Thinking about investing in real estate but aren’t quite sure where to start? Mortgage broker and real estate investment expert Dan Caird reassures you that you can make it work.
Real estate is a secure investment
I’m a big, big advocate of real estate investment. I think it’s one of, if not the most secure investments you can make simply because your investment is secured against bricks and mortar. These days, we’re hearing a lot of talk about “market corrections” and “overvaluations” and even if something like that were to happen, the nice thing about investing in real estate is that you have lots of options as far as what to do if the market does correct itself. For example, you can rent the property out and wait for the market to go back up to a favourable valuation or you can renovate to gain some forced appreciation. There are so many options out there, and you really do see these significant returns on your investment.
The other great thing about real estate is that it’s really the only investment that I know of where you’re making a return not just on money you've invested, but on money that you don’t even own. So you might buy a house for $500,000 and say it’s going to appreciate by five per cent a year, which is pretty typical in a healthy economy (these past few years, obviously, have not been typical, with increases much greater than that!). In a healthy economy, a piece of real estate will be on par with a healthy, diversified portfolio in the stock market. But if I invest $100,000 in the stock market, I’m going to make five and a half percent on my $100,000. Alternately, if I put my $100,000 down on a $500,000 house (so my 20 per cent down is $100,000), I’m making five and a half per cent on $500,000, not my $100,000. So when I actually calculate my return on investment at the end of the year, I’m seeing ROIs of 20, 25, 30 per cent at the end of the year because I’m making money on the value of that property, of which I only have $100,000 invested. So not only is it safe and secure, but typically the returns greatly outperform any other investments that I’ve come across.
Don’t try to time the market
As far as investing goes, heed the old expression from Warren Buffett: if people are wary, be greedy, if people are greedy, be wary. A lot of times when the market isn’t performing overly well, some people would argue that’s the best time to buy. In a seller's market, it’s tough. I have a lot of clients who are having a really hard time buying investment properties that make sense. They just aren’t cash flowing based on the purchase prices that we’re seeing today. So people have to get more creative – converting single family homes to duplexes, doing forced appreciation, and just being a bit more patient in your search. It’s tough when it’s a seller’s market like this, but I don’t think there’s ever a bad time to buy because there are always deals out there. Sometimes you just have to look a little harder to find them.
In my experience, everyone wishes they had gotten into real estate investing sooner. I’ve got clients who are 60 years old who are buying their first property wishing they had bought it when they were in their 20s and 30s. A colleague of mine is 20 now and he’s got two properties and his regret is that he didn’t start when he was 18. So the best time is always yesterday and the second best time is today. In a market like today’s, you just have to do a bit more pounding of the pavement to find the deals and the bargains out there. As they say, "you make your money when you buy, not when you sell". So you want to make sure you get a deal so that it is a good investment.
Forget about your misconceptions
You may hear a lot of those "terrible tenant" doomsday stories that tend to scare a lot of people away from getting into property investing. You even hear the word ‘slumlord’ tossed around a lot; everyone assumes that a property investor is someone who has a lot of dingy, dirty, apartments that they rent out to terrible people, and it’s just not the case. I don’t know anyone who has gotten into real estate investing, done it for a while and said, “You know what, this isn’t working out the way that I expected, I’m now going to get out of it.” Usually people who get into it and do it properly are in it for years to come and find it a great way to build their net worth and the assets. There are a lot of negative connotations around real estate investing that just simply aren’t true and I think that’s what prevents a lot of people from getting into it. People hear that one horror story and they don’t want to deal with it. If done right, it can outperform any other type of investment that anyone could possibly invest in.
Think you’re unable to purchase another property? Think again!
With a few conversations on the phone or a couple of meetings face-to-face, I can start to put a plan in place for people. These days, because of the internet and how easily accessible information is, people usually have at least a general idea on what’s required to purchase a property. If anything, I find that people feel it’s a lot more challenging than it really is. They don’t understand the mortgage regulations or the mortgage laws, they don’t understand what’s involved in qualifying, so a lot of times people think that buying that investment property is out of reach, that it’s not possible for them, when really, they’re in a position where it’s very possible and if anything, purchasing multiple properties is very doable for them. So sometimes I find that people are in a position to do it, they just don’t think it’s attainable for them and when we sit down and start going over the numbers and going over information, they’re surprised to find out how accessible of an option real estate investing is.
New mortgage regulations came out a few years ago, and they came out with what’s called the B-20 mortgage regulations
, which really put a lot of stringent guidelines and restrictions in place where there didn’t used to be before. One big one is, if you want to personally invest in property, you have to put 20 per cent down. The days of buying an investment property with zero per cent down or five per cent down or 10 per cent – that’s long gone now. So 20 per cent down is now required. There are also Beacon score requirements. Although you may be able to buy a primary residence with a 500 Beacon score, it’s going to become very challenging to buy an investment property if you don’t have at least reasonable credit. You have to have some sort of income, so again, the days of just simply stating your income on a piece of paper and then signing, swearing that that’s what you make, and them accepting it – those days are long gone. So income verification, down payments, they’ve really cracked down on those two specific areas. But other than that, it’s still very accessible.
Is flipping property still worth it?
I’ve got clients who do very, very well at it. There’s flipping where you simply buy a property, you renovate it and you sell it, but what you’re seeing a lot of people do is, they’ll buy a property, they’ll renovate it, and then they’ll refinance it. By refinancing it after they’ve renovated it, they’ve increased the value so then when they refinance, they’re pulling out some or most of their initial down payment funds and they’re taking that money and buying another property with it. Because if they do it right and they do it well, after their refinance is done, they have very little money left in that property of their own. Now it’s just equity left in it. If you have $100,000, someone might say to you, "well you can buy one $500,000 property," but if you use a buy, renovate, refinance strategy, you might be able to get two or three houses with that $100,000, and still put your 20 per cent down because a large part of that 20 per cent is in equity, if that makes sense. So there’s certainly some strategies out there that work really well for people. But again, they have to be done right.
Dan Caird is a mortgage broker with Dominion Lending Centres. He was inspired to start investing in property while attending college in a small town and realizing that his landlord was making pretty good money by renting out four bedrooms in a home for $500 each. He bought his first property in 2008.
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