of gaining wealth and enhancing Net Worth.... quickly. And the tax benefit is tremendous.

That's the situation our partnership faces at this moment. This partnership hasn't been mentioned here before. I haven't included this partnership in any of the figures in our Net Worth blog. It is a few additional condos in London 50% partnership. Check out our situation:

1) Cashback mortgage on our smallest condo. This jumps the rate to 6.75% and we are locked in for 7 years. However the bank puts $4,130 in the bank account. Downside is we are locked in for 7 years at a high rate......BUT thats what we were always planning on doing anyways right, holding the properties for the LONG-TERM?

2) Cashback mortgage on our other slightly larger condo in the same building. This time the bank puts $6,230 in the bank account. Downside is we are locked in for 7 years at the same high rate OF 6.75%......BUT thats what we were always planning on doing anyways right, holding the properties for the LONG-TERM?

3) Cashback mortgage on the other final unit that has very little mortgage and thus a smaller cashback. This time (its smaller) the bank will put $1,680 in the bank account. Downside is we are locked in for 7 years at the same high rate OF 6.75%......BUT thats what we were always planning on doing anyways right, holding the properties for the LONG-TERM?

CONCLUSION: Adding up all the greenery & we get a total of $12,040 in the bank account. Thus, $6,020 each (partnership 50%).

The Good News: $6k each to invest it in RSPs or you pay down RSP loan, or pay down primary mortgage on personal residence. Whatever we want.

More Good News: Added up our expenses of condo fees, mortgage payments & property taxes and added up our partnership rental income. I've also added up the costs of the big loan payment that served at original down payment. The tenants pay for all of this each month, so in a way its all free.

Even More Good News: The longer we hold the property, the more it goes up in value over time.

Best News of All: The higher interest rate & higher interest cost is tax-deductible and the cashback income is tax-free (the government considers it the same as they would a 'gift card').

BAD NEWS: We can't sell the property before 7 years, or else we owe all this money back....but.....our plan all along was to hold the properties for the LONG-TERM right, so no worries?

MORE BAD NEWS: Our rate sucks, so that means the mortgage wont get paid down as quickly. However the property still goes up just the same in value so we should still make good money in the LONG-TERM.

Where Will Our Net Worth be in 2008?

Assuming house prices stay flat for the remainder of the year, and simply focusing on mortgage paydown I took a sneak peak into our 2008 Net Worth using a mortgage calculator.

It would be interesting IF house prices stay flat as this would defy the blogisphere which is obsessed with our global housing "Bubble". It would also defy the professionals such as CREA who are calling for 6.9% property appreciation on a National level. Who to believe? Don't care. All I know is that we've selected some Prime real estate and the mortgages will be going down and we are holding LONG-TERM, through the cyclical ups & downs.

Anyways here goes:

Property Eight will be reduced from $383,500 to $379,973.11 in January 3rd 2008 = contribution to Net Worth of $3,526.89
Property Seven will be reduced from $140,400 to $139,880.75 in January 2008 = contribution to Net Worth of $519.25
Property Six will be reduced from $128,000 to $126,863.44 in January 2008 = contribution to Net Worth of $1,136.56
Property Three will be reduced from $89,717 to $88,928.94 in January 2008 = contribution to Net Worth of $788.06

We will be converting some of Properties ONE, TWO and FIVE into very small cashback mortgages in which the cashback will improve our Net Worth by $10,000 (approximate I rounded this off). The drawback to this of course is that the interest rate goes higher.

Three of our unsecured loans will be eliminated entirely. That produces $8,035.70 that goes right to our Net Worth.

Adding up all the above greenery totals $24,006.46 and adding that to our current Net Worth of $504,905.30 will make our January 2008 Net Worth $528,911.76. A 4.75% gain in Net Worth in just mortgage paydown alone.

Again, this does not include any appreciation whatsoever. Will revisit this in January and see where we are in actual comparison. I did this post as a reminder that mortgage paydown adds to the bottom line Net Worth as I often focus so much on the capital appreciation of investments.

Net Worth, Debt to Equity and Current Diversification - Feb 2007

Property EIGHT - Our HOME

Don't know if we should even consider this on the chart, I mean, its our home. That being said, houses when you live in it don't cash flow. At all. Unless you rent out a room or something but that's not for us. Anyways, here's the chart on this one. My employment paycheques are covering this one just fine, but hopefully if we structure things property, we can eventually get the cashflow from the SEVEN other investment properties to spill over and pay the monthly payments on our home:Our Final Property Purchased was Property EIGHT: London, Ontario January 2007 - AGAIN THIS IS OUR HOME. So that's where we stand, this is our final real estate puzzle. We have the cash reserves set aside in case some of the atrocities in the US hit us hard here in Canada. Our objective is to protect these cash reserves as much as possible. However, we have given some though to putting this cash reserve to work and have it offset some of this negative cash flow in other properties...... but given our current leverage, we're happy to have it set aside as a means of "insurance".

Property SEVEN

Our Seventh Property Purchased: London, Ontario December 2006. I love this property. I know anyone looking at this would wonder why because it is so heavily cash flow negative. I would think that. However, I found this property located in London's most attractive neighbourhood. Right square in the middle of it. And the sellers needed to get out as they had committed to another purchase firm and absolutely had to sell. I watched as the price fell during the holiday slow season and made an offer.

We had no down payment though. That was our major obstacle. But we factored the current bank rates on the full 100% purchase price and it cash flowed well. And that was setting the rent below market as determined through our research on other SFH in the area and their current rents.

In the end, we got 100% financing through a risky higher interest trust company and we made the conscious decision to go cash flow negative for a couple of years until equity built up and we could move the mortgage to a better place with proper bank interest rates and thus lower payments. Plus, we figured that we'd be saving from our paychecks each month about $300 anyways as means for a down payment for the same type of opportunity. This just meant we got property ownership on a great piece of real estate earlier.

So our objective with Property SEVEN was/is to suffer through the negative cash experience for a couple of years, then transfer to a lower interest place with lower monthly payments where rent will service all expenses.

Property SIX

Our Sixth Property Purchased: London Ontario Duplex Aug 2006.

The $60,000 is an inter-alia mortgage that was done by a private lender who took equity from both Property One and Property Two. This was our down-payment for This sixth property. This duplex has been zoned as a duplex and has had a long-term tenant in the upstairs unit who pays all cash each month. We bought this when we first lived out West and negotiated a great deal on this place, mainly because the main floor was vacant at the time. Also, it was a good deal because apparently there were some nightmare tenants in which one died in a horrible accident within the house. The seller had enough of property, the management, and the tenants & wanted a quick sell.

This property is great for student rentals and is within walking distance to downtown and is on a quiet street. The idea of managing students made me sick, so I hired a property management company to properly manage it instead. Student rentals get excellent cashflow in London if one is ok with having to fix up the home after they leave (the above market rental income usually pays for it easily). We lived out West at the time anyways, so hiring a management company was the best move at that time. It was right before school started and London was crawling for students looking for a home. According to my property manager, they were looking everywhere but our duplex.

It sat vacant for 3 months. We were burning cash. It was a horribly stressful time.

I kept pressing the management company but got nothing but excuses in return. Finally, after making the permanent move to Ontario, I drove up to it and took my first look at the home's condition. It was disgusting. The lawn had grown so high that it was covering the windows. The place looked like it was falling apart. Weeds were all over the place. A latern on the front porch was broken and dangling upside down. Anyways, I spent the week hiring painters, landscaping it myself and adding curb appeal.

We rented it in no time and the tenants were so excited we got a multi-year lease. Need less to say, we fired the awful management company. It felt great to have control over the stressful property ourselves and steer it back in the right direction.

Since then we've been in business with this home and very happy with the property and the way it fits into our portfolio.

Property FIVE

Fifth Property Purchased: London Ontario Duplex February 2006. Unbeatable location in the heart of London's best neighbourhood, great cashflow & fantastic appreciation potential that's already been realized in just one year. Undeniably the gem of our real estate portfolio.

Upper tenant's rent is below market rent as the tenant is a dream tenant - quiet as a mouse, very kind and considerate, pays on time etc... given those characteristics we've decided to leave the rent as is instead of jeapordizing the relationship and putting at risk the possibility of tenant leaving.

Property FOUR

Fourth Property Purchase: Toronto Ontario Duplex December 2005. Originally, we had to put down a massive downpayment to purchase this property which at that time consisted of $60,000 worth of stocks and REITs that we had invested wisely in.

Our Mortgage broker forced us to put that much down, which annoyed us.

Recently, we used that same equity, that basically had now more than doubled in a short period of time, to finance our Home, Property EIGHT via equity take out on this mortgage. Long-term tenant, keeps property very clean and pays on time without problems.

Property THREE

Third Property Purchased: London, Ontario June 2005. Classic cash flowing condo... with little expectation for serious growth appreciation. Purchased for $99,000 in London Ontario, Canada. Unlike Properties ONE and TWO, the original objective of Property THREE all along was to have the positive cashflow from tenants pay down our mortgage. That's it.

Property TWO

Second property bought - Western Canada December 2003. One year after purchasing and closing Property ONE, we were living in Property ONE as owner occupied residences as stated on our mortgage application when we decided to invest in a second presale unit in an adjacent building being built. It was December 2003, over one year after our first ever purchase.

Our intention all along with Property TWO was to rent it to tenants - at that time fundaments were pretty good in Western Canada, unlike today. Market rent for this 685 square foot unit was $1150 a month and at purchase price of $171,000 it pretty much covered mortgage expenses, condo fees and property taxes. Like Property One, there was equity take-outs to make use of the equity to invest in other better cashflowing opportunities. Properties ONE and TWO represent the growth component of our real estate portfolio.

Property ONE

First property ever bought: Western Canada in 2002. This was where it all started back in 2002. Several subsequent purchases were leveraged off of this original property. We purchased a pre-sale unit for $149,000 in Western Canada after saving diligently for 5% of the builder's purchase price.

We recently renovated the 659 sq foot unit adding beautiful hardwood flooring and slate tiling, along with crown moulding and baseboards. We re-mortgaged it once, and did some equity take-outs recently to create down payments for other better cash flowing properties elsewhere. Our tenant actually did the renovation work, and we discounted his rent to below market value for the tenant for one full year.... by crediting the tenant $100 each month for 12 months for the work (and managing the unit while he resides in it entirely by himself).

We opted to go negative cash flow on this property as the objective was to use the equity as means to transfer it to a cash flowing property in a smaller market elsewhere in Canada. The negative cashflow was offset by positive cashflow in a smaller Canadian city in Ontario. Note the negative cashflow, this is becoming a challenge.... would love to see positive cashflow soon.