Michael Dominguez from Durhamhome.ca advises investors on why you should not be tempted to repeat past mistakes.
We all know the expression, those that do not study history, are doomed to repeat it. I look back to the American real estate crisis that hurt so many real estate holders.
The investors in the U.S. in the mid-2000s that focused on cash flow in their investments, rather than appreciation, found that even though the value of their investment dropped, their cash flow remained solid. In fact, some found cash flow actually improved, as the new stream of renters (people that lost their homes) increased rental demand, thus allowing rental amounts to stay strong and in some cases, increase.
Fast forward five years and look at the Canadian market. I see so many investors jumping into the new condo builds in Toronto. I have asked a number of the investors what kind of cash flow they are generating.
The cash flow, including maintenance fees, for those new builds Toronto condos are well into the negative side. This means that each month, in order to maintain the property, they need to take money out of their own earnings, to sustain the property.
They reason this decision in a few ways. First, I’m told that the value of the condo will go up, so any monthly expenses are more than offset by the rise in values. Investors reply that it is because real estate always goes up in value. That is a very dangerous bet. As a realtor, I do believe that now is a wonderful time to buy. But never assume the values will rise. That is not investing, that is gambling.
Second, I’m told that the expenses they incur is principle on the mortgage. If you look at the pure expenses, then they are up. While technically that is true, the reality is you still need to supplement your property with outside funds to keep it afloat. What happens if you can’t continue to do that? Then you are in a very precarious position and will either need to incur further personal debt to keep the property afloat or you may lose the property.
The third one, though less common, is something I hear a lot. My expense numbers are fixed and in time, the rent will increase. Again, that is speculating. Unless you have a defined plan to increase rents, or other means of increasing income, such as renovating, this property is a cash flow loser.
I always look for properties that will produce positive cash flow. This means if I never sold another property ever again as a Realtor, my properties are paying for themselves. And Ii the economy takes a dive, and the values of my property instantly drop by 10 to 20 per cent, I know that I’m still chugging away making positive cash flow. It sucks to know that the property is worth less than I paid for it, but I’m confident that in 20+ years, with my debt on the property all but gone, I’ll have a good chunk of wealth built up.
Now don’t get me wrong, I feel the market conditions are right for further growth in Ontario real estate. Interest rates will remain low, the economy is stable and we are seeing population growth. It is all good. Also, if you are able to obtain a desirable property that is creating positive cash flow wealth, it is probable that a property like that will remain desirable in the future.
When people tell me that real estate is too risky, I ask them where they have been most successful in building their wealth. The typical response I get is that they don’t have any sizable investments. If I could find a better, safer, long term investment, I’d buy it.
There is a reason why I choose to invest in real estate. But remember, not all real estate is the same. Be smart in your selection and work with a team that can get you what you require.
Michael Dominguez is an investor and award-winning Realtor focused on cash flow generating properties in southern Ontario. Besides adding properties for his own portfolio within Oshawa, Cobourg and Orillia, Michael is building a joint venture team for these markets. As a Realtor, he uses those investor mindset skills to make a valued member of his clients' power teams. You can reach Michael at firstname.lastname@example.org or on twitter @durhamhome
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