By Don R. Campbell
It seems like politicians at every level (federal, provincial, and local) have decided that attempting to intervene in the Canadian real estate market is a good way to get votes. This helps to explain why so many changes have been thrown at the markets in the last 12 months and why it seems more chaotic than usual.
This chaos has a good side to it though. For instance, let’s say that right now you’ve decided it’s time to make a change in your life. You’ve decided to change the financial future of your family and yourself, potentially impacting generations to come, and real estate is your chosen path. But at the exact moment you take action, government swoops in with policies that incite chaos. The less strategic investor would choose to run, whereas the pragmatic realist would see others running away and understand that the competition is about to dramatically lessen—and when this happens, opportunity always arises.
But if this is your first venture into the real estate investing arena, what obstacles do you need to be aware of in order to ensure your investing business hits the ground running? To take some of the guesswork out of your investing journey, I’ve identified four key questions you can use to start moving at a mindful and strategic pace. You don’t want to spin your wheels on the real estate “treadmill” for too long—but you don’t want to start at a sprint.
Key Questions to Ask Yourself before Taking the Plunge
Are You Ready to Become a Landlord?
Before you take the plunge into the deep end of real estate investing, you be sure to inflate your water wings. Analogies aside, there are two critical questions you need to ask yourself before becoming a landlord:
1.What do you want real estate investing to provide you with over the long term? If it’s fast money or a passive investment, in most cases real estate won’t be for you. If you want long-term sustainable wealth and income, then it is a perfect option as long as you commit to being proactive and adaptable.
2.Am I patient enough to do the homework it takes to buy a quality property (i.e., to be an investor)? Or am I an emotional buyer who gets caught up in the hype of a market (i.e., a speculator)? With new regulations and rules, being a successful landlord takes some real effort, but the extra effort does pay off in the long run.
Is it the Right Time to Buy?
The right times for investing or for avoiding the market aren’t necessarily when the media headlines say so. The right time to get into the rental property market is determined by studying the specific market (e.g., the city or town) to determine if that market is creating long-term jobs and attracting people to migrate to the area. Once this has been figured out, a strategic investor then needs to look at whether or not the area is overheated by an outside “key influencer.” If it is, it will be overvalued and therefore more unlikely to be a sustainable investment environment.
Strategic investors understand that all markets are cyclical and that in order to insulate themselves for the inevitable ups and downs of a market, buying property for cash flow is always the number-one strategy in a long-term real estate investment strategy. All markets are cyclical and driven by two sets of stimuli:
Key drivers: These are the economic underpinnings of a market. GDP growth, job growth, and population growth are some of the key structural components that support the long-term cycle of a real estate market.
Key influencers: These are the stimuli that push a market to overshoot the underlying economics. With the expanded focus by federal and provincial governments on the housing market, these influences can add to the volatility.
Is This a Good Investment?
After determining whether the market is poised for long-term growth in demand (e.g., job and population growth), the next question must be: Can I find a property that can be rented out for more money than it is going to cost me to own/operate? Such properties are tough to find, as most will not carry themselves. A strategic Investor is a patient investor.
Investment real estate is a business that is driven by revenues (rents) and expenses (including, but not limited to, the mortgage payment). If you can’t find a property that pays you positive cash flow every year, then it is no longer an investment; it becomes a purely speculative purchase (which is not recommended).
Many beginner investors overlook the fact that real estate investing is a business and, as with all businesses, there must be an operations budget in place to cover inevitable expenses. Here is a list you can use to start building a budget (items with an asterisk are costs that won’t occur every month but must be budgeted for):
*Repairs and maintenance
Once you’ve determined the market rent, you must take into account the related costs, which will enable you to ascertain whether the property has the potential to be sustainable or not. Always remember: cash flow is king.
Do You Have an Expert Team?
In real estate, it is important to have a skilled team of professionals on your side—whether you are buying one property or many properties. It is preferable that the professionals you work with have investment real estate in their portfolio as well; this way, you’ll know they are paying very close attention to the latest rule and tax changes that are constantly occurring.
Here are four pillars to a successful real estate investing team:
- Investment-oriented lawyer – This is one of the most critical team members. Always use a lawyer who is not providing a service to the seller or developer from whom you are buying.
- Accountant – Your accountant will help determine whether you should buy in your personal name or under another structure. There is no black-and-white answer to this for everybody. It depends on each individual’s personal, family, and corporate situation.
- Investment-oriented mortgage broker – It is more difficult to get financing on investment properties than it has been in decades. What has worked in the past no longer works in the present. Having a specific investment real estate mortgage broker on your side (rather than someone who deals mainly in homeowner purchases) will make a big difference in your business.
- Like-minded fellow investors – When there are questions to be asked or pathways to be determined, having those on your team who have already gone out and done it will be very helpful. They’ll be able to give you their real life, on-the-street insights, which will help keep mistakes to a minimum and success to a maximum.
Be honest with yourself before you begin your real estate investing business, taking to heart the tips and considerations I offer here. The best way to avoid mistakes is to learn from those who have already done the dirty work. Be sure to check out past posts at REINcanada.com for many others tips, strategies, shortcuts, and actions steps that you can use right away to give you an advantage as you begin building your portfolio. Cheers!