When successful investors talk about their property acquisitions, they always say their first door was the hardest. A few years ago, before I bought my first investment property, I wasn’t really sure what those investors meant. Since I decided to purchase, in 3 months time, I easily came up with the required 20% down payment (made up of my own savings, a gift from my dad, and a short-term low interest loan from my mom.) There was no difficulty there at all!
Finding my first property was equally easy. I had my sights on a 2 bedroom condo in St. Albert, Alberta overlooking the Sturgeon River. The suite is on the top floor of the building and has a view of the river. This area also has all the economic fundamentals of a solid investment. In case you don’t know where St. Albert is located, it is 10 minutes North of Edmonton in Alberta and has an average household income of $136,000 (Vancouver’s average household income is just under $90,000), where the rental vacancy rate is just 0.5%. The suites in this particular property provide a positive monthly cashflow after all expenses are paid, and is even managed by Alture Properties for a nominal monthly fee. With monthly income, a waterfront view, and Alture taking care of all tenant issues, this investment was a true winner.
I believe that the Universe wanted ME to own this property as there were about 3 or 4 people who tried to purchase this particular unit before me, but for some reason, none of those people were able to close on it due to various issues. I considered this a pretty great score.
After these initial steps, everything that followed was pretty much a royal pain in the butt. Here’s what happened;
I was surprised by all the financing issues I had given that I had an excellent credit score of over 700, full-time employment with salary and commissions, a home with lots of equity, a home line of credit (HELOC) with a zero balance, and my 20% down payment. My new waterfront suite even had tenants currently renting at above-market rents, making this acquisition a profitable business. Here’s the situation with the banks;
Bank #1: The first bank said they could only finance 70%, which meant I had to come up with another 10% for a total of 30% down payment. Solution? Real estate investing is all about leverage and having your tenants pay the mortgage. Fronting another 10% of my own money is silly, so I went to another bank.
Bank #2: The second bank said they would finance 75% but wanted me to reduce my HELOC from a few hundred thousand to $50K. Apparently, they now calculate debt servicing by assuming I have used my entire HELOC even though I have a zero balance! Reducing my HELOC wasn’t an option for me, since this is my seed money for future investment properties. Solution? I went to another bank.
Bank #3: The third bank said they would finance 75% loan to value and I would get to keep my HELOC with no changes or limit reductions. Given that I only had 20% of the down payment, this option meant I had to come up with another 5% for the down payment. Solution? I realized that borrowing rules have continued to tighten and very few banks are now willing to finance 80% loan to value on investment properties, so 75% isn’t unreasonable. Since I was ok with this, I now needed to come up with another 5% of the purchase price.
I was thinking of taking this out of my HELOC, when out of nowhere my sister from Hong Kong called me. We were discussing other matters, and I casually told her about this 5% that the bank wanted for my waterfront condo.
Note: My sister happens to own a few investment properties all with waterfront views. Saying that she loves the water would be an understatement. Every window of her home overlooks the Hong Kong harbor and even her office has a beautiful view of ships sailing in water.
When I spoke to her about this purchase, she was excited that I saw things HER way, and offered to fund the additional 5% with an interest free loan… all without me even having to ask her! An interest-free loan beats paying 3.5% on my HELOC any day! (I love my family…) Great, I’m all set! So I thought…
Bank #3 had my property appraised and it turned out the appraised value came in slightly lower than my offer price. This sometimes happens as appraisers get to choose which properties in the area to use as comparibles, and this appraiser happened to chose a few non-waterfront condos further from the river. As banks will only finance 75% of the appraised value, I would need more money to cover the difference between the purchase price and the appraised price.
Determined not to give up, I spoke to the seller (who happens to be my employer at the time) and through negotiations, they agreed to finance the difference with a Vendor Take-Back Loan!
So after almost 2 months of overcoming various obstacles, I finally bought my first investment property. The bonus was I effectively financed 95% of my investment property using other people’s money! So for anyone who thinks it is impossible to purchase their first property, this proves that it really IS POSSIBLE. It may be annoyingly difficult, but it is possible! And lastly, remember that obstacles are what you see when you take your eyes off your goals, and any great achievement is preceded by many difficulties and many lessons; great achievements are not possible without them.
My recommendation. I can now confirm that all the rumors are true. Your first investment property purchase will be the most difficult. Both saving up the initial deposit and being able to finance the mortgage requires determination, creativity and patience. If you truly desire to succeed in real estate investing, be persistent and explore your options. If you’re unhappy about terms of the agreement, walk away from the deal. There will always be other great properties and banks that are willing to lend you money. Open your mind to asking family for help, vendor take back loans (VTB’s), and joint venturing with others. The more open you are at exploring these options, the more successful you will be in creating wealth through real estate.
I am a licensed realtor dedicated to securing you wealth through strategic real estate investment. My mission is to help you achieve financial freedom by creating enough passive income to eventually replace your working income, so that you can spend more time doing what you love with the people you care about. For more information, go to www.pointbinvestment.ca.