Adam bought and renovated two 4 unit properties in 2017. His efforts with the rehab and raised rents brought the value of each property up tremendously, he made half a million dollars with those properties. We dive into the details of those two projects and discuss how he made it happen. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Adam Kitchener Real Estate Background:
- Made $500k in 2017 through real estate
- Owns property in Brantford, Ontario
- Based in Ontario
- Say hi to him at https://unlimitedresidential.ca/
- Best Ever Book: How to Win Friends and Influence People
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless, and this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any of that fluffy stuff. With us today, Adam Kitchener. How are you doing, Adam?
Adam Kitchener: I'm doing very well, thanks for having me on the show.
Joe Fairless: My pleasure, nice to have you on the show. A little bit about Adam - well, he made $500,000 in 2017 through real estate. He owns property in Brantford, Ontario, he's based in Ontario... And with that being said, Adam, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Adam Kitchener: Absolutely. You see, I've been in real estate since I was a young kid; growing up, I followed along in my father's footsteps, who bought property when I was young, and my love grew from there. These days I'm actually working with small landlords who wanna make a name for themselves in real estate; maybe they've just bought their first property, they're not quite sure what they're doing, and rather than trial and error, they can come to a guy like me who's gonna walk him through the process, I'm gonna manage their properties for them, and we're gonna make their properties more valuable, get them better tenants, get those rents up, the expenses down, and in the end we all win.
So not only do I own my own property, I'm a landlord, I also have property that I manage on behalf of other people as well.
Joe Fairless: Okay. So you own your own property, and you also have a property management company. With the $500,000 that you made in 2017, what was the highest percent of that? Where did it come from?
Adam Kitchener: That was on the landlord side, so I actually found $500,000 in appreciated equity. I can tell you that last year I bought two properties, and they both appreciated and increased about $500,000 in equity that I was able to go after and refinance and buy more property after that.
So basically the idea is for me -- I've heard it's called the BRRRR investing philosophy, which is where you buy, you renovate, you re-rent, and then you refinance... That's exactly how I did it; I bought a really rundown property, I renovated it, I re-rented it at much higher rents, and then I refinanced it when I was done.
Joe Fairless: And you did that for two properties and in total you were able to get 500k out of it?
Adam Kitchener: Out of those two properties, I made 500k, yeah. We appreciated the value on one property about 300k, and the other one appreciated about 200k.
Joe Fairless: Wow, that's incredible. Congratulations on those! That's some good stuff.
Adam Kitchener: Those are four four-unit apartment buildings, so a total of eight apartments we're talking about right here.
Joe Fairless: Let's dive into those two. How about the $300,000 one where you got 300k in equity and got access to that after doing the refinance - what did you buy the property for and then what did you do to increase the value?
Adam Kitchener: I bought a rundown fourplex in the city of Woodstock, which is a small little town just along the highway 401 area. It's more of a blue-collar town. This building was very run down; bricks were falling off the side of the building, it didn't even have eavestroughs, the sewer was broken, the roof needed to be replaced, and the rents were extremely low. We're talking $500 for a two-bedroom apartment. So the first thing that I did is I went out and I took a look at it, and I was thinking to myself "What is it about this place? Why won't it sell? Why is it so scary?", and the thing is most people are scared of work, and I figured at the end of the day there's nothing really here that's that bad.
Everything has a shelf life. Right now, this building is at the end of its shelf life, so if I go in and I fix everything up, there's gotta be value to be made here. And when I did my research and I looked at properties in the area, I'm seeing on that street alone single-family homes are selling for 600k-700k, and then the fourplexes and the fiveplexes in the area are selling for about 450k, 500k, almost 600k in some cases. So I realized that if I put the time and the effort into this place, I'm able to get these low rents out and put new rents in, I'll be able to appreciate the value of this property, and that's exactly what I did.
So I went in and I addressed all the issues that were long-standing; I sent in a brick mason, he went in brick by brick, repinned, repointed the entire house, fixed all the issues that were there. We redid all of the eavestroughs, we put up new [unintelligible 00:05:19.09] the whole nine yards. We went in and we repaired all of the plumbing, we did all the real structural work that needed to be done, and none of it actually was that serious; it was more just -- roofs last 15 years, and it was at the end of that 15 years that needed to be done.
Then the next thing we did was we went into the units, and as they started to turn over -- we actually bought the building half empty... So two tenants were out and two were pre-existing. We went into the first two units and we renovated to what I would consider my level of quality, which is brand new cabinets, brand new bathrooms, brand new floors, brand new stainless steel appliances, and then we re-rented those apartments for about $1,000 each, which was literally double of what the previous rents were.
About six months after that we noticed that the other tenant was leaving... Just something about new management coming in and not letting them get away with their old behavior signaled the change; they left, we got them out, and then following that, the last tenant moved as well through no fault of our own, and ended up-- we had all four units out, we've renovated the remaining two units, doubled them up as well with $1,000 each... I took a building that was renting at $500, took it up to $1,000, and that's where we basically doubled the value, because we doubled the rents and just on the 6% cap rate the building was worth $600,000. The bank didn't give us that, they gave us 550k, but I'm not a greedy man, so I'm okay with that.
Joe Fairless: 550k, so I'm guessing - quick math - you bought it for like 200k and put in 50k, something like that?
Adam Kitchener: We bought the building for 250k, and it came back at 550k. The value appreciated $300,000. Of course, I had to put in 60k-70k to get it up there, but capital in - I try to think differently when it comes to the value. The value increased 300k, and all I had to do was spend 70k to get it.
Joe Fairless: Cool. So all-in you're at 320k, and it appraised for 550k. How much out were you able to get of the equity? How much were you able to get out of it?
Adam Kitchener: Well, the first thing I did is I actually took all the money that I put into it and I paid that off, so that 70k was gone, it was clear. Then I pulled another 60k out of it and used it to buy another property. The remaining equity is going to sit there until I find another property. There's no need to pull the equity unless I need to use it.
The great thing about investment properties is it's like a well, and you can keep going back to that well for water, as you need it. So I paid off the debt, I cleared the 70k that I put in, I pulled an additional 60k to put in another investment (20% down on another building), and the rest of the equity is gonna stay there.
In Ontario we can finance up to about 80% of the loan-to-value, so there's still some equity left in the building, and I'm gonna wait until I find the next big opportunity before I collect that.
Joe Fairless: Mechanically - or logistically maybe - how does that work where you're able to get $60,000 in your pocket...? And how much is remaining that you can take out?
Adam Kitchener: The property was appraised at 550k; they'll give you 80% loan-to-value. 550k x 0.8, so that's 440k... Minus 250k, that's 190k. I took 130k out, so I have about another 50k there.
Joe Fairless: So that extra 50k - how does that work? You just go to the bank and say "Okay, now I want my 50k that I still have in there", or do you have to do a new loan, or what?
Adam Kitchener: I will have to redo the entire loan, or I could pull a second mortgage, and a second mortgage comes with higher interest rates, so it's probably not advised. I'm probably just gonna wait the year, and in the year refinance again and pull out the extra money.
Joe Fairless: The other one, your other four-unit - can you tell us about that one?
Adam Kitchener: That was another property we bought at a very reasonable price. We bought it at what's considered under 100k/door, which is a very good price to buy at. We bought it for 385k, and just through natural turnover we were able to bring the rents up... We took again another $530 tenant and got them up to $1,000, and we appreciated the value of the property up to 590k. So we took 385k and turned it into 590k.
Some of the things that we did was also submeter the services. When the tenant would move out, we would put them on their own heating source, which would then lower our overall heating bill. So we took a building where all the tenants had their heat included, and every time they moved out, we'd put them on their own individual unit, so they'd pay their own hydro, they'd pay their own heat. Those individual things appreciated the property at about $18,000.
If you put someone on their own hydro, you created $18,000 in value, so that's exactly what we did. We just lowered our operating expenses, and as the tenants turned over... At this point we now have two tenants who have left, and brought in new tenants at new rents, at about $400-$500 list on top of what the previous people were paying, and it's just a simple 6% cap rate to figure out the overall value... But that was re-appraised and came back at the $590,000 value. We got it reappraised, so we went from 385k to 590k.
Joe Fairless: For the Best Ever listeners who are handy and they're really interested in separately metering -- I love how you say "hydro"... You're talking about water, right? Just so we're talking about the same thing...
Adam Kitchener: Oh, sorry... No, electricity.
Joe Fairless: Oh, okay.
Adam Kitchener: We call it hydroelectricity. So electricity and heat.
Joe Fairless: Okay, electricity and heat. I'm glad I clarified... You don't wanna get electricity and water mixed up. I'm glad I clarified that. For the Best Ever listeners who are mechanically inclined (or wanting to be), can you describe how you were able to separately meter those two out - the heat and electricity?
Adam Kitchener: Well, in Ontario I typically won't buy a property that has electricity included. Our electricity rates are sky-rocketing; in the last year they've gone up 25%. That is no word of a lie, look up "ontario hydro rates." We're paying the most in this country, and due to very poor management.
So what happened is we're trying to at the landlord offset our costs as much as possible. There's companies that actually do that - they go in and they put individual meters on every single apartment. And as long as the tenant agrees to it, or the units is vacant, you can put them on their own individual meter, which means isolating the electrical panel to its own individual meter, and then the tenant will be held responsible for the electricity. Same thing with the heat.
Usually, these buildings are running off of boiler systems or furnace systems, and what I do is when the unit becomes vacant, I go through, I find an old closet that's not being used, we throw a furnace in there, run a new gas line, new ducting, and hook it up to its individual gas meter and put the onus on the tenant to pay for their own gas, which provides them with their heat, also their hot water as well, because it runs off the hot water tank, and keeps them nice and toasty in the winter; we have some cold winters here.
The great thing about that too is it also removes all of the phone calls that you would incur in the winter time here. We have really cold winters, and one of the biggest complaints is "I'm cold in my unit." When you have a shared system that's for all four units, you've gotta keep all four tenants happy and nice and warm, and that's very difficult when you've got people with different body sizes and body temperatures, and keeping them all happy is a battle. So by putting them on their own individual heat sources and electrical sources, they control their usage, they control their bill, and it's completely off your books, also for me removing a variable.
Joe Fairless: Yes, that is wonderful, to have an expense item be completely wiped away from the P&L statement for good. What is the investment to do that and pay the company?
Adam Kitchener: For me, I'm spending on individual units about $6,000 on furnaces; 6k-10k, depending on the size of the unit. Now, given the fact that my average heating bill would probably be around $250 in the winter time, it's not a very good payback period, but what I have done is 1) immediately increased value; I have controlled my operating expenses, and that's where I'm getting the increase in value. So that $18,000 comes from removing that variable from my operating expense.
So yeah, it's a lot of up front, and it's gonna take me about a seven-year period to get it paid off and start making new money again, but at the end of the day that's still a good investment for me, because these are long-term holdings. I plan on holding all of my assets for 10, 15, 20 years, so for me it's worth it.
The other thing too is I can run my business at a much lower cost, even though the up front capital cost is high.
Joe Fairless: Switching gears a little bit, how has having a property management company helped you as an investor?
Adam Kitchener: The great thing is when you find a group of contractors that are absolutely fantastic, giving them more work is always a joy. I have a team of guys who work for me around the clock on my own properties, and then I'm able to give them other work at other properties, and it just increases that sense of loyalty and creates a stronger bond when you go from building to building to building with the same crew over and over again... And it's almost like a rinse/repeat process. So the more buildings, the more work, the happier they are, and things just kind of keep going. And of course, when you run a property management service as well, and you've got your own properties, you're taking advantage of being a company, a corporation with multiple entities, multiple buildings, everyone's taking in the advantages of insurance rates, bulk pricing...
When I go and price a job, I want a landscaper to cut my lawn, I'm also giving him seven other buildings, so then he's more inclined to give me a great price for all seven buildings, which is my building and the six other clients that I have, rather than just quote me individually. So they're taking advantage of bulk pricing, they're taking advantage of using a well-respected contractor who works with me... Basically, I carry a lot of weight, so when I call someone, they're willing to come quickly because they know that it's not just me, it's me and all of my clients with me.
If I was a single landlord with one building, they might brush me off for a bigger job. They're not gonna do that because I'm the bigger job, I'm the guy they call for those types, and they come to me first. That's kind of the great thing about running a property management service, and being a landlord at the same time. That's an advantage for both myself and my clients as well.
Joe Fairless: How long have you been doing third-party property management?
Adam Kitchener: We actually just launched back in January. I used to work for other professional property management companies, a lot of large firms with hundreds of millions, if not billions of dollars in assets. Then I branched out and did my own thing back in January; I started as a small company, and we're quickly growing to take on small landlords who are feeling left out in the market, or don't quite know what they're doing.
Or there's the other end of the spectrum, which is investors, retired landlords, or business owners who don't have time to manage their day to day properties. A lot of my clients are actually professionals, engineers, doctors, actual bankers, and they come to me and they say "I've got more important things to do than worry about some kind of tap leaking." Yes, it's important, but of course, it's all about prioritizing their time in their life, so they call a guy like me who knows what he's doing, who's gonna protect their investment so they can get back to what they do best, whether it be being the doctor, the engineer, the lawyer, or just being retired - in that respect as well.
A lot of them say "Adam, I've managed this building for 20 years. I don't wanna sell it and all of the profits go to taxes. I'd rather just keep it in the family, give it to my kids, and have you manage it."
Joe Fairless: What type of jobs did you do when you were working at property management companies?
Adam Kitchener: Exactly what I'm doing now - I'm managing property. I'm repositioning under-valued assets and creating value. On turnover, we're renovating the right spots to get the best return on our investment. We are getting rid of bad tenants, undesirable tenants who are damaging the building, damaging the overall sense of community that's in these buildings, and bringing in new ones who are going to create value to the property, and a sense of ownership.
We're looking at outdated systems, boiler systems, heat systems, lighting systems and retro-fitting them to be the most cost-effective, low usage, energy efficient resources on the market. Again, lowering those operating lines, removing those variables. I've done this actually myself for large companies, and now I'm doing it on a much more hands-on, owner size scale, as opposed to working for someone else.
Joe Fairless: If you hadn't worked for those large companies and you were just starting a management company now, but you hadn't had that experience, what do you think is something that you would be making a mistake on because you didn't have that experience?
Adam Kitchener: The companies that I was working for hired me on the basis that I was already a landlord, so my mindset is very much an ownership mindset, which is I spend money the way I would on my own place; when you drive your own car, you drive it better than a rental, it's kind of a different mentality... And each job I worked at did create a value to me and it added to my professional development.
To pinpoint something individually, it's very hard to say. I would say that large-scale renovations - I'm talking 100+ units - was something I would not have done if it was not through large property management firms like the ones that I worked for. I had done it on much smaller scales, like through the fourplexes, and the tenplexes and the twentyplexes, 20-unit buildings, as opposed to 150, or 206 units in some cases. Complete building clean-outs and all that was done through professional property groups, and I probably would not have had that opportunity, or would have been making a lot of mistakes if I got those opportunities, if I hadn't been working for some of the larger firms earlier on.
Joe Fairless: What is your best real estate investing advice ever?
Adam Kitchener: The best real estate investing advice ever for me would be "Be prepared to work." I always say that there's one day of reward, which is rent day, and then 29 days of problems after that. So for me it's like a small business -- or real estate, for that matter, is like a baby; you have to watch it, you have to take care of it. You can't just leave it. It's not a stock, it's not a bond, it's not gonna appreciate through the work of someone else, it's gonna only appreciate through your hard work.
So if you're thinking of getting into real estate, the first advice that I'd give people is be prepared to roll up your sleeves and start working. And failing that, hire a property manager, find a guy like me who can do it for you, and then stick to them and be a sponge to absorb all of the wisdom that he has, so that way if you do go on your own, you're a little bit wiser for when you actually go out and take over.
Joe Fairless: We're gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Adam Kitchener: Absolutely!
Joe Fairless: Alright, well then absolutely let's do it! First, a quick word from our Best Ever partners.
Break: [00:20:59.11] to [00:21:41.04]
Joe Fairless: Okay, best ever book you've read?
Adam Kitchener: That's a good one. How To Win Friends And Influence People, by Dale Carnegie.
Joe Fairless: Best ever deal you've done that we have not talked about?
Adam Kitchener: Landing my first property management gig with a professional investment firm... 26 townhomes, actually [unintelligible 00:21:55.21]
Joe Fairless: What's a mistake that you've made on a deal?
Adam Kitchener: Being overly optimistic with the numbers.
Joe Fairless: And now if you were presented a similar opportunity, what do you do differently specifically?
Adam Kitchener: I'm a worst-case scenario thinker, so I always bet if everything goes wrong, what's the worst that's gonna happen type scenario, rather than think about the best.
Joe Fairless: Are you able to be competitive with your offers by thinking about the worst-case scenario?
Adam Kitchener: Yes. A lot of it has to depend on your gut and you have to offer thinking about your gut. A lot of the Woodstock deal was "If everything goes bad, what's the actual most amount of money that I can pour into this property?" And that numbers was not $250,000, which is what it was appreciated -- $300,000 is what I ended up appreciating, so I figured "Worst case scenario, what's the most amount of money I can dump into this place if everything goes bad?", and I was still able to make the numbers work.
Joe Fairless: Best ever way you like to give back?
Adam Kitchener: I usually give back to the people closest to me, the people who work hard for me and around me, whether that's friends, family, my contractors, my team, my crew, my network. The idea is that no one person is successful on their own; we are surrounded by people who help us succeed. [unintelligible 00:23:16.05] and the best thing to do is when you realize that you have a team of people who appreciate you and they're working their butts off for you, you reward them at every opportunity.
If I get wealthy, everyone around me who was with me along the way is gonna get wealthy with me, because there is no way I could have done it on my own.
Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about what you've got going on?
Adam Kitchener: If they wanna get in touch with me, they can go to my website at www.unlimitedresidential.ca, and they can get all of my contact information from there. They can also follow me on Instagram, @RentUnlimited at Twitter, and we also have a Facebook group, which is under UnlimitedResidentialGroup. They can also google me as well, Adam Kitchener (a couple or results should show up), and there's also ways to get in touch with me on the websites, as well.
Joe Fairless: Adam, thank you for being on the show, talking about your area of expertise and focus, which is repositioning properties. I love that you got into two case studies that are fresh on your mind, because they happened last year - the two four-unit apartment buildings... Your thought process going to one of them, asking yourself "Why is it that this isn't selling? What's so scary about it?" and ultimately "Is it permanent, or is it temporary?" If it's temporary, then you roll up your sleeves and you fix the temporary stuff, and as a result, you get a substantial amount of equity in that property, and then you use that to go buy more property, and you hold onto the property that you currently have. Great stuff.
I also enjoyed hearing about how you individually meter your heat and electric, and your thought process for your return on investment, more removing an expense item from the P&L statement. And you will get your money back, it's gonna be 7 years, but it's adding lifetime value to the property because of that.
Thanks again for being on the show. I hope you have a best ever day, and we'll talk to you soon.
Adam Kitchener: Thank you. Have a good day!