Oh January, how we despair of your uncompromising gaze into our fiscal health and scorn the harsh reality of our meagre returns. If this rings true, then perhaps it’s high time to take a long hard look at exactly what you have invested, where it is held, and what it is doing for you. Those 3-5% mutual fund returns can be significantly improved upon, and my challenge to you in 2019 is to take that bull by the horns and become more deliberate with your finances. I’m no fiscal expert by any means, but I do know a few things about Real Estate Investing, and I’d like to share some tips with you right here. If they invoke immersive soul searching, awkward questions and several glasses of wine then my job is done…….
1. Identify your Why: Name your motivating factor. Are you looking for a secondary source of income to buffer any employment downturns? Do you wish to pad out your retirement funds? Are you tired of trading too much time for too little money and aspire instead to sit solidly in the driver's seat of your life? Whatever your catalyst may be, take the time to figure it out then write it down and keep it visible. You will revisit your ‘why’ many times when the going gets tough and it will encourage you to keep pushing forward.
2. Research your market: If Real Estate Investing might be a possibility, you’ll need to become familiar with the variables. Explore the vacancy rate, understand your target demographic (students, families, young professionals), examine the localised rental rates and familiarise yourself with the Ontario Building Code along with the Landlord-Tenant Act. Knowledge not only makes for a prepared investor, it also translates into higher returns and a more deliberate journey.
3. Have a transparent discussion with your lender: Ask about mortgage rates and options, qualifying protocols, down-payments, prepayment penalties, and loan insurance. Find out if your lender will arrange for renovation allowances and how this works. Make sure that you understand the benefits and consequences of any and all financial variables. Generally, real estate is a long game, but sometimes life throws an unexpected curveball and you have to make sure that you can divest with the least amount of pain if necessary.
4. Crunch those numbers: I cannot emphasise this enough. Crunch them backwards, forwards and upside down. Get intimate and familiar with them. Plan for contingencies and emergencies, understand the minutiae and minimise any surprises. Don’t forget the source of your downpayment either. If this consists of RRSP’s or money from your Line of Credit then remember to factor any extra borrowing costs into your calculations as this could demonstrate the difference between positive or dismally negative cash flow.
5. Define your style: What is it that really truly floats your boat and gets you all inspired? Is it a turn-key, updated and ready to rent property with limited headaches and solid long-term potential? Or perhaps you prefer an underachieving house with an opportunity to add equity through renovations, the perfect buy/renovate and hold formula? Or are you looking for the ultimate HGTV flip and the challenge of critically time-sensitive renovations? All of these scenarios have pragmatic liabilities associated with their successful outcomes and your personal risk tolerance will direct your approach. Dig deeper into each strategy below:
a. Flips: That old adage ‘Buy Low, Sell High’ is never truer than with this investment strategy. Add to this the success of HGTV flippers and it all looks super easy, right? There are, however, multiple risk factors which may not be 100% within your control such as a slumping market or a large inventory of similar properties, the unavailability of tradespeople, illness, unforeseen structural issues or non-compliance with zoning etc etc etc. Time is most definitely money, and any delay will chip away at those profit margins. If you chose to flip, make sure you flip well by injecting the charm and value that savvy buyers are seeking. Do not cut corners, no matter how enticing it might be or how tight of a timeline you have, saving one month of carryings costs may lose you $10+K in resale dollars. And remember that upon selling you will incur legal fees, realtor commissions and capital gains taxes.
b. Turn-Key: Someone else has done the work here. The property might be a new build or a renovated property. There may be an accessory apartment and thus 2 streams of income to help increase your cash flow. You may opt to become a Landlord or outsource that task to a Property Manager. Either way, study the regulations around the Landlord-Tenant Act as it is of utmost importance that you understand both sides of the equation here. If you are interested in a property with tenants already in-situ, investigate if they are paying market rents, if they pay promptly and whether the property is undervalued. If a property is vacant upon possession, it would be wise to address advertising and tenant viewings with the seller during the weeks prior to closing in order to ensure you receive income from Day 1.
c. Buy, Renovate and Hold: This alternative is a surefire approach for neutralising some of the risks inherent in a. and b. above. It involves purchasing an obsolete property and actively appreciating its value via purposeful renovations. While somewhat similar to a flip, upon conclusion of this renovation you don’t sell. Instead, you hold onto the property, set the rents, select your tenants (or hire a property manager) and maintain ownership. This method buffers against a market downturn, dilutes the urgency of completing renovations in an unrealistic timeline, invigorates a dated property and assumes that there will always be a strong rental market. Equity is built rapidly and can be leveraged to purchase another property and grow your real estate portfolio.
6. Build your team: Recognising the difficulty of successfully reaching your goals by yourself is of paramount importance. As such, I suggest that you diligently build a team of professionals who are invested in the success of your business, and who are willing to provide viable advice. Your Realtor can recommend highly vetted contractors, plumbers, electricians, lenders, accountants, lawyers and markets to best serve your intentions. Interview several realtors until you find someone who has the knowledge, experience and connections to guide you. Construct your team with steadfast attention to detail and chose your best partners.
7. Devise your strategy: There are many investors out there who are all searching for investment nirvana and the fast track to maximal profits. You will be in competition for any perceived ‘deals’ and must bring your A-game. Work with your Realtor to strategise the meat and potatoes of an offer, and request that they negotiate hard on your behalf. A clean offer with no conditions may well be the winner, but not always. Ask for advice, know your top limit, understand the risks and be prepared to walk away if necessary. An investment is no longer an investment if you overspend. Due diligence cannot be overstated.
8. Ssshhhhh: Everyone and their uncle will have a cautionary tale to share with you as soon as you mention Real Estate... and Investing... within the same breath. These naysayers will throw bathwater onto your dreams, and although their concerns may be well-intentioned please don’t listen to them. Save yourself a bunch of negative energy and keep your plans private for as long as possible.
In conclusion, Real Estate investing done well can be a terrific vehicle for making your money work harder and achieving returns which complement your dreams. However, like anything worthwhile, it takes hard work, street smarts, patience, and perhaps even a little magic. Let’s grab a coffee together someday soon and start building your Real Estate empire, one beautiful property at a time.
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