Investor Centre

Written By Guest User

Investing in real estate provides a great opportunity for everyday individuals to achieve financial independence.  

Many individuals have created tremendous wealth through real estate investing and almost anyone can participate in it, given how unique and diverse the industry is – from small to large deals, with little to a lot of money, from an ownership role to a transactional role – there’s an opportunity for everyone. 

Before you get started there are several things you will need to consider – this guide will provide a primer of what you’ll need to start your journey. 

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Why Real Estate? Why Not? 

So, why should you real estate? What makes it so compelling relative to other investment vehicles (stocks, bonds, etc.), well there are a few:

Benefits

  1. Flexibility: Real estate investing can be as easy or complex as you want it to be. You can invest in a single property or build a diverse portfolio, you can develop new buildings or purchase turn-key properties, the choice is yours.

  2. Leverage: Real estate offers the ability to leverage your investment, which means you can use other people's money to invest and amplify your returns.

  3. Part-time work: You don't have to be a full-time real estate investor to make money. You can start part-time and build your portfolio over time. In fact, many individuals grow their portfolio on the side for most of their career.  

  4. Tax advantages: Real estate offers several tax benefits, such as deductions for mortgage interest, property taxes, and depreciation. These tax advantages can help reduce your overall tax liability.

Risks

While there are several benefits, no investment in foolproof. There are also a few risks that should be considered to understand whether real estate is right for you:

  1. Leverage: While leverage can be a benefit of real estate investing, it can also be a pitfall. If the market turns and property values decrease, highly leveraged investors can quickly find themselves in financial trouble.

  2. Team Dependant: Real estate investing is rarely a solo endeavor. It takes a team of professionals, such as real estate agents, attorneys, accountants, and property managers, to successfully navigate the complexities of the market.

  3. Market Volatility: The real estate market can be volatile, and property values can fluctuate based on a variety of factors, such as changes in interest rates, economic downturns, and changes in local demographics.

  4. Costs and Expenses: Investing in real estate can come with a range of costs and expenses, such as closing costs, property taxes, insurance, maintenance, and repairs. These expenses can eat into profits and make it challenging to achieve a positive return on investment.

Overall, real estate investing can be a great way to build wealth, but it's important to approach it with a clear understanding of the potential pitfalls and risks involved. Working with a team of experienced professionals and carefully considering your investment strategy can help minimize these risks and increase your chances of success.

 

Can I Get Rich Quick?

The incredible asset appreciation in the GTA over the recent years can lead many people into thinking that Real Estate is a quick way to generate wealth – this couldn’t be further from the truth. Can you make a lot of money in real estate? Yes. Can you get lucky and experience rapid appreciation over the short term? Sure. But historically and over the very long term, Real Estate has appreciated by about 2% per year, so don’t expect this to be quick or easy and don’t expect the rapid appreciation to be sustained over the long term. Like any venture, success takes time and keep in mind the following points when starting your investing journey:

  1. Time: Real estate investing requires time to research properties, analyze the market, negotiate deals, and manage properties. It can take years to build a profitable real estate portfolio.

  2. Market Volatility: The real estate market can be volatile, and property values can fluctuate based on a variety of factors, such as changes in interest rates, economic downturns, and changes in local demographics. This means that profits are not guaranteed, and investors need to be prepared to weather market fluctuations.

  3. Competition: Real estate investing is a popular way to build wealth, and as a result, the market can be highly competitive. Finding good deals and securing financing can be challenging, especially in hot markets.

Investing in real estate requires patience, discipline, and consistency. While it can take a while to amass wealth, once you reach scale, the compounding effects can be enormous!

 

I Don’t Have a Lot of Money!

One of the myths of real estate is that you need a lot of money to enter the industry (especially in the GTA). While true in many cases, one of the greatest things about real estate is that is possible to participate with smaller investments (and in some cases no money).

  1. Partnering: Partnering involves finding another investor who is willing to put up the capital in exchange for a share of the profits. This can be a good option for those who have knowledge of the market, but limited funds.

  2. Private Money: Private money involves borrowing money from individuals or companies, rather than traditional banks, to finance a real estate investment. Private lenders may be willing to lend money based on the value of the property and may provide a higher loan-to-value to reduce investment capital.

  3. Vendor Take Backs (VTBs): Vendor take backs involve the seller financing the purchase, allowing the buyer to make payments over time. This can be a good option for those who cannot secure traditional financing and may be able to negotiate favorable terms with the seller.

  4. Wholesaling: Wholesaling involves finding a distressed property, negotiating a low purchase price, acquiring the rights to the property but then quickly selling those rights to an investor for a profit prior to closing. This method requires minimal upfront capital and is based on finding good deals and having a solid network of investors. 

Overall, while investing in real estate with little or no money can be challenging, it is possible using creative financing methods.

IMPORTANT: Always remember, less equity in means more debt and more debt means more risk!! Always be mindful of the risk you’re taking on – after all, great investors are also excellent risk managers.



Get Prepared

So now that we have the house keeping questions out of the way – the first thing you need to do to start real estate investing is get prepared/create a plan. You may find out that you won’t be ready to start your investing journey this year or next year, but you will find out what you need to do to get started.

Maybe you need to save up a little more or you need to improve your credit – evaluating these factors will allow you to set focused goals to get to start your investment journey.

  1. Create a Personal Finance Statement:

    1. Personal Balance Sheet: this is your net worth statement and will let you know what funds you have readily available to you

    2. Income Statement: This will let you know what your spending habit is and what you need to do to achieve your short- and long-term spending/net worth goals (e.g. whether you need to increase your earnings or cut your spending, etc.)

  2. Understand your Credit Score: a crucial step in real estate investing is to get your credit right. The better your credit, the more you can borrow and the better rates you get. There are a number of services that allow you to monitor your credit (Borrowell, Credit Karma, to name a few)

A focus on these two personal financial categories is crucial to your success not only in real estate investing, but in investing in general and sound personal finances.

 

LOCATION, LOCATION, LOCATION

“A term so important, it’s said 3 times”
— My Undergraduate real estate finance professor

 

It’s true! Location is one of, if not, the most important things in real estate. A good location can go so far as saving a bad deal and destroying a deal that looked incredible.

  • Assets in good location is easier to rent out

  • It’s easier to dispose assets in good location

  • It’s easier to get financing for assets in good locations

  • It’s less likely to lose value in downturns

  • It’s more stable and great if you’re risk averse

  • It’s easier to pitch and secure investment partners

The one issue with quality location is everyone wants it, so you may need to be prepared to get your check book out.

Some key fundamentals to look for when scouting good location is:

  • Population trends

  • Jobs

  • Crime

  • Transit and Accessibility

  

LEARN THE TERMS AND THE FINANCIALS

Familiarize yourself with the terms and the lanugange of real estate – how do you calculate NOI, what is a cap rate? What is Cash Flow? What are your return metrics? Understand benchmarks and common ratios, what should expense ratios be for apartments? What rate of return should I expect for a triplex in downtown Barrie? Can you describe the below terms?

  • Net Operating Income (NOI)

  • Cap Rate

  • Cash Flow

  • Cash-on-Cash

  • CapEx

  • Debt Service Coverage (DSC)

  • Loan-to-Value (LTV)

Analysis Paralysis: The more you learn, the more you’ll realize you don’t know and might get stuck in analysis paralysis. Remember, the best way to actually learn is by doing – so at some point jump in (do so with common sense, but you’ll have to really make the leap to know if real estate investing is really for you).

BUILD YOUR TEAM

Your team will be a critical part of your investment journey – it’s crucial that you try to build the best team you can. Research, ask questions, trust your gut – if something seems off, then don’t go with it.

So, do you need on your team? 

  • Real Estate Agent

  • Mortgage Agent

  • Property Manager

  • Attorney

  • Accountant

  • Contractor & Handyman

  • Partner (if applicable) 

Note on selecting a partner: When you pick a partner, the both of you will likely be tying up considerable assets for a number of years – individuals sometimes fail to consider all the difficulties of dealing with a partner until it’s too late. When choosing a partner make sure you understand the below pros and cons to know if a partner is right for you:

  • Pros

    • Pooling resources

    • 2 heads vs. 1 head

    • Companion vs. Go it alone

    • Accountability

    • Split risk

    • Complimentary qualities

  • Cons

    • Conflicts

    • Analysis paralysis / delayed decision making

    • Trust

    • Responsibilities & accountability

  

The Relationship Industry

If you talk to anyone in the industry, who’s been at it for a while, you’ll hear a constant phrase “real estate is a relationship industry” – everyone knows everyone (especially as you grow and scale) the deals and opportunities you have access to are based on the people you know so network, network, network!!

People get intimidated by networking – what I do is I swap out network with “friends/get to know” aka – go to an event and get to know people genuinely – what they’re interested in, what they did last summer, etc. Connections are always stronger this way.

 

Finding Your Niche

A key to being a good investor is focus – narrowing down on something you’re interested in and willing to get good at and doing it 100 times until you become a master at it. This way you can see opportunities, identify risks, and make quick decisions better than anyone else and gives you a key competitive advantage in the long term.

As mentioned earlier, Real Estate is a broad industry – here are some investment types/asset classes you can focus on:

Investment Types

  • Wholesaling

  • Land assembly

  • Value-add (fix/flip)

  • Development

  • Turn-key / buy and hold

  • Short term rental

Asset-Classes

  • Residential

    • Single family home

    • Small multi-family

    • Large multi-family

    • Vacation home/Short-term rentals

    • Student Rentals

  • Commercial/Industrial

    • Retail

    • Office

    • Warehouse

    • Storage Facilities

    • Manufacturing

 

A Quick note on BRRRR-ing: There used to be a time when this was relatively unknown among smaller investors, but there have been 1000s of articles and videos written and made about this value-add, so just as a quick summary BRRRR is:

  • Buy

  • Rehab

  • Rent

  • Refinance

  • Repeat

This is actually what some of the largest value-add real estate investment companies do when purchasing undervalued assets and bringing them to market rate. The key is finding undervalued assets. More recently in the GTA, this is becoming harder and harder to do as asset values soar to new heights each year. What that said, it’s important to understand some of the key risks with this strategy:

  • Overspending on improvements

  • Inability to refinance

  • Poor market conditions/rising interest rates

  • Overpaying for assets

  

Financing

Financing is a crucial step in purchasing real estate, as mentioned earlier, one of the challenges about real estate is the amount of capital required. One of the ways to reduce your capital outlay is proper financing. Many individuals overlook the financing stage early on, but debt structuring can be critical in your investing strategy – and given the various types of financing and specific conditions with each mortgage, it’s an important consideration when closing on a purchase – Below are a few mortgage types:

 

  • Conventional mortgage: A conventional mortgages is a non-high ratio mortgages (i.e. downpayment grater than 20%) and without any insurance premiums

  • High-ratio mortgage: A high ratio mortgage is any mortgage where the value of the mortgage is grater than 80% of the value of the home - in other words the borrower has less than a 20% downpayment. High-ratio mortgages require borrowers to get mortgage insurance to cover the risk of default

  • Private lending: A loan issued by a lending institution or person that's not represented by a traditional bank, credit union or monoline lender. Typically, the mortgage commitment is drafted by the buyer’s and lender (or lender’s lawyer). As a result, terms can be incredibly unique, however, interest rates are often very high due to the added risk taken on by the private lender

  • A- vs B-Lender: Individuals often and inaccurately think that a B-Lender is less safe/more risky to borrow from than an A-Lender. It’s actually the other way around. B-Lenders typically lend to more risky clients (lower credit scores, lower incomes, etc.) that wouldn’t qualify at A-Lenders. A-Lenders are focused on the best quality borrowers and therefore offer the best rates on the market.

 

Hopefully this primer gave you enough information to seriously consider if investing in real estate is right for you. 

If you have any further questions, don’t hesitate to contact me for more information!

Guest User