How to Generate Income with Real Estate

This is a continuation of our REAL ESTATE series.

Where should I start to begin investing in real estate?

First, consider the various kinds of commercial real estate. You could buy a house or an apartment, and rent it out. Maybe it pays for itself in 15 years; if so, that was likely a great investment vehicle. This is a fairly common technique to build wealth.

Also consider looking at warehouses, or apartment buildings, based on your vision, or perhaps shops that can be rented out.

Regardless of which type of real estate you'd be looking at, it's always the same rule with investment: you must understand what you're getting into. Whether it's a storefront or a condo, there's the same questions as you would ask if you were buying a residential property for yourself:

1. What are the costs to keep that company going, or that property going? Even the AirBNB needs somebody managing it and cleaning it. It's important to have an idea of maintenance costs, like utilities, and also consider expenses such as reimbursing:

2. Your Professional Network - Real Estate Agent - Property Managers: This a big consideration with commercial properties. Are managers hard to find or plentiful in the area, at the time you are considering a purchase? - Cleaning Services - Attorneys for legalities - Accountants, especially as taxes get a lot more complicated with commercial properties

3. What is the depreciation?

4. Who is your tenant? What are the demographics, are they changing? Are they making more money? Are they making less money? And what is happening to that tenant in the economy at this time?

These are important factors to consider before getting into how much money you want to make.

Yes, but how do I establish how much money I can make on my real estate investment?

All investments involve risk. Real estate is not as liquid as stocks or bonds. It's not as safe as owning a US government security. First look at what you make on a 10 year government bond from a reputable country. You want to make more money than that because, otherwise, you can just take your money and buy a bond.

Then you can look at corporate bonds. They give you a baseline of passive income; you can just put your money in and walk away, doing nothing else to get that return. Real estate takes more resources: legal issues, tax issues, time. Start by comparing what your money can be doing in other places. Research a few different things. You'll find alternative investments (stocks) on average return 10% a year since 1930. Now, we've had a couple of bad years, but on average, you can earn 10% in the stock market. Right now you can earn 5% on a six month government bond. What would make you take the money out and put it into real estate? Start looking at how much you're going to make on your rental income, and anything else you could make out of that property. That rental income has to be more than you would be earning on something that is safe or liquid. That's your starting point.

Your starting point feeds right into your purchase price. If you want to make a certain amount of money from the property, start with the value you expect to earn from rent. When you know how much you can generally get from rent, and say you want to make 10%, then you know that you can't spend more than X amount of money, if you want to make that 10%.

If you want to make 10% on your investment:

1. Estimate how much money you can earn on the property per your research

2. Establish an occupancy rate (i.e. how much the property will be occupied during a year) - if you are renting out on Airbnb look up averages, if you are an annual renter, assume downtime for renters moving in and out

3. Multiply the monthly rent by 12, and then by the occupancy rate to get your total expected income. For instance, if you expect to make $1,000/month and expect to have an 80% occupancy rate then multiple $1,000*12*.8 = $9,600. 

4. Use that number to decide how much you can pay for the property and still make your targeted return on investment (ROI)  ROI=income/cost of asset

5. If you would like to make 10% a year before costs like tax, insurance, and maintenance, insert your figures into the formula: $9600/.10 = $96,000.00.   ROI=income/cost of asset  10%=$9,600/cost of asset  = $9,600/10% = $96,000     At 10%, your asset will be paid for in 10 years  (100% / 10% return per year =10 years)

6. If you want your annual costs covered as well, deduct them from the Cost of your asset:

   $96,000 - (tax + insurance + maintenance) = amount willing to pay 

7. If the amount you come up with is lower than the going market price, decide if you want to pay up and accept a lower rate of return. 

   
   

*Return on Investment is expressed as a percent to help you compare this investment with things like Treasury bonds and dividends on stocks.

ROI = Annual Income / Cost of Asset

Momentum Markets

Be wary of "momentum markets," where everything is moving really fast. And they're like, "Well, if you don't pay up, you're gonna you're gonna miss it." At some point in momentum markets, the music stops. If you don't know you've been swept into an momentum market until the end of it, you could wind up paying 100 grand for a property for which you wanted to pay 80 grand. All of a sudden, there's no one there to rent the property, and your return evaporates. So, again, as my friend said, "You always make your money on the purchase price". Be really clear on how much money you want to make, how much yield you want to make, how much money you think your tenants are going to pay. Be conservative in your estimates to allow for times of vacancy, and then start to establish your purchase price based on that figure.

Exit Strategy for Investment Properties

Exit strategy considerations for investment real estate are similar to those for personal residential properties:

1. Know your Buyer You have to know who would potentially buy your property. For example, if it's a warehouse, who would utilize the space?

2. Know the Area What other industries are operating in the area? Are there industries moving in or moving out? Also, on a granular level, what individuals are moving in or out? In intersection with the first point, consider who else operates in that area so that you know that there are ready buyers around, ready to invest in your property.

3. Know the Zoning Could the property convert to something else? i.e. If it's a commercial building that leases to retail offices, or retail, or offices.

How much of my investment portfolio should be real estate?

This is a subjective, personal decision, not a rule like the 50/30/20 budgeting guideline. Some people gravitate towards real estate, and some people gravitate towards stocks. I've always owned stocks because I worked in the stock market. I have three friends who only own real estate as their investments, and they do well in it. I've always tried to get them into the stock market camp. There's no hard, fast number. I think real estate should be in everyone's portfolio because it's wise to have the balance of a hard asset.

Owning a Second Property

You're always having to sell your house if you want to make money on the real estate markets. I always think you should own a second piece. I would always own real estate because this way you always have a place to call home. I always like owning a second piece because I figure if I've invested in a neighbourhood, I've made a call on that neighbourhood so it's good to own another piece in that neighbourhood. Other people might say, "Well that's too much risk in one place." It's about comfort level and confidence. There's no hard and fast rule. Ultimately, part of your portfolio in real estate, and part in stocks, is the best way to go.

Like any other investment, real estate deserves respect. Balance your practical and emotional sides. Think about what you can afford, and how much money you want to make on the investment. Balance those figures with the emotional aspects of your dreams, goals, and life situation.

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Rookie Mistakes to Avoid When Buying Real Estate

This is part of our series on everything to do with REAL ESTATE. Read the rest of the series HERE.

Buying a home is likely one of the biggest financial decisions you'll make in your lifetime. It can also be one of the most stressful. Between searching for the right property, securing financing, and navigating the complex legal process, it's easy to make costly mistakes that could haunt you for years to come. Here are top 5 rookie mistakes we've seen, and how to sidestep them to find that home that checks all your boxes - without breaking the bank.

1. Getting Overexcited Purchasing property IS exciting: real estate is so much more tangible and creative and passionate. If we find something we like, we walk in and go, "Oh, this place just feels right." going to see places with a lot of people and everyone's excited for us. So the motion builds even more, I would say it's balancing the emotion with the practicality.

   
   

2. Skipping Inspections If the inspector says something, don't be too quick to brush it off. When you go through your inspections, listen to the real estate agent, and really listen to the inspectors so that you're not buying a lemon. If you start opening up walls post purchase and find issues with electrical and plumbing, it can just ruin everything.

   
   

3. Not Negotiating We don't either negotiate the price to fix something or we ignore it, and we don't fix it. And then it becomes a problem.

   
   

4. Getting Caught in a Bidding War Sometimes we're so anxious in someone else's bidding. So we wind up overpaying, which again down the line, it means that each month our mortgage is higher than we than we thought

   
   

5. Not knowing your budget. It takes real determination, on many levels, to make an investment in the proportion of a piece of property. Start with some practicalities. Ask yourself how much you can afford, and start to really try to ground down to that number.

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How to Buy & Invest in Real Estate, Part II

This is the second part in our series on REAL ESTATE purchasing and investing. Read Part I here.

What is an exit strategy?

An exit strategy is an understanding of how to go about selling a property or getting out of an investment. Investments like a business, art, jewelry, or real estate are less liquid than assets like stocks or bonds. Meaning, a specialized marketplace is needed in order to sell them, and this marketplace can dictate the return of the investment. In a very active marketplace, like for stocks or bonds, assets can be sold in a short time frame, as quickly as same-day. Real estate, however, could take years.

An exit strategy requires an understanding of the market in which the property is embedded. For instance, it was a lot easier for me to sell a property in New York City than in Barbados. Another important factor is how liquidity transitions over time.

An exit strategy takes into account, could you rent out that property? Are there property managers around that could care for it? If you had to move away, could you make enough money out of renting it to cover your expenses?

Is a property purchase high risk?

Absolutely any investment involves risk. Real estate, though less risky than a lot of other assets, has the risk that it won't be salable. I always tell people that a well-lived life is going to take some risk, and you have to decide what's right for you.

One of the biggest things you should consider is: what stage of life are you staring down? This is not an age thing. For a hypothetical 20 year old, who wants to travel, a fixer upper isn't going to make sense. A condo in an apartment building that could be rented out simply- now, that's a great way of entering the real estate market. The 70 year old who wants to go travel, should they be buying a fixer upper? The answer is probably the same, probably not.

In addition to stage of life, other good questions to consider are: Do you like managing a property? Do you like designing a property? The more you enjoy owning a property, the more you want to use it, or the more you can make use of that property to earn you income all decrease the risk of ownership.

Do you consider real estate to be a fun kind of investment?

I would, someone else may not. A friend who is an interior designer has made a side hustle out of buying properties, fixing them up, renting them out and then selling them to somebody else. To me, this sounds like hell. It's so personal.

It is nice. You can you can touch it. You can visit it. You should buy it in a location, and (especially if it's an investment) that you'd like to visit because you are likely going to have to check in on that property. If you don't want to travel to that property to check in on it and ask questions, then it's going to wind up being a stress point. So, yes, it's fun, and it's sexy, but you have to check in on: where are you? Where are you in your life? Are you going to want to check in on this property? Are you going to be okay with the potentiality of it not being able to be sold right away like you can with a stock. So I like a blend. I like to invest in stocks, because I like to research companies and invest in what other people are doing. I also like real estate because I like the creative part of it. So again, it's understanding your own personality and the stage of life that you're in.

How do you negotiate?

Well, I had a very smart person once tell me, you make your money on your purchase price. His point was that if you overpay at the beginning, it establishes a habit: you're very likely to then have to overpay for your contract, overplay for all your design- so I'm very picky on the purchase price.

The Ackermann system of negotiation is well explained in a masterclass run by Chris Voss, an FBI hostage negotiator. He relates it to your everyday life (including negotiating with your teenager): the Ackermann system says you would offer 65% of what you want to pay. So if you wanted to pay $100,000, you would offer $65,000. That's quite extreme. I'm doubtful that in most marketplaces that you can get away with only offering 65% of what you want to pay, but I'm just giving you the spirit of his negotiation. And then talk about it, make them feel good about what they're selling you. But give them 65%, and let them come back and say something to you, because you're gonna get a lot of information back. His point is to say something, and then see what they say and take on what they say. And then you get information back. And then he will say, increase your offer to 85% of what you want to pay. Again, get information back from them, then increase it to 95% of what you want to pay. And then you should finally start to lock into a deal. If the markets are hot, that is not going to work because someone's going to be willing to negotiate to be at at a price of 110% of the asking price. So it's not always possible to use this system in real estate, but potentially if you're in a typical market that is not steaming. He's just saying, pull back your offer, get information, offer a bit more get information and then get closer to your to your price. It's hard to do that when you really want something, but like my friend said, if you overpay at the beginning, you're likely to overpay and overpay, and you're gonna get very outside your budget. Sometimes you just have to wait and and wait for markets to turn as they have recently with interest rates going up.

What global factors affect real estate prices?

One of the biggest things that affects real estate prices is interest rates. And we've seen recently, we've had a lot of inflation, which has pushed up interest rates, the interest the inflation has come from outside influences. Russia invades the Ukraine makes a mess out of the precious metals and the oil markets globally. And that has shifted down. And then of course, we were coming out of COVID. So we had supply chain issues that all pushed inflation, FED comes in and says we don't want inflation, so we're going to increase interest rates. And when you raise interest rates, all of a sudden, there're less buyers around and market prices start to fall. So that is like that is like the perfect scenario of how something happening on one side of the world will land on your doorstep.

Another thing to watch is commodity prices. Those have big influences in what we have to pay for our goods, and if you have to pay more for food, it means you have less money to pay for your mortgage.

Watching the real estate market overall is also important. How much has it moved? If prices are up 50%, 25%, you're probably going to run out of steam soon because people's salaries have not kept up. That's another useful thing to look at: salary. How much can your neighbour afford before they're going to be completely tapped out of being able to afford their mortgage? Salaries are more of a community thing, but certainly a very, very big influence on what we are able to pay. What is the stock market doing? If the stock market has cracked, people have less gains on their investments, their pensions have gone down. So they're, again, they're going to have less money to pay for houses. So I would say those are the three biggest things I would watch if I wanted to kind of get an indication of what real estate prices in my area may do.

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