5 Rules for Buying Real Estate
The foundation for successful REI projects
Like any investment, success in Real Estate Investing is earned by those who have a solid plan and stick with it. Things get dicey when we deviate from the plan with emotional decision making. Whether you’re a multi-family mogul, rocking student rentals, or getting started with your first single-family income property, these 5 rules will ensure your purchasing process is informed by solid fundamentals.
1. Don’t shop for your home
When shopping for an investment property, the trap that many new investors fall into is trying to find a place they’d live in.
The decisions that lead to purchasing your home are not the same as those that go into selecting a sound investment. The home-buying process is about lifestyle whereas the investment buying process is about financial fundamentals.
There are some criteria that might overlap, most notably location (managing from a distance is advanced-level REI), but the decision-making process diverges in that an investment should be about the head and not the heart.
2. Be a specialist
Don’t spread yourself too thin by investing in 10 different towns. Focus on one town and pick your niche within that town. If you want to invest in student rentals in Waterloo — that’s great. If you want to focus on SFR in Toronto, go for it. Just don’t try to do both at the same time. At least not right away. Diversification is a good thing but wait until you have a good portfolio in what you know best.
3. Pick your tenants carefully
At a smaller scale, tenants will have as much or more to do with your experience as the property itself. After all, you count on your tenants to pay rent in order for the whole project to work. Different kinds of tenants can impact how hands-on you have to be, and also how much cashflow you generate. Generally speaking, the higher up on they are on the PITA index, the more rent you can generate from a class of tenant.
4. Don’t chase cashflow. Just don’t do it.
Your properties should be cashflow positive on day one with some rare exceptions BUT that is not the be-all, end-all. Cashflow is important because it is predictable. If a property cashflows today, it will cashflow tomorrow and the next day, barring some extreme unexpected expense (which you should budget for anyway). The market is less predictable which is why we shouldn’t rely on it solely, especially for projects with shorter holding periods.
With that said, we have had projects that only made money on cashflow. A lot of cashflow, but they haven’t appreciated. One example is the best performing asset in a client’s portfolio. This is a cashflow-only situation for the first 5 years. It will appreciate eventually but we didn’t count on that for our calculations. We ran the numbers at 1% annual appreciation and still decided to buy because of the enormous cashflow the property generates. So it goes to show that the value of a property really depends on the ends of the individual investor.
5. Pick your Location carefully
Real Estate is not a get rich quick scheme. It’s a get rich slow scheme. Picking a location is as important as picking a tenant. Pick an area poised for growth. Look for things like GDP growth, population growth, industry, jobs, schools, etc. Look for things that lead to greater economic outcomes: Transportation, infrastructure, manufacturing, universities, housing starts. Generally, it is a safer bet to make your money on property appreciation more so than rent income.
Andrew Baker is a Registered Realtor and Real Estate Investment Coach with a proven track record of leveraging the Four Unfair Advantages of Real Estate for his clients. Connect with his team on Facebook and fluxrealty.ca for more investing protips and 1-on-1 consulting.
