The brother of a friend of mine heard that I invest in Edmonton real estate and started asking questions of my friend. He apparently looked around my blog, and asked “isn’t there a post on there that explains just what you do?”
I figured my About page explained that, but then I realized that it only makes sense those who know what phrase like positive cash flow mean.
I’m going to try to explain what I’m doing in simple terms.
First, we’ll take a page from Stephen Covey and start with the end in mind. Take a look at My Personal Belize. This was an exercise to visualize what I want my life to be like. I’m not in real estate to make millions of dollars; I’m doing this to create a life for my family which enables us to life the fullest lives possible, without having to try to make money at it. Consider Kevin Matwichuk who took his wife and four kids to the Caribbean where they lived on a sailboat for 7 months. That’s amazing and inspirational.
Second, why real estate? That’s fairly simple. All my life I’ve worked with my family managing other people’s properties through our work at Davies Management and Realty. My grandpa’s done very well with it, as have my parents. They helped me realize the power of leverage (you can buy a lot more real estate than you can stocks because you can borrow to buy it). We’ve also learned about cash flow, renovations and the need to fix things when they need to be fixed. A normal dinner table conversation with my family has around 150 years of real estate experience at it. (And it occasionally drives Megan nuts) I’m also a member of the Real Estate Investment Network, and I use their proven systems together with my experience buy the best properties in the best places.
So just exactly am I doing? I’m buying real estate. I buy it, rent it out and hold it for 5-8 years. After the 5-8 years I refinance or sell. (Refinancing is preferable)
Typically I like townhouses, but I’m open to condos, houses and multi-family buildings. The key is that each one must support itself: the rent must cover the mortgage, taxes, utilities, insurance, a maintenance and vacancy allowance and maintain a sizable reserve fund. If all that still leaves cash left over at the end of the month (most months) then I’ll buy it. I prefer to put 10-20% down, which keeps the amount of cash required manageable, cashflow decent, CMHC fees down and risk low.
How much money do I make? I bought a townhouse in October 2008 for $250k. Right now it’s routinely clearing $500-600 per month which is split between me and an investment partner who gets 50% of the cash flow and profits.
For a property like that, if I invested $50,000 at the start and property values increased by 5% a year, I’d get ~$120,000 in 5 years. That’s the simple & conservative number.
The only thing is it takes time, effort and some careful management. I’ve got a great team of realtors, property managers, accountants, bankers, mortgage brokers and lawyers. (And Edmonton’s stil the best place in Canada to invest.)
Let’s say that I meet my short-term goal of buying 15 properties. That’s $3,000-$4,500 a month in free cash flow that I don’t have to work for. That’s a full-time job worth of income, and a full time compliment of time that I can then give to my wife, my kids and my community.
Well said Chris, I run into the same problem where people just don’t understand what we do. To often we end up speaking in real estate language and people tune out. Positive Cash flow, ROI, leverage, amortization paydown and the list goes on.
You put it in great terms here, but one other aspect you should mention is freedom.
Freedom from working for someone else and controlling your life and schedule that is. You get to take full responsibility for your success or your failure and this is part of the freedom. The harder you go, the more successful you can become and the more free time you can generate!
Thanks for the comment Bill. It’s true, and so important to understand and empathize with other people so we don’t disappear into jargon right off the bat.
I like your Personal Belize as it is very similar to my goals.
Just to add to what Bill was saying: Not that it is frustrating for me, but whenever I say, “Real Estate” people go straight into piling me with excuses to back out.
“Oh it is only good if you work in construction, otherwise you are going to lose it all.”
“House prices are too high, there are no more chances to buy.”
All of these referring to the classical buy-and-flip strategy. I hope that buying and holding becomes more popular in the coming years. I feel many people will benefit with the knowledge.
It’s tough to re-frame how we express what we do, but so useful to make sure we’re lining up with the language our ‘target market’ is using.
You mention in your post that you borrow with between 10-20% down. How do you manage to get the banks to take 10% down on an investment property? Do you have to work with mortgage brokers to find alternative financing? thanks Kelly
Hi Kelly, I do use a mortgage broker. As you probably know, any mortgage that’s lower than 20% down needs to be insured. There are three players in that sandbox, CHMC, Genworth and AIG. The latter is a small player right now. CMHC is the biggest, and has a good program, but does charge significant premiums (3-8%). Genworth is another major player, and recently relaxed it’s restrictions. A good mortgage broker who knows investment real estate (like Peter Kinch’s office) will do better than your usual banker because 98% of bankers and brokers just don’t know the programs.