How I Financed My First Investments

The power of cheap money in today’s world

Let me start by saying, I have almost never had enough capital for the real estate investments I have made.

Real estate for me started as a forced savings mechanism. I am by no means frugal, money often goes out just as fast as it comes in with me. As soon as my parents realized I had a knack for spending but an interest in real estate investing they pushed me to buy my first property. The only problem was I had something like $8,000 saved up and was in the middle of studying for my exams.

If you don’t want to keep reading, it’s very simple — leverage lines of credit, borrow personal debt from individuals you have a great relationship with and as you grow, leverage HELOCS and eventually raise and utilize private capital. Recycling capital through the BRRRR strategy also goes a long way.

How lines of credit helped me with my first property:

It was 2015, I was studying for my exams and I had just finished aggressively paying my OSAP off. I had no real wealth accumulated. I earned a whole $51k as a new grad, I lived at home and had no real fixed costs other than the $300 a month for Gotrain to work. My $51K a year worked out to be about $3.3K a month. Not a whole lot, but I was 22 and had about $3K a month to play with. That’s exactly what I leveraged.

Since I had no money to purchase a home from the market, my first investment property was a pre-construction condo. If I had the money, I would have opted to just buy something on the market to make immediate ROI rather than pre-con.

My First RE Investment:

It was a preconstruction 1+Den condo at Yonge and Eglinton for $310K. The developer extended the deposit structure, which allowed me to stagger the payments totaling $62K over nearly 2 years.

There was a lot more analysis behind the numbers when making this purchase, but this was basically all I saw when making the investment.

This is where line of credits soon became my best friend.

The Deposit Structure:

The deposit structure was nothing crazy. As the real estate market wasn’t as crazy as it is today, I was able to negotiate and increase the timeline for deposits with the developer. I was required to pay 5% in 30 days, 5% in 120 days, 5% in 366 days and 5% in 600 days.

Deposit structure agreed to at the time of purchase. This is almost always negotiable with developers as the money sits in trust so there is really no need to have an accelerated payment structure.

As I mentioned above I only had about $8K saved up. I quickly obtained lines of credits from 3 of the big 5 banks here, totaling about $47K. This basically bank rolled each of the above deposits, while I aggressively put between 2–3K towards the line of credit every month, along with any gifts, reimbursements from work, tax refunds etc. Everything went towards aggressively paying down the outstanding debt before the next payment was due.

Tip #1: Get as many lines of credit approved prior to obtaining your first mortgage. I know individuals with more than $100K in personal lines of credit which can essentially fund an entire down payment in some markets.

Tip #2: If you are going into the bank and doing a credit check for a personal line of credit, you might as well get a credit card. If they were going to give you $20K P.LOC, you can sometimes also get a $10K or $20K credit card. Wait 6 months, go back to the bank and tell them you don’t want the credit card and to convert that borrowing capacity into a personal line of credit. You will now have $30–40K available P.LOC.

Tip #3: (not applicable to all) if you have a BBA or Bcomm or are a CPA, CA National Bank will easily give you about $20K unsecured personal line of credit at prime + 0.5% which is basically the rate that you would get on a HELOC. (Its an amazing offer and everyone should take advantage of it).

Pay down and Risks:

It took me something like a year and a half to pay down the debts that I was floating through line of credits, to a point I was comfortable with (total debt unpaid of $15K) before I started hunting for my next property. This strategy I like to call debt rolling :) Leverage the cheap money that is available to us today.

I am a firm believer in high risk high reward. I take a level of risk on that a lot of people would be uncomfortable with. It does keep me up at night some days, but I am investing in real estate and you will eventually realize that with time all of your mistakes are more than made up for.

So, what are the risks?

1. I am essentially buying a property fully leveraged. This means if the market tanks I am paying the debt down for a property that is worth less than what I owe. If you value your credit score this doesn’t matter, you are going to continue to service that debt.

2. Interest expense and minimum payments — This strategy only works if you can service your debt. You should make sure you have a steady flow of income to satisfy the interest and carrying costs on your debt at all times and that this payment is manageable. This could be from other investments but is most commonly from your day job (as it was for me).

The second property:

At this point I still had not discovered the power of the BRRRR. I thought the only way to buy real estate and amass a portfolio was buy and hold through aggressive savings. Although my first one was preconstruction, it was taking forever to get built and I’m an impatient guy. I wanted to start making equity pay downs on day one.

I was able to leverage my personal relationships to bring down the cost of borrowing for the down payment (no — there were no gifts involved, I was just able to bring in family members to sign a few documents and make my cost of borrowing cheaper). This is key — you want to keep your cost of debt as low as possible early on to ensure most of your payments go towards your principal, and not just interest.

This property I went 20% down on a purchase price of about $600K, total loan was about 120K (because of closing costs). This was a mistake. Looking back, I wish I had purchased it with the 5% down option that is available to many of us.

Tip #4: Purchase with 5 or 10% down even if you have the 20% for the down payment (unless you are required to go 20%). The CMHC fee is well worth it and consider it a cost of business. It allows you to keep your capital safe and, on the side, to be reinvested into another project.

The reality is that I could have paid off debt of $30K (5% down on 600K) 4x faster than paying down debt of $120K, as the interest on $120K is quite significant. Luckily at this point my income from my job had gone up quite a bit, and I was able to service the cost of debt which at 3% was about $300 a month.

Here’s another mistake — eventually that 3% went up to nearly 4.5%. At this point it was about $450 a month and something I wasn’t okay paying for. So, I doubled down. I pulled $50K from a low interest line of credit and lent the funds out as a second mortgage at a 12% interest rate. This essentially provided me with $600 a month and covered the carrying cost of the $120K debt that I mentioned above. There are obvious risks here, primarily the risk of default, but high-risk high reward.

Random fact — it turns out double down is a strategy most commonly used in blackjack. I was a bit of a gambler in real estate before I learned what I know today. I definitely took on way too much risk, but luckily in real estate especially, time heals most wounds.

Moving forward:

Moving forward from here on it gets a bit easier. You become proficient in servicing debt and extremely interested in how to increase your available line of credits — to a level that no one else understands. Eventually you will realize there are mass markets within the financing umbrella. While we have typically been used to the big 5 banks, there are the B lender banks, private financing (hard money), MICs and even friends and family that will gladly invest in you (either as a project or to earn interest).

You will eventually sell a property or two that you pick up along the way, use that to settle any outstanding debt and the remainder to keep investing. This is basically how I grew my investments. It’s a minimal money down, high risk approach — so definitely not for everyone.

It’s a question or comment that I get too often from people I talk too. At this age funding that down payment seems like the hardest part, but it’s important to realize that money is in cheap supply. Stock up on it!

For everyone that’s just getting started or wondering how to ‘save up’ for their next deal, just know — I have almost never had enough money for a project. Get creative and get networking.