My landlord owns about five properties around me that she rents out, and makes a tidy income from that every month. I’d like to do something similar – perhaps buying an inexpensive rental property to start.

I’d also considered buying a cheaper duplex living in one side, renting the other, and when that was paid off buying my own home. Then renting both sides of the duplex for income.

Thank you for your informative article and it is interesting to read comments as well.

Did I predict the bottom? No, it wasn’t the bottom – the value of my property dropped all the way to the 90s before the market turned, but it was a whole lot better than if I’d bought it in late 80s. The real estate market in NY bottomed around mid-90s. By 1997 the prices are started to turn and were off their lows. At that time I “upgraded” from a one bedroom to a townhouse. But because I felt that the market was on the uptrend, instead of selling my old condo with a loss, I choose to rent it out. I sold it 5 years later for 215K. The difference between what I got and what I owed was enough to pay off the mortgage on my new place. Again, it wasn’t the top – my tenants moved out, and the real estate prices stopped making sense to me as I thought 215K for a one bedroom was ridiculous. In hindsight I should’ve waited a few more years. A friend of mine did a similar thing with her co-op, but her timing was better than mine: she sold at the top just as the bubble started to burst.

It is indeed difficult to predict exact top or bottom, but your timing doesn’t need to be perfect to avoid buying at the top of the bubble. It is not difficult to say that the market is overvalued. It’s also not difficult to see a trend, much easier with real estate than stocks since real estate market moves pretty slowly. For example, right now you could probably say with some degree of certainty that in some places in the US like NY the real estate is still overvalued. I don’t know about other areas.

One measure of overvalued market is the relationship between the cost of renting vs the cost of buying. Ideally the cost for equivalent (!) property when adjusted for taxes and with 20% down (in some cases even less) should be similar. If they are completely out of whack i.e. it is much cheaper to rent than to buy (equivalent!) property, then it makes sense to wait. It might take time, but eventually the prices would come down.

Granted, with rental property it is easier to decide if you want to wait or not: if you can money on rental now, there is no real reason to wait. However when one is buying one’s own property it makes sense to look at the market conditions and trend.

Joe

Your friend leveraged higher pay with the higher risk of periods of unemployment (consulting). He also leveraged other people’s money both to cover his down payment and to cover the place that he was purchasing. And then he was leveraging his own money to cover rent shortfalls. I’d say that borrowing money was really just part of his problem.

@Julie, I do take issue with this comment:
And, if you buy real estate in well researched/well thought out locations you will do better than inflation over time.

B/c it’s pretty meaningless.

I mean, if I can do this research, why can’t 100 other people? Why can’t 1,000 people? If I can find well researched / well thought out location and get it for a good price, I’m really just taking advantage of what I perceive to be temporary inefficiencies in the housing market.

You repeat something very similar on your web site.
But, we do firmly believe that a good property purchased in an area with strong fundamentals that meets your real estate investing objectives is pretty darn close to a guaranteed way to make you very wealthy.

I mean, if I can successfully find houses that generate positive cash flow, how is that significantly different from being able to select companies in which to invest? But really, me, you and everybody are almost guaranteed to be very wealthy if we can magically select the appropriate properties to purchase?

Doesn’t that sound a little ridiculous?

Now don’t get me wrong, I’m happy about this article, but it’s really important for people like Aman’s friend (and others) that they understand that real estate is really about leverage.

From your article about real estate investing success:
..#2: Leverage: …If your stocks go up in value by 5%, you’ve made $800. But if your property goes up by 5% you’ve made $8,000! This is on the same $16,000 investment…
#3: There are three ways to make money from real estate: appreciation…, rental income, and other people’s money
#4: Control:…
#5: Creative ways to make money:…
#6: Access to the Equity without selling the asset…
#7: …real estate has a lot of tax advantages…

I mean, the inverse of #2 is also true. If I have 16k in equities, I can only lose 16k in equities. If your 160k house drops 20k in value, you’re on the hook for that money.

#3: – Appreciation, as mentioned earlier, is generally equal to inflation, so I’m not really making money, just protecting it. And it’s really self-correcting, if appreciation is significantly greater than inflation for everybody, then nobody can afford the new housing.
– Rental income = leveraging other people’s money
– People paying down your mortgage = leveraging other people’s money and your ability to pay down that mortgage when renters are unavailable.
#4: You can leverage your own time to improve the property
#5: You can leverage your own time to improve the rental setup
#6: You can leverage other people’s money via a HELOC
#7: You can leverage the tax system (but you can also do this via RRSPs and TFSA)

Really, the points everywhere in this post (and others) are the Real Estate owner’s equivalent to “value investing”. The only difference, is that you get to win (or lose) way more due to the wonders of all of these leverage points.

I just want to say that borrowing money is a bad idea for a real estate noob.

Unless you have a viable business plan, borrowing money from a friend/family can add to stress if you have to pay that money back over a stipulated period of time while maintaining your mortgage payment and other associated bills.

Personally, I went into my first condo alone with a strong down payment and took the onus upon myself and have paid off a full condo mortgage in 3 years and now own a few other properties in Canada and the US.

Another good friend of mine tried to mirror my play and bought his own condo around the same time 3 years back in the same building. He also had a 25% down payment which was 10% his money, 5% line of credit and 10% from his parents.

Down the road he lost his job (or contract to be precise as he was a contract worker in the IT sector), was unable to keep up with the payments and had to short sell the condo due to increasing debt.

Its not easy when you have other people’s money in play on a big investment. Some might think its a help and source, but personally its more headache from what I experienced through my friends turmoil.

Now 3 years later he is still back home living with this parents while this time saving for down payment himself.

@GatesVp – We absolutely hit on a great time to invest in real estate! And, if you buy real estate in well researched/well thought out locations you will do better than inflation over time. BUT – that is only one of 3 ways you make money from real estate. Renters paying off your mortgage and left over rent money after expenses are paid really make the money.

We would not be millionaires right now had appreciation been slower BUT we’d still be on target to be millionaires by the age of 35… which was my original goal when we started just under 8 years ago.

Thanks to Frugal Trader for sharing my article with the readers of the blog!! Happy Holidays to all.

Over the years, real estate has gone up in value nearly everywhere.

You’re 30, so you started RE investing in say 1996. The Bank of Canada stats seem to indicate that you caught a pretty awesome decade for investing in real estate. A quick look around the net will confirm that awesome decade.

Barring the last 15 years or so, real estate has averaged inflation. Given the mass of 20-something renters and a generation of baby boomers that will want to retire and downsize, the Canadian RE investor should definitely be prepared to see slumping prices as well.

Otherwise, I really like the article, thanks for the info. It’s good to hear a little less marketing noise.

1 – they are NOT an insured lender; if the mortgages go into default your money is NOT protected (i.e. they/you LOOSE your money).

2 – the mortgages they do invest in have 11 months remaining, on average. This means there isn’t too much money left owing on the mortgage so if the mortgage does default it’s not entirely catastrophic. I would also think with that short of time frame there would be less chance of default (would you stop paying your mortgage with only 11 months left?).

3 – on average, they invest $560,000 per mortgage, 80% of which are 1st-time residential mortgages. This leads me to believe they are “investing” in rich people who, with 11 months left to pay off their mortgages, will have the means (financially and mentally) to do so.

4 – but it is ALL about not LOOSING your money more than it is about making money. An average defaulted mortgage represents 0.26% of their capital; if even 10% of their investments went bad, they should be able to suck up a 2.6% loss in capital without any noticeable effect to your return (I would hope). BTW, the mortgage default rate in Canada is 0.27% (it’s 22% in the US) — it becomes even less when you factor in a weighted percentage (all their investments are BC/AB, smaller % of population here, statistically means lower default rate = 0.06% chance of default = 22 of their mortgages in the pool).

It sounds like they have done, and continue to do, their math on what they are doing. I would say put a little bit of money in and wait a year. If you do get that favourable return and you are comfortable with their service, then put in more. A lot can happen in one year, especially these days.

Like any thing, beware the lure of high yields!

What about ownership by investing in a Mortgage Investment Corporation? I just found out about this alternative investment which seem to have a recent history of strong returns from the blog Canadian Financial DIY:

http://canadianfinancialdiy.blogspot.com/2008/05/ins-and-outs-of-mortgage-investment.html

I’m curious what other invstor’s think of this investment? Would anyone use it instead of a REIT in their asset allocation?

My first house, in which I still live: an 87 year-old in Victoria.

Lessons learned?

You get what you pay for!

Don’t buy a ‘fixer-uper’ if there are major repairs/reno’s to do.

If you can see dodgy workmanship on the surface, there is probably a ton that you can’t see (and is way more expensive to fix!).

Fixing up an old house does not make it a new house. If you want a new house, apply the reno money to the cost of a new house.

Don’t be cheap with your house, you have to live with it every single day (refer to the post on “Quality”).

Avoid dealing with “The City” at all costs, but if you must, push them every step of the way towards what YOU want/need. Do not accept what they tell you just because they don’t want to do any extra work (or any work at all).

It’s YOUR very hard earned money. Get EXACTLY what you ask for. If the tradesperson gives you any bull about why or how they can’t — kick them off your property. Don’t pay for excuses. Remember, they work for you!

Again, you get what you pay for!

I’m still ahead in terms of ‘paper profits’ (bought as a foreclosure, approx. 20% below then-current market prices for similar houses) but the amount of work and aggravation and stress and stress and stress…well, you get the idea — I’m not so sure it was worth it. I am much more wise though.

It’s not an easy business by any means. But it does have a solid long term prospects..

Best wishes for the holidays