Off to a frustrating start!

[Quantized]

Anyone in REIN who is talking about making tons of money using the REIN system is a speculator. Period. There just isn't much money to be made at 4 - 7%. If you want to get to 10 - 20% returns, you must buy into a market going gangbusters. PPD is just not going to get you there. You are better off to buy a long-term GIC through an RRSP...not being facetious, you will actually make more money with an RRSP in a flat market.

Hi Matt,

You can see my post was dated May 18th so I'm not even a month into learning about real estate. I'm certainly not an expert, but I find that many of the people I speak to about real estate have no clue about what you're talking about!

One of the criticisms I have about Don's book Real Estate Investing in Canada is that there isn't any discussion or framework for comparing private real estate to other investment options. Nor is there a discussion about overall asset mix (unless I missed it). It's an excellent road map for choosing the right real estate, but no decision is made in a vacuum. These things may be beyond the scope of Don's book but I think a brief discussion should be there.

Don meets the fellow on the plane and they go right to real estate. Where's the discussion about overall asset mix? How much real estate is prudent? What is the outlook for private equity? The stock market? Alternative investments? Commodities? For example, let's say you're considering a $200,000 investment property and you want to put down 20% ($40,000). The monthly rent is $1,350 so right away we know it's in the desirable cash flow zone of 8-10%. After deducting all monthly expenses (mortgage, utilities, maintenance, etc.) let's say the property has a negative cash flow of $250 per month. Using some basic assumptions like 1.5% inflation, rent inflation = cost inflation, refinancing at the current rate in 5 years, etc., the 10 year IRR on the property comes to around 8%. The investor is losing cash flow every month so an ACRE-minded person would probably say pass. But what is the alternative use? If you believe that your overall asset mix should have real estate exposure then you might want to look at a REIT like Riocan. Right away your cash flow situation is better since Riocan yields 5% (pre-tax). It has appreciated by 7% per year over the last 15 years so we'll assume that going forward. The 10 year IRR on that is 8.8%. So you can see the IRR for Riocan and the cash flow is better. If we assume 0% appreciation for Riocan shares then the IRR drops to 3%. If we assume that our investment property will not appreciate over the next 10 years then its IRR is 5%, much better than Riocan which pays you 5% every year! Then we can look at the stock market which over a long period of time does 5-8%. And it goes on and on. Tax sheltering in a TFSA or RRSP, deducting interest expense for investments, etc. etc.

It's fine to focus on cash flow but only IRR truly equalizes your investment options. Before evaluating a property I think one should know the IRRs of ALL the investment options in front of them (to make life simple one can just think about the major asset classes: equities, fixed income, commodities, private equity, alternative, real estate, and currencies). The IRR on private real estate should be quite a bit higher to account for time, relative illiquidity, leverage, etc.

Just 2 cents from a beginner!

 

[KimAlex]

We purchased older, suited houses where one suite needed upgrading. We put low money down and lived in one suite while using more of our capital to upgrade the other suite. The end result was a handful of renovated, legally-suited houses that have paid us since day one. And even when the market corrected, those suited houses were still worth more than we paid because of the added value from the upgraded legal suites..

Sherilynn: Am living in one now with your exact same strategy, wondering if it is worth to have a separate thermostat controlling 2 zones/baffles for the main floor and basement tenant with single furnace. And split the bill 50%/50% between up and down. Do you have someone to recommend for such job ? Thank you so much.

 

[GaryW]

I think you just proved Matt's point.

Congrats

Using "No Money" meaning acquiring houses(Assets) Free. They cash flow easier with no borrowed Down Payment or out of pocket expenses, of course due diligence still is a factor. The post is a new investor, but I'm just commenting on the "Anyone In REIN" comment.

 

[Tyler - Picket Fence Properties]

I 100% understand why you’re frustrated – like any of us you’ve worked incredibly hard to get to where you are and you want to make the best decision you can so you’re set up for the future. If I can give you 1 piece of advice it’s that everyone thinks that they’re an expert. When I first became a REIN member a few months ago I was overwhelmed by the differing advice, opinions, etc on the forums but then it clicked for me. There will be people all around you that try and bring you down, discredit your ideas, and question what you are trying to achieve. A forum is no different, the key is to read through the BS and focus on the posts of experts like Sherilynn and Thomas who have proven their abilities and knowledge.

So, to help you out a bit:

The year is 2016 and you have managed to save up $50,000. You’re stuck on whether to invest it in a GIC, Mutual Fund/Equities, or to purchase an investment property.


Scenario #1: GIC Purchase

Let’s be incredibly generous here and say that a GIC will give you a 3% rate of return on your $50,000 that you invested. In 2041, (25 years later) you’re ready to retire and reap the rewards of the investment you made back in 2016. You have $104,688.


Scenario #2: Mutual Fund/Equity Purchase

Let’s assume that you were targeting growth-based companies paying healthy dividends…Some years were great, some years not so much, but in the end you averaged a 7% return on your original $50,000 you invested. You have $271,371!! Pretty awesome, right??


Scenario#3: Investment Property Purchase

To show how significant the contrast is, let’s be extremely conservative with this example even though we were aggressive on the previous two examples. You purchase a property in 2016 for $250,000 using the full $50,000 as a 20% down payment. You get a tenant into your property but unfortunately after you’ve paid your mortgage, taxes, property management, made provisions for vacancies and repairs, you’re left with $0 cash flow each month (again being conservative). However, flash forward to 2041 when you’re ready to retire and your tenants over the years have paid your mortgage down to $0 and you own a house free and clear.

Let’s assume the market over the next 25 years is stagnant and the price of housing doesn’t go “gangbusters”, but keeps pace with inflation – let’s say values increase 1.5% per year. Your property you purchased in 2046 is now worth $363,662. Keep in mind this is assuming that you generated $0 cash flow each month and that the price of real estate only went up by 1.5% per year.

 

[RE123RE]

Hi,
Don't forget in scenario 3 you spend 10 times more of your time. It is not a passive income like GIC.
Of course you are expected to make more money in RE. Its like comparing doing nothing to going to work every day. You are expected to make more by going to work.
Even if you delegate a lot (and you should) there will till be a lot of work in scenario 3.
Like in many fields, if you are willing to work hard, have the skills and choose scenario 3 you are obviously expected to make much more. Numbers-wise the analysis 1-3 is right. Its just missing the compounded effect making RE much more profitable than shows thanks to refinancing and buying More. in other words, the 50K really are going to buy you more than 1 property, maybe 10.
Thanks

 

[E]

I 100% understand why you’re frustrated – like any of us you’ve worked incredibly hard to get to where you are and you want to make the best decision you can so you’re set up for the future. If I can give you 1 piece of advice it’s that everyone thinks that they’re an expert. When I first became a REIN member a few months ago I was overwhelmed by the differing advice, opinions, etc on the forums but then it clicked for me. There will be people all around you that try and bring you down, discredit your ideas, and question what you are trying to achieve. A forum is no different, the key is to read through the BS and focus on the posts of experts like Sherilynn and Thomas who have proven their abilities and knowledge.

So, to help you out a bit:

The year is 2016 and you have managed to save up $50,000. You’re stuck on whether to invest it in a GIC, Mutual Fund/Equities, or to purchase an investment property.


Scenario #1: GIC Purchase

Let’s be incredibly generous here and say that a GIC will give you a 3% rate of return on your $50,000 that you invested. In 2041, (25 years later) you’re ready to retire and reap the rewards of the investment you made back in 2016. You have $104,688.


Scenario #2: Mutual Fund/Equity Purchase

Let’s assume that you were targeting growth-based companies paying healthy dividends…Some years were great, some years not so much, but in the end you averaged a 7% return on your original $50,000 you invested. You have $271,371!! Pretty awesome, right??


Scenario#3: Investment Property Purchase

To show how significant the contrast is, let’s be extremely conservative with this example even though we were aggressive on the previous two examples. You purchase a property in 2016 for $250,000 using the full $50,000 as a 20% down payment. You get a tenant into your property but unfortunately after you’ve paid your mortgage, taxes, property management, made provisions for vacancies and repairs, you’re left with $0 cash flow each month (again being conservative). However, flash forward to 2041 when you’re ready to retire and your tenants over the years have paid your mortgage down to $0 and you own a house free and clear.

Let’s assume the market over the next 25 years is stagnant and the price of housing doesn’t go “gangbusters”, but keeps pace with inflation – let’s say values increase 1.5% per year. Your property you purchased in 2046 is now worth $363,662. Keep in mind this is assuming that you generated $0 cash flow each month and that the price of real estate only went up by 1.5% per year.

I do agree with this, however be sure that option 3 is in an area with positive fundamentals. If the market takes a downturn and is not able to recover (which can happen in areas that are single employment dependant) option 3 can turn out different. In hindsight option 2 could also be affected by a down turn as well, option 1 could be seen as less risky. All in all though I would go with option 3 as from my track record this has been the best for me.

 

[Matt Crowley]

Hi Matt,
One of the criticisms I have about Don's book Real Estate Investing in Canada is that there isn't any discussion or framework for comparing private real estate to other investment options. Nor is there a discussion about overall asset mix (unless I missed it). It's an excellent road map for choosing the right real estate, but no decision is made in a vacuum. These things may be beyond the scope of Don's book but I think a brief discussion should be there.

I don't think REIN is the right material for you Quantized. I don't think it is robust enough for you to find a lot of value in. The best route quite frankly is to read the detailed pro formas you can find on CBRE, Colliers, JLL... there is some sales to how the pro formas are assembled, sure, but a lot less than some of the shenanigans I've seen headlined in this forum "ARE YOUR RRSP'S NOT PERFORMING? OH DRAT. HOW ABOUT $964.19 CA$H FLOW INSTEAD?" You and I both know that nearly every piece of real estate cash flows, just put down more cash initially so cash flow means next to nothing.

I think that what you are moving towards is a neighbourhood and demand-supply side analysis. It isn't that hard to do, just follow the principles as you will see in the CBRE / Colliers pro formas. They identify the area and its major attributes. Then they propose an operating expense budget. It is not 35% because that sounds right. It is $1200 for accounting per year because that is what I paid last year sort of budget. And the rents are based on real market facts. As far as demand-supply side economics, it is not taught at REIN. You take an inventory of the whole market on Kijiji one day and then go back weekly to record changes in rent / incentives and track how many weeks it takes for that product to be absorbed. In 2 months you will have a very solid understanding of the market.

There is nearly zero analysis by asset type that I have ever seen in any REIN material. Overall the financials that are presented in the materials are weak to useless. Some members on here are professionals and the financials are good.

It's fine to focus on cash flow but only IRR truly equalizes your investment options. Before evaluating a property I think one should know the IRRs of ALL the investment options in front of them (to make life simple one can just think about the major asset classes: equities, fixed income, commodities, private equity, alternative, real estate, and currencies). The IRR on private real estate should be quite a bit higher to account for time, relative illiquidity, leverage, etc.

Just 2 cents from a beginner!

You are not a beginner... people should be reading your post to get a clue. Yes to IRR... although as a finance guy you already know that IRR does not equate small fish and big fish on equal merit. A 8% IRR on a maximum investment on $1,000 is not the same from a practical standpoint as an IRR of 6% on $100,000 when you cannot readily duplicate the $1,000 investment... as can be the place with non- commoditized assets. As real estate can sometimes be. IRR is my #1 go to as well.

 

[Quantized]

I don't think REIN is the right material for you Quantized. I don't think it is robust enough for you to find a lot of value in. The best route quite frankly is to read the detailed pro formas you can find on CBRE, Colliers, JLL...

Thank you, I'll take a look at these.

You are not a beginner... people should be reading your post to get a clue. Yes to IRR... although as a finance guy you already know that IRR does not equate small fish and big fish on equal merit. A 8% IRR on a maximum investment on $1,000 is not the same from a practical standpoint as an IRR of 6% on $100,000 when you cannot readily duplicate the $1,000 investment... as can be the place with non- commoditized assets. As real estate can sometimes be. IRR is my #1 go to as well.

Well I am a beginner since I haven't even bought my first property yet!

The leverage and systematization is what attracts me to real estate. You're 100% right that real estate gives you an unrivaled bang for your buck. A 5% increase on a $200,000 property with 20% down is the same as a 25% gain on a $40,000 investment. Yes, I can go and leverage my non-registered investments but as soon as the market falls by X% I'm going to get a margin call. If real estate values fall nobody from the bank is going to call you up and demand you pay down your mortgage or force you to sell off your income property (for the average person). Plus, with an income property you have someone paying down the leverage for you. I'm not going to bank on real estate appreciation but I have a very high degree of confidence that in 25 years someone else will have paid off virtually all of my loan and the price is going to be the same or higher than when I bought it (in other words with no appreciation I make 5x my initial investment or a 6%+ compounded annual growth rate). That's $160,000 net from a $40,000 investment. Not a lot of investment options offer size, repeatability, systematization, leverage, cash flow, and a return commensurate with the risk taken.


In other news I may be closing in on my very first property!

 

[Thomas Beyer]

Buying REITs that yield 5-9% with a 50-66.67% margin account at prime or prime plus one is a worthwhile real estate based investment strategy for smaller and larger amounts.

More volatility though but a lot less work.

Let's say you have a REIT that yield 6% and you have $100,000 in cash. You buy $200,000 of REIT units that yield $12,000 a year minus 3.7% or $3700 assuming prime plus 1. That is still a 8300 or 8.3% yikes plus any upside on REIT.

 

[Matt Crowley]

Sounds like you have a plan.

If real estate values fall nobody from the bank is going to call you up and demand you pay down your mortgage or force you to sell off your income property (for the average person).

Be careful with the comment above. I see it often that small investors buy as much as they can in a fury then realize when rents drop by 10% they are strained financially and are forced to sell an asset or two. This is a really long term plan with pretty skinny gains for a long period of time. 99% of people will not be able to hold on for 25 years. Probably 25 - 50% of small investors can't hold on for even 5 years. I bought out one investor in January and am in process of buying out another due to exactly this problem.

You really need to understand from a business perspective, real estate investment is not your "risk" piece of your portfolio, it is you "safe and reliable" piece ie. it will safely yield you next to nothing for 10 years because it is so easy for anyone to pick up and rent out a house. So, so easy.

All businesses offer "systems". Same as a hot dog stand. Nothing special at all with real estate. Zip.

 

[Thomas Beyer]

Nothing special at all with real estate. Zip.

Not quite.

You can control upgrades and thus, rent levels/increases more directly than say a REIT.

You can determine leverage level, say 0, or 25 or 50% or 65% or 80% even. Thus you can determine cash-flow or higher ROI, as explained further here: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

Money is cheap cheap cheap .. sub 3%. Cheaper than on a hot dog stand or any other business.

Other thoughts by others on "why real estate" http://blog.reincanada.com/2013/03/at-what-point-does-real-estate-income-actually-start-to-flow.

Land is getting more and more expensive, and thus the real estate on it.

On average, even if you know little about property management or value-add strategies, you get inflationary 2-3% annual rent increases and mortgage paydown even in flat market. It is very hard to lose money, if you are not too levered, say 65% or less, unlike a hot dog stand.

 

[Dapper]

I've heard of a lot of success in the Oshawa region buying bungalows with basement apartments. Try looking at those. I'm currently investing/experimenting in Malvern, Toronto buying row houses (end units and will put in a basement apartment). Based on the numbers it will cash flow.