Real estate investing comes with highs, lows and everything in between.
After some hard-learned lessons in 2007, followed by more than a decade of success, I'm sharing 12 practical insights I wish I knew at the beginning of my journey.
Rule No. 1: Speculating is not investing
In the world of real estate investment, you’ll find two kinds of individuals, speculators and investors.
Speculators buy property, hold it for a few years, make quick improvements then hope to sell for a profit one or to years later. If the housing market turns sour and they want their money back early, speculators can face devastating losses. Speculation is basically gambling.
I learned this rule the hard way. In 2007, I purchased some presale high rise condominiums in Kelowna. By the time they were completed in 2010, their market prices had dropped by more than my initial equity. I was deep underwater and forced to close, leading to my first humbling real estate “tuition” payment of $150,000.
Investing is a far wiser strategy. Investors know that trying to time the housing market is nearly impossible. They also know housing prices typically trend up over time. Regardless of where you’re at in the market, a property that produces positive cash flow and lets you pay down the mortgage on a long-term horizon generates a solid return on investment.
So, keep your head up, relax those shoulders and focus on the long haul.
Rule No. 2: There are no good or bad markets, only good or bad tactics
Some tactics work best during a slump. For example, trading up when higher-priced homes get hit the hardest. Or creative deal-making like seller financing where the buyer mortgages a property directly from the seller.
Those same tactics will not work in a boom market. When the market is trending up, it's usually best to use a “buy-fix-sell” strategy.
During recovery periods—between the end of the slump and the beginning of the next boom—buy and hold, rent-to-own or make agreements for sale (similar to using call options in the stock market). Recoveries are also great times to launch new real estate development projects. The key is always knowing where you're at in the market cycle. The housing market always cycles from boom to slump to recovery, in that order. If you’ve been in a slump for a while, get ready because a recovery is almost inevitably on the way.
Rule No. 3: Your team matters
One of the top reasons I joined Canada’s Real Estate Investment Network, was to rub shoulders with professionals who specialize in real estate investment. Growing my network, then building out my own dream team, was one of the biggest contributing factors towards my success in real estate.
With a team of real estate services professionals at your side, you’re more likely to achieve your goals in a shorter time.
First, find an investor-focused realtor and ask them to refer you to trusted mortgage brokers, lawyers and insurance agents. Add in an ace property manager and you'll have a dream team that can leverage you to your highest of heights.
Having the right people on your side is the difference between buying a couple of properties with varying success and building a well-oiled real estate machine that produces fantastic returns but doesn’t consume your life.
Rule No. 4: You get what you negotiate
A sharp real estate agent can get you a great deal. But to truly thrive in this market, you’ll need to attain mastery in the art of negotiation.
Check your ego and your emotions at the door and allow the process to unfold over time. Never be in a rush to close, and never slam the door on a counter-offer. Remember real estate negotiations aren’t always about price. When it comes to value, the terms of the deal are often more important than the dollar amounts.
Find out what’s important to the other side and try to help them solve their problems, while creating a wonderful situation for yourself. Dates, inclusions, improvements and even financing options are all up for negotiation. If you ask, you just may receive.
Rule No. 5: Find your niche
Don't try to be an expert in everything. Instead, focus on a particular property type, then study until you become an expert in that niche. It could be homes with basement suites, condos that allow short-term rentals, multi-family units or commercial properties. The key is to find your groove, double down and master it.
If you invest into a mixed-bag of properties, it’s extremely difficult to build a resilient portfolio, negotiate the best terms and produce great returns. When you only focus on one niche, you’ll become more confident and shrewd with every new deal, and each one will turn out better than the last.
Rule No. 6: You don’t have to invest where you live
Most people like the idea of being able to drive over to their investment property and kick the tires, so to speak. While it might feel reassuring owning assets in your hometown, they might not actually be your best investment options.
Look for opportunities in markets showing strong economic fundamentals so—over time—you can increase your rental rates, property value and cash flow. For example, cities with strong economies, job growth and relatively lower home-price-to-income ratios will yield the best returns.
Your own home town might be nearing the end of a boom cycle, but cities one or two provinces over might be coming out of a lengthy slump. On a five-year horizon, you might find far more attractive opportunities in a neighbouring province purely because of where they are headed in the market cycle.
Once you find an opportune place to invest, a strong team of local professionals can help you make smart investment choices—without requiring constant travel.
Rule No. 7: Graduate for economy of scale
Once you've mastered single-family homes and have reached the limits of bank financing—which usually happens at five properties—look into multi-family properties so you can achieve economies of scale. When you own multiple units in one location, you’ll have far lower per-unit costs for ongoing expenses, like roof repairs, landscaping maintenance and HVAC repair.
Quality investment properties streamline and simplify your real estate investment portfolio.
Rule No. 8: Big numbers do not always mean big risk
A $1 million fourplex carries less risk than a $500,000 home. And a $5 million apartment building is less risky than a $1 million fourplex. That might seem counterintuitive at first, but it comes down to the mathematics of diversification.
When you have more units available for rent, you minimize the probability of falling into a negative cash-balance situation due to tenant vacancy. For example, if you own a multi-family property, three out of your eight units could suddenly become vacant and you’d still have enough cash flow to cover your mortgage. But if your individual apartment or single-family house suddenly has no tenant, you’re on the hook for paying the entire mortgage payment until you find a suitable tenant.
Rule No. 9: Master joint ventures
Eventually, you’re going to hit a limit on what you can accomplish as a solo investor. Everyone runs out of one of the three key ingredients you need to expand an investment portfolio.
Capital for a down payment is the limit most investors run into first. After you’ve deployed your liquid capital, it takes a long time to save up for another down payment.
Access to financing is the second problem, because individuals can only borrow so much money from a bank at one time.
The third ingredient is time and expertise. You can only stretch your own personal resources and knowledge so far.
When you reach one of these milestones in your journey, it’s time to embrace the art of joint ventures.
For every person out there flush with cash, but lacking time or expertise, there’s another cashless person with the knowledge, skills and bandwidth to execute your plan. These are the matches made in heaven that can launch your investment career to new heights.
Rule No. 10: Cash is king but cash flow Is queen
We all know that cash is king, but cash flow is what really helps you achieve your financial goals.
With $500,000, you can buy a new highrise condo, rent it out at $3,000 per month, but still end up in a negative cash flow situation. But that same $500,000 invested in a $2 million multi-family property can bring you close to $15,000 in monthly revenue. That’s five times more revenue per month to help you live the lifestyle of your dreams.
Rule No. 11: Force appreciation
Boosting value through home improvements is one of the best aspects of real estate investing.
Complete “low-hanging fruit” renovations like flooring, sidings and fresh paint to quickly increase your property's curb appeal. Next, invest sweat equity into your income property in the form of landscaping, gardens or other yard projects.
With certain properties, you can unlock even more value through property development, such as adding a secondary suite or rezoning the land for commercial use.
Even if you’re financing has hit a limit, you can increase your portfolio value through strategic improvements.
Rule No. 12: Hold for wealth
You can make good money by buying, fixing and selling properties. So good in fact, some people do that as their full-time job. The problem for those folks is they rely on those profits to live. Real estate flipping ends up occupying all of their time.
In a boom market, real estate can generate serious short-term profits, but the inevitability of an impending bust market means the real magic happens by holding on to solid assets over time.
Remember, real estate investments typically double every 15 years. By simply holding onto real estate for decades, you can create multi-generational wealth.
AJ Hazzi is a real estate coach, investor, and team lead of Vantage West Realty - an independent group of Kelowna realtors, known locally for five-star experiences and the “Guaranteed Sale” program.
If you'd like personalized advice about how to manage or build the real estate portfolio of your dreams, please feel free to reach out for a private consultation.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
When interest rates shoot up, the real estate market inevitably feels the tremor.
For many, affording a home becomes a towering challenge. Let's break it down. Today, financing an average starter home priced at $900,000 (with 5% down) will set you back $5,725 monthly. That's almost twice the rental cost for the same home.
To qualify, without any other debt, you'd need an after-tax income surpassing $220,000. And here’s the kicker—you'd have to qualify at rates 2% higher than the standard ones, which means over 8%.
This same starter home is often what new buyers and investors are both eyeing. Historically, these homes were great for positive cash flow. Imagine a $900,000 home, leveraged at 2.5% interest. It would bring in a profit with just $3,000 in rent monthly. But this profitable picture was largely painted by affordable loans.
However, with economic instability, banks tighten their grip. Rates for non-owner occupied property buyers can surge by 1% to 1.5%. Banks also set strict guidelines regarding the debt coverage ratio, which essentially measures if the rental income can comfortably cover the property's expenses (and then some).
With current rates, most investors would need to make a hefty down payment—often more than half of the property’s value—to even consider a positive cash flow.
Borrowing against your primary home for another property's down payment? Once a viable strategy, it now seems a distant memory. Simply put, the costs of borrowing heavily outweigh the returns from rentals. This shift has left many potential real estate investors on the sidelines.
While there will always be buyers for lower-end single-family homes, albeit fewer, the investor-specific properties, like fourplexes and apartment buildings, face uncertainty. Some landlords, especially those using variable-rate mortgages, find their investments draining their pockets.
Their solution? Selling the property. But here's the snag, prospective buyers face the same soaring interest rates.
To understand the math, let’s dive into ‘cap rates,' a term investors throw around to measure an asset’s return. It's calculated by dividing the asset's value by its net operating income (NOI), giving a percentage as the result. But with higher property prices, the returns diminish.
In a world where investors won't borrow at 6.5% for a 4% yielding asset, the numbers simply don’t add up.
Unlike a young family fuelled by dreams of homeownership, investors prioritize the bottom line. If the income from a property remains stagnant (or even declines), the only logical way to boost returns is to slash prices until the yield is enticing enough.
Enter the cash buyer.
These investors have two unbeatable advantages—no competition and no interest rates to fret over. The ability to close a deal quickly, say in seven days, often leads to significant discounts.
This is the game plan my investment fund, CashOffer LP, banks on. The next step? Wait out the economic storm. As history suggests, the Bank of Canada eventually loosens the reins on interest rates. By then, property values rise, and the smart cash buyer can refinance, earning a significant profit, all while enjoying a steady cash flow.
For those ready with cash to dive in, the next 12 to 18 months promise a golden window of opportunity.
I’m gearing up for it, and if you'd like a deeper dive into my strategy for this high-interest landscape, watch this video on Youtube. Or feel free to reach out, I'm open to sharing my playbook.
If you are interested in learning more about the current market dynamics and what it means for everyday buyers and sellers, you can always catch our latest Vantage Report
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
Two new zoning bylaws have opened a rare window of opportunity for investors in Kelowna
Heading into 2023, Canadian investors are up against two major economic headwinds—rising interest rates and rule changes that make being a landlord increasingly difficult.
For real estate investors in Kelowna that means some rental properties won’t produce worthwhile returns in the years to come.
With interest rates above 5%, finding properties that produce a positive cash flow is a challenge. Most of the obvious ones—good single-family homes, homes with legal suites and Airbnb condos—have been picked over by investors, driving up the valuations.
New Kelowna duplex legislation
New legislation in Kelowna has opened a window of opportunity for duplex investors. Kelowna duplex homes can now be further subdivided into 3-plexes or 4-plexes under the RU4 zoning bylaw.
If you own a half-duplex or full-duplex in Kelowna, you can now add a secondary suite to each half-duplex property and create up to a 4-plex.
With rental rates at record highs and vacancy at a record low 0.6%, this new legislation helps increase our supply of rental housing at a critical time and opens a window of opportunity for duplex investors.
In 2022, Kelowna’s population grew to more than 142,000, pushing rental rates up to record highs. From 2020 to 2022, the one-bedroom rental rate in Kelowna jumped 35% from $1,450 to $1,950, while the two-bedroom rate grew 45% from $1,650 to $2,385, according to Zumper.com.
Student housing legislation passed
Student housing legislation passed
A second piece of legislation may impact student housing and further benefit duplex and multi-family homeowners in Kelowna. Kelowna landlords are no longer permitted to sign lease agreements that start in September and terminate in June.
In past years, Kelowna landlords signed student leases that stipulate the tenant had to move out on May 31. That let owners rent out their units for summer vacation rentals, which are way more profitable. In the summer, you get weekly what you’d get monthly the rest of the year.
Landlords will now be reluctant to sign lease agreements with post-secondary students at all. With no mutual agreement in place to end tenancy, most landlords won’t want to risk losing out on their summer revenue by entering into a year-round student tenancy. Why do 12 months of work when you can earn the same money renting for 12 weeks of summer?
As a result, I expect to see some student renters left in a lurch, and more demand for studios, apartments, and by-the-room rentals.
“House hacking” an advantage for investors
In recent years, I have introduced my book of investor clients to a technique called “house-hacking.”
House hacking involves buying a property with the right configuration, separating it into additional units, then renting out each space individually, often bundling incentives like internet, utilities and laundry.
If you find the right duplex house plan, you can now create up to four sources of rental income in Kelowna. As an investor. you get two huge benefits—more revenue than you possibly could have earned before and far lower tenant risk.
That’s because if you have two doors in your portfolio and one tenant vacates, you lose 50% of your rent that month. But if you have four doors and one is vacant, you only lose 25%.
Heading into 2023, I believe half-duplex and full-duplex properties are one of the best investment opportunities for anyone seeking a passive stream of income in Kelowna.
The duplex homes segment is a bit less obvious. Most people just aren’t aware of it, so valuations haven’t been chased up. You can still get a good deal on a half-duplex because the revenue growth hasn’t been priced in.
We’re already seeing three-bedroom rentals for $2,700 per month near the UBC Okanagan campus, so seeing $1,000 per bedroom rents next year is not out of the question.
The main obstacle for duplex investors in Kelowna? A limited inventory of duplex housing with 51 duplex homes on the MLS, many of them located near Kelowna’s post-secondary schools.
To see the latest duplex homes for sale in Kelowna, check the 2022/23 Kelowna Duplex Hot List.
AJ Hazzi is the founder of Vantage West Realty, Inc.Contact him at (250) 864-6433 or [email protected].
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
Most baby boomer clients I’ve spoken with lately are feeling very frustrated.
They are frustrated because financial planners have been telling them the same thing for years—they’ll need a couple of million dollars saved to comfortably enjoy retirement.
Based on the returns offered by most financial products out there, that assessment is unfortunately quite accurate.
Right now, the majority of boomers have their net worths tied up in low-yield savings accounts and expensive primary residences that yield almost no cash flow. To top things off, inflation is roaring and increasing the price of almost everything.
But the good news is, there’s a way to protect yourself going forward.
After years of steady price growth in Canadian cities, there’s never been a more advantageous time to cash in your primary residence, downsize your footprint and experience the freedom of exiting the rat race in style.
If you get it right, you’ll earn passive income for life and watch your net worth continue to grow well into your retirement years.
Worry no more
Worried about the legacy you’re leaving behind for your kids and grandkids? Concerned about getting off the straight and narrow path with only a fraction of what you’ve been told you need to retire?
I’m going to show you how a $500,000 investment—with 25 years of runway and conservative growth expectations—can produce enough income to make your “elegant exit” and grow into a sum of money significant enough to create multi-generational wealth.
The 2022 exit strategy
I have had the pleasure of consulting with a fair number of boomers who wanted to strategically invest their nest eggs into British Columbia real estate and live off of the cash returns.
I’m going to share a few different examples of how I’ve helped individuals and couples use real estate investment strategies to fund their retirement, beat inflation, and set something aside for their loved ones.
Each of these successful game plans took less than six months to a year to execute – with no investment expertise or MBA required on their part.
Case study 1: Tom
This is a real-life story about a frustrated investor who, for the sake of privacy, we’ll call Tom.
Tom was always a risk averse person, which allowed him to save up a handsome nest egg of about $500,000. Half was saved in a Registered Retirement Savings Plan (RRSP) and half in low-risk stocks, bonds and GICs.
He was about thee years away from retiring from his $75K per year job with a great credit record. Following the “conventional wisdom", Tom diligently paid down his mortgage and only had $100,000 left outstanding to own his home, which was now worth a cool $1.2 million.
By most people's standards, Tom had made it. He secured a safe future for himself and his family.
The only thing keeping Tom up at night was the fact that he worked hard his entire life but was now facing the impending reality of living on the returns of a low-risk portfolio that could only generate $30,000 per year for the next 20 to 40 years. (Based on a $500,000 portfolio with a 4% annual return ($20,000), plus his $10,000 annual pension).
Tom and his wife still wanted to travel, check items off of their bucket lists and spoil their grandkids from time to time. Tom needed a way to change the outcome of his golden years.
After reading a few of my articles, he came into my office and asked if I had any bright ideas to help him meet his financial goals. He was afraid his fixed income wouldn’t be adequate to enjoy life in Kelowna, let alone travel the world.
As a risk-averse investor, he had always been afraid of buying rental property. He heard the horror stories of tenants doing the midnight dash and leaving the property in bad shape. And he didn’t have the time to be running ads, screening tenants, handling maintenance or chasing down rent payments.
What he did like about his current investment portfolio was it offered a passive, hands-off income.
We spent the next hour or so going over his finances, and I outlined an investment vehicle we’ve used at Vantage West Realty to generate completely passive returns, while eliminating the biggest risks associated with owning a rental property.
Tom asked me to sketch up a personalized plan and present it to him and his wife. I welcomed the challenge.
Tom had around $250,000 invested in non-registered funds that were earning a very modest return. We discussed an opportunity in a limited partnership called Cashoffer LP that would offer a rate of return five times higher than his current portfolio.
The Cash Offer LP fund strategy is quite simple:
1. Sophisticated investors like Tom pool together their capital then make discounted cash offers on homes (at least 10% off of market value) to highly motivated sellers.
2. The partnership improves each property with cosmetic improvements that increase the property value.
3. The home is either resold at a profit or offered as a rent-to-own opportunity to the many Canadian buyers who do not yet qualify for a mortgage.
Tom liked this concept for a few reasons:
• He wouldn’t have to take on new debt
• He didn’t have to offer a personal guarantee the partnership has its own lending arrangement
• It’s a hands off investment managed by real estate professionals who live and breathe housing (and have major skin in the game)
Now he is invested into a diverse portfolio of more than a dozen properties, Tom sleeps well, knowing he’s earning an 8% annual cash flow and expects to double his capital in three to five years.
The combination of buying at a discount with an instant cash offer, then selling at a premium with creative buyer terms creates an exceptional return for our investors at Cash Offer LP.
Unlocking Tom’s home equity
Most of Tom’s saved equity was essentially frozen into his largest asset, his primary residence which was worth $1.2 million. By accessing a line of credit for less than $8,000 per year, Tom could draw on around $880,000 in home equity. We decided not to over leverage and only re-advanced up to 50% of his home’s value, freeing up a $500,000 line of credit.
The plan was to invest this equity into a long-term multi-family holding property. I showed him one he could buy for $2 million, with a $500,000 down payment.
After covering for expenses, including the interest on his line of credit, the property would produce an annual net revenue of $25,000.
Unlocking the RRSP
The last piece of the puzzle in Tom's quest to move from non-existing returns into the land of double was to put his RRSPs on steroids.
I showed Tom how he could invest his RRSPs into a self-directed account and essentially become his own bank. That means he would be free to allocate funds into real estate investments and earn a handsome annual return.
There are many successful Real Estate Investment Trusts that will pay an 8% dividend and allow you to be totally hands off. With Tom's new plan, he can expect to earn $20,000 per year on his $250,000 of registered funds.
So now let's take a look at what Tom will have three years down the road when he decides to pull the plug on work and set his sights on that bucket list.
CashOffer LP Investment—$40,000 (16% annualized return)
Multi-family property—$30,000 (6% annualized return)
RRSPs in a well-managed REIT—$20,000 (8% annualized return on $250,000)
Canada Pension Plan—$14,445
Tom's pre-tax earnings—$104,445 per year
A dream retirement
With a six-figure income, Tom had almost doubled his working salary and he didn’t have to trade his free time to earn it.
With $1.1 million of his cash in the real estate market earning him his dream income, all of his hard-earned equity now does the heavy lifting. To replicate those returns with traditional investments, he would have needed to save close to $4 million.
In addition to this amazing cash-flow, Tom's apartment building is now going up in price, further increasing his return on investment.
The best part of this entire process was helping Tom see what's truly possible in his retirement years. As this 55-year-old investor approaches 75 years of age and looks towards succession planning, he will have a debt-free portfolio worth nearly $4 million producing an income of around $250,000 per year.
Now you’ve seen what’s possible with a solid real estate investment strategy, here are some final thoughts to consider.
Let’s assume you can sell your present home at a profit of $500,000. Investing this amount with a successful REIT can return 8% per year and yield a $40,000 annual income. With a conservative housing price growth estimate of 3.5%, the investor could see a $56,350 capital gain in the first year alone.
• REIT Income: $40,000 per year
• Capital gain: $56,350 per year
• Net return: $96,350 on $500,000 (19.3% ROI)
Now, assuming the 55-year-old investor is playing the long game with these properties, let’s explore the amazing potential of compound growth over a long timeframe. After 25 years of 3.5% growth—as our retired investor approaches 80 years young—he will have a debt-free portfolio worth approx. $3,200,000 producing an income of $250,000 per year.
• Long-term win: $250,000 per year and a $3,200,000 portfolio.
How’s that for a legacy?
If you want to learn more about syndicated real estate investments like Cash Offer LP, and other ways to generate double-digit returns in real estate, contact me directly. Book a virtual coffee with me or email me at: [email protected] or call or text me at (250) 864-6433.
If you would like to do a 30-minute strategy call to discuss your unique situation, click here.
A.J. Hazzi is the founder of Vantage West Realty.
More Investment Real Estate articles
- Speculating or investing? Feb 23
- 2021 predictions for city Dec 17
- A BRRRR strategy Oct 8
- Sell high and buy low? Jul 30
- Less risky real estate strategy Apr 23
- Cardinal rules of real estate Apr 10
- A retirement rescue plan Nov 28
- Open house the right way Sep 19
- Selling your home sucks Jul 27
- Investment secrets Jul 10
- Kelowna's real estate reverb May 31
- Investing with $50k Apr 19