Top 3 Reasons to Buy an Income Property NOW

[RealtyHub]

One of the most common catch phrases that I hear when talking to individuals about their reluctance to invest in real estate has to be "It`s not a good time". It's a very vague statement which can be interpreted to mean either; (a) it`s not a good time for me personally to invest or (b) it`s not a good time to invest in the real estate market. Granted that there may be circumstances which preclude certain individuals from investing in real estate for any number of reasons, but for the rest of you out there, "it`s not a good time" is a statement which can end up costing you tens of thousands to hundreds of thousands in potential real estate gains in the long term. In fact, I believe "it`s always a good time" to invest in real estate (and let me be clear that I am talking about investing in cash flowing real estate and not talking about speculating in real estate hoping for future appreciation).






When it comes to real estate investing time is your biggest ally if you are invested and your greatest enemy if you are not. The phrase "Time is money" has never been truer when you apply it to real estate investing. Time facilitates the three most important pillars of real estate investing:





1. Mortgage Pay down





Most individuals use leverage (eg. mortgage) to purchase an investment property which makes it such an appealing investment. For every mortgage payment you make a certain portion goes towards interest, but more importantly, a certain portion goes towards principal and contributes towards building your equity in the property. I like to think of it as "forced savings" which may sound a little paternalistic in nature but for most of us it`s a good thing. The amortization period is typically between 20 to 25 years which means that after that timeframe you will own a free and clear property. As many like to think of their real estate investments as a retirement fund, given that you derive the greatest benefit of mortgage pay down the longer you own the property, investing NOW becomes all that much more compelling if you are counting on it for your retirement.





BONUS: After several years of equity build up, you have the option to re-finance or put a Line of Credit on the property and take money out. Psychologically knowing you have this type of security in an emergency is immense.





2. Cash Flow





As stated from the outset, investing in real estate means buying a property that provides monthly cash flow. The formula is relatively simple; Gross Income - Expenses - Mortgage Payment = Cash Flow. The beauty of real estate investing is that the cash flow is there from day 1 (if it`s not, then you are speculating and not investing). I don't need to tell you the benefit of having extra income coming in every month.




BONUS: For those that are sick and tired of their jobs and looking for a career change, once you have accumulated enough cash flowing real estate you can focus on managing your portfolio full time and enjoy the independence and flexibility that comes along with it.




3. Appreciation





I have appreciation down as the last of the 3 benefits intentionally. As I stated above, investing in real estate strictly for appreciation can be a huge gamble. I know people that lost everything because they gambled on the real estate boom in the late 80's and lost in a big way. On the other hand, the potential benefit of appreciation coupled with steady mortgage pay down and consistent flow is a big winner. Typically appreciation is calculated at 1-2% annually. So very conservatively speaking, by the time your mortgage is paid off, the property will have appreciated in the range of 25-50%. It`s more likely that you will see appreciation in the range of 100%++ but I like to be conservative.





BONUS: Appreciation can be like a lottery ticket. Over time some properties can become extremely valuable based on their geographic location and return 100%, 500% and even over 1000% depending on how desirable that location has become (Eg. King Street West in Toronto or pretty much anywhere in Vancouver)





If you have every seriously considered investing in real estate, every day that slips by is costing you money. As such, since you can`t start investing in real estate yesterday, you need to start taking steps TODAY towards making your first income property investment.











Author: Paul Kondakos BA, LL.B, MBA - Professional Real Estate Investor - www.RealtyHub.ca

 

[Thomas Beyer]

True in principle, but a tad too vague, as the appreciation is not always a given (or at least may take longer than you can hold) .. and as cash-flow is also not always a given either, as many properties do not cash-flow.



Thus, the trick is to buy assets that do cash-flow, which is a function of rent vs. price and mortgage level - or to have enough of a reserve to cover periods of negative cash-flow, for example during periods of vacancies or property upgrades to enhance value and rent. Too many investors have too high a mortgage, or under-estimate expenses or vacancies or upgrade costs, or over-estimate rents.



In many markets some assets will depreciate for a while, say Toronto or Vancouver condos (but perhaps not houses), or in markets where people leave, like those with poor economics.



One needs to have some (in)credible research into where to buy (and where not to), and how to market one's asset once one owns it. REIN provides such an incubation or research environments, as do a few others (albeit not as well in Canada).



The trick is to HOLD LONG ENOUGH for the mortgage paydown to be significant and for appreciation to kick in, as it eventually will.



To me that means lower mortgages than 80% (maybe 60-70% depending on asset), and select asset types only in select in-migration & growth markets !



People have drowned in rivers one foot deep on average .. after the heard the preacher told them "don't worry .. it is safe to cross the river .. it is only one foot deep on average".



Don't invest in an average property in an average market, as you may drown. Buy only specific assets in specific markets !

 

[RealtyHub]

Good afternoon Thomas, thanks for the feedback.









The article was meant to be a top level overview as to why it's beneficial to invest in real estate sooner rather than later. As such it is somewhat vague given the complexities of real estate investing.









I couldn't agree more that appreciation is not always a given which is why I consider it the "bonus" of real estate investing. Mortgage paydown and cash flow are the cornerstones whereas appreciation is the gravy. I stated in the article never invest based strictly on appreciation as that can lead to financial ruin in hurry. The condo markets in Toronto and Vancouver could fit that bill in short order.









With respect to cash flow, I should have been clearer and stated that investors should only buy cash-flow positive properties. I didn't go into the criteria for what they should be looking for with respect to income properties, but for anyone that is interested, I have re-posted another one of my articles below:









THE SECRET SAUCE TO FINDING GREAT INCOME PROPERTIES









The key to success in multi-unit residential investing is determined before you even close on the property. What do I mean by that? At any given time, there are dozens of properties on the market. The key to success is finding the RIGHT property and then moving on it before anyone else does. In most cases this means literally looking at hundreds of properties to find the one diamond in the rough. To many this is a great enigma and is what scares away most prospective investors. Want to learn what to look for in a great investment property???? Read on!

I've been investing in multi-unit properties within Canada for more than a decade and have done very well following a simple formula. Before buying any investment property I ensure that as many metrics as possible are tilted in my favor which helps to limit downside and significantly increase the potential upside.


All the metrics that I focus on are steadfast numbers which determine the profitability and cash-flow of the property and have NOTHING to do with potential appreciation (this helps to significantly limit any downside when the market turns and any appreciation is as bonus). While most people I know would keep this information to themselves and not create potential competitors, I'm a big believer in Karma and think that the market is big enough for a few more serious investors who just need a point in the right direction.


THE RIGHT GEOGRAPHIC REGION


You can find some incredible bargains out there, but if you can't get tenants to fill your vacant units, you will be singing the blues. You need to ensure that the area/region that you are looking to buy in has its metrics moving in the right direction. By that I mean you have to do some research on the following which can influence your investment:

• Unemployment
• Population Growth
• GDP Growth
• Vacancy Rates
  Rental Rates
  New Projects (eg. Maple Leaf plant in Hamilton, Toyota plant in Cambridge)
  University in Town

While the big cities tend to have the most favorable metrics, don't overlook the smaller towns that can be just as competitive on these fronts.


CAP RATE

This is usually the first metric people look at to determine whether the potential investment is appealling to them. Obviously the higher the cap rate the better, but in this period of low interest rates, cap rate compression has been taking place (Plain English: Cap rates are going down because interest rates are going down) making it much harder to find properties with high cap rates. Cities like Toronto and Vancouver now command a 5% cap and less. As such, I encourage investors to look to the outskirts such as Durham region (Pickering, Ajax, Whitby, Oshawa) or University towns such as Guelph or Kitchener/Waterloo where you can still find cap rates of 7% and beyond if you look hard enough. A caveat here (and future topic) is to never assume the cap rate advertised is accurate (many times waste, maintenance, vacancy, property management, and other expenses are not included). Although interest rates are very low right now and may allow properties to cash flow, if you buy a property with a cap that is too low (anything below 6.5% is too low in my opinion, unless you are buying all cash), you may get hurt when you mortgage is due for renewal.

RENTS


This is where I have made a significant amount of money in the past. Many investors tend to get complacement after years of owning a property and leave their rents significantly below what the market will bare. In this instance, if you buy the property at a good cap rate, you can score a home run if there is room to significantly increase the rents. Here's a real life example. I purchased a 12 plex (all 2 bedrooms) in Waterloo, ON back in 1999. The average in the building was $650/month. With a little work to each unit (about $4,500), within 12 months, the average rent in the building was increased to $850/month. A $200/month increase in one unit adds approx. $35,000 in value to the building based on a 7% cap. As such, looks for properties with rental rates below market (use websites such as CMHC and viewit.ca to determine the current going rates). On the flip side, ensure that the rental rates which you see in an income statement are either at or below market, because if they are above market, you will have a tough time keeping them rented at those inflated rates which will lead to an increase in your vacancy rates.


EXPENSES


Finding efficiencies in inflated expenses is another way to help make your investment more lucrative. By inflated, I mean that the current owner hasn't realized, or doesn't care, that they can make their property run more efficiently and thus make more money. This skill usually comes with time and experience in owning and operating an investment property as you get a feel of what the average water, gas, hydro, management and maintenance bills should be. Spotting inefficiencies can be a quick way to add value to a building. Here's another real life example. I recently bought a property which I knew, based on size and number of residents, had a monthly water bill that was way too high. I sent my superintendents into every unit to check for leaks. They were able to pinpoint and fix about 1/2 a dozen leaks. As a result the water bill was reduced immediately by 30% on a monthly basis and lead to savings of several hundred dollars per month. The point once again is to look for opportunities to either increase income or decrease expenses.


APPLYING THE THEORY


It is rare to have all of these metrics working in your favor so what you want to do is to try to have as many of them as possible working in your favor. It will take time and effort to find the right property, but if you do your homework and persist, you will be rewarded. In the last few months I purchased the 2 following properties which I found using my formula above.

The first one was a 24 unit property located in Kitchener, ON. The georgraphical metrics are bang on here as all the metrics are moving in my favor (check mark). The cap rate was a very healthy 7% with room for improvement under the right management (check mark) Rents were on average $100/month below market. Over 24 units, $100/month is very significant (check mark) Expenses were high (this is the property I was refering to with the high monthly water bill) (check mark). Other intangibles included a great VTB at 0% for 3 years, the potential to convert the units to condos and the potential to add 2 more legal units (check, check and check!). Within 6 months the property had an offer of $800,000 over and above our purchase price.

The second one was a 12 unit property located in Oshawa, ON. The geographical metrics again were bang on here as Oshawa has one of the fastest growing GDP's in 2012 and projected to continue into 2013. Oshawa has been stigmatized as a one trick pony (GM Plant), but it has made great strides in becoming a multi-dimensional economy also focused on high tech and education (check mark). The cap rate was a super healthy 8% (check mark). Rents were pretty much at market and expenses were also pretty much right on. While rents and expenses offered no real room for growth, the region and cap were enough to make this one a winner as well.


Needless to say, both buildings were in great shape and environmentally sound. These were just great finds and not a case of being discounted for some major short coming.


Great properties are out there, and now that you are armed with the knowledge of what to look for, its time to put the theory into practise. Good hunting!

 

[Thomas Beyer]

[quote user=RealtyHub]



.. that investors should only buy cash-flow positive properties. ..





not quite.



They could be break even or even slightly negative IF there is enough of a cash reserve.



Also, sometimes they are cash flow negative in the current condition, but with some upgrades they will become cash-flow positive.



One can also buy old and ugly, fix up, and then sell right away, with no cash flow whatsoever.

 

[bizaro86]

[quote user=RealtyHub] This is where I have made a significant amount of money in the past. Many investors tend to get complacement after years of owning a property and leave their rents significantly below what the market will bare. In this instance, if you buy the property at a good cap rate, you can score a home run if there is room to significantly increase the rents. Here's a real life example. I purchased a 12 plex (all 2 bedrooms) in Waterloo, ON back in 1999. The average in the building was $650/month. With a little work to each unit (about $4,500), within 12 months, the average rent in the building was increased to $850/month. A $200/month increase in one unit adds approx. $35,000 in value to the building based on a 7% cap. As such, looks for properties with rental rates below market (use websites such as CMHC and viewit.ca to determine the current going rates). On the flip side, ensure that the rental rates which you see in an income statement are either at or below market, because if they are above market, you will have a tough time keeping them rented at those inflated rates which will lead to an increase in your vacancy rates.



I really like this strategy, as forced appreciation is the best kind. Out of curiousity, how are you able to raise rents immediately and significantly in Ontario with rent control?



Also, if you're using this article for marketing purposes, I'd consider changing "market will bare" to "market will bear." The market is allowing the rents, not removing its clothes.



Regards,



Michael

 

[RealtyHub]

All great strategies for the more experienced investor, but I personally wouldn't recommend them for the novice investor.

 

[RealtyHub]

Hi Michael,



Ontario does have rent control legislation in place, however, when a tenant vacates a unit, the landlord is free to increase the rent as much as he/she sees fit for the new tenant.



Another little known fact is that rent control legislation in Ontario does not apply to units that were built after November 1, 1991.



Thanks for the heads-up on the typo.



Regards,



Paul

 

[Thomas Beyer]

[quote user=RealtyHub]A $200/month increase in one unit adds approx. $35,000 in value to the building based on a 7% cap.


Indeed.



that is THE SECRET in multi-family investing and has paid very very well for us (and our co-investors)



The difference between AB or SK based assets vs. those in rent-controlled BC or ON is that rent control slows down this process, as this can only be done on turnover, i.e. after a vacancy, and even in time you will be left with paying tenants that have rents far below the market rent - smoking and living in their (usually ugly) suite !

 

[TorontoPM]

With all due respect, I don't think Thomas has lived in the GTA.



Things have changed dramatically. Five years ago newcomers were buying houses for 0% down with few income or resident checks.



Now?



Mortgage rules are a lot tougher. Meaning... a huge amount of qualified tenants in the GTA.



If you are a landlord in many areas, the whole paradigm has changed since 2007. Lots of great tenants out there hoping to find a great landlord.

 

[Thomas Beyer]

Actually, I did live in Scarborough for 3 years .. But still maintain the opinion that a small downtown condo remains a poor investment in 2012 due to double land transfer tax, condo fees, property taxes, flat equity for years and little to no cash flow even with 30% down. Investment into houses in desirable neighborhood like Roncesville or Beaches or other areas close to transit make sense with high value increase potential due to greenbelt land constraints, but are very hard to cash-flow.

 

[housingrental]

Thanks for your perspective

Perhaps you can share where in the GTA you have recently purchased investment properties (and their types) and the types of returns they've offered you





[quote user=TorontoPM]With all due respect, I don't think Thomas has lived in the GTA.



Things have changed dramatically. Five years ago newcomers were buying houses for 0% down with few income or resident checks.



Now?



Mortgage rules are a lot tougher. Meaning... a huge amount of qualified tenants in the GTA.



If you are a landlord in many areas, the whole paradigm has changed since 2007. Lots of great tenants out there hoping to find a great landlord.

 

[TorontoPM]

There is Money to be made...argh..

 

[housingrental]

Thanks but "argh" is not a meaningful answer

Please respond to my last post:



Thanks for your perspective

Perhaps you can share where in the GTA you have recently purchased investment properties (and their types) and the types of returns they've offered you





[quote user=TorontoPM]There is Money to be made...argh..

 

[TorontoPM]

Certainly.



While Waterloo
faces landlord licensing, increased competition from university owned
housing, the decline of RIM, and the wear and tear of students, we have many investors who have done
extremely well investing in the Greater Toronto Area, especially the
northern part of the GTA.



Why? How?



First of all,
many properties in the northern section of the GTA have seen price
appreciation of, on average, 25%. If you purchased a property that is
in a 'prime-time' location we've seen gains much higher. So your rental
property increases in value $100,000+ while you have also collected
rent for years and your mortgage is much smaller than before.



Second, the Ontario Residential Tenancy Act is punishing
and many mom and pop landlords don't last past their first 'pro tenant'
who uses the current system. This, added with the fact mortgage rules
have changed making it harder for first time home-owners to buy, plus
prices rising means there are fewer good rentals available and a huge
tenant pool of qualified tenants with high credit scores and stable
employment.



Third, there is a continued flow of immigrants to the
GTA. Why the GTA? Because the weather isn't like Alberta and the
prices here are still much cheaper than Vancouver. You add in excellent
shopping, hospitals, entertainment, etc. and the GTA is a very
attractive choice for newcomers. The idea that Ontario only attracts
the "worst immigrants" is simply wrong.



The right property, well-managed, has worked very well for our clients (and myself).

 

[Rickson9]

[quote user=TorontoPM]First of all,
many properties in the northern section of the GTA have seen price
appreciation of, on average, 25%.


Is this anecdotal information? Do you happen to have a source for this information that "the northern section of the GTA has seen price appreciation of, on average, 25%"? Any help appreciated!



[quote user=TorontoPM]
Third, there is a continued flow of immigrants to the
GTA...The idea that Ontario only attracts
the "worst immigrants" is simply wrong.


For anybody that cares, according to Stats Can the "continued flow of immigrants to the GTA" appears to be around 37% of all immigrants in 2010. Inflows into Montreal are huge as well.

http://www.cic.gc.ca/english/resources/statistics/facts2010/temporary/28.asp

 

[Thomas Beyer]

[quote user=TorontoPM]Because the weather isn't like Alberta
hear hear .. but neither are the wages (they are lower in GTA) nor the house prices (they are higher in GTA) .. and snow at +2, -3 or -8 is similar. Most immigrants move to GTA because they know folks there, and some move later after they discover the facts of high humidity in summer, cold/wet winters, average wages and high rents or house prices.



It makes sense to buy income properties if the rent carries all costs [like mortgage payment, insurance, property management, property taxes, condo fees (if applicable), utilities (if applicable) and repair & maintenance allowance], and that is the case in some instances in GTA (or Vancouver) but not too many anymore @ 75-80% levered, perhaps OK @ 50-60% !

 

[housingrental]

Thank you for the response. Perhaps posting this for third time will result in a response that directly answers the questions asked. Again:



Perhaps you can share where in the GTA you have recently purchased investment properties (and their types) and the types of returns they've offered you



To add:



Which part of the northern section of the GTA has appreciated 25% and in what time frame? How does this compare to other markets?









Thanks for your perspective













[quote user=TorontoPM]Certainly.



While Waterloo
faces landlord licensing, increased competition from university owned
housing, the decline of RIM, and the wear and tear of students, we have many investors who have done
extremely well investing in the Greater Toronto Area, especially the
northern part of the GTA.



Why? How?



First of all,
many properties in the northern section of the GTA have seen price
appreciation of, on average, 25%. If you purchased a property that is
in a 'prime-time' location we've seen gains much higher. So your rental
property increases in value $100,000+ while you have also collected
rent for years and your mortgage is much smaller than before.



Second, the Ontario Residential Tenancy Act is punishing
and many mom and pop landlords don't last past their first 'pro tenant'
who uses the current system. This, added with the fact mortgage rules
have changed making it harder for first time home-owners to buy, plus
prices rising means there are fewer good rentals available and a huge
tenant pool of qualified tenants with high credit scores and stable
employment.



Third, there is a continued flow of immigrants to the
GTA. Why the GTA? Because the weather isn't like Alberta and the
prices here are still much cheaper than Vancouver. You add in excellent
shopping, hospitals, entertainment, etc. and the GTA is a very
attractive choice for newcomers. The idea that Ontario only attracts
the "worst immigrants" is simply wrong.



The right property, well-managed, has worked very well for our clients (and myself).

 

[TorontoPM]

"hear hear .. but neither are the wages (they are lower in GTA)"



Except they are not. The GTA has a very diversified economy and it's easy to find a job, and, after a while, find a good job. And the company might be owned and run by your very own ethnic group so you can use your true native language at Head Office.



"nor the
house prices (they are higher in GTA)"



Except they are not. There are lots of great deals and there are new neighbourhoods being build regularly.



".. and snow at +2, -3 or -8 is
similar. Most immigrants move to GTA because they know folks there, and
some move later after they discover the facts of high humidity in
summer, cold/wet winters, average wages and high rents or house prices."



Except that is not true. Winters in the GTA are much milder than in Alberta. And newcomers know it!



"It makes sense to buy income properties if the rent carries all costs
[like mortgage payment, insurance, property management, property taxes,
condo fees (if applicable), utilities (if applicable) and repair &
maintenance allowance], and that is the case in some instances in GTA
(or Vancouver) but not too many anymore @ 75-80% levered, perhaps OK @
50-60% !"



That is your investment philosophy. Fortunately it's not one shared by many investors/residents in the GTA.

 

[TorontoPM]

Ok, Adam.



I hope this helps and answers your concerns. As you seem very unhappy where you are, doing what you are doing. I would be too in such a declining market that saw it's peak years ago. Personally, I would not invest in Waterloo and would suggest people currently there sell.



I'm not going to provide my clients addresses (or mine) on the internet.



My post breaks the "Alberta is the best/student housing is safe" paradigm but my clients (and myself) have had great success investing in the GTA. I'm sorry if this doesn't match the thinking of a few of the loud members here. Earning a few hundred dollars in "cash-flow" in Alberta or Waterloo is tough slog.



Regarding prices rises, simply Google it. Actually, the media doesn't really report the gains because they include a lot of horrible neighbourhoods where there will never be real gains.



A smart investor will see where the good neighbourhoods are.

 

[Thomas Beyer]

Stats on growth rates: http://news.nationalpost.com/2012/02/08/canada-census-2011-see-which-cities-and-towns-have-grown-the-most/



Affordability Index in Vancouver stood at 83.2 per cent of income, followed by
Toronto at 52.4 per cent, Montreal 40.2 per cent, Ottawa at 38.7 per
cent, Calgary at 38.3 per cent and Edmonton at 31.1 per cent.



Infor for immigrants on cost of living: http://canadianimmigrant.ca/guides/moving-to-canada/moving-to-canada-cost-of-living-in-major-cities



just wait until the public sector shrinks due to excessive debt: http://www.torontosun.com/2012/09/26/pay-freeze-nope-its-time-for-public-sector-layoffs



yes there is opportunity in GTA, in pockets. Tread carefully.