The 10 Commandments of Investing in Real Estate
As Canada’s highest producing brokers, here at REC Canada, we have seen literally thousands of our clients make millions using real estate as a tool to create wealth. As information is now everywhere, the aspiring investor has so many options and all the power in the world to invest using the experiences and relying on others strategies to ensure mistakes are not made and capital is not lost. We have compiled a list, a list to serve as a safety net, one that unless you understand each one, you may want to hold back until you have given yourself all you need to succeed.
1. Thou shall get a Real Estate Education
Knowledge is the new currency. Without it you are sure to follow other people’s advice without knowing if it’s good or bad. Knowledge will also help take you from being a “good” investor to becoming a great investor, and that knowledge will help provide a passive stream of income for you or your family. You will use your knowledge to deploy strategies on what method of investing a particular opportunity needs, in order to gain the biggest profits in both cash flow and appreciation. If you are looking for places to start, please email us at info@reccanada.com , we will send you links to many different professional organizations and local networking meetups where investors get together and mastermind on their collective experiences.
2. Thou shall Understand and Establish GOALS
A goal is much different from a dream, or a wish; you may wish to be rich, but that doesn’t mean you’ve ever taken steps to make your wish come true. Setting clear and specific investment goals becomes your road map and action plan to become financially independent. You are statistically far more likely to achieve financial independence by writing down specific and detailed goals than not doing anything at all. Your goals can include the number of properties you need to acquire each year, the annual cash-flow they generate, the type of property, and the location of each. You may also want to set parameters on the rates of return required. Naturally, none of this is possible if you don’t completely understand your options and have a clear path on how to get there. Do you have enough capital to get started? Do you qualify for financing? Creating your Real Estate Action Plan (RAP) is a detailed and comprehensive process we have at the REC to ensure you know what your are capable of and the best way to get there.
3. Thou shall not Speculate
We know, you are sick of us saying it…but again, the real estate market goes up and down, UPWARDS. Always invest with a long-term perspective in mind. Never speculate on quick short-term gains in flipping or a neighborhood you think is hot based on hype. You never know when a market will peak and it’s usually 6 to 9 months after the fact when you find out. Don’t chase after appreciation, if the rest of the fundamentals are not in line. Only invest in prudent value plays where the numbers make sense from the beginning.
4. Thou shall stick to the Fundamentals of Cash Flow and Good Sense
With few rare exceptions, always buy investment property with a positive cash-flow. The higher, the better. Your cash-on-cash return is directly related to the before-tax cash-flow from your property. Cash-flow is the “glue” that keeps your investment together. Your equity will grow over time (through appreciation and mortgage paydown), while the cash-flow covers the operating expenses and debt service on your property. As times goes on, your cash flow will also grow significantly, giving you the chance to slowly replace your working income.
5. Thou shall Invest Where the Returns are Best
Canada is a very large country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to many local factors. As such, you should recognize that there are times when it makes sense to invest in a particular market, and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or you bought property there before. Taking the emotional attachment OUT of any market, will allow you to see opportunities for what they really are; dollars and cents. YOUR DOLLARS AND CENTS. After all is said and done, no one has a bigger responsibility to protect YOU than YOU do!
6. Thou shall start at the Top
Always start by selecting the best real estate markets that align with your investment goals. Most investors start by analyzing properties with little to no regard of its location. This can be a big mistake if you don’t consider the investment in light of the market and neighborhood it’s in. The best approach is to first choose your city or town based on the health of its housing market and local economy (unemployment, job growth, population growth, etc.). From there you would narrow things down to the best neighborhoods (amenities, schools, crime, renter demand, etc.). Finally, you would look for the best deals within those neighborhoods. Ensure a local realtor, with experience in the micro market you are working within is engaged and becomes a vital part of your team!!!
7. Thou shall Diversify Across Markets
Focus on one market at a time, accumulating from 3 to 5 income properties per market. Once you’ve added those 3 to 5 properties to your portfolio, you would diversify into another prudent market that is geographically different than the previous one. Typically that means focusing on another province or a market that is based on different fundamentals. One of the underlying reasons for diversification within the same asset class (real estate), is to have your assets spread across different economic centers. Every real estate market is “local” and each housing market moves independently from one another. Diversifying across multiple provinces helps reduce your “risk” should one market decline for any reason (increased unemployment, increased taxes, etc.).
For Example, even if you don't live in Toronto or Ontario, you can invest in the Toronto Real Estate Market, which has become a hotbed of buyer activity that could be really beneficial for real estate investors; just ask the multitude of overseas investors who are choosing Toronto as the city of choice to invest in for the foreseeable future.
8. Thou shall Build a Team of Experts
Never manage your own properties unless you run your own property management company. Property management is a thankless job that requires a solid understanding of tenant-landlord laws, good marketing skills, and strong people skills to deal with tenant complaints and excuses. Your time is valuable and should be spent on your family, your career, and looking for more property. Use only Investment Focused Realtors, Lawyers and Accountants. Building this team BEFORE you start investing is CRITICAL, as only once you have presented your actual full plan to experts like this, you will not get sound and complete advise on best practices for tax reduction, corporate structure for your holdings, etc.
9. Thou shall Keep Control but Continue Growing
Be a direct investor in real estate. You always want to be in control of your real estate investments. There are other ways, passive ways to invest in real estate that can be profitable and truly amazing.
Unless you have a deep understanding of how Limited Partnerships, REITs and MICs work, I would suggest that any “paper based” investments are made AFTER you have an established a really well rounded portfolio YOU control and is performing at its PEAK.
10. Thou shall use The Power of Leverage
Real estate is the only investment where you can borrow other people’s money (OPM) to purchase and control income-producing property. This allows you to leverage your investment capital into more property than purchasing using “all cash”. Leverage magnifies your overall rate-of-return and accelerates your wealth creation. As long as you have positive cash-flow and your tenants are paying off your mortgage for you, it would be foolish not to borrow as much as possible to buy more income property. This specific topic is one that will analyze in great detail next week!
Your friends in the Business,
