Introduction to Real Estate Investing
Do you know anyone who has invested in real estate over a long period of time and has consistently lost money? Neither do I. That’s because real estate is one of the safest asset classes you can own long term as long as you invest in a good location with a robust economy. The thing with land is they’re not making any more of it 🙂
Using leverage can easily double our money in less than 5 years. The only downside is that if prices fall, we risk the chance of being underwater. However, as long as we can ride out the bear markets and continue to pay our mortgages on time we should still do fairly well in the long run. Even in the US despite housing prices falling significantly during the last recession, prices are still higher today in 2014 than a decade ago. Real estate investing isn’t for everyone, but if you want to become financially successful then it might be one of the best purchases you can ever make. That’s not to say people can’t become rich by renting, but 97% of millionaires are home owners according to the well respected authors behind “Millionaire Next Door.” Somehow I don’t think that’s a coincidence. 😉
How to directly invest in real estate
There’s honestly too much to go over on this one page for first time real estate investors who are looking to get into the market. For what it’s worth how I did my initial research is type into Google “buying real estate in BC” You can replace “BC” with your own province or state. Then spend an hour or so to click and read through all 10 or 20 links on the first page, and maybe even some more on the next page. You’d be amazed at what you can learn on the internet. But here are the basics you need to know (the following applies to real estate investing in Canada. Other countries may require different or additional steps or considerations.)
- Figure out what the purpose of your real estate is mainly used for (Investing? To live in? Both? For your Business? Storage? Vacation home?)
- Figure out what kind of property you’d like to buy (Condo, house, retail, restaurant, other types of commercial property, etc)
- Figure out all the criteria you’re looking for (Near public transportation, allows pets, allows rentals, large backyard)
- Find a real estate agent or company in your area to help you find properties to view. You can easily find realtors by typing into Google Maps “realtors in Toronto” for example, but replace “Toronto” with your own city. Some real estate agents are specialized. So for example, you would not want a residential realtor to help you look for a commercial property.
- If you require a mortgage, contact a mortgage broker or a representative from your bank. You can shop around for the lowest rate.
- Once you found a place you like, submit an offer via your realtor. The closing date on your offer should be at least 4 weeks later to give your lender plenty of time to approve your loan. Make sure to include a subject to financing if you require a mortgage.
- Find a lawyer, or ask your realtor to recommend one for you. Sign the completion papers and you’re done.
- (optional) rent out your property to generate income
Special Note on Foreign Real Estate. It’s very easy to buy far away properties today with the help of the internet. Purchase agreements can be emailed, printed, signed, and scanned so the entire transaction process can be done without leaving your home. Even if you live in Vancouver, you could easily buy a condo in Toronto today if you have an internet connection and an email address. The only thing is you’ll have to go to a lawyer’s office to sign the final documents when it’s time to close on the deal. The offer I made on a rural property in 2012 was all done through email because the land was over 1600 Km away (1000 miles.) The lawyer in Saskatchewan also sent me forms to sign via email, and I just emailed him back after I printed them out and signed them. In my case I needed the help of a local notary public to notarize the papers but it’s not hard. But here are some important information to consider when buying distant property. If you plan to buy RE outside of your own province then the lawyer you use to purchase the property should be from the jurisdiction that the property resides in. For example, I live in BC, so when buying my farm in Saskatchewan I found a lawyer in Regina, SK to handle the legal proceedings because only lawyers and solicitors who work in Saskatchewan can have access to the provincial bar to request land title changes, etc. The real estate agent should also be from the area of where you want to buy. In my case the realtor knew the area well and has experience dealing with agricultural properties. If you need a loan then again, ideally you want to also deal with a bank branch or lender close the property. This may not always be possible however. For example if I wanted to buy a house in the US, most lenders down there will not finance my purchase because I don’t have a US social security number or any US employment history. So in that case I will need to find a lender in Canada instead before I plan to buy a vacation home south of the border 🙂 With my farmland though, it was much easier because at least it’s still within Canada. I secured a loan with TD, and because TD branches are everywhere in Canada I just had to talk with a local lending representative in Vancouver BC, and he contacted someone in one of their Saskatchewan branches to secure my 25 year loan on the farm.
Indirect ways to invest in real estate
You can buy something called a REIT (Real Estate Investment Trust) from any discount broker. I recommend no less than $1,000 when buying your first REIT. REITs are essentially a holding company, that could be private or publicly traded, that manage real estate assets. For example, one of the REITs I own is RioCan, one of the largest in Canada. They own the buildings of many shopping centres including locations occupied by Walmart and Shoppers Drug Mart. RioCan makes money from renting out their property. REITs often specialize in certain segments of the markets. Some, like RioCan, primarily on commercial real estate, while others manage office buildings, or residential apartments. REITs are known for their high distribution, which is usually a mix of dividends and capital gains, and their performance is more representative of the real estate market rather than the stock market index. Examples: Dundee, Calloway, RioCan, Boardwalk.
A Real Estate Operating Company (REOC) is like a REIT, except it reinvests any profit it makes instead of paying cash back to shareholders. REOCs generally have more growth potential than REITs, but have very small yields, or often one at all. Examples: Morguard Corporation, Mainstreet Equity.
A Mortgage Investment Company (MIC) invests in real estate via financing instead of ownership. MICs lend money to buyers and developers, and all the interest they make is distributed back to their investors and they typically have a relatively high yield. MICs are kind of like short term, high yield bonds which are secured by real property. Examples: Firm Capital, Timbercreek, Trez. There are also private MICs.
My personal experience with real estate investing….
Unlike some people who got started with stocks my investing journey began with real estate. After landing my first job in 2008 I wanted to make the most out of my savings. And being 21 years old with a career I wanted to move out from my parent’s home and live independently which means I had to either rent or buy. With low interest rates at the time monthly carrying cost of owning an apartment was cheaper than renting a comparative place. Over the last few decades Vancouver real estate has been increasing on average by more than 5% a year, and I believed that it would keep going up in the future. So buying my own pad just seemed like the obvious thing to do. In Canada you need at a 5% down payment minimum to buy your first home. I aggressively saved over 90% of my take home pay that year while still living with my parents. Luckily my folks didn’t charge me rent despite how I was making an income (^_^) By early 2009 I had saved up $15,000 and that’s when I bought my first investment; a two bedroom condo for $230,000.
Because $15,000 only represented about 6.5% of the purchase price I had to buy CMHC mortgage insurance. Lots of people told me I should save for at least a 20% down payment so I don’t have to pay the 2% insurance premium. I see their point but it would probably take me at least another 2 years to save up to a 20% down payment. And if real estate continues to go up by 5% a year, then isn’t it better to buy now and pay the 2% extra on my mortgage rather than wait and pay 10% more for the same apartment two years later? Even if we assume a more modest 1% price appreciation per year, which is even lower than the average historic inflation rate, then the same apartment would still be 2% higher anyway, except I would have spent a whole lot of money in the meantime renting and helping someone else pay off their mortgage instead of building equity for myself. Real estate investing works because the value of land can never goes to zero. Rather it tends to go up in value over time, especially in urban cities, where the population is growing but there’s no more land for expansion. If we assume a conservative low to normal economic growth environment, then it just doesn’t make sense for me to save for a 20% down payment from a mathematical point of view. Hoping for a correction or waiting for a price drop is just speculative in nature. Trying to time the real estate market is like trying to time the stock market. Sometimes it works, but most of the time it’s better to just get into the market ASAP 😀 As the saying goes – don’t wait to buy real estate, buy real estate and then wait.
How has my property performed so far since I bought it? Just by simply applying the annual inflation rate (CPI) to the purchase price of my condo over the years it is now worth $254,000. This means it’s worth $24,000 more than what I bought it for. I initially bought my place with only $15,000 as mentioned earlier, and now it is worth $24,000 more. That’s 160% return on investment over 5 years, or roughly 21% return per year. Not too shabby eh? The secret is in the leverage. I only paid 6.5% of the total cost in order to own the entire condo, but 100% of the condo’s current and future appreciation all goes back to me. Pretty sweet deal :0) Furthermore the $254,000 price I determined for the present value is a very conservative estimate based on inflation. This year’s government assessed value, as well as the market value of my condo is actually much higher than that. Good thing I didn’t wait until I had a 20% down payment, otherwise I would just be playing catch up as prices in Vancouver have gone up for 4 consecutive years from early 2009 which means I’d have to save increasingly more to keep up with the growing prices. In 2011 my condo’s assessment was already at $270,000. So because I bought my place early, all that extra value has been added to my own equity instead of someone else’s. I was fortunate that local housing prices has gone up since my purchase. But even if demand had stayed the same my condo would have gone up 2% a year anyway just from inflation. Waiting for a housing correction is like fighting an uphill battle because every year, simply based on math and statistics there’s a bigger chance of a price increase than a price decrease. My suggestion for anyone who is currently renting in a large Canadian or US city who doesn’t plan to move around a lot is to consider buying a property as soon as they can come up with the minimum down payment :0) There’s always the chance home prices will be lower in the next couple of years compared to today, but there’s an even bigger chance that in 5 years from now prices will be higher. I have a lot of high risk investments but even I am not brave enough to try and time the housing market lol.
As with any other real estate with multiple bedrooms I can theoretically rent out the spare room, which I’m currently using as my computer room. Right now my cash flow isn’t very tight so I prefer to have the space and privacy of the entire apartment to myself, but if I fall on financially hard times, it’s always good to know that I can make an extra $500 a month from renting out my second bedroom and have room mate :0)
In terms of REITs, I currently own Allied Properties (AP.UN) RioCan (REI.UN), Annaly Capital Management (NLY) and Calloway (CWT.UN) in my stock portfolio.
I also own a handful of MICs, including 300 shares of Timbercreek Mortgage Investment Corp (TMC on the Toronto Stock Exchange) and $10,000 in an Antrim mortgage fund.