Taking the Stress out of ‘Stress Tests’ with Derek McEwen

 

In this podcast episode Derek McEwen walks you through the ins and outs of growing your portfolio from setting up your business, financing, choosing which strategy is right for you, finding partners and placing tenants - with tips to take the stress out of the process.

Sarah: REITE Club nation. Welcome, we are speaking to Derek McEwen today and it is me. I am the one solo co-host and we talk about making offers and how to put your deals together. We talk about structuring, partnership deals and Derek shares some of what he's been doing as an investor. He's also a realtor and helps a lot of investors buy properties in Cornwall, Ontario.
I hope you enjoy this today's conversation today's podcast episode. Don't forget to leap a rating and review and check us out. We've got tons of meetings, some virtual, some in person we've got wine tours, all of that fun stuff. Check us out on thereiteclub.com. Go to the calendars and the event page on that note. Let's bring in Derek McEwen, Derek, welcome to the show. How are you?

Derek: I'm doing very well. How about yourself?

Sarah: Good. We haven't met, so this is actually the first time. I'm gonna learn about your story along the way as well. And right before pressing play, I asked you where you were joining in from and I think one of the potential really great markets that Ontario has to offer, maybe share a little bit about who you are, where you're from and the markets that you're investing in.

Derek: Sure, that sounds great. Originally, I am from Montreal and I've been living out near Cornwall for about the last 12 years. When I moved to the area, I I became a realtor as a second career in Montreal. I was an insurance broker. Along the way when I became a realtor, I was lucky enough to meet at the office that I was working with at the time someone who was giving investment seminars.
I learned from them about the possibilities of investing in real estate as a reason to potentially attract new clients. But the more that I worked about it, the more intrigued I got. I started to buy it myself.

Sarah: That's great. Are you able to share, maybe today, what your portfolio consists of? Is it a specific strategy? Is it in a specific area or have you expanded since then?

Derek: Sure. My area is around Cornwall because that's what I know. I'm able to easily do the research in that area. I like to buy and hold, so I have one property on my own. With my partners, we have five now. And looking to buy more when the opportunity comes, we focus on small multis, duplexes or triplexes. If we're lucky enough to find a good deal on a fourplex, we'll definitely grab it. But our budget and our price range we're sticking around that area there for now. We'll see how we can grow going forward.

Sarah: You've got one on your own and a handful with JV partners or partners. Why did you choose scaling up with another partner versus maybe doing it on your own? Cause there's pros and cons to both.

Derek: Sure. The main reason was because my partners are into property management. We have a great partnership, working relationship together, me as the realtor and them more hands on taking care of the properties. It's an excellent fit. We just work well together. I do the research when we're in the buying position and they manage it. I don't have to worry about what's going on behind the scenes and I have confidence in them that they're taking care of things. It works out very well for us.

Sarah: It's like you're complimenting each other in the sense that you're finding the deals and they're doing maybe the management day to day stuff that you may not want or have time to do, still working as a realtor. What about just like financing and funding? Like, how did you and your partners, for example, decide how to go about that?

Derek: For the first property, we reached out for a private loan. That property itself was about four years ago. The timing was actually very lucky for us because it was before the market really went crazy. The prices have escalated a lot since then. From that initial property, we have been able to BRRRR it and get two more properties out of it. Along the way we also borrowed for two other properties.
We're in a position to look at our portfolio in general. We're thinking of selling off our lease, performing property and in doing so that will pay off the majority of our loans. We'll be able to go forward on a very stable footing.

Sarah: You've closed with private lenders. Was this like a hundred? The more we can share, obviously with the audience on some of the things that they could do, for example I think that the easier it might be for them to be able to do something similar now.
Were these loans like through a mortgage broker? Was it the financing through a private financing of somebody that both knew personally.

Derek: That's exactly it was private financing from somebody that I knew a family member actually. I discussed with them my desire to purchase real estate and the opportunities around it. And they felt that I knew what I was speaking about showed them the opportunities that are out there that other people have become successful doing. We made an arrangement for a loan and like I said, now we're in a position to pay that off and move forward.

In our case, it was not necessarily easy, but it was a familiar face. The quest wasn't as difficult as let's say, going out in the network and looking for a complete stranger. But there are mortgage brokers in our area that do deal with that kind of thing. They work with private lenders.
For the people out there that are looking, I think that's a great place to start is to talk to a local mortgage broker, see if they have any vendors in their portfolio and it could be a great fit, could be a good way for people to start.

Sarah: Absolutely. You have an exit maybe with a lender type of bank or a trust company or credit union once you're done because you have to still wait or maybe you didn't, right? If you're still just holding as a buy hold from a private money standpoint, you just have to make sure that the numbers work regardless cause sometimes private money is great. Sometimes it's a lot more expensive than others. I guess the more that somebody, the easier it probably is going to negotiate terms that might make sense maybe even to keep the property for a little bit longer.

Derek: Exactly. We are in a buy and hold strategy that's for sure. The private loan for us was basically enough to put down payment. We went with a traditional financial institution as well. It was like a second mortgage. Now, we're in a position to pay that off and just continue moving forward with our standard bank.

Sarah: You're essentially like maybe going to refinance the new value and then minus the old mortgage, then that Delta is likely enough to cover the 20% down or whatever it was that you put down as the down payment. And so the private lender then gets paid back and potentially you can reuse their funds into a future deal.

Derek: Exactly. It worked out very well so far. The thing is now obviously the property prices are rising as everybody has noticed across the province and the country for that matter. Getting your hands on the right deal at the right time is becoming a little bit more difficult, but we're not in any rush we're not going to buy just for the sake of buying. We wanna make sure the numbers are right. That we're in a good position.

We don't wanna overextend yourself which I highly recommend that to everybody to make sure when you're buying don't panic. Make sure you are well prepared for not only your current debt needs by future as well. When you have to refi in three or five years, make sure that you're gonna be in a great position to to handle what could be coming with all the interest rate hikes we're seeing.

Sarah: Absolutely, we're likely seeing an increase in June, like another increase in October. Probably even more down the road, depending on what happens. Let's talk about numbers. Let's talk about acquisitions. I know that's your main bread and butter of how you're positioning your partnership. You look for these properties, you analyze them, walk us through that process.
What does that look like? Maybe just step by step. Somebody starting out, looking at properties has an idea of how to even look at these properties or how to run some of the numbers that you're looking at.

Derek: For me, it's very important for myself and not only my partners, but any of my buyers, just to make sure that the property will cash flow meaning that the rental income is gonna be able to carry the expenses of the property taxes, water taxes, the insurance definitely the mortgage and still have enough leftover just in case there's a little bit hiccups along the way in case we get a vacancy or potentially a problem with a tenant.

We just wanna make sure that the cash flow is potentially there. But not only that, but we like to look forward a little bit. What if the cash flow is adequate to get by, but also what is the potential cash flow on a tenant turnover? What's our potential uplift? In the next year or two, where we can really see some great appreciation and capture that additional income to be able to put it into the next project when our mortgage does come up for renewal. A little bit of all of that combined but the most important thing is that we wanna make sure is the income.

Sarah: Absolutely. The cash flow portion is what's going to in my opinion. Have that staying power as rates increase as the market might go into a different cycle, maybe a downward turn. This is why we don't just bank on the crazy appreciation that we've had in the last couple of years. Everybody that bought anything, looked like a genius but at some point it didn't last forever.
Some markets are faster. Its market cycles are faster than others. Alberta has a faster market cycle than for example, Ontario. Everything comes up, everything comes down. It's just a matter of at what degree and what portion. We talked about cash flow. When you're looking at your cash flow numbers, how would you even suggest that somebody figure out what market rents might be the first specific area? Like where can they get that data?

Derek: I would speak specifically with a local realtor and I think that's very important. Everybody has their own realtor that they like to work with. But a realtor from Ottawa isn't necessarily going to be a great realtor to tag along with you to go buy a property in Hamilton or London or somewhere around there. I think the knowledge of a local market is very important for everybody and a realtor that does deal in real estate will understand.

They'll have their finger on the pulse of what a two bedroom is going for or what a single family home can rent for depending on the condition it is or the size or whatever. I think that is the most important key for anybody.

Sarah: Absolutely. You've gotta work with people that have a local pulse on the market. It could be even through property managers. That is local in that area. If you're planning on hiring that property management company, they likely have some good data because many of them also place the tenants and put the rents at whatever the market rent is and start screening that way.

What about stress testing the property for the rate increases? Like, how are you factoring some of that in, as we know that. We're not gonna be in these low rates forever. Something that cash flows now may not necessarily cash flow the same, in two years from now, are you doing anything specific to account for that?

Derek: For us we, we don't take any money out of our company per se. We're accumulating our cash and our cash flow, but also at the same time when we do purchase. We try to envision what would happen upon our mortgage renewal. How much more can we handle and what effect will that be on the bottom line at the same time, we're hoping that there will be at least one tenant turnover in a property.

If we're doing multi, if it's a three unit property. Assuming that we're gonna get at least one tenant turnover in that four or five year period of time and maximize our market rent on one of those units. That'll additionally help us during the refinance when we go through that.

Sarah: You're buying these essentially with the tenants in place, and then hoping that one of them, or two of them, or three of them move out at some point so that you can reset. The rent's back on the market because in Ontario, if there's a tenant in place, if these buildings are in rent controlled units, you can only increase it by a very small amount, which is 1.2% in 2022 and not more than 2%, thanks to Kathleen Winn back in the day that capped it. But, market runs can go up 10%, 15% a year because of supply and the low vacancy.

When your tenants move out, if you're a new investor, that is actually a good thing, right? It is a good thing when they move out and you can reset to the market. Once they've been there for 2, 3, 4 years, you'll start falling behind thoughts.

Derek: It's extraordinary. The whole thought process of all of that. Like you said, we're kept this year at 1.2%. And yet boy we got nailed on our insurance increase over the last two years. It must have gone up about 30% or 40% combined for the past two years. 1.2% doesn't go very far. When you have one of your suppliers that is insisting that you come up with the extra money.

I don't want to be a tenant basher, but just realistically, a lot of tenants don't understand some of the expenses that a landlord goes through. They don't understand why. When a tenant does turn over that a unit that was going for X is now going for X plus $500.

It is to be able to properly manage the property. Not a huge windfall. It is money that's being allocated to additional expenses that are coming up. I'm pretty fortunate right now. One of my tenants in my personal building. They just left after three and a half years, they were excellent tenants.
There's that loss of a great tenant that you can count on, but there's also the opportunity to get back to market rent. For this property here, I'm able to increase by $400 a month like for a small town that's pretty decent. That'll help me pay for the extra insurance. That'll help me spiffy the place up and get it ready for a great new tenant that I've already found for June.

It is necessary to go through to put those increases in, even though it's difficult on society that they're facing all these increasing expenses as well. Why are we not doing it as agreed? We're doing it out of the necessity to properly manage our property.

Sarah: Absolutely. Thanks for sharing. The other thing, because you're a realtor I'm just curious and we're gonna take a little bit of a different question here, but you talked about placing the tenants and finding the tenants, which is awesome. Are there any specific screening measures or things that you do in order to find the right tenant?

Derek: Lately, what I've been doing is actually asking for word of mouth. Basically, because of our area, there is a housing shortage, like there is in most of the country, most of the province. I'm at a point where if we do get a vacancy I ask colleagues and I ask friends and I give them or their contacts the first kick at the can. I think there's a little bit of a better safety net in there because a friend of a friend is more than likely gonna go outta their way to be a great tenant. They're not gonna wanna let down their lead who referred somebody to you.

I think that's important, but at the same time, they're still screened, just to make sure that the income is there and do they have any past references or stuff like that. I think that's a good way to go about it because we hear so many horror stories of that potential. That one potential lousy tenant that can actually ruin your livelihood. And those are the ones that have to be avoided at all costs.

Sarah: Absolutely. Thanks for sharing that. If somebody knows somebody that's a great tenant, you still do obviously your regular checks, but it's also nice to know that like you said, were referred by somebody else who if they mess it up or never referred by that person ever again. I wanna go and ask you just a couple questions before we wrap up just about offers and then you are a realtor. You probably do a lot of offers for yourself, but you also probably write up a lot of offers for other investor clients.

What are some clauses that now that I think the market's slowly shifting that we could probably have some clauses back versus just going firm. Of course, there's risks and pros and cons. But what are some maybe interesting clauses that as an investor you might wanna consider or just what you're seeing works really well in order to win the deal.

Derek: The last two years it's definitely been the sellers market. And not only that, there's been a lot of competition. A lot of them have gone multi, so it's been difficult to put in anything that's gonna be very beneficial for the buyer. Now things, like you said, are softening up a little bit. You still have to put it in your inspection class. You never know what could be hiding. You're just not expecting.

For example, in our area we have the core pipe which I don't know how common it is across the rest of the province, but basically it's sewer piping that's been put in from the forties to about the seventies or early eighties, depending on if there was still leftover stock. And they're unreliable. Basically, for a very inexpensive price. For a very inexpensive check of the sewer system with a local contractor, just to verify if it's functioning properly or if it's ready to collapse. Ones that do, it could cost somebody, $15,000 or $20,000 to get the mess cleaned up and new piping put in.

For me, it's very necessary whenever possible, to get that inspection clause put in there, just to make sure that the property is not going to hit you with any setbacks. Aside from that like just the standard clauses or just to have the seller confirm that there's no current problems with any of the tenants and paying their rent or any disputes in the property, or they haven't been damaging it. Stuff like that.

For somebody that's buying, let's say someone's buying a single family home that is tinted. We come into that whole issue. Is the property going to become vacant? Is the seller already in a situation where they've advised the tenant that they're selling and has the tenant advised the seller or confirm to the seller that yes, we are moving out.

Basically, for any buyer you want to put in that the property is going to come guaranteed, vacant now whether or not the seller is going to want to agree with that. That's another story, but if a counter offer comes and that clause is scratched out. It's a big warning sign to any buyer that you could be waiting a long period of time for that property to become vacant.

If the tenant says take me to the Landlord Tenant Board and let's have our day in court, even though eventually they should be moving out anyway. That's a big one for everybody to pay attention to. And I would definitely put that in there now.

Sarah: I'm gonna add a little bit to that because the vacancies in a province like Ontario, again, this is gonna be a little bit different for every province, but technically you can't ask for vacant possession unless you're moving into the unit or into the property. In that case as the buyer, you would issue an N12, and the N12 you're signing saying that you're moving into. However it doesn't mean that the seller might not have a good relationship with the tenants and offer you vacant possession, potentially if you ask for it.

As soon as you close, even if you close on these and the tenants are still there, they become your problems and your responsibility and in a place like Ontario, if they're paying the rents and they're not doing anything illegal, you're really not. Again, unless you're moving in yourself, your child or your parents or something, you're really not able to ask them to move, just to ask them to move. It's not the same as a commercial tenant.

Just to keep that in mind, work with your lawyer, work with your paralegal, if there's anybody listening to this, because there are some nuances around it. And I've had situations where people I know were moving into a property. And then all of a sudden the tenants were still there and they couldn't close. And then they had to delay closing. And at some point, they have to either decide if they want to forgo the agreements or take the chance and close with the tenants there.

It's always a bit of a risk, but just to keep that in mind, obviously work with your realtor, but work with your paralegal and your lawyer as well. Because if the seller accepts a vacant possession, that's great for you as the buyer. If they just agree to it essentially, you do wanna save your last showing and not use all of your showings to be able to ensure that is truly the case. I usually do a last showing the day before.

Derek: That's a great clause to put in as well, is the day before walkthrough just to make sure the property is in the condition that you're anticipating definitely, necessary.

Sarah: In terms of clauses, obviously, there's lots of clauses, but as an investor specifically, like just as we're talking, a couple things I would consider is, if you are doing this and you're potentially doing some renos or you're gonna do something that requires some purpose to add a clause with your realtor on your contract that says that you can start the permit process with the city while you're waiting to close. Cause there's no sense of waiting to close and spending and wasting 30 days or 60 days when you know, that could be time.

The city's gonna need to give you these permits anyway. You might as well have that clause in there. I think just even an assignment clause, you never know if you wanna sign it, bring in a joint venture partner, put in a corporation, it just gives you more flexibility. You can do that any time before closing. There's lots of things for you. Ask for the financials to confirm that the tenants are in fact paying that they're up to date.

There's so many things that you could do, off the top of my head. I would probably at least suggest like those get in there and that you're able to do it. Sometimes I like the due diligence clause, because it's all encompassing and you can put anything you want in there. You can walk through your contractor. You could do, just zoning checks of verifications, like your due diligence.

It's like this overarching clause, but again, more negotiation ability as there are gonna be less and less buyers. I think, in the coming months, this is gonna be a great opportunity for very savvy investors that are gonna be in this, be in the game for the long term to be able to snag some good coming opportunities.

Derek: I completely agree. We're already seeing a little bit of a shift, a lot of the properties that were being snagged up. Basically, no conditions, presentation date and on that day, the sold sign goes up. Now, we're seeing a lot of them that are going conditional.

In that aspect, there has been a slow down. Like you said, it's definitely going to continue further where there's gonna be some properties that might stay on the market a little bit longer than what the seller anticipated. Maybe some price changes will happen soon. Less competition. Like less people want to deal with some of the interest rate hikes. Definitely, for people that are in a position to buy a better time is probably on the way.

Sarah: Derek, that was great. Thank you for sharing. The next part of the podcast is lightning round. There's gonna be four total questions you can give us the first answer that comes to mind in 20 seconds or less. Here's question number one of the lightning round. What is the best advice that you have ever received from another investor or at a networking event?

Derek: Buy now, if you're ready to buy now, don't hesitate because if you hesitate too long, then you're probably gonna regret not making the decision. If you're ready, then you should go.

Sarah: Number two. What is your favorite resource for investors? Could it be anything, a book, a training person event, like anything you can think of as a resource?

Derek: No question about it, is The REITE Club. I was speaking with Katherine about this the other day, and there are so many knowledgeable people here. There are so many great resources here for people that want to learn how to invest. Not just necessarily in Canada, it could be the United States overseas down South somewhere. Different strategies of buy and hold, getting financing like you were speaking about earlier. All kinds of different ways to invest.

The ideas are seen in The REITE Club. I truly recommend everybody to look into some of the resources here and learn as much as you can.

Sarah: Number three. What is the one attribute in your opinion that has made you most successful?

Derek: I think my honesty. Not gonna be a realtor that is just going to tell somebody to buy just so I can make a sale. I want my client to be able to buy a property that suits them properly, whether it's an investment property, make sure that their numbers work for them, that it will cash flow for them. And that they won't regret it.

I've told many clients to walk away from a property that they seem hesitant on and that it might not work. I would rather be that guy that tells someone to walk away from an iffy deal and save my client from a potential mistake. And from that I get referrals. I just want to be honest. I don't wanna be that sleazy salesman.

Sarah: I think when working with investors, it's a small industry, but also, you help them make money on the first one. They're gonna come back to you for their second and the third. And as investors, we don't wanna just get one property and be done. It's about building a portfolio. You're thinking about exactly, which is awesome. Number four. It's Sunday morning as an example, what do you typically do on a Sunday morning?

Derek: Typically, sunday morning is is breakfast with my mother and after breakfast then I'm taking a look at any potential emails or text messages, and more than likely I have an appointment set up for the afternoon to go take a look at a property, could very well be a property or for a buyer that's outta town. I just go there solo. I do my walkthrough. I take a look at the place, get an understanding of what my buyer could expect in the event that they're gonna put an offer on it. And then make the call afterwards and let them know what I think. And it'll give them additional ammo to number crunch and think about things to see if they wanna put an offer in.

Sarah: Derek, thank you for playing the lighting round. Where can our REITE Club nation reach out and find out more about you?

Derek: Thank you very much. It's been a pleasure to be here. I really appreciate the time.

Sarah: Absolutely. Now, where can The REITE Club nation reach out and find out more about you?

Derek: They can reach out to text message is always easy. At 623 330 7056. They can call that number as well, but it goes to voice messages a lot because I'm in the country, but text messages show up and I will reply to it as soon as I possibly can.

Sarah: Derek, thank you so much for being on and sharing so much great information with us.

Derek: Thanks again. Appreciate it.

DJ: Thanks for listening to The REITE Club podcast, where the focus is on helping all levels of real estate investors advance to the next level and help you customize your life. Be sure to tune in next week at thereiteclub.com/podcast or wherever you listen to podcasts. And if you get a few seconds, please rate the podcast. Wherever you're listening, it helps the show get noticed by others like you, and we truly appreciate it. And don't forget to subscribe.