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.