Jelani Smith is a personal finance guru with a passion for real estate & personal finance. He is a real estate agent at RE/MAX HALLMARK REALTY and managing editor & founder of Bay Street Blog, a Millennial Finance Hub. He envisions the blog to improve the financial literacy rates among millennials. Jelani bought his first home in Toronto as a recent U of T grad and looks forward to sharing his knowledge with students & recent grads.
Jelani has received multiple agent awards – & closed 39 deals in the first 12 months of his real estate career & continues to help clients climb the real estate ladder. All in all, Jelani has the vision of providing guidance to investors, buyers, & sellers – with the underlying goal of wealth creation.
In my interview with Jelani, we discuss what is house hacking and why do it, how to scale your real estate portfolio using the BRRRR Strategy, and how to successfully work with contractors.
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Full Transcript
Sean Cooper
Welcome to the Burn Your Mortgage. I'm Sean Cooper and it's great to be back for another episode. On today's show. I'll be talking to Jelani Smith. Jelani Smith is a personal finance guru with a passion for real estate & personal finance. He is a real estate agent at RE/MAX HALLMARK REALTY and managing editor & founder of Bay Street Blog, a Millennial Finance Hub. He envisions the blog to improve the financial literacy rates among millennials. Jelani bought his first home in Toronto as a recent U of T grad and looks forward to sharing his knowledge with students & recent grads.
Sean Cooper
Jelani has received multiple agent awards – & closed 39 deals in the first 12 months of his real estate career & continues to help clients climb the real estate ladder. All in all, Jelani has the vision of providing guidance to investors, buyers, & sellers – with the underlying goal of wealth creation.
Sean Cooper
In my interview with Jelani, we discussed what is house hacking and why do it, how to scale your real estate portfolio using the BRRRR Strategy, and how to successfully work with contractors.
Sean Cooper
Hi, Jelani. How are you doing today?
Jelani Smith
Hey, Sean, I'm doing great. How about you?
Sean Cooper
Pretty good. Thanks. It's great to have you back on the podcast. I was going to say that it had been a couple of years since you were a guest. But then you reminded me that it actually had been quite a bit longer. When I looked back at our email exchange, it seems like it's been almost five years. Boy, doesn't time fly? And it seems like you've been doing some very interesting things in those times. So I'm super excited to chat with you. I came across your Toronto Star articles, your latest one on House Hacking. So yes, really excited to speak with you and, and share with the listeners some exciting things that you've been up to
Jelani Smith
Likewise, it's crazy. It's been almost five years since the last podcast, I think I remember the last time we spoke, it was about me buying my first home at the age of 22. Right. So now fast forward to today, gonna be talking about house hacking, kind of going into portfolio etc. So I'm looking forward to this podcast as well.
Sean Cooper
You're not a spring chicken anymore, you're not 22 anymore, but you're still in your 20s. So you still have a lot of you still have like three years left to accomplish some amazing things. So yeah, excited to talk about these great topics, because it's certainly challenging. Some people are finding it challenging to buy in big cities like Toronto and Ottawa. So yeah, I'd be curious to hear how somebody like yourself was able to do it on your own in some cases here.
So yes, let's get started with the Toronto Star article. So I saw it when you shared it on Facebook, the Toronto Star article, and it was talking about house hacking. So for anybody who's not familiar with the term house hacking? Why don't you talk a bit about what house hacking is? And just define it for the listeners and explain what that is. Because, yes, some people may not know. I'm sure people are familiar with the concept, but they may not know the term house hacking. So if you could go over it and explain it, then that would be great.
Jelani Smith
100%. So essentially, house hacking is one of the many real estate strategies out there that mostly applies to your principal residence. We live in a duplex for example, or it can be a triplex as well etc. But essentially, in my case, I'm living in a legal duplex, which was originally a single-family home that had been converted to a duplex, which is also known as two units. So I do live on the main floor and rent out the basement apartment, which is a legal, basement dwelling. And that is my job for approximately $2,175 per month, plus utilities as well.
Sean Cooper
Wow, it must be very nice to be that a basement for $2,100 that you're renting out or what is that exactly? That's pretty good rent that you're getting.
Jelani Smith
Definitely, so the basement is a three-bedroom two washroom apartment.
Jelani Smith
Wow, that's big.
Jelani Smith
Just renting over $2,175 per month, plus 30% of utilities
Sean Cooper
Is that a basement? That's quite sizable for a basement?
Jelani Smith
I will say that the average Scarborough bungalow basement is about 900 square feet, but it's fully renovated top to bottom with high-end finishes like quartz countertops and the kitchen bathrooms are laminate flooring, smooth, and etc. So kind of a little bit high and all the finishes to kind of attract better quality tenants and of course better rents as well.
Sean Cooper
You fit in three bedrooms in that basement there? Wow, you really allocate the space well.
Jelani Smith
Definitely, it definitely has the Scarborough bungalows, or bungalows in general, maximize it, every square of the space, in most cases is doable to get three bedrooms two once in the basement. There are some cases where it might be three bedrooms, one washroom, or two bedrooms, two baths. But I find in most cases, if you allocate a score for the property, you can get three bedrooms out of it.
Sean Cooper
Well, that's amazing. Well, keep going with your story there. Sorry to interrupt.
Jelani Smith
No, no problem at all. So since essentially renting out the basement, that covers a good chunk of my mortgage, and that also helps me leverage that rental income to refinance the property as well. So I'll just use this duplex as an example of how I was able to secure my additional properties. I purchased it for around $800,000 back in May 2020. Yeah, so we have May of 2020. I forgot maybe $250,000 in renovations. I did a refinance last year on this specific property, the bank appraisal came back at $1.48 million. And keep in mind, I did purchase this property for $800,000.
Sean Cooper
Wow, that's pretty good appreciation.
Jelani Smith
Oh, definitely. Definitely. And also, I did buy this property when COVID first became a thing. So a lot of people were scared to get in the market, buy something etcetera. So it was at a time when the market is at a standstill, and at also a great time to kind of start looking for investment properties. And as well, because I'm not sure if you remember back in January 2020, February 2020, the market was ridiculously hot, then COVID became a thing on March 15, 2020. And that's when all the buyers just evaporated. So that made it a very attractive opportunity for me as an investor or a buyer kind of looking to experiment with a portfolio from there.
Sean Cooper
That's great. You were able to benefit from that there. And yes, so I'm just curious, can you talk a bit more about house hacking? And what are the different forms of house hacking like there's physical separation between the units there's some people might think that's like having roommates. Maybe you can just explain that a bit more for people who don't understand the term house hacking you prefer. Okay, remember that in the article there you said you prefer the privacy between the units there, but I guess there are different forms of it. So maybe you can just talk a bit more about that.
Jelani Smith
Sure. So for the key per house hacking is making sure there's a separation between each unit to pass I mentioned before. So the reason why I love bungalows is that in most cases bungalows were built in the 50s, 60s, 70s. In most cases, they already do have a separate entrance building. So it's already kind of set up for that dual unit type of property. So there's a separate entrance to the basement. And of course, from the upstairs to downstairs is kind of blocked off with a fire-rated door as well. And also, there are two other things that the legal permit would require for a legal basement apartment having above-grade egress windows, and fire away the drywall in the ceilings, and around the furnace room, just for privacy purposes.
I do know in some cases, some people like to soundproof the scene, this is a kind of additional separation between the two units as well. And also in my case I added separate laundry for the basement so that we did additional privacy between the units. And there's not much mix and mingle between myself and the downstairs tenants.
But this is a strategy that I also do with my other properties to earn duplexes or triplexes, I do like to separate laundry for each unit. Not only is somebody that tends to appreciate, but it also helps attract better quality tenants. And it could benefit the rental income as well, especially this less is it makes it more convenient for the tenants and just kind of benefits everyone in that case.
Sean Cooper
Yes, that's a good point that you raised. I would imagine when I think about it this way if your rental unit is missing stuff like laundry as well as a dishwasher and it only has a stand-up shower and doesn't have a bathtub, I would imagine that's kind of cutting down the rental pool-making it smaller and smaller so that the chances of you getting a high-quality tenant are less than by lacking those things so smart. It sounds like you thought about that there and made sure that you had those items there because a dishwasher kind of seems like a no-brainer.
I mean, it can be quite costly to add in some of these other things. Like if you don't have a bathtub, add that in but by buying it you can buy a relatively affordable dishwasher for 5-$600. And it seems like you're gonna earn that money back pretty quickly because yes, that seems like a lot of tenants won't want to rent a place that is missing a dishwasher like that. They'll just not even consider the place. So it seems like investing in that and maybe private laundry and a bathtub might make sense, but definitely a dishwasher. That seems like it pays for itself relatively quickly.
Jelani Smith
Sure. And it's funny that you mentioned that as well, because when notice is, especially given the way the rental market has been exploding during the whole interest rate hike cycle, a lot of buyers who were planning to buy, we're looking to rent instead. So I've noticed that has dried up the supply of good quality rentals, as well, as a lot of the feedback I've gotten from like prospected tends to develop the renovations, or it's pretty hard to come across those type of, quote-unquote, high-quality renovation, renovated apartments in the city of Toronto as well.
So I find that even doing a fresh coat of paint, a nice deep cleaning, making sure everything presents, well, that alone will help you get better quality tenants as well, right, because I find a mistake a lot investors make is not taking proper care of the unit.
This kind of if you just put up on the market when it's not professionally clean, or this law marks damages on the wall and etcetera, those small things, nor what deter the good prospects of tennis from renting the property as well. Right. So that's another big reason why I kind of make sure that the place is kind of kept up to date, like, a super fresh coat of paint, making sure it's professionally cleaned before I rent out to the next set of tenants.
Sean Cooper
That's a great point. And I'm just curious how handy you view any of this stuff yourself. I mean, it sounds like you're pretty busy as a realtor would imagine that you don't have a lot of spare time. So are you doing any of this stuff that yourself like the painting or anything else? Or do you outsource that all other people like the cleaning as well? Do you do any of that or basically outsource that to everyone?
Jelani Smith
It's funny that you mentioned that because, to be honest, I'm the least handyman person. So typically, when it comes to painting, general handyman stuff, I usually outsource that I do have a couple of contracts to kind of help out with these items. And if you have a cleaner that I work with, they clean all my properties just before the new tenant moves in.
And of course, before I do the showings etc. So I do like to outsource these things, just kind of saves a bit more time effectively that way. And he gets the job done quicker as well if I outsource it to someone who specializes in that tax too.
So I do have a contact list of plumbers, electricians, landscapers, cleaners, etc. So whenever my tenant texts me, hey, we say for example, the other day, the furnace at one of my properties, unfortunately, shut down. And it's one of the coldest nights of the year. So I texted my HVACR, and I'm like "hey the furnace shut down at one of my properties, would you be able to go and check it out?" He was able to go there with you the next day, and the problem was solved. I personally didn't have to go there.
Because he's already fixed the apartment, the tenants are happy, everything was sorted out. So I think having that system in the process is very important. There is a common misconception that if you have a rental property, you have to go there every month, to make sure everything's okay.
But that's not necessarily the case, as long as you set the expectation from the beginning with the tenants, if something does go wrong shoot me a message when my contacts know to kind of fix that problem accordingly. As long as you have that system in place, as long as you have those respective contacts in place, it does make it a lot more efficient to manage multiple properties at once.
Sean Cooper
No, that's very well said another thought came to mind here. Are you managing all these properties yourself? Or are you having the assistance of a property manager? Like what was your thought process on whether to do it yourself or do it with a property manager? I'm sure you thought about that there.
Jelani Smith
Definitely so for the moment, I'm managing seven of my properties at the moment. However, if it does come to the point to see if it's something like a five-unit building and up, I would say probably makes sense to get Property Management at that point. But most of my properties are either duplexes or triplexes. So it's kind of self-managed at the moment. But if it's something like a larger Multiplex, for example, I think that is something I will definitely outsource to a property manager.
Sean Cooper
Yes, it kind of becomes a bit much after a while and you want to be able to have some time for yourself as well. So yes, definitely. I think that's a smart way to go about doing it. And I'm just curious, you mentioned earlier about buying as you said that you're a fan of bungalows and parts of the city like Scarborough for example. I'm just curious.
So you said you did quite a bit of renovation. I believe you said you did over $200,000 worth of renovations so if this is a rental property epic comes with a 20% down I'm just curious about how you said you're refinancing other properties, but how did you pay for the renovations as well? That sounds like a lot of money you put into the property, did you have that much equity and the other properties that you could pull out to cover the downpayment and the renovations? It seems like a lot of money you put into that property.
Jelani Smith
Definitely. So for the rental hacking bungle, I'm currently in that the renovation came from the accommodation, my equity, from the very first property, and my savings to go back to my property, which is pre-construction freehold townhouse that I purchased for $526,000 back in 2016. Fast forward to a year and a half later, the property's appraised at several $700,000.
So I was able to take the equity of that property towards a down payment of the property that I have converted to a legal duplex, and it turns out the renovations did come from savings as well.
And however, I do want to mention one thing, I did spend a bit over $200,000 in renovations for this property because I'm living there. So I did quite a bit of structural changes, high-end finishes, etc. But for most of my bungalows, which were converted to a duplex, I typically spend around $110,000 at max on renovations, as well. So that's usually the average that spent, there's just this one here is principal residence two. So that's my kind of spending a bit more.
Some of the structural changes I've done are, for example, adding a lot to the bungalow converting the scenes to vaulted ceilings, and also the extra insulation in the basement so that way this sound traveled between the two units. So those are some of the things that have been added to that budget.
Sean Cooper
Thank you for sharing that. It's very helpful. And yes, I'm just curious. So how did you originally get the idea to house hack? Myself, to be honest, I heard a Scott McGilvery story from income property about house hacking, and we used to watch the show income properties. That's how I got the idea. But maybe you got a different way yourself. So I'm just curious, how did you come up with the idea of house hacking? Do you hear from somebody else or read a book or something like that?
Also, maybe you can just talk a bit about the numbers. I'm sure the numbers played in your decision to house hack, I'm sure you looked at how it would be carrying the property on your own versus house hacking. And also, you probably looked at the numbers, keeping it the way it is versus renovating and how much more rent you could get after the renovation. So maybe we can talk about what gave you the idea to house hack and discover a bit more of the numbers as well when you were deciding to do this.
Jelani Smith
Definitely, I think the biggest thing that gave me the idea to house hack is because it kind of makes more sense on paper as well, getting additional rental infinite basements. But aside from that, it also helps me scale my portfolio as well because the banks are able to consider obviously depends on which bank because every bank has its own separate policies on rental income, but the banks are able to take a percentage of the rental income and essentially added to the total combined income statement to make, which is also known as a mortgage offset as well. So that is something.
So doing a duplex rent-to-hack is something that has really helped me scale my portfolio to additional because we want them because it was my second property. But renting out my basement showed that additional income was one of the parts that have helped me to scale my portfolio to additional five properties over the next two years, essentially. So I think that's one of the main reasons why I decided to rent out the basement. And also I wasn't using the basement as often. So I was like my squad is burnt out and gets that extra income coming in.
Sean Cooper
I'm just curious, did you ever consider living in the basement yourself and renting out the upstairs for more money? Or did that not cross your mind? I'm just curious.
Jelani Smith
To be honest, I didn't do this for two weeks, because the upstairs has a bit more living space. They're a little bit more acquainted with the upstairs, they kind of like 10 feet, vaulted ceilings upstairs and etc. And also was getting around almost $2,200 in rental income from the basement. They brought the rental upstairs, maybe we'll get an additional $500. So I personally didn't think it's worth that extra $500 to be staying in the basement if that makes sense. So that's why I decided to stay on the main floor and rent out the basement.
Sean Cooper
Okay, that makes sense. Yeah, it sounds like the numbers played into your decision a lot. And yeah, it just shows the importance of considering the numbers and ranking them ahead of time. And I'm sure you did some research and looked at what other places were renting in the area. And that's how you came up with your final decision there.
Jelani Smith
Definitely. And that's the main reason why I pursue investing in bungalows, there are so many benefits of it like one is a bigger lot size. So there's long-term value. And of course, there'll be an easy conversion to a legal duplex, especially the new homes that they're building nowadays, like anything in the 1990s or newer than the 2000s.
In many cases, they don't come with separate entrances. So to convert those to legal duplexes is doable, but there'll be additional costs because you have to add a side or entrance cut costs about $5000-ish with permits, again depending on the contractor that you're using or a walkout basement entrance from the backyard.
That will cost about 10 to $15,000 with permits depending on which contractor to use. So buying those new homes, you're paying a premium factor ready. Plus you have to spend additional money to convert to a two unit. So that's why I believe that bungalows are that sweet spot. They do have the upside potential in case you do want to do a rebuild because they usually come on much larger lot sizes, and they're usually a bit more cost-effective. and newer homes too.
Sean Cooper
Because it also helps that they have that separate entrance already. So you don't have to spend $5,000. Like what you're saying?
Jelani Smith
That's correct. That's correct. Right. So that's the beauty about investing in bungalows because in most cases do have that extra inch already.
Sean Cooper
Great. I'm just curious, something that I've heard from people looking to buy rental properties in the GTA, as they say, it's challenging to get a cash flow, and positive property, and maybe you can let me know whether it was timing or whatnot. I don't know how much that played into it. But how have you made it work because the trolls are articles that you own seven properties in the GTA, I don't know if you're at property eight, or nine says the article is written there.
But how have you made that work? Because I have heard from some people that it's tough to like, not only are you spending a lot on the property versus some that are more affordable, like Hamilton, Niagara Falls, or Windsor, it's tough to get positive cash flow properties.
So maybe you can share with the listeners how you're able to get that to work. Maybe cash flow isn't as much of your priority, it's more about appreciation, maybe you can just share your thought process and how you're able to make it work in the GTA.
Jelani Smith
So in the GTA, especially in Toronto, passive cash flow can be a bit challenging. But the workaround is easy, finding something that has duplex or triplex and up potential. Because if let's say a brand new condo was single rental income, or even a townhouse, in most cases, it could be negative cash flow, obviously doing a much larger down payment.
So that's the main advantage of buying something great, because additional units to it so that we are taking advantage of that dual rental income, for example, in those cases, you will be positive cash flow. For example, the latest project I'm working on right now is semi-detached in downtown Toronto, it was initially a single-family home, but I've converted it to a triplex in order to have that positive cash flow coming in.
So that's the trick when it comes to investing in the Toronto Region is having a dual rental income coming in so that we are able to pretty much cover your carrying costs and have some money coming in. Or it might even break even, which is necessarily not a bad thing. Because as you mentioned before, you could be banking on the long-term appreciation of the property as well.
Sean Cooper
That's great. Thanks for sharing that there. And I'm just curious it sounds like you've done quite a few renovations over the years. So maybe you can provide the listeners with some tips when it comes to dealing with contractors finding reliable people. How did you find people that you trusted doing this kind of work? Because, yeah, it sounds like things could easily go over budget and things could go wrong.
So yeah, how were you able to? I'm sure there have been complications. But yes, maybe you can share some tips when working with contractors like getting several quotes. How have you made it work for yourself there? And then what tips do you have when making it a successful relationship when working with contractors?
Jelani Smith
100%, I think the biggest thing, when it comes to finding contractors, is to see the past work in person, or my personal favorite way of getting contractors is referrals. Because as they were brought, they already have the additional trust in them, if that makes sense. Right. So it's either referrals or kind of seeing that work in person, person to work with about to trust a contractor.
So that's kind of maintaining that relationship because they've done work for me in the past, and no complaints to get the job done in six to eight weeks, and on to the next project. So I kind of stick with the same set of contractors that I use as well. But for those who are just starting up, I'll see the best source of foreign contractors is through referrals.
Jelani Smith
Or if there's someone you've met online, if it's a random contractor per sample, and you're just seeing their past work in person, or maybe just kind of just based with their past customers this person's testimonials. So doing due diligence is very important as well, because you don't want to be in a situation where you've hired a contractor in front of the polisher that takes much longer to complete it, and I'm paying the mortgage on something that's not being rented out etc.
So when it comes to real estate, investing in contracts is one of the most crucial aspects. So everybody's just vetting the contractors, seeing the working person, seeing fear, anyone in your circle of influence does have referrals to work on.
And if we find good contractors, it's just that we should just keep adding on to them and keep building that relationship, even if they do charge a little bit more than other contractors, like presenting this worth it to kind of have that trust in that relationship, because they'll get the job done quickly for you. The quality of work is there. And it really benefits scaling your portfolio as well.
Sean Cooper
Yes, I'd imagine once you have a good experience with a contractor then you know that you can go back to them and you trust them in the future and they're going to likely deliver quality work to you as opposed to I guess someone where the work didn't go so well. And yes, it's like you said earlier it's good to have those reliable people like the plumber, the electrician, your HVAC person just having that list of people that you know so that you can go to instead of having to always research that from scratch.
Jelani Smith
100% 100% is very key, definitely to climb, keep a list of all the contacts as well, just in case, during the management of that property in case anything goes wrong, it will be fixed within the next day or so.
Sean Cooper
And lastly, I'm just curious if you could talk a bit about how joint ventures allowed you to grow your real estate investment portfolio. I understand us talking offline before the interview, but you mentioned that you hadn't bought all these properties on your own.
So maybe you can talk a bit about why you decided to do that, and how it's enabled you to scale your investment portfolio, buying a property with somebody else.
Jelani Smith
Definitely. So the majority of my properties are individually owned, but many of them are owned by a partner. So we went in 50-50 on these properties, as well, when it comes to joint ventures, and personally, to do with someone that I trust, like, for example, my joint venture partner, I've known him for over 10 years, a really good friend of mine as well, right. So obviously, when it comes to joint ventures, it does help you skill as well, because you're using combined income to purchase the property. So that also benefits the total debt servicing ratio.
To be honest, in general, for joint ventures, I personally do with someone that I trust some of that I've known for a very long time. And that is some investors out there are comfortable doing it with random individuals. But there could be some risk that does come with that because you have to look at a joint venture as a long-term partnership.
Let's say, for example, me and I buy property together. Next year I get married, I could come to say, hey, Shawn, I'm getting married and have to sell the property, but he may refuse to sell the property. So I've seen some cases like that happen in the past.
So the key thing to a successful joint venture is making sure everyone has a clear understanding of the long-term objective, the long-term goal for the property. So my partner and I for each property, have a specific plan of how long we're going to hold it for, or our strategy is like, for example, one of our properties, we plan to do a rebuild in the next year or two.
So that's the plan that we have for one of our properties, just making sure you have a plan in place. And this applies to if you're buying a property by yourself individually or through a joint venture. The key thing is to make sure you have a plan in place for each property.
Sean Cooper
Thanks for listening to another episode of the Burn Your Mortgage podcast. Besides being a podcast host, I'm also an independent mortgage broker. If you or anyone you know, family, friends, co-workers or neighbors could ever use any unbiased mortgage advice or a second opinion, feel free to reach out. Email me at Sean. That's sean@burnyourmortgage.ca call or text me at 647-867-3711 for a free mortgage consultation. Also, be sure to head on over to www.burnyourmortgage.ca and sign up for my free weekly newsletter. As a small token of my appreciation, you'll be able to download my Ultimate Mortgage Checklist on choosing the perfect mortgage. I look forward to hearing from you and helping you with all your mortgage needs. Once again, thanks for listening.