“Wide diversification is only required when investors do not understand what they are doing.” – Warren Buffet
I used to worry about the fact that a big bulk of my net worth is tied up in real estate. Isn’t that like putting all your eggs in one basket? But real estate has been good to me these past few years. Here’s my property purchase history:
1) I bought my first property in my university town when I started graduate school. I was 25 years old at the time and bought it with my then-boyfriend. I lived in the basement, on days that I had to be at school, and rented out the top three bedrooms to students. Early house-hacking? Yes, please!
2) At the time, my then-boyfriend and I were still crashing at my dad’s house in the town where our jobs were. One day, after three years of living with him, he tells us that he bought another house and we can either live with roommates in his house or find a new situation. We quickly found and bought a house just one block south of my dad’s place (it was a good location for us). This was 2009 and I was 27… house number 2! The great thing about this house was that there was a basement apartment, which we were able to start renting right away. My house hacking adventure continues.
3) After 6 years in that house – and eventually paying it off!!! – we tapped into the equity and used that money on a downpayment for a house in the heart of the city by using the Home Equity Line of Credit we had already established for house number 2. It was 2015, I was 33, and we had purchased house number three! I’m not going to lie… I was nervous about this purchase. It was the most expensive house I’d ever purchased (by far!) and I was purchasing it entirely with borrowed money. Also, the mortgage, while not huge, would apparently have to be paid for by our salaries (mine and my then-boyfriend) as there wasn’t an immediately obvious way to house-hack this house. At this point, we would be carrying three properties, one of which didn’t appear to be able to generate any income for us. That is… until our neighbor stopped by the week we moved in! We got to talking in our new living room while sitting on painting ladders and folding chairs. Our neighbours had also just bought the house a few doors down but not to live in… to Airbnb! While I had heard of Airbnb, I didn’t have much exposure to it. I expressed my concern over not being able to generate any income from the house and they suggested Airbnb-ing our spare bedrooms. Well, they had me at hello. I immediately started gearing up for my Airbnb house-hacking journey in house number three.
4) Well, life happened and then-boyfriend and I had decided to part ways. We had three properties together and had to find a way to amicably divide our shared assets. We ended up requesting bank appraisals on all three properties. From there, we made a simple balance sheet. How much were the houses worth, versus how much did we owe? What came to pass was that the combined equity on houses number one and two were equivalent to the equity on house number three. Basically, one of us would take houses one and two, and one of us would take house number three. After months of going back and forth, I kept house number three and my now ex would take our first two properties, with a five figure cash cushion from me. It was fair and I believe we were both happy with the outcome. Note, my ex ended up selling house number two for an insane profit.
5) Fast forward to 2018. I’ve met someone new and have decided to pick up and move to a new city! While we each had our own houses, we agreed that moving in together was the start of a new chapter and warranted a shared space that was both of ours. At 36 years old, in comes house number four on my journey… a triplex in a new and strange city. We are renting out the bottom two units and live in the top unit, which is plenty of space for just the two of us (and our pup!). Our plan is to eventually buy something else in about 4 years or so, but for now, it’s the perfect space for our small family.
6) The plan to move in about 3-4 years includes paying down this house, together, moderately aggressively. In about 3-4 years’ time, the house will hopefully have appreciated a bit and we will have acquired quite a bit more equity in the property. At that time, we will re-assess the property value and borrow against the house (using a Home Equity Line of Credit or HELOC) to put down a hefty downpayment on the next house!
If there’s one thing to pick up from my long and windy house journey, it’s that getting into the real estate market early was certainly advantageous. I bought my first house before the housing bubble burst (which thankfully wasn’t too bad in Canada!) but because it generated income, I was able to take advantage of the low prices in 2009 to purchase a second house. Paying off that second house enabled me to leverage my way to a third property that ended up being even more versatile, as it was in the heart of the city and large enough to effectively house hack and generate decent income through Airbnb. While I plan to continue my journey and tap into the equity of my triplex in a few years to buy a new property, I do so wearily. If I’ve learned anything from Dave Ramsey, it’s the dangers of over-extending yourself and taking on undue risk and debt. I will tap into my equity but will make sure that I keep at least 50% equity in my property and that the income generated by two of the three units is sufficient to service the debt. Some real estate investors might consider this overly cautious but if you hate debt like me, you’ll easily set up rules like this and abide by them happily.