Real Estate Investing
There are a number of stories out there about going from rags to riches through real estate investing—and an even higher number of real estate investing courses that offer you all the get-rich-quick schemes.
All I will say is you need to be skeptical.
Yes, there is great opportunity to build wealth by investing in real estate; however, it will not happen overnight and requires a great deal of patience and understanding of real estate to make money.
Real estate doesn’t always increase in value. I bought a home in Windsor, Ontario; I lived in it for six years, and I lost more than $20,000 when I sold it. The price of my house dropped during that time in 2011 when real estate in Windsor tanked. I took a loss. It happens, and it happens to even the most seasoned real estate investors, developers, and contractors.
So now that I have thrashed real estate investing, let me explain why I think that real estate is a good investment that should be part of a balanced portfolio of investments. With Canada’s stable economy, investing real estate can result in double-digit returns for the savvy investor. Further, it is easier to understand (for me) to understand in comparison to try to understand how the stock market works. Real estate is tangible. You are investing in a property. You can easily find it and evaluate it.
However, you need to know what you are doing. A red flag should be raised when anyone tells you that an investment is guaranteed to provide a rate of return. It may or may not. Further, you should not think the word secure means the same thing as guaranteed. Your investment may be secured to a property, but the property may be worthless. So understand what secure means when someone is pitching you an investment.
So how can you invest in real estate?
- Purchase a rental property or a fixer-upper. You can purchase a property that you can turn around and rent to someone else. You hope that the rental amount will cover the cost of any debt you incur to purchase the property, taxes, and repairs. Further, you have to consider how you are going to cover the cost of the days/months that the property is empty. I have attached a cash flow sheet for you to play with to see if a property is in the positive.
- Lend money to allow someone to purchase a property. This is often called private lending, which has some negative connotation. Traditional lending institutions tend not to like to lend to a number of people, particularly those who are self-employed or those who have run into problems with their credit in the past (I’m simplifying this a bit). However, private lending is an essential part of our economy and of keeping the real estate industry buoyant. Each deal—if you are going to lend—requires you to do your due diligence. You should have a system and advisors to help you make a decision about whether to put your hard-earned cash into a mortgage. Yes, it will be secured against property, but that doesn’t mean you will make money. One of the biggest questions you need to ask yourself is what the exit plan is if someone cannot pay the mortgage? If you are funding a person who is renovating and flipping a property, do you have the resources to finish the project if it goes sideways? If it is the first mortgage, do you have the finances to carry a property as you go through the foreclosure process? There are many things to consider.
- Pool your money with others and syndicate a mortgage. There has been a great deal of negative press on syndicated mortgages for the past two years. At Unimor, we have been doing syndicated mortgages for forty-four years, and we have not had one that did not return the funds to our investors. However, this doesn’t mean it couldn’t happen. It may seem that there is less risk in a syndicated mortgage because it is a pooled investment, but I would suggest that is naive thinking. You have to do just as much due diligence—if not more research—on this type of mortgage. Is the mortgage in first or second position? Is it a third position and postponed to a bank mortgage and the bond company? (Believe it or not, being in the third position may not be a bad deal. However, you need to know much more before ever investing.)
This blog is really simple when it comes to real estate investing. If you want to invest in real estate, you need to become educated. A couple resources to get you started include:
- Real Estate Investment Network (REIN): Many courses, books, and market research on Canadian real estate
- Local colleges and universities: Courses on investing (You don’t need to pursue a degree to take one of them.)
- Your financial planner
- An ethical mortgage agent or broker
If you are interested in investing in mortgages, I have developed a questionnaire to see if you are up to investing.
Follow this link, if you are interested.