How Can You Find Deals In Real Estate?
cashflow is not the way it's not the problem. That's just an excuse for not to get into real estate. And the reason why I like multifamily is because you can get economies of scale so that you can potentially get cashflow positive or even break even right, but that shouldn't be a reason to stop it in my opinion.
Transcript**
Kenneth Yim 0:00
Alright guys, another edition of Table talks. Let's do it. Today we're gonna be talking about how to find deals in real estate in Toronto for multifamily, right? Yep. What do you find it kind of look man
video deals out there. A lot of people look for cash flowing properties, right? That's the biggest thing that doesn't cash flow. Screw you, man, your cash flow is your job. That's what it takes. As long as you can carry the place we just talked about last week, we talked about how as long as you can carry the place, it'll appreciate in value. There's four ways what's the four ways to make money in real estate? Who knows this first one mortgage, mortgage paid off paying down your mortgage just right, just by guarantee by default and 25 years, your place with paid off just by paying a mortgage right? As you go a line of credit interest only whatever, maybe do a 30 year, but you're gonna be paying it off by 25 or 30 years for sure. That's one way what's the second way appreciation? price goes up. Everybody knows that everybody loves it. That's the way in Toronto for the past few years. It's going up in price, right? speculative nature who knows how long it'll last for but it will happen, right? Because of inflation we just talked about to the currencies being debased, right, so it's definitely gonna go up in value based on that alone. What else cash flow, cash flow. Everybody thinks cash was a wake made way to make money in real estate. I disagree. Unless you have 100 unit apartment building 200 unit apartment building, it's hard to make the spread now because everything's so expensive, right? What I mean by the spread is what it costs you to carry with mortgage means taxes, insurance, versus what you get in rent.
Bahder Boestamam 1:38
It's hard to make that. Yeah. Some people just getting breakeven, at that point.
Kenneth Yim 1:43
Even at best, I would say even and that's what I'm trying to say. cashflow is not the way it's not the problem. That's just an excuse for not to get into real estate. And the reason why I like multifamily is because you can get economies of scale so that you can potentially get cashflow positive or even break even right, but that shouldn't be a reason to stop it in my opinion. That's you know, it's common knowledge and like the states right if you listen to say bigger pockets or something everybody over there always podcasts a I'm only my biggest criteria is by cash flow properties. Absolutely idiot, buy something that appreciates in value. That's where you really make your money at the end of the day. And what's number four
Mark Botelho 2:18
Tax deduction?
Kenneth Yim 2:20
Tax benefits, there you go. Tax benefits, there you go, Oh, you got it. It's gonna get one day
Michael Ng 2:29
Deductions,
Kenneth Yim 2:31
Tax deductions, tax benefits, there's 403 ways in Texas to defer, deduct and depreciate, depreciate, yes. Okay. So what that means is you get benefits from deferring taxes, if you want to business a cash out refi, right. So you have enough equity in your property, and you're deciding whether to sell it, or refinance it ticket money, right? If you sell it, you're gonna pay capital gains on it. So basically, 50% is included in your inclusion rate, that gets included your income, so you're at the highest tax bracket, let's say you're paying 50% taxes right on the income you make. So that's basically 50% or 50% 25%, you're paying in taxes, right? The other way to do it is to leave 75% of equity in your property and refinance it to 75%. You leave 25% equity refinance of 75%. So essentially, you're taking the same amount of money out anyway. Right? So just refinance it. And when you do that, you don't pay taxes. Deferring deducting means to basically deduct all the expenses that you have for the property, right, like
Michael Ng 3:27
Anything that's involved with maintaining the property maintenance,
Kenneth Yim 3:29
Repairs, upgrades, yeah, trades, even like travel, meal expenses, all things, it's not really a benefit, cuz you're not really getting that income, but at least you get the benefit of doing that. It's not you're not paying with after tax income to maintain your property, whereas you would do that in your primary residence. Right? Last one is defer the taxes which we talked about depreciate, right, same thing. Those are the four ways to make money in real estate. And that's why I like multifamily, because you can do that at scale, with a single door with a condo with a house, maybe even two units is really hard to do that. Right. I would say, in order to be cashflow positive, in my experience, you probably need three doors or more. The reason why cashflow is not something I really believe in or really expect to as my criteria is because I'll never be rich off the cash flow on it, I need a lot more money in that every month to survive and to pay the bills, keep the lights on going on here and I need scale you need the appreciation and take that money that way instead, right? Meanwhile, cash flow just maintains the the asset and keeps me in the market. Right. So as long as you can get the cash flow somehow, whether it's substituting from the rent that you get from the income that you get from property, maybe have a coin operated laundry or something or parking or whatever it is, or whatever it is not whatever it is that you have in your property, your multi unit property, that'll keep the mortgage going, then you're good, right and whether it means you have to supplement from your own pocket. It's good. All right, what else how to find deals in real estate right? Okay. So what I would do is I would look at the basic fundamentals. The easiest way to do it is through the cap rate. You guys know what cap rate is
Michael Ng 4:58
Cap rate is essentially a percentage measure that we use to see how profitable businesses or how good of an investment it is, it's by taking your gross income divided by the initial purchase price of the property,
Kenneth Yim 5:10
Almost, that's very good. It's a great explanation. It's good way to compare property a property B, because they're No, no two properties are ever exactly alike. Right, but at least you can do just a quick litmus test, almost like a P E ratio, you know, I mean, like, just, you kind of have a price earnings ratio, you kind of know how to evaluate a property based on certain criteria, right. And that's basically the net income, not gross income. So you take the gross income, gross rental income, minus all the expenses, you get a net operating income for the year, you divide that by the purchase price, and you get a ratio, that ratio, you can use the compared to this one to this one to this one. Okay, so that's called the cap rate. Basic fundamental. What do you ask me? Okay, what's the cap rate in Ontario, what's kept in Toronto, people are accepting like three. So lower the cap rate, it means that you pay more for it, right? So the percentage of net income versus what you buy it for? Brings, like the lower you get, or the higher this goes, yep, then that brings a ratio down, right, that cap rate down, you're looking at, traditionally, it used to be back in the day like 5% 6%. Now it's down to like 3%, maybe even two people or so by four. But you because they're buying for generational wealth at the end of day, like if you're looking for if you're stuck looking for five 5% cap rates, you're not gonna buy anything. And that's a problem. So if you just close your eyes, just buy it at 4% 3%, whatever, at least you'll have the property and you can find ways to make it more profitable over time, right? A lot of people think cap rates only thing I'm not gonna buy because it doesn't meet my criteria and cap rate. Yeah, well, the way I find deals is that you look at under market rents, because those tenants may or may not leave unless enforced. Now, I'm not saying be a slumlord. I'm saying over time, they will leave naturally on their own. Or maybe you improve rent by giving them extra benefits, right, including washer and dryer in their units, you can raise the rent by whatever that changes your cap rate calculation. Right. So you can get the cap rate higher, based on things you do to the property as you as an operators and landlord, that's what you do. So another way to
Michael Ng 7:02
Do it is to live in neighbourhood growth, and not just base your decision on cap rate. That's the
Kenneth Yim 7:06
Appreciation portion of the investment part of it, right. So you look at places that you think are going to be appreciating you buy in a C class area. So another way to one way to rate properties is that you can do it based on on a rating scale ABCD that's kind of normal, right? So you can do it based on the building and the area. So we just closed on a C Class building and a class area, for example. But a lot of people say that they prefer to invest in C or B areas, not D because D is too much crime rate. Right? Like you're talking about schools access to amenities and that's how you kind of rate right. It's too long for the D class areas to turn back to a C class and do a B class into a class dimensionally right but so far C class like say, I don't want to name neighbours because people get pissed off. But you all know them. You know, the C C class neighbourhoods, those are slowly changing in gentrifying just to be class, right? So invest in those ones, maybe that's a great way to do it. Or take a dump of a building and renovate, put some capital expenditures and renovate the building, make it nicer, turned around. That's what we did at Kensington. It was great. Back to that question marks, you bought out a great question, how do you find those deals? Well, of course, it was MLS, I think the majority of properties are on them. Last off market deals may not even be a good deal. A lot of people are crazy about off market deals. In my opinion, I think that you can get ripped off and off market deals if you don't know what you're doing. Right? So certainly, but that is an avenue. Sometimes there's situations where you might want to sell ahead of time and don't sell it off market. Maybe they're older, maybe it's just an easy, easy button to buy it off market. Yeah, right for the sellers. That is what you can do for off market, you can talk to property managers that manage the property, maybe they have the first kind of experience first experience of when the seller wants to sell or they're getting you're selling, right? Maybe you can, you know, send fliers, whatever you might be like, just talk to industry people. You know, some of us will have insider information on properties that are not listed. That's great way to do it. What
Michael Ng 8:59
I like to do was actually observe what kind of businesses and kind of people are going into areas. Because as far as an investment goes, I enjoy seeing which neighbourhoods are are just reaching the beginning of their potential. So you know, I just like to observe demographics, and it kind of dialed back to how I was going through university and I just studied data on, you know, what kind of people are moving in how employment is affecting the neighbourhood, what kind of businesses are going in? And what the what the average education level is for that neighbourhoods? Just looking at all sorts of stats like that.
Mark Botelho 9:33
Oh, look at this area. This area, you know, 30 years ago, no one wanted to live here. Yes, it was a sketchy, sketchy area. Look how far it's come?
Kenneth Yim 9:44
Yeah, so for those guys don't know. We're in Riverdale and South Riverdale, North Riverdale, sorry, just the border between North and South and the North actually. But this area used to be really seedy. We're crossing the dawn jail and used to be full of crime here but you know, it's getting better. He's Chinatown right?
Bahder Boestamam 9:59
For me It was like when I bought in it was Regent Park back in the day. So that was like, pretty bad neighbourhood but now it's like depreciation for the the units itself is going up by a lot but when I purchased this already went up like 50 60,000 already. So it's like, like you said, like a C Class C Class place, becoming turning to the class and get there. Yep. So
Kenneth Yim 10:22
One strategy yet to look for deals, you're looking for areas that you think are gonna be gentrifying, you know, things close to subway lines, for example, like the upcoming LRT Line, that's the big one. If you're around there is no question your place is gonna be a progressive value. Sometimes a cluster has to be close to I don't get so how do I evaluate the classes? I think I mentioned it really quickly before, I should go a little more detail for that. But it's basically the quality of the schools in the neighbourhoods, right? That determines that the amount of crime that you see in the neighbourhood? Now, none of these things? They're all subjective measures, right? Like you just kind of know that rubric dependent like Riverdale, for example. It's a perfect example. Is it a class or is a B class? Or is a C class? Right? It's definitely C, I think it's B, I think maybe it's a but we look at Plato States doesn't a kind of thing. Right? So I'd say access to schools, good schools, but the crime rates, infrastructure, transit is good one. And then isn't just shopping and groceries and whatever else around there, what kind of quality stores you have, the people, the income levels of the people in the area that matters as well, to that matters, the quality of your neighbors, right, all that stuff. All that stuff factors in on the subjective ruling on what you would say a neighborhood is based on ABCD scale, the property, same thing, how old it is, that's probably the biggest thing. If it's newer, it's probably gonna be closer to a class based on on the finishes and materials and the amount of maintenance is required on it. Right. If it's less than, obviously, it'd be a lot higher, brand new windows efficiencies, things like that,
Michael Ng 11:47
Right? Because he's being funneled into that neighborhood and to the property for the property in that neighborhood. Yeah.
Kenneth Yim 11:55
Alright. So back to the question again, how do you find deals? Everybody's looking at that? That's the biggest question. You know, there's a whole bunch of strategies as real estate agents that we do such as for residential such as
Michael Ng 12:04
Well, I do door knocking a lot. And I have buyers on my roster, that I'm looking for something specific. And I'll go out there and I'll try to book appointments to find these houses that they're looking for.
Kenneth Yim 12:16
As a multiplex owner, I get in my personal house, they send me letters. I know how to do this, by the way, but and a few people out there know how to do this. I'll tell you guys off camera how to do this. But basically, I get letters to my own house, based on, you know, are you willing to sell here's multiplexes that are they they're smart, they know how to do this, what else you need to do to find multiplexes. Or you can create them too. Don't forget the other thing. If you see a big house that is large enough has enough square footage that you could fit a few units in. You can take your steps to go to committee get set up, you know, if you get a minor variance, if you need to maybe have to rezone, probably not if you're a residential area. Yeah. But there's ways that you you just kind of see as long as the building code and barcode, you're allowed to have two units for a zoning in Toronto. Right. So what maybe you could take one in turn to three units.
Mark Botelho 13:06
Yeah, some of you some people do it in smaller houses to basement main level, top level. And they you know, get the proper zoning and get it all done. So.
Michael Ng 13:15
So when did that my neighborhood read on my street, they turned a 26 by 100 foot lock into from one single family home that was detached into three separate units with water and electricity all separately, metered. Nice, nice. Yeah, generates about $65,000 worth of revenue based on rental income.
Kenneth Yim 13:35
How's she going to find deals? Because someone is what creative ideas? Yeah, so
Bahder Boestamam 13:39
Far? Yeah, just basically just talk to other agents like what they have, like, you know, for example, for you, you probably have tons of like, maybe like you come across more often off market properties and all that because you're in right? door knocking, like he says a good one, just sphere of influence, I guess, too, and just talking to people. And like, let's say, let's say you have a client who's thinking about investing in something, maybe kind of pitch it their way, like why don't we you try to make your house to be like a multiplex or something like that. Right? That could be a great idea. And then they end up like buying something else or invest in something else. So that's another way. That's another
Kenneth Yim 14:13
Way to do it. Actually, that's a good way. Now, you mentioned that if you want a house right now, and you're looking for another investment, go buy another house gonna find another place to enter some of these in theory, right? But go buy another place to move, right? You might be in a situation, go buy another house, or even keep your house that will keep the existing house you have and turn it into units and gardens who'd come in and we've been through
Bahder 14:32
Exactly or laneway house to is cheaper to do laneway House and Garden suites and then you could live there and then rent out the main house. Right. So that's
Mark Botelho 14:40
Your time your next triplex Well, and that's what that's what we're looking at right now. Because we bought our place right now because of the laneway and the potential to build a laneway house. Yeah, but we know that once the kids are starting to get older, we're going to move to something else and we want to hold on to that house. And you know, hopefully by then we built the laneway house you have like income from the house as well. is going well.
Kenneth Yim 15:02
And we're not talking about this in terms of greed, like, yes, we're doing our best for our families because we need to be there you're providing. So it has to be safe, it should be safe anyway, they should hopefully don't do it some some way. Hopefully do it with permits and do it legally. But the reason why that's important is to let you ride safe housing for people as alternative options. Instead of just renting those expensive condos downtown. You can have cheaper options for people to rent, which everybody there's a huge need for it with all these people coming to Canada.
Mark Botelho 15:28
Well, it's not just for us, this is the type of stuff that we look to do for our clients. What's it
Kenneth Yim 15:32
Right so Yeah, another way to do it talk to people that are having troubles right now. Someone that plays on their own right unfortunately, maybe we have a Buy It Now price from them and maybe we'll buy it maybe we'll get a group of our investors together by other questions multiplexes multifamily anybody know what's coming twice. Gone. Thanks for watching. See you next week.