So you have been watching home renovation and property-flipping shows on TV for some time now. You know, the ones where people are apparently making money hand over fist flipping properties. Or you know of a friend of a friend who has made it big investing in real estate and is now living a dream life on a beach in Bora Bora. Now you think you can do it, too!
Whether you are a novice to real estate investing or already on your way to becoming the next Canadian Donald Trump, there are five rules you need to know and follow religiously, to become a successful and wealthy real estate investor.
- Be an Investor, Never a Speculator
If you are thinking of flipping a property to cash in on the equity created by renovating a home, you are looking to become a real estate speculator, not an investor. Speculation is risky business. You need only look at what happened to all the people who were actively flipping houses in the U.S. immediately prior to the financial crisis of 2007. Many not only lost their investment properties but their shirts as well.
Real estate moguls know that the key to success is buying and holding onto properties. By having tenants pay for your investment properties’ monthly expenses and mortgages, you can realize excellent returns. Know that you can become incredibly successful and wealthy without ever having to renovate, rehab, flip properties or even lift a hammer.
- Location, Location, Location!
Buying cheap real estate in declining locations is usually a bad idea, unless you are a speculator. You may be thinking of buying cheap properties in a transitioning area in the hopes that it could become the next Liberty Village. Before you do, you should know that the term “transitioning neighbourhood” means that it is changing, hopefully from one that may be plagued by crime and poorly maintained properties into the next “hip” area of town. Beware that the transition process may take several decades to complete, with no guarantees that it ever will.
- True Wealth is Built by Time in the Market, Not by Timing the Market
Considering investing in pre-construction condos, hoping to cash in on the increase in price from the time you buy to years later when the condo is built? Attempting to time the market is also speculating not investing.
Say you buy a condo today for $350K that will be built in three years. You hope condo prices will go up by 5 percent annually, but what if they don’t? What if you find yourself in a situation where in three years we are in the midst of a 20 percent market correction? That $350K condo is now only worth $280K. Instead of the $45K you were hoping to make, you would end up losing $70K!
Real estate moguls instead buy great properties in great areas for the long term, knowing that it is their time in the market, rather than trying to time the market that will get them to the finish line.
Bonus: If you hold your investment property forever, you can avoid or defer many transaction costs like real estate commissions, legal fees and taxes on capital gains. Better still is that your loved ones can continue benefiting from your properties’ stable monthly income long after you are gone.
- Build Your Dream Team
Investors attempting to go at it alone, based solely on what they may have read or seen on TV, are almost always doomed to fail. A real estate investment Dream Team, including real estate agents, lawyers, accountants, property inspectors and coaches, who are also active real estate investors themselves, are key to successful real estate investing. Your team should provide you with great advice, support and insight when you need it most.
- Positive Cash Flow is King
Maintaining a positive cash flow is the absolutely most important rule of successful real estate investing. Positive cash flow is simply the remaining portion of the rent that you receive from your tenants that you keep after paying your mortgage, property taxes, insurance, utilities and making any minor repairs.
Think of positive cash flow as your investment insurance policy. In any market, whether it is the stock market or real estate market, corrections will occur from time to time. It is not a matter of “if” but “when” corrections will happen. Positive cash flow is the one thing that will help you weather any storm, regardless of market conditions.
Caution: Currently, cash flow positive investment properties in the Greater Toronto Area are nearly impossible to find. Beware of any real estate agent or builder who claims they can find or offer you a great Toronto investment property.
Great cash flow positive properties can still be found in cities within reasonable commuting times of Toronto. Always use a real estate agent who specializes in locating such properties and who also invests in real estate there themselves. They put their own money where their mouth is. These professionals have first-hand knowledge of what properties and areas of the city work and which do not. You want their priceless experience and knowledge working for you.
Felix Vortsman, CPA CA CIA is the Founder of Cloud9Life.ca™, professional real estate investor, financial planner and coach, sales representative at Rock Star Real Estate Inc. Brokerage and Chartered Accountant. He is a member of the Ontario Institute of Chartered Accountants, Toronto Real Estate Board, Realtors Association of Hamilton-Burlington, Canadian Real Estate Association, Ontario Real Estate Association and Institute of Internal Auditors. You can contact Felix at firstname.lastname@example.org.