1. Speculation is not investing
Speculation is more akin to gambling as you put all your eggs in one basket, home-value appreciation.
You have no contingency plan. Cash flow and mortgage pay down create ROI regardless of the market. Spec buying is putting a deposit down on a condo that’s two years away, hoping the unit is worth more and you can sell it before the building completes.
Speculation is buying a property that doesn't cover itself with rent each month because you believe in the area and the potential for appreciation. I learned this lesson the hard way back in 2007; by the time my high-rise condominiums were built in 2010, they had dropped by more than my equity.
I was “underwater” and forced to close anyway. This was a $150,000 tuition.
2. There are no good or bad markets — only good or bad tactics
For example, there are specific tactics that work in a slump, like trading up as the higher-priced homes get hit the hardest. Or negotiating creative terms like seller financing.
These same tactics won't work in a boom. Here you would use a buy-fix-sell strategy.
In a recovery period, the time between the end of slump and the next boom, this is the time to use a buy-and-hold tactic, and even more advanced strategies like rent to own, and agreements for sale.
This is a great time to begin a real estate development project as well
The key is to know where you are in the cycle at all times. The good news is we always know where we are heading based on where we came from; it always goes Boom-Slump-Recovery.
In this order, in a cyclical fashion. If you’ve been in a slump for a while, get ready, the recovery is on its way.
3. Your team matters
You need to build a dream team around you.
This is one of the biggest reasons I chose to join Canada’s leading Real Estate Investment Network — R.E.I.N. It’s in rooms like this you can rub shoulders with professionals that specialize in this kind of thing. Building out a dream team is one of the largest contributing factors in my success as an investor.
You want professionals that specialize in helping people achieve financial freedom through real estate investing.
Find an investor-focused, real-estate agent, have them point you in the direction of a great mortgage broker, lawyer, and insurance agent.
These three in conjunction with your ace property manager are the group of professionals that will leverage you to the highest of heights.
Getting this right is the difference between buying a couple properties with varying success and building a well-run real estate empire that creates multi-generational wealth without consuming your precious time.
4. You get what you negotiate
Having a sharp agent who can negotiate a good deal for you is one thing, but a great negotiation starts with you. You need to become a master at the art of negotiation. Check ego and emotion at the door and allow the process to unfold over time, never be in a rush.
Also, remember that a real estate negotiation does not need to only be about price. Often terms are more important than dollars. Find out what is important to the other side and try to solve their problems while you create a wonderful deal for yourself.
Dates, inclusions, improvements even financing options are all up for negotiation.
If you don't ask, you don't get.
5. Find your niche
Don't try to be in too many different arenas at once. Find a particular property type and become an expert at it. Maybe it’s homes with a basement suite, maybe it's a condo that allows short-term rentals, perhaps it's small multi-family or light industrial.
The key is to find a groove and master it. It’s very difficult to build a strong portfolio with a mixed bag of all of the above, but pick one and really master it; each deal is better than the next and you become the most confident investor possible.
6. You don't need to invest where you live
Most people like the idea of being able to drive over to their investment and give it a kick or a feel. And as nice as that is, where you live is not necessarily the best option for you.
Proximity to your home matters far less than positive cash-flow in a market with strong economic fundamentals for growth in both rents and market value. Furthermore, you might be at the tail end of the boom at home, but one province over is just coming out of a long slump.
The opportunity for the next five years is far greater in the neighbouring province purely because of where they are in the cycle. A strong team of local professionals can be found to help you make a smart investment once you locate the area with the best opportunity
7. Graduate for economy of scale
Once you have mastered the single-family home game, and hit the limit of your ability to finance homes, which usually happens at five properties as banks typically place a limit on how many properties you can finance.
Mortgages aside, the biggest reason to graduate to multi-family investing, which is more than five units on one title, is for economies of scale.
You can get cheaper property management, a roof over an apartment building of eight units costs less than the four separate roofing jobs, same with one boiler system versus four individual furnaces.
Having multiple units in one place just streamlines and simplifies your portfolio.
8. Bigger numbers don't equal bigger risk
It’s counterintuitive, but a million-dollar four-plex is less risk than a $500,000 property, and a $5-million apartment building is even less risk than the four-plex and on it goes. As prices rise, risk is reduced. The big reason for this is diversified risk.
The more units, the less risk of falling into a negative cash-flow for example three out of eight units could suddenly be vacant and you could still cover your mortgage.
If your house or apartment suddenly becomes vacant, you are on the hook for the entire mortgage payment until a new tenant is placed.
9. Master joint ventures
At some point, every single investor reaches a ceiling as to what they can accomplish alone. Eventually everyone will run out of one of the three ingredients needed to grow their portfolio.
The most common is capital for down payments; once you’ve deployed your chunk of liquid capital, it takes a long time to build up another down payment. Other times, the issue isn't capital, but rather access to financing.
Every single investor eventually hits their limit for how many mortgages they can convince the bank to give them.
And then there’s time and expertise, the third but equally important ingredient. Eventually, your time and expertise can only be stretched so thin.
When you hit this point, it’s time to master the art of joint venturing. For every person out there flush with cash but without extra time or expertise to spare, there is a person with the capacity and expertise to execute who has run out of capital.
This is a match made in heaven and, with the right documentation and expectations, can be a mutually beneficial partnership that serves all parties for years and allows investors to reach new heights in their career.
10. Cash is king, but cash-flow queen
Yes, cash is king, but what really holds the power to your success and designing the lifestyle of your dreams is creating cash flow.
For example, you could have a half million dollars and buy a nice condo in a high rise for a million with your cash, rent it for $3,000/month and you and find yourself in a negative cash flow situation monthly. That same 500k invested into a $2 million multi-family will bring in close to $15,000 in revenue per month; that's five times more revenue and positive cash flow each month that can pay for your lifestyle.
11. Force appreciation
One of the best aspects of real estate as an investment class is the opportunity to influence the value of the asset by improving it. Take advantage of low hanging fruit renovations like floor and paint to instantly force up value. Put your sweat equity into landscaping and cosmetic projects.
Some properties let you unlock value by developing them further, adding a suite or rezoning to another use. There are many ways you can influence the value of your real estate.
Even if you are currently stuck in terms of finances, you can give your portfolio, and thus your net worth, a boost, simply by being strategic
12. Hold for wealth
Saving the best for last. Good money can be made buying, fixing and selling property. Many people do this as their full-time job.
The challenge here is that this will forever be their full-time job because they rely on these profits to live. Real estate is great for creating a profit but the real magic is what happens when you own it over time.
Multi-generational wealth is created by holding hard assets like real estate over decades.
Consider that a $2.5 million portfolio of real estate today that you've invested under $500,000 of your own capital in, using 80/20 leverage, will, in 30 years, be a fully paid for portfolio worth around $10 million (real estate doubles every 15 years historically) and generating over $500,000 in rental profits every single year.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.