Stocks or Real Estate, That is the Question?

Guest post by Brian Dagenais, founder, Brian Dagenais Properties

I often get asked how I got into the real estate business. Kicking, screaming and against my will would be the honest answer. Although I’ve been doing this since 2000, prior to that year, my attention was 100% focused on the stock market. I was quite happy to continue renting my tiny little 1-bedroom apartment, working full time at a rather ordinary job and flipping the channel between ROB and CNBC at every opportunity. It was an exciting time. Even though I earned significantly less than $30,000 per year, I was able to invest consistently and watch contributions of a few thousands of dollars turn into several tens of thousands of dollars in fantastically short periods of time. The mid to late 90s were great for investing in technology. I thought I was so smart and had my stock portfolio planned out to the year 2005, at which time I’d have in excess of a million dollars and would sell my portfolio, buy an interest bearing investment and live off the interest for the rest of my life—retired at age 34! Then my wife came along and ruined the party.

If we were to get married, we’d have to own a house, no more renting. I protested, “I don’t have any money to buy a house. Check my bank account, there’s $16 in it! No bank will qualify me for anything more than a tool shed.” And then to my indignity, she pointed to my stock portfolio. There’s lots of money there she insisted. Sell some of your stock. We almost didn’t get married over it. I was devastated. I never had the discipline or the work ethic to do all that well in school and obtained only a very ordinary diploma from college. My stock portfolio represented my only opportunity to be wealthy in this life and here is this person telling me to start cashing it in early! Anyway, she won the argument.

A Brian Dagenais Property (circa 2013)

Thank God for that because I was able to actually buy two homes from the proceeds before the stock market crashed and eventually eroded what was left of my portfolio down to only a few thousand dollars. It was such a bizarre concept—a single share that was once worth well in excess of a hundred dollars, now only worth a couple of dollars a few years later. I was lucky enough to have sold most of my stock before it eroded away to nearly nothing but it was still a very sobering moment.

When I gave into my (now) wife, I assumed she’d want to buy a small single family home but she’s an observant person and told me about some family friends that had bought rental properties in her home town and done very well over the span of a couple of decades. This husband and wife team had three children and when they got married, as a wedding gift, the parents bought each of them a small home in cash. That got my attention. After all, who pays cash for a house let alone three?

We ended up buying a small triplex, living in one unit and renting out the other two. I knew nothing about owning a home, even less about how to be a landlord. I was petrified. What if a toilet breaks at 2 am? What if tenants don’t pay? What if they trash an apartment? I was ill equipped to handle such things. Luckily none of those things happened for the better part of a year. I seem to remember our first crisis being a leaky kitchen sink around 8 or 9 months into our ownership and miracle of miracles, I was able to fix it myself without calling a plumber. When I look back, that first 8 or 9 months of smooth sailing was so crucial to allowing me to continue and build upon this little venture of ours. Whatever else, your first investment has to work.

I think that if we had experienced road bumps early on, not being fully committed; I think I would have asked my wife to give up. But that didn’t happen. And what did happen, which was very exciting—my mortgage balance shrunk rather quickly and noticeably. With a mortgage of $102,000 paying biweekly, I was able to cover the mortgage with my employment income, while my wife’s income covered the rest of our bills. That left two rent cheques free to pay down the mortgage. And we did, and we bought another triplex six (!) months after buying our first using the remainder of my stock portfolio.

Over the next  three years, we were able to pay down nearly 40% of the mortgage and appraisals of the property hinted at a little over $100,000 in price appreciation. I sat down and did the math—$100,000 in price appreciation and about $40,000 in mortgage pay down equaled about $140,000 in net worth built up over 36 months. And that was from just one property. What took me about five years to achieve in the stock market, I was able to achieve in about three from one property. After that appraisal, I was hooked; I was determined to push this as far as I could. Over the next several years, I bought a small single family home to flip in 2003, another triplex in 2005 and 2008, a fourplex in 2009 and a seven unit building in 2010. In 2012, I put an addition onto my smallest triplex, doubled the size and added a 4^th unit to the building.  It’s been good by any standard but I’m always thinking it should be better.

Without a doubt, these investments have allowed me to live a lifestyle much better than if I had only employment income to draw on. That being said, I’m not rich, it hasn’t been easy, it hasn’t been quick, it’s been frustrating at times and despite what the seminars and others may tell you, it’s not idiot proof, it’s not as passive as you think and although the income may grow in ways that please you, the expenses often grow more quickly than you ever expected. To this day, 13 years into this adventure, it is the “one-off” expenses; the unplanned expenses that never seem to stop and erode into your paper profit far more than you ever expected.

I invest for cashflow; properties that can support themselves without regular injections of cash out of my pocket. I do this because I look at a house and see it as a big hungry bear. It consumes a lot of resources. When things are going well and running properly, it’s great to have the bear on your side. When things are bumpy and crashing down around you, that bear can be one giant burden. If the bear is self-sufficient, I feel far more comfortable in owning it as opposed to a bear that continuously digs into my pocket, wearing me down financially over time.

Maybe I expose myself too much to those Rich Dad, Poor Dad seminars that suggest you can be a millionaire in a few short years and a few short hours of work if you follow their advice or those TV renovation shows and get a little envious or frustrated when I see some office worker who’s never used a hammer buy a run-down house and flip it for a $75,000 profit three months later. Unlike on TV, whenever I do a renovation, my bank, in all cases but one, values the property higher than prior to the renovation but only at a fraction of the money spent. My most recent renovation—a rather large project costing several hundreds of thousands of dollars only returned 60 cents on the dollar according to the bank’s appraiser. I was hoping for 80 cents. We’ll never know who is right until the property is sold but regardless, it was disappointing to see such good and seemingly thoughtful work only receive modest credit. By the way, I think the bank’s appraiser is working for the bank not me so naturally, I believe he’s wrong, I’m right.

I’ve been told that real estate is a passive form of investing and while I actually spend far more time at my 9-5 job, my real estate does occupy significant portions of my time, either requiring my presence or more often, simply requiring me to devote portions of my days and evenings planning, thinking, brainstorming on how to grow a more efficient business. While it is true that there are landlords out there that put little thought and attention into their properties and care little about their tenants, I like to go to bed with a clear conscience and truly believe that if you invest with an attitude towards quality and good customer service, it will pay off more often than not.

I’ve been a very fortunate landlord over the years. Starting with three units and working my way up to 24, I’ve had less than $6,000 in non-payment of rent. I’ve had but a tiny handful of midnight phone calls from tenants. I’ve had many tenants leave behind a big mess but I can only remember 1 or 2 incidents where I’d say they trashed the apartment. I did have one careless tenant cause a flood that did $17,000 in damage. At the time, I was very upset, feeling very worried and sorry for myself but looking back, I think I was able to actually turn it into a positive. Insurance covered the repair and returned to me an apartment that was actually better than the old one. They also covered the lost rent while the repair was taking place. I evicted the tenant and rented the repaired unit for 12% more than before. I guess that’s a win but it certainly didn’t feel that way at the time.

 On the subject of evictions, I’ve had to do some but not as many as you might think—perhaps a half-dozen in 13 years and of those, only one fought me long and hard on it. One thing I’ve learned about this business is that you approve your tenants slowly but act quickly to remove them when appropriate. It’s not a matter of being a nice guy, it’s a matter of standards and I expect my tenants to rise to my standards as opposed to me bending to meet theirs. And in the vast majority of situations, it’s worked.

Tenants can make you or break you in this business. People often ask me what I look for in choosing a tenant. I tell them I look to rent to people that have something to lose in life and by that I usually mean a verifiable job or in the cases of a young adult, an established parent. People with stable parents and stable jobs can be sued successfully. While there are no guarantees in this business, I find people with consistent and stable employment—verifiable employment—far less likely to take off in the middle of the night, far less likely to trash a unit or cause problems for others than compared to tenants with no job or sporadic employment. Someone with consistent and predictable employment likely has a fairly set routine in their lives. They are unlikely to want to disrupt it in any significant way by being a bad tenant and risking eviction. No guarantees though. The other thing I like to do is talk. I talk to my applicants. I try to get them to open up. We can talk about anything; it doesn’t have to be solely about the apartment. In fact, aside from my sales pitch on the unit, I’d rather talk about just about anything else in their life. I find that the more I can get the applicant to talk, the better. I get a better understanding as to who they are as people; it gives me an idea as to how they’d fit in the apartment and with me and I also find that with potential tenants that have something to hide, in many cases, the more they talk, the more clues they give about their past. And since they may have something to hide, they’re often exceedingly nice and likeable and when I find myself resolving gaps in their stories in my head because they’re so nice, that’s my warning sign that maybe I should pass on this person. It’s not a perfect system and it takes time and practice but it works far more often than not in my experience.

As I’ve gained more experience, I’ve had more and more people come to me, most like to hear the story and a few want to get into it themselves. I’m always nervous giving advice because what works for me may not necessarily work for others. I was presented with a specific situation and opportunity and was able to plan, adjust and mold my actions slowly over many years. Each investor is going to have his or her own unique set of circumstances that will have to be taken into account. As such, I usually limit my advice to the advice I find that I give myself more and more recently—be patient, understand that you own the investment much more intimately than a stock and treat it as such; do not to be afraid to lose yourself providing customer service for your tenants. Dare to dream but be careful not to lie to yourself too often and accept disappointments and realities as they come and learn from them. I truly believe if you can follow these steps, you’re very likely to be a satisfied investor over time.

Brian Dagenais, Brian Dagenais Properties https://www.briandagenaisproperties.com/

Postscript 1: Many small and medium sized Landlords use services to do background checks on prospective tenants. They can do: 1. employment verification, 2. credit check and 3. criminal record check. Costs usually range from around $50 to $100. This can be well worth it. You can find them by searching for “background checks for landlords”. (Ed)

Postscript 2: One other thing that is highly recommended is regular, periodic checks of your units (giving tenants proper advance notice). These could be monthly but should not be less than quarterly. It helps further develop relationships with your tenants, gives advance warning of any problems with the units that need to be fixed and also provides an early warning that a tenant is turning into a problem. (Ed)