Claude Boiron, broker and educator, explains why you should not be afraid of taking the leap into commercial real estate investing.
Commercial real estate investing. This combination of words seems to always evoke a heady mixture of thoughts and emotions in my clients: attainable wealth, uncertainty, tentative excitement, fear, and an affluent retirement lifestyle. I would postulate that both the positive and negative thoughts evoked are usually the result of an incorrect assumption and a lack of knowledge with regards to investing in commercial properties.
A lack of knowledge is the biggest difference clients can face when considering the merits of commercial real estate investing and other types of investing, including residential. It takes real knowledge of retail, industrial, multi-family, the commercial real estate market, property management, financing, and more, to avoid making costly mistakes.
Most people investing in condominium units can afford to make a mistake or two. Usually the sums of money involved in such investments are smaller ($300,000-$500,000 is a typical investment condominium price) than in commercial real estate investments. Not only are the purchase prices of commercial properties higher than those of residential properties, but the amount of down payment you have to commit to a transaction is also more - often 30 to 50 per cent down.
At this point you might be wondering if you will ever be able to stomach the risk and take the plunge into commercial real estate investing. However, the two largest benefits commercial real estate investing offers over residential are as follows;
1. The landlord has more power than the tenant (anyone who is a residential landlord in Canada is aware that more often than not, landlords are at the mercy of their tenants); and
2. The owner has myriad opportunities to increase the value of the real estate asset by decreasing expenses, replacing a tenant with a better paying one, dividing space and charging more per square foot, changing the allowed use of the property, redeveloping the property, and so on.
If you really want to learn about commercial investing, ask investors who are actively in this property area. You should also reach out to Realtors, lawyers, and friends that are involved in this sector, and get them to tell of the bad stories they may not be keen to recall.
When did they lose money? What went wrong? What would they do differently now if they faced the same situation. As I regularly say to my students: The most important thing in commercial real estate investing is to know what questions to ask and who to ask them of.
These questions alone will not only keep you out of trouble (i.e., keep you from losing money), but will likely allow you to create more wealth for yourself in commercial real estate.
Claude Boiron is an author, speaker, instructor at the University of Toronto, and Real Estate Broker with Royal LePage Terrequity Realty.
For more information, please call 905-882-8800, or visit www.boirongroup.ca.
Are you thinking about selling? Best to consider these factors and avoid the following traps.
1. Profit has been maximised: When a property has reached maximum value, there is little value in holding onto it for longer. Therefore this is generally considered the optimum time to sell.
2. Property has not performed: Having cash or equity tied up in an investment that has not performed (over a reasonable time period) can prevent an investor from reaching their financial goals.
3. Better opportunity elsewhere: Investors should know how each of their properties are performing relative to a) others in their portfolio and b) those in the market place. If another opportunity presents itself with greater investment prospects then it should be considered.
4. Depreciation has been maximised: Depreciation on a property lasts for up to 40 years from the time of construction. Over time the value of depreciation recedes. This could weaken a property's cash-flow position to the degree that it becomes better to sell.
While a forced exit can cause investors to panic and make easily avoidable mistakes, there are a number of traps that any investor wanting to exit a property needs to be aware of, according to experts.
-Selling too soon - before the market has started moving. This can impact on capital gains and, thus, the profit made.
-Holding for too long until demand has dropped off and the market is going down. This can prolong the sales process and result in a lower price.
-Selling to buy in a rising market, but then sitting on the sidelines. If an investor sells in this scenario, they shouldn't then neglect to buy a property as intended.
-Forgetting to factor in selling costs (eg: agent commissions, legal costs and the like).
-Cross-collateral implications with lenders: Selling might trigger the need for valuations on other properties in a portfolio. This, in turn, could impact on the value of the portfolio.
Real estate investor Oliver Limcangco is finally living the dream after achieving financial freedom through his property portfolio. In a new regular posting, the 31-year old shares his insights into how he acquired 26 doors and manages it all while travelling abroad.
How's your morning been? It's 10.30am and I'm going through my list: I have a tenant move-in for an Edmonton townhouse, two leases that are renewing at end of the month, two tenant move-ins in Calgary, one vacant suite in Calgary after a former tenant was evicted, three windows that need to be replaced, and a suite for which the floors need to be renovated due to flooding. Sounds like a handful, right?
Many people give up managing rental units after one suite, however, we seem to be able to hand close to 30…and still travel the world. How?
1. Tenant Selection. This is the most important part of the process. While most people put in the first application that comes in the door, we spend most of our effort ensuing we find the right tenant for our property. Why would I trust my asset worth hundreds of thousands of dollars to just the first application? It is less expensive to leave your suite vacant for one month than to kick out a crappy tenant for months while they destroy your property.
2. Property Management. Yes, you've got a property manager and you can leave all your worries with them right? Absolutely not! Remember, they have hundreds, sometimes even thousands of doors to look after. It is your job to make sure that yours are taken care of better than anyone else's.
3. Tenant requests for repaid. If you want great tenants, you need to provide them with great rental suites. However, you can't just give them blank cheques. Make sure that every repair / renovation that is over $500 needs to be approved by yourself before it can go ahead.
4. Fast Decisions. Your property manager is one of your greatest resource and they will do most of the dirty work. However, they will need to get your decisions once in a while - make sure that they get this as soon as possible. As an investor, it is your responsibility to enable your team to do their best and your PM can’t do a lot of things without decisions from you.
TIP: It's always a give and take. They may make decisions that may not be the best once in a while - during these times, do not be emotional and take it rationally. How much did it really cost you? If it isn't that much, don't sweat the small stuff! It is way better to have a great relationship with your team than to save that $50 from something that they missed.
Remember, investing in real estate is not passive. It's like a baby that needs constant attention and you need to tend to its needs right away. Build your team, implement your systems, and make fast & rational decisions - and watch your investments grow (even if you are traveling the world).
Knowing what property to acquire remains one of the more difficult decisions for any investor. The good landlord looks at the financial numbers and tries to make decisions based on facts, and attempts to keep emotions in check.
The common way to evaluate different investment properties is through comparing CAP rates. CAP rates are determined by factoring all of the investment’s expenses (but not finance) and calculate that against the projected revenue. Too often, property management, repairs, maintenance and vacancy expenses are left out in determining a proper CAP figure.
But CAP shouldn’t tell the whole story in evaluating properties. An in-depth analysis should consider projected appreciation which will lead to a superior return on investment (ROI). Suppose you are offered two investment opportunities. One is located in Windsor Ont. and offers a true CAP rate of 8 per cent and another in Toronto that offers a CAP of less than 6 per cent. If CAP is the only component to consider, it is a no brainer. You buy the Windsor property.
I'm sure you've heard the expression that past returns are no guarantee for future success. That is certainly true. But, it can be an indication. You also look at an area and see the growth within it to help estimate potential future growth. Based on your research, you conservatively estimate that the Windsor property will grow at one to two per cent over the next five years.
Meanwhile, the Toronto property should appreciate at four to five per cent over that same period.
Now calculate the projected ROI over those next five years. Ensure to include the numbers used to calculate the CAP rates, but add in the mortgage pay down and the projected appreciation and you will likely find that the lower CAP rate property, with the better appreciation, winds up on top.
The other factor to consider is risk. If I'm going to take on a riskier venture, I want a better ROI. There is nothing wrong with a solid ROI on a low risk venture. If you acquire a well-maintained building in a desirable neighbourhood, one might be willing to sacrifice some ROI to add that property to their portfolio. However, if one is willing to acquire a property that will include higher risk ventures, such as dealing with environmental issues, tear down and rebuild, complete renovations etc., then one should be looking for an ROI that can support that risk.
No one can tell you what an acceptable return on investment should be for any venture for you. A low risk individual who is accustomed to investing in GIC’s will not require the same return on a deal as a person who is more willing to gamble with his money.
My advice is not to wait around for the home run deal. Find a cash flow generating property in fair to good condition, located in a market that you have researched and understand to be a desirable area to invest and buy it. You can certainly use numbers to convince yourself not to take action in any deal, but, in my experience, the investors that do the best are those that take action.
Today’s homebuyer is different to those of previous generations. In the age of smartphones, apps and smart homes, the modern house hunter’s demands have changed dramatically. At the same time, in an era defined by fluctuating house prices, today’s homebuyer is more cost-sensitive than ever before.
As searching for the perfect property continues to evolve, global real estate portal Lamudi explores the top 10 most important factors for those looking for a home in 2014. From energy efficiency to the latest technology, these are the top demands of modern house-hunters.
1. Energy efficiency
Cost of living and the household budget have always been important factors for those on the hunt for a new property. But as the price of amenities such as gas and electricity increase, it is no surprise that buyers now want reassurance about a home’s energy efficiency.
2. Storage - and plenty of it
One word: built-ins. To satisfy the needs of the modern household and help homeowners stay well organised, an ample amount of storage space has become a high priority. Built-in storage - including linen closets, wardrobes and even walk-in kitchen pantries - are now a must to attract modern home buyers.
3. The latest technology
Technology is now part of all elements of our lives and our home life is no exception. This can be something as simple as LED lighting, or involve more complicated technology like automated thermostats. These days, many property seekers expect to have the latest gadgets and high-tech features installed before buying.
4. Top notch security
Home security has been completely transformed by new technologies. Features like glass break sensors for windows and doors, and motion-activated lighting for exteriors, are just some of the modern security solutions that are attracting buyers.
5. Open plan living
Bright, open living spaces have become a staple of the modern home. The trend has even reached the kitchen, which homeowners often prefer to combine with the dining area. In fact, a 2012 study in the UK found that the dining room was becoming a thing of the past, with one in three households featuring a combined kitchen-dining area.
6. A modern kitchen
Kitchen design trends have changed significantly in recent years, as popular features of the past decade have started to look dated. Granite is no longer in vogue, with marble countertops and a simple black-and-white color palette giving the kitchen a distinctly modern edge. Here too, buyers are looking for the latest state-of-the-art, energy efficient household appliances.
7. Entertainment options
The modern home is much more than a place to sleep and eat. It is now also a place to entertain and be entertained. As a result, features including game rooms, home theatre systems and outdoor entertainment areas are now highly sought after.
8. A dedicated laundry room
It sounds simple enough but several recent surveys have pointed to the importance of a laundry room for new home buyers. According to a recent study of the most popular characteristics for new homes from the National Association of Home Builders in the US, a laundry room is one of the top features of a typical single-family home in 2014.
9. Smaller homes in general
As buyers have become more cost conscious, the appeal of the traditional McMansion or large home has dipped. Instead, homeowners are willing to sacrifice space for other key features, such as high-quality appliances and overall energy efficiency, as well as easier upkeep.
10. Location, location, location
The desire to find the perfect home in an ideal location remains top of mind for most house hunters. Where a property is located is often the number one factor influencing a property seeker’s decision to buy. It seems some things about looking for your dream home will never change.
Launched in 2013, Lamudi is a global property portal focusing exclusively on emerging markets. The fast-growing platform is currently available in 28 countries in Asia, the Middle East, Africa and Latin America, with more than 500,000 real estate listings across its global network. The leading real estate marketplace offers sellers, buyers, landlords and renters a secure and easy-to-use platform to find or list properties online.
Auctions can prove to be a real battleground for buyers, with many fearful of paying over the odds for their property choice. However, with the right approach and mindset, you could bag that property without shelling out extra cash. Here are some practical and time-tested tips from our experts.
1. Check everything before you put in your bid. Make sure you do some leg work well before the day. Remember it’s your money and it’s your decision. Make sure you base your decision on some good substance.
2. Don’t give away too much. If you tell people how high you’re prepared to pay, it will put you at a disadvantage. Play it like a poker game and keep your cards close to your chest.
3. Know the true value. This means, do your research! You can find out what similar houses in the area went for by looking in the paper or hiring an independent valuer.
4. Get legal advice. Before you sign any documents, hire a lawyer to look through them for you. Do not be tempted to save a few bucks by doing it yourself as it can cost you tens of thousands.
5. Don’t bid too soon. Do not bid before the reserve price has been reached. The reason for this is because until this price is reached, the property isn’t for sale.
6. Keep your highest price a secret. The buyer has the advantage in an auction negotiation simply because they know the minimum price the seller is willing to accept without the seller knowing the maximum price the buyer is willing to pay. If you keep this price to yourself you have a good chance of saving thousands of dollars.
7. Try to speak to some other potential buyers on the day of the auction and ask them how much they think the property will sell for. Most of the time, people will quote their buying capacity unknowingly, which means you can suss out your competition. This is sometimes hard to pull of casually and takes some courage to do, alternatively walk around the pre inspection and listen intently to people talking around you.
8. Refrain from making any bids on the day of auction if no other bids are made, until the last minute and aim to be the first and only bidder. This allows you to negotiate after auction session with the vendor’s selling agent (no doubt the vendor will be feeling worried about the property not selling at auction and maybe likely to move).
9. Bid confidently. Deliver your bid with a loud, clear voice and for the full amount. Your quick and understandable bid might put your competitors off psychologically, making them believe that they should back down because you are nowhere near your limit and have endless amounts of money, shown by virtue of your confidence.
10. Ignore the agents coming up and befriending you throughout the process saying it’s your dream home or investment and its only $1,000 more. Remember – they are paid by the vendor and by law have to represent the vendor, not you.
I recently read a great book, The Wealthy Barber Returns, by the legendary David Chilton. I really loved this following passage. “Each year, the Washington Post runs its Mensa Invitational contest where readers are asked to add, subtract, or change one letter of a word to give it a new meaning. One year’s winner was cashtration. The act of buying a home, which renders the subject financially impotent for an indefinite period of time.”
I am a huge supporter of adding assets into my wealth portfolio. The mistake that most people make is they simply don’t know what an asset really is. Most people believe that an asset is stuff they own. The more sophisticated say that it is stuff that appreciates over time.
I tend to feel that a true asset is something that generates enough cash flow to (at minimum) sustain itself, and ideally creates cash flow that will support your personal expenses. An asset will not only cover its pure expenses, but also its debt servicing.
These are the following assets that can lead to personal “cashtration.”
1. Cottage. It is no surprise to most that a cottage is an expense. Yes, over time it may appreciate but you can never completely bet on appreciating values. When you consider property taxes, utility expenses, insurance, occasional repairs and debt servicing, this is a true expense.
2. Personal Residence. This one might generate a few arguments. How many times do we hear parents say that their house was the best investment ever owned? This could be because they never owned any other investments. I agree that you need to live somewhere, however, as long as you contend that it is a needed expense, we can all agree.
3. Downtown Condo Rental. The rental income in this case needs to generate more than the carrying costs.
How can you avoid cashtration? Simple. Make sure that any asset you own carries itself and actually contributes to your income.
We have all heard the expression “two-income household”. That typically refers to a household where both spouses bring an income that contributes to the household expenses. Why can’t you have the goal of having a 10 income household? Some might think that this means having some harem of women all working towards the household income.
But what if you add assets that pay you money on a regular basis? For me personally, I have my own realtor income. My wife’s salary. Our RRSP’s and other paper investment’s dividends. Finally, each property I purchase must contribute to the family income.
Not quite the harem of women solution, however, I’m pretty sure that option would have its own host of challenges too.
This way if one of the incomes dry up, like my wife’s job ending or one of my properties unable to rent for six months, then we have alternative sources of income.
When it comes to property investment, timing is everything. Ultimately, choosing the right time to enter the market will have a significant impact on the long-term success of your investment.
But how can you as an investor know whether the timing is right? Global property portal Lamudi has compiled a list of 10 tell-tale signs that now is the time to start building your investment portfolio.
1. You are financially ready. You have saved enough for the downpayment and you have also established your emergency fund. You have taken into account home maintenance expenses. Your credit history is good and you are able to meet all the financial obligations.
2. You have set your long-term goals. You have a clear picture in your mind of the purpose of your investment and you are flexible enough to adjust to changing circumstances. You are not hesitant and when the timing is right, you are able to adapt to the market needs and the development of technologies.
3. You have done your research. You know the neighborhood of your future property well enough to foresee the coming trends and the possible changes in the community. You have researched all the schools in the area as well as the best commuting means and you are able to predict the next homebuyers needs.
4. You have chosen a stable economy. The area is financially stable, economic trends are promising and equities are surging. No demographic fluctuation or no irregular variation of population have been recorded in the area.
5. You understand the country’s policies regarding real estate. The policies of the region promote and encourage a positive, innovative environment as well as drive further economic growth. The tax policy in the country is positive for homeowners. Global innovation index is rising in the area.
6. Infrastructure projects are underway and likely to lead to an increase in property values. The infrastructure of the area is being developed with a focus on: transport, energy, solid waste and water management developments.
7. The region is moving toward sustainable development. The region’s awareness of global and local environmental issues is increasing, the demand for eco-friendly homes as well as for sustainable rural and urban development is rising. As more and more people head toward sustainable living, investing in sustainable property will increase its value in the future.
8. The location draws a lot of interest. Whether it is the best travel destination or the hot jobs spot, the location is always on the top of the search engine. It has become a successful startup hub already or is planning to do so in the coming years, driving a lot of job seekers into the area. The number of enrolled students is increasing every year, the area draws interest of international students.
9. You have found a reliable real estate agent. If you are an overseas buyer, it is particularly crucial to make sure you have a good representative on the ground. Your real estate agent is trustworthy and knows the local market well enough to be able to help you make the choice.
10. You have researched local differences in the property market. Whether you plan to invest in a residential property and turn it into a rental or an office space, you are fully aware of all cultural differences that might occur when you deal with a property seller.
According to a TD Bank report from 2009, and accounting for inflation, education costs per child could range from $37,000 (for a live at home student) to $137,000 (for a live away student) when he/she turns 18 years old.
Investors already know that buying real estate is a solution to paying for a child’s education however, this may not be the right solution. In fact, it could be detrimental to a child’s performance, according to a paper published by University of California, “More is More or More is Less? Parent Financial Investments During College.” It suggests that there is a direct relationship between parents who pay the bills and lower academic performance by their children.
Rather than let your children party at school while you are stuck with the bills, why not get them to pay the bills. Tracy Ma from Financial Nirvana Mama outlines four key strategies for getting your kids to pay for their own education and at the same time, teach them real estate investing skills.
1. Teach them property management
If your properties are less than five years old (i.e. low maintenance) and your child goes to a school near your properties, why not have them manage the properties as their part-time job? Better yet, have them live in a unit as their principle place of residence and rent out the extra rooms to friends. Teach them how to manage the properties like a pro, with the right agreements, contracts, and templates. And don’t forget to teach them about all the applicable rental regulations. Now, they can use the cash
flow from the properties to help pay for their own tuition and books.
2. Teach them to profit from a real estate portfolio
If you have a couple of properties that you have held for more than ten years, you probably have a nice nest egg for your child’s education. Rather than selling the properties when your children are ready to go to post-secondary school, hold the properties a little bit longer until they graduate. Have them take out an interest-free student loan to pay for their education. Then, transfer the assets to your kids after they graduate from post-secondary education and have them sell it, or borrow against it, to pay for their loans. Any remaining profits from a sale, or available room in a home equity line-of-credit, can jumpstart your child’s purchase of their own real estate.
3. Have them manage a real estate portfolio
If the properties are held more than 15 years and your children decide to the leave the city, why not refinance the balance of the mortgage, and have them retain a team to manage these properties? Teach them to oversee the properties and monitor the expenses and payments. The cash flow can be used to offset their tuition fees and books. Once school is finished, they can liquidate, or borrow against, a property and pay off their loans.
4. Teach them hard money lending
If the properties no longer have any mortgages and your kids are off to medical school or they are too busy to manage real estate, teach them to sell the properties, contribute a portion to their tax free savings account, and lend out their money to other real estate investors as a mortgage-backed loan. Now your kids have mortgage payments coming into their bank accounts to help offset their living expenses and tuition costs. And after they have finished their education, they can recall the loans that they have issued to pay off their own student loan.
Be creative and financially savvy with these exit strategies to not only make your money work smarter, but teach your kids life skills. Using the strategies described, your kids will be on their way to paying off their education (and becoming real estate investors) in no time.
Tracy Ma is a mother of twins, mentor, engineer, real estate investor in Ottawa, Ontario. Connect with her at her website www.financialnirvanamama.com where she shares free tools, videos, and articles to empower women on investing.
The promise of low cost properties down south continues to lure Canadian investors. But Madeline Ficaccio and Patrick Gregan from American Multifamily Alliance Group share their secrets to ‘right’ investing in the U.S.
Investors must be aware that just because a property seems “too good to be true” with respect to price, this does not mean that it is a good deal within that particular market. It’s important to deal with someone who has experience in the particular market you are buying.
Secondly, investors must know enough about what they are considering purchasing. Investors have to have the ability to do independent research without wholeheartedly trusting the appraisal or comparable provided. Just because someone with a license places a value on a house, it doesn’t mean it’s worth that price
From our experience, one of the difficulties that we have found purchasing houses in the U.S. is that we are have to landlord from a distance. When purchasing only a house or two, there is not the cash flow to be able to fly out to check on your property every so often. Therefore, you have to place your trust in management and “hope” that they are taking good care of your property. We all know, as real estate investors, that our biggest challenge is always management, so be sure of what management company you are using. Investors should still expect and include in your costs the need to fly out and be checking on your houses as well.
This is a large part of the reason why we started purchasing multifamily properties. It afforded us the opportunity to self-manage (although we realize this is not everyone’s cup of tea) and to be able to fly often to keep a close eye on our properties and not leaving it up to anyone else. All 818 units are located within 10 minutes of each other and therefore, we know the areas inside and out and do not compromise by going into areas we are not familiar with. It is important to be an expert in your area and not be purchasing all types of properties in all different markets.
Investors that live in the East of Canada are investing in Florida and those who live in the West are investing in Arizona and Nevada, partially for retirement purposes and the fact that they can catch a direct flight to those markets. However, we have targeted an amazing market in Dallas, Texas. The Texas market is very strong, has strong consistent population growth, has employment from many different sectors and is in our opinion, much less risky that most markets in the U.S.
The opportunities are that properties purchased in the right market can significantly cash flow compared to many Canadian markets because purchase price can be lower with little difference in rental rates. There is also much room for appreciation as markets increase and recover from the recession.
Foreign investors need to take the time to learn different markets and decide where is the best place to invest. It is important to note that in large centers in the U.S., where one street is a nice neighborhood, three blocks over could be a very rough area. Therefore, research is imperative or invest with someone that you trust who knows the market well and is looking out for your better interest.