When you buy a condominium you’re really getting two things when the title gets transferred to you – a piece of real estate and a piece of a business.

The guts of what makes a condo different than a free-hold property is the condominium corporation. Because there’s your property is broken in two – your property and the common property – someone has to take care of the common property. Usually you own from the drywall in, while the condo corporation, via the board, takes care of the siding, the roofs, the walks, lawns, parking and other buildings.

The condo corporation is a corporation and business like any other. It takes in revenue, spends money, maintains savings and has to keep track of what money is going where and what’s likely going to need to be fixed.

What is absolutely vital to buying, owning and selling a condo is the package of documents that we casually call ‘condo docs’.

You must receive, read, maintain and pass on a complete package of documents. Usually we just buy them when we’re ready to sell and send them over to the buyer, who seldom actually look at them. They’re then shocked when they receive the same letter I did – a special assessment for $28,000. There’s another condo deal I’ve been involved with as a Realtor where they’re a potential $100,000+ special assessment that’s already been clearly discussed in the minutes. The current owners were shocked to find this out and you can imagine something like that would throw the deal a little sideways, besides reducing the value of their unit.

Make sure you have a complete set of documents. Read the minutes when you get them. Attend the AGM’s and actually look at the statements and reserve fund studies. You bought part of the business and you’ve got to be a part of it.

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The most fundamental attributes of Real Estate, beyond the fact that it’s, well, real, is that is can be borrowed against. The action of borrowing money, much like a lever for moving physical things, has the effect of amplifying things. A small push on the right lever can move a large object.

This amplification has several effects on real estate and other financial instruments. Leverage amplifies returns (profits), as well as risks and loss. Much like a sensitive electric guitar plugged into a big amp, small changes have a much larger impact.

So here’s the basics of leverage for real estate investing.

First, leverage can be calculated by dividing the purchase price (i.e. asset value) by the cash required to purchase it. For most purchases, for most people, this is 1.

So when you buy a $100,000 house for all cash, your leverage ratio is 1.00.

However, with Real Estate it’s normal to borrow part of the purchase price with a Mortgage. This amplifies the numbers, leading to a leverage ratio of 10.

What this does is amplify the return (or loss) on investment. Return on Investment (R.O.I.) is calculated with the following formula:

So assuming we buy a $100,000 home and it appreciates (or otherwise generates a return of $10,000), we get a return of 10%

If, however, we’ve only put down $10,000, as above, we get the 10x leverage as above, creating a return on investment of 100%.

The principle of leverage is one thing that separates real estate from other investments, and has made home ownership possible for millions of people over the past several hundred years.

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Surprising no one, the Bank of Canada chose not to raise interest rates yesterday, maintaining the benchmark overnight rate at 1%, which makes the banks’ prime rate 3%.

From the BoC press release:

The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the Bank projected in its October Monetary Policy Report. In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust. However, net exports were weaker than projected and continued to exert a significant drag on growth. This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.

Aptly summarized by Canada Mortgage Trends:

• Global economic “risks have increased”
• “…pressures affecting prices remain largely unchanged”
• Today’s decision “leaves considerable monetary stimulus in place”
• “In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust.”
• “…net exports were weaker than projected and continued to exert a significant drag on growth”

This is good news for investors and people considering a new home purchase. The fundamentals underlying the recovery in Canada are very strong, and global forces causing the recovery to stretch out a bit will help keep interest rates down longer, with less pressure on inflation.

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Inspired by this weeks’s entertainment, I got thinking about the commonalities of real estate, economics and investment blogs, whatever their slant.

I think there’s a lot we can agree on.

Your house is not a damn ATM

If you put a HELOC (home equity line of credit) on your home, be damn careful what you use it for. Spending it on consumer goods, excessive renovations and entertainment are right out (forget about the 52″ plasma). Reasonable renovations and smart, careful investments can count, but you need to be cautious and a HELOC should never be your sole source of investment funds (see the next point).

Canadians need to save more

Our national savings rate went from better than 10% of after tax income in the early 90′s to only a few percent. We’re not as bad as our friends down south, but this is going to be a potential long term problem for many Canadians as we get older.

Live within your means

This shouldn’t surprise anyone, but it’s not quotes often enough. David Chilton, author of the Wealthy Barber, probably the best book on financial planning for retirement ever written, lives in a house of less than 1,000 sq ft (see the great interview on CBC’s The Hour here). I drive a used VW, live in an older townhouse and don’t really carry any consumer debt. I don’t really see that changing too much, except sizing up as my family grows.

Give money away

No one ever went broke by donating money to charity and it’s an important habit to get into particularly when you don’t have any money. 10% is a great goal, and you should also donate your time. If you want to make sure you’re hitting your 10% goal, try adding up your volunteer time at minimum wage or $10/hr and see what that does. Giving your time and talents to those who need your help when you barely have anything to give teaches us about what’s possible (and trust in God, but that’s another post).

Diversification can be a good safety net

There’s no doubt that your asset mix should reflect your goals and the time in your life. When you’re young (like me) and have few obligations, but high earning potential, you can handle more risk. When you’re getting to be 50-60 you should be looking for some more stable, fixed income assets with a lower risk profile. You should use the advice of a good financial planner. One big caveat on diversification though – as Warren Buffett says, “Wide diversification is only required when investors do not understand what they are doing.” Invest in what you know, and if you’re really serious about investing and building a business, keep to what you know. This leads us to:

Diversification is for the weak

Warren Buffett doesn’t buy tech companies because he doesn’t understand them. I avoid complex market plays (shorts, etc) because I’m not as familiar with them. I buy stocks I know and trust like Coca Cola, Cogent (makes some great fingerprinting hardware) but the majority of my active investing goes into real estate. I gained a lot of knowledge by osmosis, working on a team managing other people’s properties and because I made a point of learning as much as I could. The 3 years since I bought my first property have also been full of some great lessons.
If you really understand tech stocks, or mining, or real estate, put your money there. The nice thing about real estate is everyone has at least a little familiarity with it and we’re all capable of learning. What each person needs to decide (with some help) is what mix of diversification vs. single minded focus is right for them.

Look Behind the Curtain

There’s a lot of sources for information and opinion. You should do a lot of research on your own, and also pay for other people’s analysis. I trust REIN’s analysis more because they don’t sell real estate. Same deal with the IMF; they couldn’t care less if you or I buy another piece of real estate. I also listen to sources like RBC for their housing affordability index. Sure, they sell mortgages, and more activity in the housing sector is good for them. I think Garth Turner buries his good points in a lot of rhetoric intended to sell more books. Does it make their opinion worthless? No, you just take it with a grain of salt.

There’s a lot we can agree on, and a lot more that bloggers, professionals and friends can be doing to help people out.

Photo credit: Stuseeger

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So this is actually really simple.

1. Buy a $200,000 house today.
2. Rent it out, making sure you’ve picked a house where the rent covers the expenses with a bit leftover.
3. Wait 20-30 years. That’ll make me 50-60.
4. You’ll have (at least) a $200,000 asset free and clear that you can sell, remortgage or light on fire.
5. Repeat Step 1 as able while you’re young.

Make sense? What do you have that’s better? What’s holding you back?

Photo Credit: stevendepolo

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15 years learning by watching

4 years building relationships

2 years buying my own stuff

Which leads to the experience of getting an email, making two phone calls and calling the seller back within 30 minutes of their email to say, “we’ll take it!”

I don’t advocate buying property sight unseen, and after I gave the seller a verbal we still had a chance to do a full walkthrough, but I’ll explain why I felt fine with this one.

1. A wholesaler I trust. The email came through from a wholesaler who I trust and my parents have bought from before. I trust their numbers and the types of properties they offer. They emailed me a 4-bedroom townhouse they had an contract on and were looking to assign. With properties like this there’s almost no way you’ll be able to get a 1st mortgage, so you’re left with bridge financing or closing in cash, and you’ve gotta do it fast.
2. A condo complex, neighborhood and renovation plan I know. They happened to find a property in a development I already own one unit in and am very familiar with. I like the board, the construction and know quite a bit about the recent sales. I know exactly how much renovation will bring how much value. It made the purchase a 90% automatic yes.
3. A joint venture partner ready to close. Being able to pick up the phone and have an experienced JV partner who could come up with $200,000 cash lined up is huge. This isn’t a particularly rich deal for me, but being able to help put it together was a significant personal achievement.
4. Skilled eyes for the one and only walk-through you’re likely to get. Bringing in my Dad, who is a great Realtor, Property Manager and who happens to be a Certified Engineering Technologist and a Journeyman Carpenter is like having a walking home inspection service. Then to bring my Mom in, who has done a lot of renos and is an Accountant is icing on the cake. We could have a second look if we really wanted, but when it comes to great deals, I want to be the easiest person on the block to deal with, so I’m looking to say yes/no as soon as possible and be true to my word. When it comes to wholesale or pre-foreclosure deals, the homeowners are frequently a little skittish so you want to be very careful about how you treat them.
5. Multiple exit strategies. This one is planned to be a flip, and we know the neighborhood well enough to make sure our renos fit the types of sales we’re looking for. I also already have a potential purchaser lined up. I also did the numbers and know that it’ll cash-flow like crazy if we end up having to hold it for unforeseen circumstances.
6. An all-star renovation team and contractors. Knowing which contractors I can have, including some ballpark estimates from a few contractors thanks to my wholesalers means the budget is pretty solid. Concerns are few, risks are low, awesome is high. There’s sure to be things that pop-up unexpectedly, but it’s great to know we have a wicked team to handle it.

Now I’m just looking forward to the process of getting the renos done!

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Whenever I talk with new real estate investors I ask them about what type of property they’re going to focus on. Most of them haven’t thought about it at all. A few want to go crazy with basement suites or rooming houses (dreaming of the extra cashflow). And if someone actually has a couple properties in mind, they’re often as not enamoured with beautiful looking vacation property or shiny new condos.

The reality is that some of the best real estate investments out there are just ugly. There’s no way you’d want your children to live in it. If it’s ugly when you buy it, even better, because you’ll get a break on price. Add paint and new flooring and you’ve just made a huge improvement (relatively) to the quality of that building.

The reality of cash flow and exit strategy is most buy and hold (or rent to own) folks are best targeting housing for the lower-middle class (or the upper-lower class). There’s always someone to rent it and always someone to buy it. The purchase costs are lower compared to the rent and the margins on what rental increases your renovations will buy you are higher than if you’re buying some 3000 sq ft single family home. The appreciation isn’t always greater, but your ROI and risk will both be better in smaller, simpler properties.

Yes, in a brand new unit you might have fewer renos.No, it’s not worth the new unit markup.

Stop being afraid of renos.

Stop being sucked in by good marketing.

Stop wasting your money on someone else’s new paint.

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When you start buying properties with the assistance of Joint Venture partners, you end up putting a lot of trust in the hands of someone you might not know very well. Particularly if they’re the money partner, they can get cold feet at the last minute and leave you standing at the altar with no way to close on the deal.

Neil sent me an interesting email on this exact topic.

Hi Chris,

Hope all is well and you had a nice long weekend.

I have an interesting situation/dilemma with a few potential JV partners that I wanted to share and ask you about:

Before spending time and putting effort into looking for a new property for you and your JV partner, how do you make sure they will not walk away last minute (either before closing or before releasing the conditions) and you just wasted a lot of energy and time finding a good property?

I am considering having them sign some document, perhaps an intention to purchase with me or something similar to what RE agents use(?) not sure though especially since some of them are kind of friends. Do you have your partners sign something before you start working on a new purchase? does it help?

Thanks,
Neil

So here’s what I wrote back:

Hi Neil,

I do have several levels of paper-based commitment, all out of the REIN JV Secrets package (there’s also a new e-book that’s like JV Secrets-Lite and is only $37), talking to other investors and my own experience. Not every partner has to jump through every step, but everyone gets at least a written JV agreement and usually a letter of intent (which is what you’re looking for). It seems like a lot of steps, and it will reduce the number of people who make it through to the other side but you’ll reduce your risk substantially and end up with better JV partners. This is what works for me, and if nothing else, the first three steps will take care of 90% of the problem people you’re likely to find.

The full funnel for Joint Venture partners that I use on people who are less-well known to me has 9 or 10 steps and goes like this.

1. Interest Questionnaire – who you are, where you work, what you have, etc. Weeding out the tire-kickers.
2. Letter of Intent – Ballpark numbers and general agreement. E.g. JV Partner A brings $100k and JV Partner B does all the management. Acquire a 4 bedroom townhouse on a long term buy and hold, split 50/50.
3. Cash Deposit – $1,000-5,000, best if it accompanies the Letter of Intent.
4. Draft Joint Venture Agreement – in tandem with the search for a property, your lawyer will be able to take the letter of intent and draw up a JV agreement. Here’s where your JV has to take the draft and get their independent legal council.
5. Property Acquisition Begins. Find it, write an offer and once your offer is accepted move to #6. Now’s also a good time to make sure you have the rest of the cash (before you remove conditions).
6. Full Joint Venture Agreement Prepared – You’ve got almost all the particulars of the property, so you can finalize the JV agreement document.
7. Property Closes - Real money moves, title gets transferred and the real work begins.
8. JV Agreement Signed – Make sure everything is locked and loaded.
9. Caveat Registered – If you’re registering the JV agreement via caveat, you’ll want to do this. As a rule, I like to wait at least 6 months so as not to spook the bank if they happen to pull title. If it’s not an issue for the JV partner I don’t bother registering a caveat.
10. And don’t forget to plan for the exit. You’ll dispose of the property and have to send out a statement and a pair of cheques. Make sure to refer back to the original JV agreement to make sure you’re doing what you said you’d do. I know of a couple people who changed policies half way through and nailed their JV with fees they’d never agreed too.

It looks like a lot of steps, but it’s worthwhile. Yes, you’ll lose some people, but they’re people who will cost you more in the long run. Someone who promises $60,000 and then backs out after you’ve removed conditions can potentially cost you more than $300,000. Finding the right person with $60,000 can make you both another $60,000.

N.B. This isn’t intended to be legal or professional advice. It’s just what I do.

Photo by hans.gerwitz

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A shiny new book showed up today, in a boring brown package. Wiley sent me a free copy (being a Facebook addict has it’s advantages), just for commenting on the wall of their Facebook group. That’s a pretty smart way to do things, and I’m going to pay it forward, but I’ll get to that in a minute.

First, it’s called 81 Financial and Tax Tips for the Canadian Real Estate Investor: Expert Money-Saving Advice on Accounting and Tax Planning, and it’s written by Don Campbell, George Dube (CGA) and Navaz Murji (MAcc, CA). I’ve heard them all speak at REIN meetings, and I’ve talked with Navaz about handling my taxes, although I’ll probably wait until next year. I’m looking forward to reading this one, especially given that it’s tax time.

It’s laid out in the same way as 97 Tips and 51 Success Stories. There’s a tip, some explanation and then a series of boxes with red flags, insights and tips.

I thing they’re great books, and I’m looking forward to this one. To pay it forward, I’m going to give away a copy of one of Don and Russell’s (et al)  books. Just drop a name and email in the form and I’ll send you a free copy.

Real Estate Investing in Canada: Creating Wealth with the ACRE System

Real Estate Joint Ventures for Canadian Investors: A Proven and Powerful Step-by-Step System
51 Success Stories from Canadian Real Estate Investors
81 Financial and Tax Tips for the Canadian Real Estate Investor: Expert Money-Saving Advice on Accounting and Tax Planning
97 Tips for Canadian Real Estate Investors

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One thing I’ve been able to do quite a bit of lately is catch up on some great blogs, but there’s also some real stinkers out there. Some of the negative/bad/bubble blogs are important for me to read because they bring up the questions I have to answer from potential investors, but there’s often an ongoing war in the comments of blogs like Sara and Sheldon’s Edmonton Real Estate Blog. (I don’t know why the weekly statistics posts attract such attention. The shortest time frame I ever look at is monthly.)

There’s always a million people with a reason why you shouldn’t do something that could have a positive impact in your life. It’s the same story for many of the things which make successful people successful. Education, giving to charity, attending church, taking action and investing in real estate.

There’s an unlimited number of statistics you can pull to try and explain why an investment might implode, or a market might be less than optimal. What you don’t see (amongst the thousands of blog posts, comments and water-cooler conversations) is just what the successful people do. They take all the options into account, then decide on a course of action and jump in. They ignore the ranting fools and do what they need to.

I bought a condo nearly at the peak of the Edmonton market, and it’s likely lost value. I’m fine with that. My business plan takes that risk into account. It positive cash-flows, so I don’t worry about the value and just cash the cheques that come in month after month. I can hold it indefinitely, and one day the tenants will have paid off the mortgage and I’ll have that property free and clear.

I choose to associate with some very successful people. I watch what they’re doing, and they’re buying. Every single time you go to a REIN meeting there’s someone who’s bought property, and often someone who bought more than a dozen doors in the past couple months.
Action is the key to success. Reading fear-riddled blogs is not.

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