I made $800k from this ultimate side gig

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The ultimate side gig
The ultimate side gig

Ultimate Side Gig?

There’s an old axiom “you’ve gotta have money to make money”. For the most part, this is true when it comes to this side gig. I averaged $114k per year over the 7 years that I did this, or $800k in total. It could well be the ultimate side gig.

So how can you make these amazing gains? Real estate investing. It’s a fantastic side gig,  if you’ve got the capital and persistence. But it’s not for the faint of heart.

An Accidental Journey

We became accidental landlords in 2008. My wife had bought a small downtown condo to live in, but we ended up moving in together in another property. Rather than sell it straight away, we decided to rent it out. The tenant we found was good and being a brand new condo, there was little to do in terms of maintenance. Our total investment was about $50k for the down payment. The rent we collected paid for the mortgage and other expenses, but we definitely didn’t “cashflow” from this property. We we talk about “cash flowing” we mean making a monthly profit after expenses.

After about a year, and when the tenant’s lease was up, we decided to sell the place. The condo market was starting to boom at that time and we made a quick, tidy profit of around $100k. Not bad for a relatively passive investment!

Moving On Up

We then took some of that money and bought an old row house in what I would call a “B” neighbourhood in the city. This is a neighbourhood where people live more because of its affordability rather than its chic. We did, however, think this neighbourhood was turning around. There was lots of renovation work going on in the houses around the one we bought.

This house had two units: the main and second floor plus a basement apartment. We rented out both units.

We also bought another, period home in a city about 100km from us. Houses were cheaper there, the rental market was good, and we scored a triplex (three rental units).

Now that we got the bug, we also found another triplex in the same city. However, we didn’t have quite enough money to buy it. So we did a Joint Venture with my parent-in-laws.

Joint Venture

As mentioned, a Joint Venture is useful when you don’t quite have enough money to invest in a rental property yourself. A common scenario is that two Joint Venture partners will go 50/50 on a property. Another common scenario is that one person will bring the downpayment money and the other person will “run” the property — find tenants, fix things, mow the lawn, etc. We went 50/50 with my parent in laws.

Cash Is King

One rule I have for investing in property: make sure you have positive cashflow. I’ve heard of many people who stupidly invest in property that doesn’t make money every month in the hope they’ll recoup their losses when they sell. If the property you like doesn’t cashflow, then move on and find one that does. Or look in a different market where rents are high and property values low — I did this to great effect.

Find a Property

Generally you’ll work with a real estate agent to find a property. For the latter two of the properties we bought, we worked with specialist real estate agents (on both the buy and sell transactions. Specialist agents tend to be able to find you rental properties better, often have access to properties that aren’t on the open market, and understand what valuation metrics like CAP rates are.

Renovate It

I like to buy “B” properties that need a little bit of work. You’re generally getting them at a discount versus the cost of doing the renovation work at the expense of time.

You’d be surprised what just new floors (laminate and tiles for cost and durability) and a coat of paint will do to a property. These are things you want to look for when you buy a property too: look for things that could be easily be renovated to make the property “pop”.

Kitchens are generally very expensive to renovate, but a new countertop (again, laminate) can make a huge difference and be a reasonably priced renovation. I’ve used glass and stone tile backsplashes to great effect: my wife knows where to find outlet prices from Italian tile distributors in our city.  Cabinets can be painted (the doors benefit from being sprayed and should be removed).

Bathrooms benefit from new floors just like any other room, but they especially make things look clean. Tubs are a huge pain in the bum to replace. I would strongly recommend avoiding it if at all possible. However, bathtubs and shower stalls can be refinished by professionals and look as good as new for less than a remodel. We had an original clawfoot tub in one property and had it refinished — it looked like new.

Approach It Like A Business

Get an accountant who knows about rental property and how to do the taxes properly. Make sure you let your mortgage company know it’s going to be a rental property upfront. Get personal liability insurance (we carried a $2m “umbrella” policy rather than insuring each property separately). Keep the names and numbers of roofers, plumbers and handy persons on your phone — you may well need them.

Find Tenants

We found that free classifieds worked best for finding tenants. Real estate professionals were too expensive (often taking a month of rent) and weren’t necessarily any more effective.

Screen tenants properly. I can’t stress this enough. Even with screening we still had at least one “professional tenant” who scammed us and we had to evict.

Getting a credit check or using a service like Naborly is a good idea. Get them to fill out a proper application form that has all applicants on it. Find out what pets are going to be in the unit — two 150lb Great Danes in a second floor apartment doesn’t always work out so well.

 Do Your Side Gig

Assuming no catastrophes, you can sit back and collect passive income. The first passive income is the difference between your expenses and the income you received in rent. Hopefully this is positive, as we’ve already discussed.

The second passive income is that someone else is paying down your mortgage. Whilst this is an unrealized gain (you don’t free up that money until you sell) it is effectively free money. The only risk here is if the value of the property sufficiently tanks that you don’t recoup your purchase price.

Fast Forward

All in, we were landlords for 7  years. I’m not going to tell you it was easy. A lot of the time it sucked. But we made really good money from it and a lot of that money has now gone into my new home. We still have a loan on the new home, but it’s a heck of a lot smaller than it would have been and we have a huge amount of equity.

If you’re interested in the financial breakdown from each property, it’s below. Its worth noting that Property 3 and 4 were in a “B” market and turned out to be the most profitable over those years. The property market in the Toronto area has been crazy for the past decade, so it might be hard to reproduce these results until the next property dip. However, if you’re smart you can still make a property cashflow even in a good market.

PropertyBuy priceSale priceMortgage value at saleNumber of years heldNet proceeds*
Condo $189,000.00 $269,000.00 $152,000.002 $117,000.00
House 1 $364,000.00 $562,000.00 $331,000.004 $181,000.00
House 2 $249,000.00 $450,000.00 $164,000.006 $264,000.00
House 3 $227,000.00 $420,000.00 $165,000.006 $235,000.00
TOTAL $797,000.00
* Including all fees associated with selling but exclusive of taxes

Pros

  • Great return on capital versus savings accounts or stock market.
  • If you’re smart, you’ll make sure you have cashflow and tenant’s are then paying your mortgage and expenses. Wait 25-30 years and you have a free house!
  • Can be setup as a passive income with the use of a property manager and hired help

Cons

  • Getting called to fix a ceiling leak or exploded toilet.
  • Tenants can be hard to deal with an make your life miserable.
  • Amount of capital required to get started is high, but can be lessened with a joint venture.

Final Words

Real estate investing can be a way to secure real wealth. But it’s not for the faint of heart and anyone who calls it “passive income” is lying — even if you get other people to do the work, you’re still spending time managing them. Plus “subbing” out tasks means less money in your pocket, sometimes it even means no or negative cashflow.

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