Real estate is an excellent way to diversify your investment portfolio and build income streams. The problem is that people are often drawn to real estate investing based on misconceptions of quick returns with minimal capital investment or effort.
Those situations do exist. Much like the stock market there is an endless line of people who are happy to tell (and sell) you the details of how they made a large sum of money in a very short amount of time buying/selling real estate.
But the stories about failure, lost investments and ruined financial plans are less openly discussed, despite being much more frequent.
While large amounts of money can be made in the real estate game in relatively short periods of time, those scenarios often require significant upfront capital, a high tolerance for market volatility/risk, and a strong understanding of your specific market.
Real estate can be fickle. If anyone tells you that real estate only goes up, they are wrong, very wrong. History clearly shows that the real estate market can, and has, had very substantial peaks and valleys.
Over the historical long term, it generally does increase, but if you buy at a peak and then find yourself in a significant market downturn, you could easily be looking at holding the asset for 10-15 years before you recover your position and see gains in the value.
This was one of my earliest lessons in real estate, and I learned it the hard way. I divorced at 24 (I was too young to be married in the first place), but during the divorce I leveraged myself to the max to maintain ownership of the half-renovated condo I was living in, and keep a townhouse that was rented out. This happened only months before the market crash of 2008.
I struggled to keep afloat in the years after that, and ultimately it took 10 years for the market to reach the point where the townhouse had regained its original value.
Like any investment, you should be both willing and financially able to stick it out over the long term OR have sufficient funds that allow you to absorb potential losses without having a significant detrimental impact to your financial stability.
This is where a lot of those quick buck investors go awry. Often they are overextended just to make the initial investment, and when the value of their property doesn’t increase as planned, they are unable to make the required payments to float the investment. This is where people generally panick and sell out, sometimes at a substantial loss.
Personally Mike and I don’t enjoy the risk game. We aren’t willing to risk everything we’ve built for the illusion of a quick buck, so we always try to minimize the risk as best we can, while still maximizing our opportunities.
There’s a lot to talk about when it comes to investing in real estate, but if you’re thinking about adding real estate to your portfolio, consider these points before moving ahead.
1) Play with the long game in mind
Avoid the crash and burn of the flip investors. Flipping can work, IF YOU HAVE THE RIGHT KNOWLEDGE, EXPERIENCE AND CONTACTS. But it is absolutely not how you should get your feet wet in real estate investing. Like anything, there is a learning curve to all aspects of real estate: selecting an agent, purchasing, specific market dynamics, contracts, inspections, lawyers, finding tenants, drafting rental contracts etc.
While you can educate yourself on many of these areas, there is no replacement for experience, especially when it comes to establishing the relationships required with people in the market. So start small and do so with a long term plan.
2) Know Your Market
Choosing your market does not mean you have to buy where you live. Identify your overall investing goals and choose a market that best accommodates those goals.
If you are looking to purchase a property to rent, make sure you know the vacancy rate and average rental prices in the areas you are considering. The rent for the property you choose should at the very least be able to float all the costs of the property, including a monthly percentage for possible vacancy or repairs.
Ideally you should look for markets where the housing price/maintenance costs to monthly rent ratio allows you to generate some monthly cash flow within a reasonable time frame (cash flow being over and above any mortgage principle paid by the renter).
Our goal is always to achieve a positive annual cash flow of 5% or greater of our initial capital invested. Easily done in some markets – not so easy in others.
If you are looking to employ a step-up style where you buy, renovate, move into the new home and sell your old home to gain access to substantial equity increases, look for developing neighbourhoods that are either being just established or revamped.
By purchasing in the transition phase before infrastructure or significant improvements have been made, you are likely to improve your equity gains moving forward.
Doing your homework and selecting your ideal market/property type, before you ever talk to an agent will ensure that when you do actually meet with and interview agents, your expectations of how far your money will go is reasonable.
Showing you’ve done your homework will also assist the realtor in perceiving you as a serious buyer, not just another tire kicker.
3) Be Reasonable
Everyone wants a deal. Which means they can be hard to find. But understanding what an actual deal in your chosen market looks like will allow you to move quickly and with confidence, giving you a leg up on the average buyer. (And a deal doesn’t mean just knocking 10-20% off whatever the list price is.)
Don’t expect to get rich overnight. Keeping your expectations in check will help you make informed and level headed decisions.
Don’t think there won’t be work. The more hands on you can be, the more return you will likely see from your investment. The more you contract out things like management, maintenance, repairs etc, the smaller your bottom line will inevitably be, so to get the best bang for your buck, be prepared to roll up your sleeves and build some sweat equity.
4) Keep Your Investing Within Your Means
If there’s anything we’ve learned in our experience with real estate thus far, it’s that if you keep your investing within your means, your likelihood of success increases dramatically.
You might not hit it rich overnight with this approach, but you will definitely mitigate your risk and the stress that comes with that risk.
Mitigating stress translates to better decision making. I know this from having been stretched WAY to thin in my early days.
If you don’t need your capital investment back immediately, and your income can easily cover the payments required to maintain the property (even if it goes vacant for a few months, or renovations take longer than expected, as they always do) you will be able to weather any storm, financially and mentally.
That means you won’t be one of those investors bailing out and forced to sell quickly.
5) Build Your Network
There is no greater asset in real estate investing than a roster of credible, switched on industry experts. From your agent, to your lawyer, to you contractor, to your handyman, the bigger your roster of reliable people, the easier every step of the process will be.
So don’t hesitate to interview multiple agents before selecting one, or try out multiple contractors on smaller jobs. The important thing is to find people who you work well with, and who’s abilities and advice you have confidence in.
Not to say you shouldn’t critically assess the information you are given, but you can’t be an expert in everything so it’s important to feel comfortable enough with the knowledge of the people you work with that you can, when needed, rely on their expertise.
6) Know Your Rights and Obligations
Whether you are thinking of buying to live in, renovating, renting, or some combination of those, there’s a great deal of regulations governing property use that you should take the time to familiarize yourself with before purchasing a property.
If you are renovating, make sure the local bylaws allow you to do what you actually want to do. IE: If you want to turn an old heritage home into three separate apartments, live in one and rent out the other two, you better be sure that the applicable zoning bylaws allow you to do so. Before your realtor hands you the keys to the house.
If you are renting to tenants, review the Residential Tenancy Act for your area. Know your obligations and responsibilities inside and out. Not understanding what you are responsible for and taking shortcuts as a landlord is the foundation that most rental horror stories are built from.
Not to say reading regulations will prevent you from having difficult tenants, but if you find yourself in such a situation and you have followed the regulations, you will have a much easier time enforcing payment, remedying damages or even evicting tenants than if you took short cuts or made “verbal agreements” along the way.
7) Be Flexible
While you might have planned to buy a property, rent it out, renovate after five years and then sell it, the market might have other ideas. Perhaps things take a downturn, or development is announced in your area that would make holding on for another year or two substantially more profitable.
Or maybe the market unexpectedly takes off after a year and you can sell and capitalize on a large amount of equity growth and reinvest in a different area. The bottom line is that like any longer term investment you should definitely have a plan going in, but be ready to flex and alter that plan if market conditions or personal circumstances change.
From our perspective, real estate is an investment strategy that has worked well for us. It didn’t make us rich overnight, and we have definitely invested a lot of our own time end energy into the properties we have owned, but it has been an integral component to our overall strategy to achieve Financial Freedom.
Remember, it’s just one tool you can use, so don’t rely solely on your real estate investments to guarantee a financially free life, but don’t ignore an excellent tool at your disposal either.
If you are thinking about dipping your feet into the real estate game, please feel free to leave a comment or drop me an e-mail directly. Real estate is a passion for Mike and I, and we are always happy to share what we have learned thus far.