12 Rules of Real Estate
Rule #1: Speculation is Not Investing
In the investment world, you’ll find two kinds of people – speculators and investors.
Speculators buy property, hold for a few years, make quick home improvements, then try to sell at a gain. But if the housing market turns sour and you want your money out early, you can face huge losses as a speculator. It’s basically gambling.
I learned this lesson the hard way back in 2007, by the time my high rise condominiums were built in 2010, they had dropped by more than my equity. I was “underwater” and forced to close anyway. This was a $150,000 tuition.
Investing is a far better strategy. Investors know that trying to time the housing market is virtually impossible, but that housing prices trend up over time. Regardless of where you’re at in the market, positive cash flow and mortgage paydown over a long-term horizon generates solid ROI.
So keep your head up, relax your shoulders, and stay in for the long haul.
Rule #2: There are no good or bad markets - only good or bad tactics
Some tactics work well through a slump, like trading up when higher priced homes get hit the hardest. Or negotiating creative terms like Seller financing where the buyer mortgages directly from the seller.
These same tactics will not work in a boom market. When the market is trending up, you can use a Buy-Fix-Sell strategy.
During recovery periods - the time between the end of slump and the next boom – either buy and hold, rent-to-own, or make agreements for sale. Recoveries are also great opportunities to launch real estate development projects.
The key is to know where you are in the cycle at all times. It always cycles from Boom to Slump to Recovery – in that order. If you’ve been in a slump for a while, get ready because a recovery is on the way.
Rule #3: Your team matters
This is one of the biggest reasons I chose to join Canada’s leading Real Estate Investment Network, R.E.I.N. It’s in rooms like this you can rub shoulders with professionals that specialize in investment. Building out a dream team is one of the largest contributing factors in my success as a real estate entrepreneur.
Build a dream team of professionals that can help you achieve your goals. Find an investor-focused realtor, then get them to refer you to a great mortgage broker, lawyer, and insurance agent. These 3 pros plus an ace property manager is the dream team that will leverage you to the highest of heights.
Getting this right is the difference between buying a couple of properties with varying success and creating a well-run real estate empire that won’t consume your life.
Rule #4: You get what you negotiate
A sharp agent can get you a great deal, but to thrive in this market you’ll need to become a master in the art of negotiations. Check your ego and emotions at the door, and allow the process to unfold over time. Never be in a rush, and never slam the door on a counter-offer.
Remember that real estate negotiations aren’t always about price. The terms of the deal are often more important than the dollar amounts. Find out what’s important to the other side of the deal and then try to help solve their problems while creating a wonderful deal for yourself.
Dates, inclusions, improvements, and even financing options are all up for negotiation. If you don't ask - you don't get.
Rule #5: Find your Niche
Don't try to be an expert in too many areas at once. Instead, select a particular type of property, then become an expert in that niche. Maybe it’s homes with basement suites, condos that allow short-term rentals, small multi-family units, or light industrial.
The key is to find a groove and then master it. It’s extremely difficult to build a strong portfolio with a mixed bag of all of the above, but if you just focus on one, all of your deals will turn out better than the last, and you’ll become the most confident and shrewd investor you know.
Rule #6: You don't have to invest where you live
Most people like the idea of being able to drive over to their investment and give it a kick or a look over. While that might feel reassuring, your hometown might not be your best investment option. Invest in areas showing strong economic fundamentals so you can increase your rental rates, property value, and cash flow over time.
Also, your home town might be at the tail-end of a boom, but cities one province over might be coming out of a lengthy slump. The opportunity for the next 5 years is far greater in the neighboring province, purely because of where they are in the market cycle.
A strong team of local professionals can help you make smart investment choices once you find an opportune investment area.
Rule #7: Graduate for economy of scale
Once you have mastered single-family homes and have reached your bank financing limit - which usually happens at 5 properties – look into multi-family investment properties to achieve economies of scale.
With multiple units in one place, you’ll have significantly lower per-unit costs for expenses like roof repairs, boiler maintenance, and property management. Investment properties streamline and simplify your real estate portfolio.
Rule #8: Big numbers do not always mean big risk
This might seem counterintuitive at first, but a 1 million dollar 4-plex carries less risk than a $500k home. And a 5 million dollar apartment building is less risky than the 1 million dollar 4-plex. Why? Because of the mathematics of diversification.
With more units available to rent, you reduce the probability of falling into a negative cash-balance due to tenant vacancy. For example, 3 out of 8 units could suddenly become vacant and you’d still cover your mortgage payment. But if your house or apartment suddenly becomes vacant, you’ll be on the hook for 100% of the mortgage payment until you find your next tenant.
Rule #9: Master Joint Ventures
At some point you’ll hit a ceiling on what you can accomplish as a lone investor. Everyone runs out of one of three key ingredients needed to grow an investment portfolio.
Capital for Down Payments is the first limit most investors face. After you’ve deployed your liquid capital, it can take a long time to save up for another down payment.
Access to Financing can also be a problem, since individual investors can only get so many mortgages from a bank at once.
Time & Expertise is the third ingredient; your personal resources can only be stretched so thin.
When you reach this milestone, it’s time to master the art of joint venturing. For every person out there flush with cash but lacking time or expertise, there’s another cashless person with the skills and bandwidth to properly execute your investment plan. These are the matches made in heaven that will launch your investment career to new heights.
Rule #10: Cash is King - but Cash Flow is Queen
We all know that Cash is King, but what’s really going to help you achieve your financial goals is cash flow.
With $500k you can buy a nice high rise condo, rent it out for $3k per month, yet still find yourself in a negative cash flow situation at month-end.
But that same $500k invested into a 2 million dollar multi-family property will bring you close to $15k in monthly revenue - that's 5x more revenue each month to enable the lifestyle of your dreams.
Rule #11: Force Appreciation
One of the best aspects of real estate investing is the opportunity to boost value through home improvements. Pick low hanging fruit renos like flooring, paint, and sidings to quickly increase your property value. Next, invest sweat equity into landscaping, gardens, or other yard projects.
Some properties let you unlock value through further property development – such as adding a suite or rezoning for commercial use. Even if you’re stuck in terms of finances, you can give your portfolio a serious boost through strategic improvements.
Rule #12: Hold for Wealth
We’ve saved the best for last: you can make good money by buying, fixing and selling property; and some people do this as a full-time job. The problem for these folks is that real estate flipping will occupy all of their time because they rely on these profits to live. Real estate can generate serious short-term profits, but the boom and bust of market cycles mean that the real magic happens by holding the asset over time.
Real estate investments usually double every 15 years. That means you can create multi-generational wealth by simply holding onto real estate for decades.