Investment Properties – Why Bother?

Buying and managing an investment property is not that hard. So why don't more people do it?

That is a question that I ask myself constantly.

Q: Why did you decide to do this blog?

• A: It is a natural thing for all of us to grow, acquire knowledge and wisdom and to “spread it around”. I have done the growing and acquiring for 30 years; I am now in the “sharing” stage of my life.
• To examine the mindset of those who set out to do something worthwhile, creative and to achieve their goals and of those who don’t.
• To share how real estate investing can help you improve your quality of life (and mental health) by achieving financial independence. (We all want to be independent and free in all areas of our lives.)
• To share a few practical tips on how to do it, how specifically I look at the investing game, what criteria I use to choose investment properties, how I run and operate them. Whether you are a novice or an experienced investor, I’m sure you will find something useful.
• To dispel some of the most common myths about real estate investing and how they prevent so many from doing what they know they need to do.

Q: Investment properties. Why bother?
A: Real estate will set you free. Through all the years of investing and helping others to acquire investment properties, I rarely heard anyone say they had a burning desire to look after tenants. Why do they do it? These people all have one thing in common: clarity. They are clear about their goals and about what motivates them. They know that real estate is the best investment there is for building a secure and independent future.  It’s simply a vehicle that gets them there faster, safer and… legally.

Q: You talk about freedom, but isn't it a lot of work to look after a property?
A: Conventional wisdom says managing a property is hard. It’s too much work. It enslaves you. In my view, it’s actually the opposite. It does not enslave you: it will set you free. It is not nearly as much work as you may think. It all depends on your efficiency (just like any other aspect of your life – what some do in an hour, others take a week to do).

Q: But doesn’t it take a lot of time?
A: To manage my properties, I created a management style that I call drive-by management: I go to get groceries or the dry cleaning; I drop my son at karate class, stop by to show an apartment to a prospective tenant or let a tradesman in, then come back to pick up my son and go have fun. I don’t make this a special day excursion. I want the minimum amount of disruptions, traveling, repairs and maintenance. I want to collect the rents and forget that I own the property. This way, I can manage many units on only a few hours a month. (This takes a lot less time than any part time job.) But it sure pays a lot more than any full time job I know. My approximate hourly is $10,000 an hour, when I calculate the growth over 10-20 years of holding a property divided by the approximate number of hours I spend annually on the property (Time spent managing properties averages to about 5-15 hours a year). At this rate, I want more of those hours, not less. 

If you think that a few hours a month, on the average, is a lot of work, how do you feel about a 40 hour work week in retirement because you don’t have a choice? Now that’s a lot of work.

Q: If it’s so obvious, why don’t more people do it? What is holding them back?
A: This question has puzzled me for years. I realized it’s all in the mindset. Nothing is more common in my business than hearing clients tell me: “I could’ve bought this one or that one last year and now look at it. Stupid me. I missed the opportunity, I know I should’ve invested back then. It is too late now. I missed the boat now. It can’t possibly keep going up”. (I have to admit, I am not exempt from those inner dialogues: I never regretted what I bought, only what I could’ve and should’ve… but didn’t.). Real estate opportunities are equal for everyone. It's how people view their future, and financial freedom that separate those who achieve it from those who don’t. Here are the main objections I hear most often.

Tenants are a hassle:
That’s typical conventional thinking, In my view, it’s the exact opposite. I view my tenants as my friends, my teammates, my best clients. Why? Because they are paying off the debt I have taken on to buy an asset that is appreciating in my name. What other investment do you know allow you to borrow to buy an appreciating asset and have someone else pay it off? I love my tenants, I respect my tenants, I am grateful to my tenants.         

Real Estate values can’t possibly keep growing:
That’s what people said in 1910 when they paid a few thousands for their homes. That’s what they said in 1950, in the 80s and in 2000. Today, they are saying it again. But the fact remains: real estate keeps appreciating.

If an 8 year old kid with $50,000 to invest came to you for investment advice, would you tell him to put his money in the bank? In stocks? Not me. If that kid invested in a revenue generating property and held it for 10-20 years, do you think he would have any of the financial problems that his peers would have years later? What if in the next 5 years he refinanced, and bought another one…and then another? Now, when I buy a property, that’s exactly how I look at it. My 8 year old is already my partner in a few properties. He will be paying for his own education… and then some.

Real estate is way too risky
It certainly is… if you are a short term investor. I would never recommend speculation. In 30 years, I have not once speculated on a property. However, if you are a long term investor, then read the previous question. Not investing is the biggest risk of all.

Gretzky once said: “I missed 100% of all the shots I never took”. You don’t play, you don’t win. If you are a long term investor and not a speculator, where is the risk? Do you know people who lost money holding real estate long term? As a matter of fact, true professional investors always buy but never sell.

The first investment I made was in 1981, at the peak of the boom. I paid $80,000. Six months later, the house was worth $50,000. But I had tenants paying the rent and carrying the property (my interest rate was 21% at the time). I held on; a few years later it appreciated; I refinanced it to take out the down payment for my next purchase and my real estate investing career took off. Lesson? It doesn’t matter when you buy, even if it is the worst time, as I did, it still worked out very well for me. Would I be happy to buy that property for $80,000 today?  You bet. I would buy ten of them! That one “big mistake” in timing of buying a property at the peak of the market, led to an incredible investment career.

I am afraid to refinance my principal residence. Shouldn’t I pay off the mortgage on my principal residence first?
That’s what conventional wisdom will have you do. If you are nearing retirement and restructuring your sources of income, that may not be the right thing for you. However, taking on a good debt (leveraging) to make a good investment is a “forced saving” and an excellent idea. For the sake of this illustration, let’s say your home is worth 500K and is mortgage free. Would you have 500K sitting in a bank account earning you nothing? Well, that is effectively what your 500K-worth of bricks is doing right now… earning you nothing. It’s safe, but it’s dead. It’s not growing, or moving you towards your financial goals. Before you know it, your tenants will pay down your mortgage on your investment property while covering all operating expenses. Now you have two properties that are appreciating: your principal residence as well as your investment property. Not to mention great tax advantages you will realize.

I’m 60 years old. Isn’t it a bit too late?
In fact a few years ago, I sold a property to a 60 year old client. A lawyer, she worked all her life, did a lot of travelling. Like many people, she realized at 60 that she had nothing to retire on. So she purchased an investment property. In a few short years, the equity in her investment grew substantially more than what she has been able to save through her entire working career.

My income is too low. I don’t have the savings or the initial capital.
I didn’t either when I bought my first property. I spoke to my bank manager. She told me it was very common, and that I needed to learn about “forced savings”. (This was the most important learning of my entire career.)To do this, she arranged a $10K loan and told me that she would debit my account monthly. I invested this money in a property. I didn’t even notice the money missing because, like most of us, I was wasting more than that each month. (Can you relate to that?) The property (and paying off the loan over the next few years) became my forced savings. I kept the property which continued to generate income over the years, appreciated in value and provided me with my first equity capital to refinance and to buy another property. Regardless of whether they earn a high or a low income, most people are not disciplined savers. As a matter of fact, I know many people who make a fairly low income, but invested and ended up much further ahead financially than those with a substantially higher income and no investments. The bottom line: there are several ways of raising initial investment capital. I am always happy to share on how to finance with those who are interested in knowing more

Q: What are your main criteria in selecting a property?:
A: I don’t look for cash flow initially. I just want the property’s income to cover its expenses allowing me to simply maintain and carry the property over the long term. Eventually, over the years, the objective will change: I will already build up substantial equity, mortgage is paid down and now I am ready to focus on cash flow.

I look for the following criteria:

1.  Quality, quality, quality. I like a quality property. It grows better, faster, stronger. It is more fun to own. It is infinitely less work to manage.

2.  It must be local: the properties I own are 10 minutes at the most from me. I am not interested in driving across town. (See drive-by management above)

3.  I look for apartments with some character. I make sure the apartments are appealing: good tenants like good apartments, and I like good tenants. Good tenants hardly move and rent collection is never an issue. Apartments are kept well and clean. When I am looking at managing a property long term, I want the minimum amount of disruptions, movement, repairs and maintenance, this way I can manage many units with no hassles or headaches on only a few hours a month.

4.  Financials: obviously, I am not interested in taking a loss monthly to carry the property. If I can get away with putting as little as 10%-20% and carry it, I am happy. If I can get the income to cover the borrowing cost of my down payment, I am even happier. I use lines of credits for down payments.

5.  I also like buildings that I can improve either the rent numbers or the apartments themselves (hardwood floors and good lighting go a very long way). I took over a 6plex 5 years ago and went from 50K a year in income to 92K now by a combination of both, improving the apartments and bringing the rents up to market. By doing that, I doubled the value of my investment in less than 5 years.

Q: Where do you see real estate going in the future?
A: I can only speak for the Toronto market, because that’s the market that I know. I can’t predict the future in the short term. But if we study the past, one thing is very predictable: properties appreciate. When people ask me that question, my answer is always the same: the next 10 years look fantastic. And the next twenty look even better. I always get some raised eyebrows. That’s not what they expected to hear, because they are looking for me to do some crystal ball gazing for the next 3-12 months.

Q: Why are you so bullish on real estate for Toronto? 
A: I anticipate this strong market to continue for years to come. Perhaps not at the same pace as the last years, but grow it will. Toronto is one of the strongest markets in North America and many international investors are coming here now because they consider it to be safe, stable and still below the level of other major international markets.

We have high immigration. The demand for housing is driven by real people with real housing needs (contrary to the situation in the US.) Our financial institutions are stable, so is our currency. We have a very diversified economy (financial, IT, tourism, manufacturing, etc.) Not to mention that it’s a beautiful, safe, clean, cultural, functional city and a lot of fun to live in. No wonder it attracts so much attention from local and international investors alike. (Have a look at this recent articleif you still have a doubt.)

Hopefully I have given you enough to reflect upon. Ask yourself some questions. “What is my dream? what is my goal? How do I want to live my life? How much is enough? How will I get there?” Become clear in your answers. Search the information you need. Find the mentors who’ve done it and ask a lot of questions.

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