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Sunday, 11 November 2012 11:00

Top 3 reasons to buy NOW

Written by  Paul Kondakos,
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One of the most common catch phrases, veteran investor Paul Kondakos hears from Canadians reluctance to invest in real estate is "It’s not a good time." Ah, but it is, he writes in this Top 3 list of reasons to commit.

That catch phrase is a very vague statement that can be interpreted to mean either (a) it’s not a good time for me personally to invest or (b) it’s not a good time to invest in the real estate market.

Granted that there may be circumstances thatpreclude certain individuals from investing in real estate for any number of reasons, but for the rest of you out there, "it’s not a good time" is a statement that can end up costing you tens of thousands to hundreds of thousands of dollars in potential real estate gains in the long term.

In fact, I believe "it’s always a good time" to invest in real estate (and let me be clear that I am talking about investing in cash-flowing real estate and not talking about speculating in real estate hoping for future appreciation).

When it comes to real estate investing, time is your biggest ally if you are invested and your greatest enemy if you are not. The phrase "Time is money" has never been truer when you apply it to real estate investing. Time facilitates the three most important pillars of real estate investing:

1. Mortgage pay down

Most individuals use leverage (eg. a  mortgage) to purchase an investment property which makes it such an appealing investment. For every mortgage payment you make a certain portion goes towards interest, but more importantly, a certain portion goes towards principal and contributes towards building your equity in the property. I like to think of it as "forced savings" which may sound a little paternalistic in nature, but for most of us it’s a good thing.

The amortization period is typically between 20 to 25 years which means that after that timeframe you will own a free and clear property. As many like to think of their real estate investments as a retirement fund, given that you derive the greatest benefit of mortgage pay down the longer you own the property, investing NOW becomes all that much more compelling if you are counting on it for your retirement.

BONUS: After several years of equity build up, you have the option to re-finance or put a Line of Credit on the property and take money out. Psychologically knowing you have this type of security in an emergency is immense.

2. Cash Flow

As stated from the outset, investing in real estate means buying a property that provides monthly cash flow. The formula is relatively simple; Gross Income - Expenses - Mortgage Payment = Cash Flow. The beauty of real estate investing is that the cash flow is there from Day 1 (if it’s not, then you are speculating and not investing). I don't need to tell you the benefit of having extra income coming in every month.

BONUS: For those who are sick and tired of their jobs and looking for a career change, once you have accumulated enough cash-flowing real estate, you can focus on managing your portfolio full time and enjoy the independence and flexibility that comes along with it.

3. Appreciation

I have intentially put down appreciation down as the last of the three benefits. As I stated above, investing in real estate strictly for appreciation can be a huge gamble. I know people that lost everything because they gambled on the real estate boom in the late 80s and lost in a big way. On the other hand, the potential benefit of appreciation coupled with steady mortgage pay down and consistent flow is a big winner. Typically appreciation is calculated at 1-2% annually. So very conservatively speaking, by the time your mortgage is paid off, the property will have appreciated in the range of 25-50%. It’s more likely that you will see appreciation in the range of 100%+, but I like to be conservative.

BONUS: Appreciation can be like a lottery ticket. Over time some properties can become extremely valuable based on their geographic location and return 100%, 500% and even over 1000% depending on how desirable that location has become (eg. King Street West in Toronto or pretty much anywhere in Vancouver)

If you have every seriously considered investing in real estate, every day that slips by is costing you money. As such, since you can’t start investing in real estate yesterday, you need to start taking steps TODAY towards making your first income property investment.

Paul Kondakos is a seasoned property investor and his RealtyHub.ca helps others get a leg up, or two, in real estate.

Last modified on Wednesday, 14 November 2012 16:16

6 comments

  • Pure Garcinia Cambogia Extract Wednesday, 24 April 2013 03:16 posted by Pure Garcinia Cambogia Extract

    Thanks for finally talking about >Top 3 reasons to buy NOW

  • Anthony Vojvodi Monday, 03 December 2012 23:28 posted by Anthony Vojvodi

    As a Real Estate investor, I always find it interesting when people come up with excuses to wait. In my opinion, if you need to wait for your market you're probably looking at the wrong market in the first place!!

    If you're in it for long-term returns, then try looking at OTHER markets and base your decision on cash flow and the fundamentals for the region (especially long-term job growth and population growth). If you cash-flow and have long-term potential for tenants, then who cares if the market goes up, down, or sideways? Jobs and population growth help ensure tenants (and cash-flow) and helps bolster future appreciation. In that case I have no problem paying full price because I know I've bought a strong property. After all if all I want to do is buy low then I'm pretty sure I can find a place or 2 in Detroit.

    In my opinion, if you're worried about taking the next step solely because you think the market will go down, then you're purely in it for speculation and that is a dangerous game!

  • Lawrence Kobescak Thursday, 22 November 2012 00:59 posted by Lawrence Kobescak

    Paul as a real estate investor in Toronto, I absolutely agree. If I buy a property that cash flows now, why do care if the property price goes down, I don't. I can obtain a 5 year mortgage at 2.99%. What is important to me is vacancy rate and immigration. Ontario is expected to increase its population by 10% over the next 20 years by about 1.4 million. Lets presume 1/3rd of those immigrants end up in Toronto, the number one destination for immigrants in the country. That would put the increase the population of Toronto by between 17%-18%. Have we over built condos in Toronto, maybe, but not everyone is looking for a condo. The lack of available building space and the absence of rental buiildings being contructed over the last 20 years has me quite comfortable with the overall view of the real estate market. I though Vancouver was expense 15 years ago, oops. On an additional note, as the number of people in Toronto buying downtown condos is dwindling due to affordability, the number of people renting and the rents is increasing significantly. The downtown condo market filled a demand that was present with little to no supply. To each their own but for now, I will take a 20% return instead of standing on the sidelines.

  • RANDY SIMON Wednesday, 21 November 2012 20:06 posted by RANDY SIMON

    Pretty weak article. One of the reasons I cancelled my subscription. I find many articles in the magazine "page fillers". I think its pretty fair to say anyone investing in real estate has a pretty good grasp of those 3 concepts. You MUST buy low and have good cash flow, hard to do in most Canadian markets now. That's why I am looking in the USA

  • Carol Youngberg Tuesday, 20 November 2012 22:20 posted by Carol Youngberg

    It appears - all the statements are being made - basing your
    opinions on the market in the greater Vancouver area
    For the other parts of the province the market has been SOFT
    for 4 - 5 years - and we have historically looked at a 7 yr
    real estate cycle - of downturns - this should end in the
    spring of 2014 - for all of us in the remaining parts of
    B.C. - therefore there are GREAT bargins thoughout the
    province. Just My Thoughts. Thanks

  • Paolo Di Petta Monday, 19 November 2012 20:07 posted by Paolo Di Petta

    I have a few huge problems with this article. I speak a little bit about it here: http://mrt.gs/P1RLf7

    A quick summary however would be that
    a) It's better to buy low, and have a higher interest rate. Generally, we start the real estate cycle post-crash with high rates and low prices, and as we continue through the stages, rates get lower and values appreciate (partly because lower rates increase 'affordability' and the potential market increases causing more competition).

    The past four months have shown a progressive downward trend in the market. The market has peaked and there's a good chance that property values are going to decrease in the coming years.

    b) you need to carry the property and there's costs associated with that. Do you want to be owing a mortgage on the current (high) price? Because even as the value slips, and rates start to head upwards (you'll have to renew eventually), your profit margin will erode. In fact, you might end up negative cashflowing, and having negative equity in the property. Not an attractive situation.

    Personally, I'd rather wait, and buy when the market starts to bottom out. You get more property for the money, with a smaller mortgage, and more room for margins that will generate positive cashflow.

    The "in the long term" argument is a weak one. If in a few years (after the downturn), I can buy more property with the same amount of money, with less of a mortgage to carry, then in the long term, I'll still be much better off waiting.

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