Scott McGillivray of HGTV’s Income Property sat down with us to provide his words of practical wisdom. He presents tactical strategies on how to start and remain successful in real estate. Scott divulges his story so readers can pursue their own dreams in building out a constantly evolving portfolio.
REC: So in terms of real estate, a lot of people are curious about your history. You have shows, books, co-founded the largest real estate investment group in Canada. I picture you as a kid building homes. Where did this all start from?
Scott: I know that I’ve always been ambitious. Just perpetually looking for something to do. Growing up, to be honest, I had no idea what I wanted. I just knew I wanted to strive on my end. I was kind of like Forrest Gump, as in I wasn’t sure what I wanted to do, but I knew I was going to try a whole bunch of things until I got good at them. So I started to make lists of things I wanted to do and when I accomplished that list I would make another list and then I would just try things that I was completely unqualified at. In university, I was studying business and I was determined to be a business person. I knew I wanted to make money and I knew I wanted to work hard and I wanted to be successful but I also went through a lot of struggles. Our family was not in a good financial position. So I was already paying my way through school which I wouldn’t say was the norm. Lots of people’s parents help them with tuition but in my scenario my family couldn’t afford to do that. And that was frustrating, and I remember thinking, “Gosh, I don’t like being the poor kid, this sucks.” Then even after I graduated, my father got very ill and passed away. So even though I got through university, when I was looking for my first job I lost my father and I was so sidetracked and so distracted and it really kind of took me. I think I found my rock bottom. I could hardly pay my rent and I’m working like a dog. And that’s when it kind of dawned on me, if I could get on the other side of this rent situation [I would be alright]. I knew that the amount of rent we were paying was more than all the expenses my landlord had. I worked at a restaurant as a waiter and one of the clients was a real estate agent. This one in particular was super nice and very helpful, and I was trying to get her to find me a place for cheap rent and she’s like you should buy a place and I thought “that’s impossible, right?” What I ended up doing in my final years was instead of paying my student loan I used it as a down payment on a property. I got a primary with four extra basements, three bedrooms upstairs and two rooms in the basement. I lived in the basement, rented out the other four rooms and I lived there for free.
REC: Were you scared at that time?
Scott: I’m going to spare you the details because I could go into half an hour off of you know the months and months of dead ends and “you can’t do this, you’re crazy, you’re too young, you don’t have a job, you’ve got too much debt.” But it was a struggle and I was always searching for a reason why it wouldn’t work. And that’s when I realized I had the wrong mindset. If you want to find a way that something isn’t going to work, you’re always going to find it right? So instead of using my student loan to pay rent every month I used it as a down payment, that’s 15 months of prepaid rent in a place where I never paid rent again. I was making money living there renting to my friends, renting out the bedrooms, bringing in $2000 a month. I’m like “I’m crushing it rushing right now, this is what I should be doing.”
REC: So now you bought your first property. What happens? You just got the bug now?
Scott: Oh, that was it. I was bitten and there was no going back. If I’d just gotten in sooner. I did the same thing everyone does. If I just bought more properties when I was younger I’d make enough money off of the rentals, but I really felt like it was too late. Every 22 year old thinks the same way. They’ve already missed all the big opportunities. And it wasn’t until I went to renew my mortgage that I realized I could pull equity out of that first house and I’d have another down payment. The down payment comes from the house I already have; not from working, paying taxes, covering expenses and then trying to pay off student loans. I thought it would take me seven or eight years to build up another down payment. I had one sitting right there in this house.
REC: Do you remember approximately what you were able to pull out?
Scott: I know exactly how much it was, $31,000 in equity. I pulled out of that first property just about a year later, and I had done a little bit of work but the market was going up and I had converted it to a student rental. Mortgages were a little easier. Financing was a little easier. This was like 2000 – 2001. I actually spread that money out and bought two properties $15,000 down each. And so I bought two more properties and and then I kind of had a formula. I started working on them, renovating them. I built tenant lists, I’d put it postings at the university. I had this one posting that crushed it for me. Everyone else would put up a sign like “Three Bedroom House Looking For A Mature Student.” I put one big sign up and it said “Are You A Student Looking For A House? I’ll Buy One For You. Call Me.” There’s so many houses, all I need is the tenants because when they pay you first and last month’s rent I can cover my closing costs. I had hundreds of tenants on this list. Houses were cheaper but the rent was still solid. And I would take my tenants shopping to a house that was for sale. I had 25 student rental properties by 25.
REC: What will bring the highest return for someone who is thinking about doing something similar?
Scott: There’s a way I can get more. You need to see start doubling, tripling, quadrupling up on your income streams. Real estate is probably one of the best assets that does that. The first way I like to make money in real estate is on the purchase, I make my money right upfront. I put in lots of offers, I’m not usually offering list price, I’m offering something that’s below, what I know it will be appraised for. And I’m trying to find a motivated seller, you know and it doesn’t always work this way but I’d say more than one out of ten times I will get a property where someone is ready to sell it to me based on my conditions, not my price. I might start with a conventional offer. The house is listed for $400,000 and usually the scenario is that it’s probably only worth $380,000. And after 100 days on the market I might put in an offer for $315,000. At first people think I’m a jerk. I’m not putting the offer in because I’m expecting to get that offer, I’m putting that in because list price is just a suggestion. List price is irrelevant. [I’m hoping] I can make this place have cash flow as a rental at $360,000. Anything less than that is making money on the purchase. So I might negotiate a little bit, they might say “Oh no, we don’t like the price and we don’t like the closing and all these conditions.” So I might move up to $325,000, drop the closing to 30 days, waive my condition of financing and then start from there. Then I might go up to $330,000 and I might move my closing to 10 days. That’s if these people need to get out of this house quickly. I will help them do that. But it’s going to be at a discounted rate as it should be but most people in that situation find it’s a win/win. They’re okay with that.
REC: What are the multiple streams of income you benefit from in real estate?
Scott: I like to make my money on the purchase. That way I know if I have to get it reappraised or I have to sell it even as is, there’s room for me to make some money. So you make your money on the front. Second way I make money is forced appreciation, which is doing a renovation that adds value and the value of that renovation is worth more than the price of it. So you put $50k in, it’s worth another $75k when you’re done. So now I’ve made money on the purchase. I’ve made money on the renovation and then I like to make money on rental income. So positive cash flow is the third way I’m making money. Fourth way I’m making money is principal recapture. So ideally your financing principle is being paid back. Fifth way I’m making money is market appreciation over time. I finance both in Canada and the United States and I can make money on the currency as well because as the currency changes I can just move my debt back and forth to different lines of credit. So I make money a sixth way. Six ways to make money when investing in North America. The seventh is in your tax benefits, I make money through companies, I make them through capital gains which is a savings compared to income tax.
REC: Talk a little bit about what the average Joe can do in terms of rentals. What’s two to three things that Scott would do right away?
Scott: I don’t usually talk about this, but I think it’s important for every investor to know if you want to make fast money in real estate and you want to do it in a way that’s not going to put you in a risky situation, it’s sometimes the smallest fixes that will have the best returns. You see us on TV ripping all these places apart. I mean we’re going gangbusters and don’t get me wrong there’s money to be made there. And it’s well-earned and it’s hard work but some of my best flips have been super simple. It’s about securing the right property in the right market, cleaning it up. Honestly, you won’t see this on my shows. You won’t see me buy a property, throw all the furniture in the garbage, paint it, mop the floor, replace the appliances and put it back on the market because there’s not enough content there for a TV show. But you can make $20 – 40 grand on a property doing that and there’s nothing wrong with it. And so realistically, take on something that’s within your comfort zone. You don’t need massive renovations in order to make good returns. So you’re either going to do the bare bones, which is the buy, clean it up, stage it and sell it. That’s sort of the simpler way or you’re gonna go full on you’re going to rip it apart restructure it. That’s where you have to make your decision. And a lot of the times they say try simple things first, don’t go gangbusters on one small change. Maybe you’re painting the whole house, ripping out the carpets, sanding the hardwood. Pick something that’s not going to put you in a precarious situation where you’re running out of time, where you’re running out of money. Get this thing back on the market as soon as possible or clean it up and get a tenant into it. You know there’s fast money to be made, but the big money is all long term.
REC: I’d love that you said the long term because the team always stresses that the most important strategy is the buy and hold. That’s really where the money is to be made. Why do you think a lot of people don’t see it? They want to get rich quick?
Scott: It’s because we’ve evolved for instant gratification. We’re always looking for the fastest way to be happy. And I don’t want to just go ahead and say the cliche: real estate is not get rich quick, there are ways to make a lot of money quickly and real estate is very risky. So it’s get rich or get broke, and you better have the stomach for it. You better have the stomach and you better have you better have deep pockets. You have to be able to weather some pretty heavy damage in the short term game.
REC: I can’t tell you the amount of people that sit at this table in client meetings with us, and the first thing they want to do is take on a huge flip right away. They’re going to tear down a wall, it’s a bungalow and going to add a second story because they’ve seen it happen on TV.
Scott: People see the results. Don’t forget about all the process that went into that. I’ve been a real estate investor for 19 years. People don’t look at the 19 years, they look at the 21 minutes. They’re like “Look at what happened in 21 minutes.” Actually there was 19 years ahead of that 21 minutes.
REC: You guys didn’t just shoot content for 21 minutes.
Scott: There’s a lot more going on.
REC: Why do income properties work in both hot or cold markets?
Scott: Because people need somewhere to live. When a real estate crisis hits like it did in 2008 in the United States, people couldn’t get mortgages. People couldn’t afford mortgages and anyone who could was scared to get one. They still need to live somewhere, they all became renters. If you look at rental rates during any real estate crisis they don’t go down. And I tell people this is the biggest secret in real estate success: long term is not to look at the real estate cycle that goes up and down because that scares people; the real estate market is going to go up and down all the way up. Rental rates are a straight line. It doesn’t go down. It doesn’t go crazy. It’s just a straight line that goes up slowly. It’s the consistency that allows real estate investing to be a safe bet. If you’re investing only for the value of the property it’s going to go up. It could go down. Your speculating, but if you look at rental rates those are your most secure returns. So if you invest based on rental income and cash flow you’ve basically mitigated a lot of the risk in real estate and that’s why I like to do it.
REC: Are you always looking around transit lines near universities, like student housing? Do these still excite you?
Scott: Of course they excite me. Anything with cash flow, I don’t discriminate. I’ve bought $100,000 houses in Cleveland that I rent for $4 – 5,000 dollars a month. They make positive cash flow. They rent and they cash flow so I don’t discriminate. Do I like student rentals? Absolutely. They’re like the highest cash flowing properties that are out there. I would always advise somebody that you know student rentals are a license to print money. Very recession proof. People are not going to all of a sudden say, “You know what. No more education.” The enrollment is up, the amount of international students is way above their projections. There’s a crisis in student housing right now which for real estate investors is a huge opportunity. Everybody’s worried about the next big thing. The only people who are gonna make money on that are the people who are already in the thing. Get into the thing before it’s crazy out of control. Even like student housing for the last seven or eight years people have been like, “Wow student housing hasn’t been great.” It’s still cash flowing. I’ve been in it now for so long and then all of a sudden the last two or three years, the number of international students applying to Canadian institutions is exploding. They’re years ahead of their projections and all of a sudden my student housing rental rates are skyrocketing. I’m going from $520 a room up to $750. I’m just enjoying the places I’ve rented. The mortgages are being paid down, you have cash flow. Nothing’s really leaving your pocket. I’m like I guess I won’t sell any. I just keep them now. Buy and hold and hold and hold and hold.
REC: In terms of those that already have 5, 7, 8 or 12 income properties, what’s a passive investment that Scott likes to invest in? Some advice.
Scott: So I mean there’s a session that I call advanced strategies for real estate investors, when you’re starting off getting one property or two properties. It’s like you can hold the entire model together with some bubble gum and duct tape and you’re gonna be okay. I got a mortgage here. Get a line of credit. I put a renovation on my credit card. You’re gonna survive that. It’s not super effective though. When you’re getting into half a dozen properties or more you’re talking the million dollar mark. It’s time to get more strategic. And this is where you need advance strategies. You need proper tax planning. You need to know how to re-leverage your money three to four times over. For every $500,000 you have, you should be able to invest in about $2 million worth of assets at least. And there’s ways to use that $500,000 earning you interest and then still being able to tap into it. I like to train folks who are what I call amateur investors, people who think “Oh I have to go out and get a mortgage to buy a rental property.” People come to me all the time and say “I can’t be a real estate investor anymore, I can’t get a mortgage.” I’m like “Oh, so you’re an amateur. Only amateurs run out and try to get mortgages on rental properties.” That’s the last thing you get on a rental property.
REC: Do you mind if I ask what are you telling these people?
Scott: What I usually tell them is if you’re having trouble getting financing you’re doing it all wrong. If you have a reasonable portfolio of properties or you’ve got equity in properties, it’s about understanding how to do high net worth, like total equity plans in terms of being able to leverage your full value through favourable lines of credit. So if you want to buy a $500,000 property you should be able to go get $500,000 today, you don’t have to qualify for it. You gain $500,000, you buy the property. And if you need to put $50,000 or the work into it, I pull another $50,000 over here and it’s in the form of a line of credit. So my original investment is still earning income. I’m basically leveraging against an asset that’s still earning. So I’m making money on my money while I take more money to make money. This is the idea of multiple streams of income, layer that on top of the seven ways to make money in real estate. You’re now making money an eighth way as well. A lot of people will take equity out of their house, take $500,000 out and they’ll use that to buy a property, which is not an effective way to buy rentals. You could have your $500,000 in securities or equities. So you’re earning hopefully 5 – 8% on that. And then you can get a $400,000 other line of credit which is 80% loan to value against the $500,000. Use that as a down payment on two to three properties, 80% loan to value and get mortgages on the back end of all of them, so you get the mortgages last if needed. And now you’ve turned $500,000 of equity into a $500,000 investment and you’ve got $400,000 to secure, let’s say, a $2 million property. You’re now controlling $2.5 million worth of assets.
REC: Now that’s quite advanced.
Scott: It’s very advanced because of the unit. A financial advisor who understands this model is thinking: “Don’t forget about the cost of financing. You need to make sure that every time you move your money into something that it’s earning more than the cost of the leverage you’re putting against it you’re still going to have to debt finance along the way.” So it’s an advanced strategy. I don’t like to start with this because this is where people get caught up, they think it sounds too complicated
REC: Now they think real estate investing is too complicated. This is not for someone who’s just thinking about just getting into investing.
Scott: Yes, if you’ve got a million dollars in real estate or more, we need to have a conversation about advanced strategies or you’re throwing money away. And you’re probably having troubles with financing which you shouldn’t be having troubles with.