Trust Your Real Estate Agent?

The first time I bought a home, I didn’t use a realtor’s services because I wasn’t convinced that they brought added value to the table. Granted, as a buyer, the realtor walks you through each prospective home, and provides detailed information about the home, current market conditions, and comparable sales statistics in particular neighborhoods. But realtors don’t have a lock on this kind of information; it’s widely available on a host of different websites found through a simple Google search.

As for the house walk through, I assume they mean well but I find realtors to be more nuisance than helpful. I mean, as soon as we walk in the front door, they start selling, pointing out what they see as appealing features, staying silent about the negative aspects, and offering a fix for any troubling issue mentioned. I find myself having to focus not only on inspecting the house but also trying to block out incessant sales pitches.

Most importantly, I was led to believe that ‘your’ realtor is an objective advisor, on your side, giving to you the good, bad and ugly about your potential new home, protecting you from being sucked into a bad deal, and negotiating the lowest price for you.

Just like people ‘lawyer up’ in a lawsuit, when buying a home, you ‘realtor up’ because it’s you and your realtor pitted against the seller and their realtor.

But it’s the rare realtor who’s looking out solely for your best interest. Fact is, realtors are in the sales racket. They get paid only when deals are struck. And as the person bringing a buyer to the table, their role is one of inherent conflict: buyers realtor exists to encourage buyer to buy! With the ultimate goal being consummation, you’re better off doing your own diligence if you don’t want to get f —-d.

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But … ‘MY’ Agent Is Really Good!

Ask your friends, they’ll recommend a realtor. ‘Mine was so good, you have to use her.’ Or, ‘Listen, this guy’s cool, he just lets you be and doesn’t push you to buy. You’d be a fool not to use him.’

I don’t get it. Why is it common for people to get attached to their realtor?  Well, here’s my guess: it’s human nature to trust. We want to trust. We want people with whom we have relations to be trustworthy. So, we project trust onto the realtor, the person who has smilingly told us that they will take care of us, they will ensure that we get the home we’re looking for. And why shouldn’t we trust someone who holds them self out as an expert when it comes to helping folks buy and sell homes?

Now, let me be clear before continuing: I’m not anti-realtor. Just like any other profession, some realtors are ‘good’ people, some not. My point rather is to shine a light on realtors, to encourage you to recognize the bluster, the snow jobs, and see when realtors are not on your side, are not acting in your best interest.

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Don’t Worry, Be Happy

First off, the intent of this heading was not to plant the song in your head. And if it’s now going round and round, the trick to getting rid of it is to think of another song. But I digress.

Realtors love you when you first meet. Visibly excited, they ask questions about you and what you’re looking for in a home. They want to be your pal, ingratiate themselves to you. And they tell you how much experience they have, and whatever area of town you’re searching, they know that area inside out. In other words, realtors know that in order to sell you a house, they first have to sell themselves to you.

The realtors goal is to have you believe that their interests are aligned with yours; that they want you to buy the ‘right’ house just as much as you want to buy the house that perfectly fits your needs and wants. So in these early days, everyone’s happy and motivated to get to work.

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Grinding Out The Search

As time marches on, after you have viewed five, ten, twenty or more houses, the realtor is wearing down, calculating whether or not their effort will be financially rewarded, calculating whether or not to cut and run. But before doing so, the realtor will start banging the drum for you, buyer, to broaden your search, spend more money, and/or lower your expectations. Basically, whatever it takes to convince you to stop looking and get on with buying so they can get paid.

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Found It!

Lets say you find it; the house you want to make your home. And now you’re ready to make an offer. Naturally, you defer to the realtor, the expert who has been through the process countless times. That would be a mistake. BIG MISTAKE.

Because the realtor can smell the deal closing at this point, their goal is keep you moving forward, toward signing on the dotted line. So, what happens? First, realtor will try dissuading you from negotiating. Depending on the market, you’ll be encouraged to either offer the asking price or above asking to stack your odds of sealing the deal, and avoiding any drawn out negotiations that may or may not end with a handshake.

Here’s the thing, the list price is made up. Not exactly out of thin air, but it’s the sellers agents guess as to how much someone may pay for the property. Not how much it’s worth, but how much the seller may get. If you’ve done your homework, then you have an idea as to the property’s value and this should be your opening bid.

Low Ball. If you offer less than list price, your realtor may come back with, ‘oh, if you do that the seller may take offence and not want to strike a deal with you.’ This is baloney. Buying and Selling property is a business transaction. Seller always retains the option to say no to any offer. Worst case scenario, seller says no. Then you decide whether to increase your offer.

False Conditions. A sad, common tactic is for the realtor to manufacture a false sense of urgency. You’re told that if you want a shot at the house, it’s best to draw the offer immediately because it’s a hot property and other bids no doubt will be pouring in anytime now.

Listen, this is a massive purchase for you. Don’t rush the process. Ever. Think it over, discuss the pros and cons, and only when you feel ready, then you make an offer. If you feel the slightest bit of pressure from the realtor, walk away from them, saying you’ll call when you’re ready. And in the interim, if another offer is accepted, so be it. The house wasn’t for you.

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Negotiating

Along the trail of my first home buying experience, an offer was placed on a property that I didn’t end up buying. The offer came in slightly above list price because it was a strong sellers market and I thought the home was undervalued. The realtor I used encouraged me to offer ‘as much as I possibly can.’

Four hours later, realtor calls me. Tells me ‘You’re not going to believe this. I’ve never seen this in all my years. Someone else bid the exact same price as you. So, I think you should raise your offer.’ Oh? By how much, I ask. Again, realtor trolls out the same line, ‘as much as you can possibly afford.’

At that point, I walked away. Why? Because realtor was anything but on my side. Because who knows if there even was another offer on the table? Maybe seller’s realtor implied there was another offer, and my realtor was all too happy to read between the lines and come back to me with an urgent request to immediately increase my price. If realtor was actually on my side, they would have provided fair guidance, told me to think about it, suggested parameters for a sweetened bid, rather than hoping I would up the ante by a silly amount.

This happens. Lots. Because buyers realtor has two goals in mind: get the deal done as quick as possible, and get the highest price possible. So really, you’re negotiating against your realtor! And in any negotiation, always be willing to walk away; this is your power.

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Looking Out For Number 1

In the house buying game, you are Number 1. And you’re better off looking out for yourself, educating your self about how realtors operate, and learning about the local real estate market before and during your search.

Do all realtors operate as I’ve described in this post? No, of course not. But enough do that I thought it worthwhile to share my thoughts and experience. That said, rely on your realtor to show you houses and maybe get you front of the line access to new listings. Nothing more.

As for making a decision on what property to buy and negotiating, cut the realtor out of the picture and do this on your own. Or, if you’re not comfortable on your own, hire an independent, objective third party, such as an attorney, to fill that role. Sure, it will cost you a few bucks. But the cost will be so much less than what you would have paid by relying on someone who may be working against your best interest.

 

 

 

 

Whether to Rent or Buy: Part 2

Continuing where we left off during the most recent post … several people contacted me to say that I’m wrong. Just plain wrong in stating that, “paying monthly rent is no more throwing money away than is paying mortgage interest and property taxes.” These folks insisted that rent payments are akin to flushing dough down a Texas sized sinkhole.

I thoroughly appreciate the feedback. Because a broad spectrum of opinion is always welcome. Sharing different perspectives furthers discussion, prompts us to consider alternate points of view and re-examine our own. So in the spirit of stepping back, let’s take another look-see.

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Have You Considered This and That and This and That and …

Let’s go back to the starting point: should you buy or rent (to be clear, this post is referring to your primary residence)? But let’s not seek an answer just yet. I know its tough sometimes, to just sit with uncertainty. And it feels good, a sort of sense of completion or achievement, when picking a side and saying we’re either for or against.

Still, like many issues in life, this issue does not readily lend itself to an across the board, simplified black or white answer. Because any answer to the question of, ‘should you buy or rent’, is going to depend on evaluating so many factors, and these factors are entirely dependent on your particular situation.

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Dig Deeper

Pay rent and it disappears.

Pay a mortgage and you’re building equity in a valuable asset that will eventually be paid off, allowing you to live mortgage free.

On the surface, no contest. Buying wins. So now it’s time to dig a little deeper.

Rent money, yes, it disappears, doesn’t go toward building worth in an asset. So is renting a lose-lose proposition? Aside from sending money into a void each month, do renters reap any financial benefits?

Short answer: yes. Longer answer: Renters don’t incur ongoing expenses such as property tax, maintenance, repairs, and mortgage interest (know that a significant portion of mortgage payments goes toward paying interest, not principal; if you have a mortgage, look at your statement. It will show exactly how much of your payment is allocated to principal, how much to interest). Nor do renters tie up a hefty lump sum in the form of a down payment. As for the building equity angle, true, renters don’t build equity in their home. But that’s no reason in itself to shun renting.

Smart renters take hold of the money saved on property tax, maintenance, repairs, and mortgage interest, and put that money to work in investments other than residential real estate.

This is where renters build their equity. And this is precisely why renting is NOT on par with being sucked into a deep space black hole. Because renting allows for the opportunity to invest and generate equal or higher returns than that generated by owning residential real estate.

Screeeech! That was the sound of a U-Turn. What if renter doesn’t pursue the opportunity to invest elsewhere? Then opportunity is lost and renter is clearly behind the financial eight ball as compared to homeowner.

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Home Is An Investment

Is your primary home a good investment? After all expenses, will you come out even or ahead on the money angle when the time comes to sell?

It depends. It depends on your specific situation, how long you stay in your home, whether you bought at the top, bottom or middle of market, the bucks you spend on repairs and renovations, mortgage rate … and on and on. Oh, and really importantly, it depends on the particular piece of earth on which your home is situated.

Meaning? Historically, residential real estate is an investment that keeps pace with the rate of inflation (i.e., returning gains of 2-3%/year). So if your non-real estate investment returns exceed, say 3%/year, then you’re building more equity than the home ownership crowd.

But that’s an average. Real estate is a local game and you have to know your local real estate market. Take San Francisco. If you bought a home in San Francisco sometime in 2008 or 2009 that you still own today, the value of that home likely doubled or more. This, of course, far, far exceeds the historical average return. Heading north, a detached home in Vancouver purchased by a young family back in 2001 would have tripled or quadrupled in price according to today’s insane values. Who needs the heartburn of stock market swings when you have bricks and mortar trucking along at a healthy clip?

Screeeeech! Sure but there wasn’t much dancing in the streets in the good ole’ US of A back in 2007-09 when Wall Street shenanigans brought the red, white and blue house down. More like unbridled panic among many real estate investors, fretting alongside stock market investors. But, like the stock market, if you didn’t sell during the dark days, you’re sitting pretty now.

Okay, so play the long game and you’ll be fine, maybe double or triple or smack a home run on your house? Not likely for most of us. There will always be certain cities that ‘outperform’ others when it comes to investment returns; and there will be certain time periods that we look back on and say, ‘if only I would have bought at the market bottom’. But over the long haul, property prices are likely to conform to their historical average.

So how do we know in advance what city or time period in which to buy a home, to get the most bang for our buck? We don’t. And if you proceed on the assumption that home prices, wherever they may be, eventually regress to the mean, then you can expect (with no guarantees) a 2-3% rise in value during your ownership period.

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Home Is Not An Investment

All this talk about renting vs. buying, which one is the better investment, which option costs less or more. Well, there will always be people on both sides of the discussion, convinced that one or the other is the best way to go. But because of all the variables involved, it’s not possible to provide a one size fits all answer.

Not only that but, whether or not to buy a home, a place to live and grow and find peace, is not, at its heart, an investment decision. Rather, it’s a consumption decision. And imbedded in this decision, in addition to financial means, are your values.

Because the most satisfying housing decisions are those made in alignment with our values … and our needs, goals and budget; not market trends and crystal ball gazing at investment growth down the road.

 

 

 

Whether to Rent or Buy: Part 1

Friends of mine (a couple I’ll call The Renters) had been renting the same home for more than seven years. They could afford to buy but chose to rent. The thinking being that renting simplifies their lives. How so? No financial responsibility for repairs, maintenance, or property taxes. No tying up a big chunk of dough for the down payment, nor paying five or six figure sums of mortgage related interest over the twenty to thirty year mortgage term.

Charged with the singular responsibility of sending payment once a month to the owner, not obligated to sink huge dollars into a home, The Renters happily invested their substantial liquid assets in stocks, bonds, and ETFs, and watched their wealth grow, on average, at about 6%/year.

Then their thinking changed. The Owner had delivered a formal notice to vacate. This despite giving his word as recently as six months ago that The Renters were welcome to stay in the house indefinitely. Apparently, owing to an overheated local real estate market, The Owner wanted to cash out while the cash was plentiful.

The Renters were disheartened by Owner’s dishonesty. The more pressing issue, however, was the hard fact that they had a meagre two months to find a new place to live.

Jane The Renter. “We should consider buying. I really don’t like that we can be kicked out of our home at any time.”

George The Renter. “Maybe. But not now. We have only two months to find a place. I don’t want to rush into a huge purchase. And the real estate market has to top out soon.”

Jane The Renter. “Who knows where the top is? Has San Francisco stopped climbing? New York? Vancouver? They’re all insanely priced, going up year after year. Let’s at least consider buying now. Because who knows if prices will continue marching higher or pull back? It’s all a guessing game.”

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The Process

Does it make better financial sense to buy or rent your home? There’s no clear cut, one size fits all answer. Instead, there are a whole lot of factors that come into play, depending on your particular circumstances.

But before taking a look see at some of the nuts and bolts factors, lets talk about the most powerful influencer of all: Emotions. How we FEEL about a house, our gut instinct, is what underlies most buying decisions.

Rational considerations, money issues, these tend to fall by the proverbial wayside. Especially when Buyers find their DREAM HOME and claim to ‘FALL IN LOVE’. My advice: don’t fall in love. Ever. With a house. Because it’s not really love, and it’s dangerous to your health.

Sure, maybe I say this because I’m a guy and emotions are buried seven layers below the surface, strategically placed, and difficult to access. Regardless, when making the call to spend THAT KIND OF MONEY, I only want to deal with cold, hard facts.

I want to know all the realities of home ownership, especially all my costs not only in buying the house but, just as importantly, the cost to maintain it. How much will I sink into these four walls every year? Will I stress about mortgage payments? What’s the annual property tax? Will I have to cut spending if I buy this house?

Whatever the issues are, I want to think about them thoroughly, and carefully cost them out, well BEFORE letting anything hinting of excitement sneak its way to the surface.

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Save, Save, SAVE!

Despite popular opinion, paying monthly rent is no more throwing money away than is paying mortgage interest and property taxes.

That said, owners seem to have an advantage in that mortgage payments do lead to whittling away the balance owing, and correspondingly increasing your equity (i.e., your outright ownership and financial interest) in the home. More equity translates to less debt that results in more savings, assuming the home’s value remains constant or rises.

Buy a home in your 20s or 30s with a 20, 25, or 30 year mortgage, and by the time you approach retirement, the mortgage is paid off and you’re sitting pretty in the form of a valuable asset that is yours, all yours, goodbye and good riddance to the bank.

Those in favor of renting might argue, validly, that money otherwise applied toward paying a mortgage is invested. And investments will grow at a pace equal to, or greater than, the home’s value.

Fair enough. Certainly with a well thought out investment plan, in 20 or 30 years, The Renters assets may be similar to, or even greater than, a homeowners. Still, being human, we may know what’s good for our long-term health but not necessarily take steps to make our self healthy. Meaning, will The Renters consistently contribute money to their investment account or will they be tempted to use that money to splurge on winter vacation down south each year when they’re desperate to escape cold weather?

The thing with home ownership is that you’re forced to save. Don’t pay the mortgage and you lose the home. That’s incentive to enough to make payments.

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Up, Up and Away

When The Renters sold their home seven plus years ago and first started renting, they were paying $2,000/month. With the increase in home property prices, rents have also jumped, and they’re now paying close to $3,000/month for a four-bedroom house in a pleasant neighborhood.

Could rents go higher still? Yup! Conceivably, rents could rise every year even in areas with legislated rent controls (most rental control laws limit the percentage by which landlords may raise rent, but don’t prohibit annual rent increases; also, rent control laws are not written in stone – they may be watered down or disappear one day depending on the political flavor of the moment).

And the more rents rise, the less discretionary income available to The Renters, the more rent payments negatively impact their standard of living, and the more it makes sense to become a homeowner.

In buying a home, The Renters would know their exact mortgage payments for the duration of the mortgage term. If property prices continue to rise, well, The Renters – um, now presumably morphed into Homeowners – benefit from having secured their home for as long as they like; not having to worry about rising rents or being tossed out; and knowing that their home equity increases whenever property values increase.

Still, should they buy now? While I seem to have temporarily misplaced my crystal ball, I will offer that hot markets don’t stay hot forever. When the market will cool, that’s anyone’s guess. But if The Renters can be patient, then they’re more likely to avoid overpaying and rushing into a meaningful decision that is best made cautiously. Even if it ends up being their dream home.


I’ll have more to say on this topic in Part 2, to be posted in a few days.

In the meantime, if you’re in the mood to plug in some numbers and get a good feel as to the merits of buying or renting in your neighborhood, check out the NY Times calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html.

 

 

 

 

Negotiating For Your Dream Home

Sure, a home is an investment and it gets all exciting when it’s located in a market where real estate prices are rising and property value is increasing. But the thing is, as much as it feels good to know that our net worth is getting a boost, first and foremost, our home is a sanctuary.

Home is a refuge with deep emotional meaning; a place of comfort, waiting to greet us with a warm cozy bed, a spouse, loveable munchkins, and a furry four-legged friend; a place where we don’t have to put on a face to the outside world, where we can let it all hang out. Home is our soft landing.

We fall in love with our home, maybe at first sight, maybe sometime later. Either way, we ultimately develop an attachment for our home that simply is not formed with any other investment, no matter how much money it is worth. And that attachment, dear readers, is a problem.

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Emotions Monkey Wrench Negotiations

Any sort of successful negotiation involves emotional detachment. This doesn’t mean you have to dial down the delight at having found your dream home. But to get the best price possible, it would help to bring a cool reserve to the bargaining table, an objective perspective focused not on the picture perfect property but on striking an advantageous deal.

Advantageous to you and the seller, that is. Because both buyer and seller need to feel that they’re benefitting from the transaction. Otherwise, the deal won’t get done.

And typically, the most effective way to ensure that the deal is fair to you, the buyer, is to stop your self from blurting out during a tour of the home,

‘I don’t care what it costs! I love it! I want it! Money be damned!’

And the best way to do this is to hire a real estate agent. A realtor places distance between you and the negotiation process. They take emotions off the table. Because for the realtor, this is all about business. And their business is to advise you, to guide you, and to negotiate on your behalf and in your best interest. They have zero emotional attachment to the house. Rather, they’re just doing their job. Oh … and the bonus? Seller pays the realtors commission; you don’t pay a dime.

 
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Market Conditions Dictate

The local market will determine your offer and how much wiggle room, if any, there is in negotiations. That said, real estate is a local game, meaning prices will vary not only in different cities but also in different neighborhoods.

Your realtor will provide you with up to date information (i.e., comparable sale prices for similar homes in the same area during the past few weeks and months) and tell you whether it’s a buyers market, sellers market, or somewhat balanced. This matters because the kind of market will go a long ways to determining your bargaining power.


Buyers Market

This kind of market is reflective of too much housing supply among limited demand. A market where properties sit for months. Where price reductions and other purchase incentives are common. And where buyers can strike their best deal. For buyers, this is nirvana!

Here, you definitely do not pay the asking price. As for determining how much to offer, this can be tricky. Make an offer too low and the seller may be insulted and close the door on you.

That said, you never know what a seller will accept if you don’t ask. That’s your role as a buyer, to ask. The seller’s role is to push back. And the offer is your way of asking. If a seller responds with a “no” to your offer, and does not extend a counter-offer, well, then you have two options.

First, walk away. This being a buyers market, there will be other homes for you to choose from.

Second, submit a revised, higher offer that is within your limit and respectful to the seller. Because how the buyer presents them self is important for a lot of sellers. In this regard, no one wants to feel like they’re being burned on a deal.

If you do submit a higher offer, be sure you know your upper limit and that limit is within your budget. Otherwise, you may end up overpaying and digging your self a big, deep, financial hole.

As for timing, you may submit a revised offer immediately or wait. If there are no other buyers on the horizon, then wait a week or two as this will add pressure to the seller. Seeing no other potential buyers, seller is more likely to accept a bid under the list price.


Sellers Market

This is a major headache of the migraine variety for buyers (Hello San Francisco! Vancouver! Both examples of steaming hot markets where prices seem to climb and climb and climb and …).

For the most part, buyers have no leverage. Whatever the asking price is, buyers offer that price if they are to have any chance of completing a deal. Still, with demand high and supply low, sellers can be picky and wait for the best offer. Often, this means multiple offers over the asking price.

When competition is intense like this, and buyers are in a tizzy, fearful they will miss out on a once in a lifetime opportunity, some offers exclude the usual conditions (i.e., subject to financing and/or inspection) in an attempt to woo the seller.

To put it mildly, this is not a wise approach, one I certainly would not recommend. If financing falls through, tough luck for the buyer because the contract is enforceable and they’ll have to find the money somehow if they don’t want to be subject to a lawsuit for breach of contract. Or if the inspection turns up asbestos, a leaky roof, or cracked foundation, that is at buyers cost as well, further adding to an already inflated purchase price.

If you can be patient, wait for the market to cool, this will serve you well in the long run. But if you’re intent on buying in a sellers market, know that you’ll most likely be holding the short end of the stick when it comes to price to be paid.


Balanced Market

With the forces of supply and demand about equal, neither buyer nor seller has a distinct advantage. As a buyer, you would want to offer a fair price that is less than the list price. But know that the seller may not be in hurry to accept the first decent offer that comes along, believing that other offers will soon follow. Still, if your offer is reasonable to the seller, expect them to at least provide a counter-offer. And if both sides want to get the deal done, then both sides compromise on price.

Chewy Bit. Buyer and Seller had come to terms on a property listed for $1.5 million. One contentious issue remained: a built in cappuccino machine, cost $500. Buyer wanted it included in the purchase price. Seller refused. The deal fell apart, and the seller waited another two months to sell the property for $100,000 less than what the initial buyer offered. A $1.5m deal implodes because of a $500 difference of opinion? That’s ego talking, and the seller paid a huge price for not being able to see the big picture.

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Hold The Love

That whole ‘falling in love with your home being a problem’ bit that I mentioned near the beginning of this post? It’s only a problem when you’re wearing the residential real estate buyer or seller hat. At all other times, well, bring it on!

 

Dividends: The Ultimate Second Income

Bored with the same old games, my 11-year old son and teenage daughter rummaged through the games closet and found an ancient relic, Monopoly. And as I excitedly told them about its history, that is was invented by self-described anti-monopolist, Elizabeth Magie, in 1903, that its purpose is to illustrate the hazards of concentrating land in private monopolies, my kids looked at me as if what they were hearing was, ‘blah, blah, blah’, rolled their eyes in tandem, and walked away.

Not an unexpected response. I mean, hey, the kids just want to be free to play, not weighed down by an adult (that would be me) spewing historical facts and economic theory. And play they did.

From time to time, they would ask me to clarify rules, which I was only too happy to oblige. Eventually, after surreptitiously spying on them from the kitchen, watching and listening as they learned rules and strategy, I came in from the cold and asked, ‘Can I play?’

Of course, being the adult whose headspace has not yet adjusted to the idea of summertime freedom, to the idea that summer is a time for letting it all go, for letting it all be, for being here, now, the Dad in the room (that would be me) had a hidden agenda.

And as I sat on the family room rug, took a seat at the playing board, and chose the Hat piece because the RaceCar was swiped by my son, I prepared to teach the kids a thing or two about the joy of property ownership.

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Interest and Dividends Rule

In other blog posts (see Property Investing: Need To Knows and Thinking About Investing In A Condo), I’ve discussed upsides, downsides, and things to be on the lookout for when buying real estate as an investment. And I also batted around the advantages of owning Real Estate Investment Trusts (REITs). Whether we’re talking about owning REITs (i.e., stocks that pay monthly dividends) or real property (i.e., bricks and mortar buildings with tenants paying rent), the beauty of both is … they’re Income Generators.

I love Income Generators! What’s not to love? In essence, you’re paid for being the owner. An ‘income stream‘, is the somewhat poetic phrase describing the monthly cash flow that makes its way to your pocket.

While playing Monopoly, I tried explaining the concept to the 11-year old as he insisted on buying RailRoads (a kid with a fervent imagination, a romantic at heart, naturally he finds RailRoads captivating) instead of Marvin Gardens or Tennessee Avenue.

Listen, even if you own all four RailRoads, you collect only $200 each time someone lands on Pennsylvania or Reading or the others.

So.

So? You know how much rent you collect when someone lands on Tennessee and you’ve put up a hotel? $950!

I don’t care. Besides, I have way more money than you!

True, you do have more money. But I have more properties. And eventually, you’ll be paying that money to me for landing on my properties. Then Ill have the properties AND the money, and you’ll be left with bubkus.

I still want the RailRoads.

Ya well, kids see something special about trains and RailRoads. I get it. As for that particular game, it played out as expected, the kid coming up short. Same in the next game. But the third time around, the kid’s romantic heart took a back seat to his competitive nature. Taking a page from my playbook, the kid gave first priority to property accumulation, knowing that this was the eventual way to riches. At least in the game of monopoly.

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Knowing The Deal

Let me back up a moment. I’m not saying you’ll become wealthy if you own property. It may happen but it’s far from certain. But I am saying that property ownership is a truly excellent, outstanding way to generate income. That said, income is only one half of the equation. The other half being expenses.

When you own real property, like a condo (Thinking About Investing In A Condo), it’s absolutely essential to get a firm handle on expenses. Because if expenses outstrip income, then you have to revisit the question of … what’s the purpose of this investment?

If it’s not about generating net income, then it’s all about capital gain, i.e., expecting property value to increase before you sell the property. And if capital gain is the sole purpose, then you’ve ratcheted up risk level because you just don’t know what the property will be worth tomorrow or ten years from today.

Personally, I’m a big fan of REITs. And I’ll step outside my usual commentary and say that I prefer individual REITS over a REIT Index Fund. Why? Because while the REIT Index Fund typically offers less price volatility as compared to owning one or two or a handful of individual REITs, it will also pay a lower dividend, sometimes much lower.

So, I’m willing to trade off more volatility for more income. And I’ll do so knowing that REITs in general are not a volatile group like, say, technology stocks. And they usually do not see wild price swings.

Granted, you also won’t see price gains like you might in the technology sector. But I’m good with that. I’m good with owning stable REITs that offer relatively smaller price gains and a healthy dividend.

And I’m real good with watching the monthly dividend deposits to my account, knowing my total ownership expense is $9.99 for each purchase and sale.

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What Kind Of Income Are We Talking About

Let’s say you have a spare $100,000. And you want to invest in property. You could apply that 100k as a down payment toward a condo. Incur the costs of taking on a mortgage, monthly condo fees, legal fees, title fees, any property transfer tax. Then find a renter. And hope the renter is reliable, cares for your property, and minimizes your maintenance costs.

And maybe you would turn a profit each month. It just depends on the numbers involved. And you, being a BuddhaMoney enthusiast, would crunch, crunch, crunch all the numbers before making your purchase decision. I’m not trying to be a wet blanket here; these are just some of the realities of property ownership.

Or you could take that 100k and buy a few REITs. I lean toward REITs listed on the Toronto Stock Exchange because their dividend yields tend to be much more generous than those offered by companies with U.S. listings.

While there’s a whole bunch to choose from, I’ve listed a few below (though I want to emphasize that I’m not advising, telling, suggesting or otherwise whispering in your ear to go out and buy any of these REITs without first doing your research):

  • Pure Industrial REIT (TSE:AAR.UN). Pure Industrial’s portfolio concentrates on industrial properties located in both Canada and the U.S.A. It pays a yield of 4.65%.
  • Slate Office REIT (TSE:SOT.UN). Slate owns Canadian based commercial properties, with an emphasis on office buildings. It pays a yield of 9.65%.
  • RioCan REIT (TSE:REI.UN). RioCan is Canada’s largest REIT with a market cap near $8 Billion (CAD). It focuses on shopping centers, retail and mixed use properties. It pays a yield of 5.80%.
  • Dream Office REIT (TSE:D.UN). Dream owns a stable of office properties throughout major urban Canadian cities and pays a yield a whisker under 8%.

So for simplicity sake, let’s say on 100k the average yield for these four REITs is 7%. That’s $7,000/annually, less trading fees which would equal $9.95 x 4 = $39.80. And the bonus is that dividends are taxed at a lower rate than interest income (think rental income) meaning more money in your pocket.

Putting money to work for you. Generating an income stream. All helps toward building your wealth.

 

Timeshares Are A Bogus Investment

Jesse and Janine vacationed in Hawaii last year for the first time. And like so many others who have ventured to the Land Of Bliss, they were smitten upon arrival. Lush, tropical environment, sandy beaches, warm ocean waters, extraordinary rainforests, majestic volcanoes, out of this world snorkelling among friendly fish, deep blue sea diving, idyllic sunsets, hiking up mountain cliffs … how could anyone not fall in love?


Pssst! You Wanna Own a Piece of Paradise?

On their second day, after breakfast, J & J go for a stroll on the beach. Passing a Marriott hotel, they spot a well placed sign encouraging people to attend a seminar presentation on the topic of ‘How Anyone May Own Property In Hawaii’.

Though sceptical that they could afford to buy land in high priced Hawaii, they were intrigued. And once learning that simply for attending the 90-minute seminar they would receive three nights in an Orlando, Florida, hotel and two tickets to Disney theme parks for the rock bottom price of $99, they signed up.

So what happened next? For those of you who have subjected yourself to the agony of a timeshare presentation, this will sound familiar.


Jesse and Janine’s Unfortunate Adventure

Picture a large, well appointed conference room. Picture hordes of smiling sales people about to begin a sleek presentation. Picture about one hundred naïve, dreamy, excited vacationers eagerly waiting to learn how they may afford a part-time home in Paradise.

This is the scenario for a typical timeshare presentation. And here’s what happens at these high-pressure sales events:

  • Way Too Long. Instead of the advertised 90 minutes, the seminar went on for a grueling three hours.
  • Keep Coming At You. Not one, not two, not three but six salespeople will corner you, the potential buyer, relentlessly badgering you to buy.
  • Buy Now. Now! After the pitch and the badgering, you will be told (not asked) to make a decision. You will be told to make, ‘the best decision of your life’, and to do it now, commit to it now, before leaving the seminar.
  • Preying On Emotions. When the sales force realizes you’re not buying their pitch, they summon another weapon: guilt. Saying things like, ‘if you don’t buy, I won’t get paid and if I don’t get paid I can’t feed my family’. Or, ‘how could you accept our free gift without buying? Is that the kind of person you are?’ Nice. Real nice. Just the kind of folks everyone wants to deal with. Not.
  • Investment Blather. As if using guilt as a sales tool isn’t low enough, as an alternative way to reel you in, they outright lie about the timeshare’s investment value.
  • Locked-In. And for those who take the bait during the pressure packed seminar, handing over anywhere from $15,000 – $20,000 before leaving the room, don’t count on being told that you have the right to cancel, usually for up to seven days after signing the contract.

What Is A Timeshare, Anyway?

Before I tell you why timeshares are a bogus investment, I’ll do my best to be objective, and tell you a bit more about this investment nonsense, er, um, I mean, ownership opportunity.

So … what is it?

Also referred to as vacation or fractional ownership, a timeshare is a real estate program in which a residential property is divided among many owners who have purchased the right to use the property for a specific period of time, i.e., one or two weeks.

Typically, a timeshare refers to a room at a resort or vacation destination. Instead of paying full price for the room (like a hotel room), each ‘owner’ pays only a share of the property’s total cost. In return, the ‘owner’ is privileged to use the room at a pre-determined time. For example, if you buy a 1/52 share of a room, then you ‘own’ the room for one week each year.


Timeshares Come In Different Shapes and Sizes

Deed. Most timeshare purchases are ‘fee simple’ transactions that come with a title deed. This means that you’re buying a share of ownership, and may sell, rent or give away your share just like other kinds of real estate.

DeedLess. This type of ‘ownership’ structure is essentially a lease, with the owner buying usage rights for a specific number of years. At the end of the lease term, the buyer loses their right to use the property.

Vacation Club. This is slightly different than the standard timeshare set up. A vacation club is an organization that owns several timeshare properties in different locations. Buyers may choose to vacation at rooms in the different properties.

Points Program. Another variation on the standard timeshare set up. Here, you buy membership in a program that gives you a certain number of points that may be exchanged for rooms at different properties. 


Cost Of A Timeshare?

Hanging on to your hat? Get this: average cost is $19,000 (USD)! On top of that, lucky buyers fork over an annual maintenance fee that usually tallies between $650-$1,000 (USD).

Given that these are average prices, cost will vary according to several factors including:

  • Location.
  • Time of year the room will be occupied, i.e., winter holidays and spring break will cost more.
  • Property condition.
  • Amenities.
  • New timeshare or resale property.
  • Deed or No-Deed.
  • Whether the timeshare is part of a brand such as Disney.

Tell Me Again … Why Would I Want To Buy A Timeshare?

Okay, really, I have no idea. It makes no financial sense to me why anyone would purchase a timeshare. All I can fathom is that the idea of ‘ownership’ taps into some primal need to plant a stake, to claim ownership of territory.

My lack of understanding aside, here’s what some claim are advantages of buying a timeshare:

  • The perfect plan for those with a Certain, Guaranteed, Unchanging vacation pattern, who want to prepay for their vacation, i.e., same location, same dates, same price, same room year after year.
  • Access to condo room for those without resources to buy a condo outright.
  • Not responsible for repairs, upkeep, or security, as would be the case if you purchased full ownership of a condo.
  • Opportunity to sublet the room during your reserved vacation time thereby earning money.
  • Option to buy a spacious 2 or 3 bedroom timeshare. The benefit here would be for a large family that would otherwise pay for more than one hotel room when vacationing.
  • Option to trade reserved dates and location with other timeshare owners.

Now Tell Me Why Timeshare Ownership Is Just Plain Silly, And Sometimes Harmful

Out of all of the so-called advantages, the only one that I don’t take issue with is the first. I mean, if you prize certainty of vacation location and dates above all else, including whether you’re overpaying for your vacation, then a timeshare is for you.

As for the other ‘advantages’, they’re a truckload of hooey. Here’s why:

  • NOT AN INVESTMENT. Forgive me, I put that subheading in CAPS. And yes, I’m raising my voice here because it’s really important you know that a timeshare is not an investment. It just isn’t.
  • Immediate Loss Of Value. Unlike buying residential real estate, most timeshares lose value, sometimes nearly all resale value, as soon as the purchase is consummated.
  • Minimal to Non-Existent Resale Value. Because there is a huge supply of timeshares, supply that far exceeds demand, it can be difficult to even give them away, never mind recoup anywhere close to your ‘principle payment’.
[Chewy Bit. Notice I did not say ‘investment’; you will not make money on a timeshare sale; the only people making money are Developers and Salespeople who sell the timeshare. In this regard, consider that a timeshare unit is sold at a price of $20,000 per week. If sold by the Developer for 50 weeks, then Developer makes a cool $1 million plus tens of thousands of dollars in fees for a unit that likely cost much less than that to build].

  • No Tax Benefit. Selling your timeshare at a loss does not allow you to claim a Capital Loss for tax purposes, as you would do with Real Investments.
  • Costs. True, you are not responsible for upkeep but you do pay an annual fee and this annual fee commonly increases every year. As well, you are held responsible for closing costs, broker commissions, and special assessment fees. And here’s a fun fact: if you don’t pay maintenance fees or special assessment fees, the Developer has the right to foreclose on your timeshare.
  • More Costs. If you take a loan to finance the purchase, you’re paying interest on top of the principal. Horrible, horrible idea to finance a timeshare, and increase the amount of money you’re tossing into a dark hole.
  • Locked-In. Some timeshare contracts lock you in for life! How insane is that?! Others lock you in for several years. This means you are responsible for all fees for the duration of the contract, whether or not you make use of the timeshare property.
  • Uncertain Availability. The supposed advantage of vacationing at the same place, same time may be hard to come by. It is not unheard of for a timeshare company to misrepresent the ease of scheduling your vacation time. Also, most vacationers want to reserve ‘their room’ for the same time period. Of course, this isn’t possible.

If You’re Still Gung Ho About Timeshares …

Fortunate for J&J, ignoring excessive pressure to stay for the entire spiel, they walked out of the presentation without handing over a dime. Others remained and a percentage of those remaining likely bought themselves a piece of … um, something?

Despite my obvious concerns about timeshares, don’t take my word for it. If interested in a timeshare, then by all means do your research and determine whether it is best for you. To help you along, keep the following in mind:

  • A timeshare is more like a lifestyle purchase. It is not an investment (right, I’ve mentioned this a gazillion times now).
  • Crunch the numbers and be sure to include depreciation (as soon as you get the keys, resale value drops anywhere from 50% to 100%), travel costs, maintenance fees, and the value to you of prepaying for future vacations.
  • Ask whether you want to visit the same vacation destination year in, year out. Or if you prefer to mix up your vacation destinations and activities.
  • If salespeople are less than forthright with you, or if they do not offer a grace period allowing you to change your mind and cancel the purchase, then its best to walk away.
  • Do not pay any funds toward purchase without first inspecting the vacation property. I mean, would you buy any other real estate sight unseen?
  • If you need to borrow funds to make the purchase, then a timeshare is absolutely not suitable for you. And its telling that many banks will not lend money for a timeshare purchase. Not surprisingly, a developer will not hesitate to finance the purchase cost at a high rate of interest.

Fairy Tale Ending

You’ll be pleased to know that Jesse and Janine resumed their vacation immediately after leaving the timeshare presentation and had an excellent time. So much so that they expect to return one day, maybe visit one of the other Hawaiian islands, and stay at a different hotel, and not give another thought to wasting their valuable time with any more timeshare shtick.

 

 

 

 

 

 

 

 

Thinking About Investing In A Condo?

There’s something about owning real estate that gets folks going all ga ga. On a primal level, we humans crave to see, touch, even smell (ya, odd, but hey, we’re a diverse species) our investments, and real estate offers the chance to do just that and more.

The more part? Well, there’s the Sunday drives where you may visit your property for inspection or simply wave hello, and feel good about a particular piece of wood, brick, steel or stucco belonging to you. And you may show your friends and say things like, ‘hey, lets meet at my investment property before we go for dinner’. And all that will give you the warm and fuzzies like no stock ever could.

But, putting on my investor cap, aside from being a source of the occasional feel goods, does it make money sense to buy a condo for investment purposes?

Talking This And That

Alright, first off, I can’t give you a blanket yes or no to that question. There are just too many variables, too many ‘it depends on this and it depends on that’ scenarios such as: the particular neighborhood where you buy; is property demand growing owing to neighborhood/town/city growth; is the condo structurally sound or will the building need major repairs in the near future; did you lock into a smoking hot deal, like those on offer in 2008-2009 in many parts of the USA; what are your financing terms; did you hire a property manager or will you be responsible for dealing with maintenance, repairs and tenants; do you enjoy being a landlord? do you understand that property ownership is a business in itself, requiring your commitment of time and energy if it is to be successful …

All of these issues will affect both your income stream (i.e., rent) and whether or not the condo’s value increases over the years to come.

Uh Oh, I Didn’t Think About Those

Look, I’m not trying to dissuade anyone from investing in a condo. But I am saying there’s a good chance that it may not be all your friends say its cracked up to be. And I’m saying that you have to look at downsides and potential pitfalls, you have to fully inform your self as to what you’re getting into, before starting any business or venturing into any investment.

Working For A Living

Running your own property investment gig takes commitment, skill, and energy. And to do so successfully, you need to know how the game works. In this regard, consider the following Need-To-Knows:

  • Condo Fees

You’ll pay a monthly fee, akin to a maintenance fee, that goes toward keeping the building in good working order. When you’re budgeting expenses, be sure to factor this into ownership costs. And count on the fee increasing at least as much as the rate of inflation.

  • Who’s Running The Show?

Owners are elected to the Condo Association, which is usually made up of between 5 to 9 people. When owner-occupiers serve on the Condo Association, they typically take better care of the property. Landlords not so much as they’re more concerned with keeping monthly fees to a minimum so they can maximize personal cash flow.

  • Condo Rules

This condo rule thing, it’s fairly wide open as far as what may or may not be permitted. Common examples include: uniform colors throughout the building, no pets, and even no kids. For the potential landlord, well, it goes without saying that you need to ensure that the rules do not prohibit renting.

  • Joy of Assessments

Let’s say the building needs a new roof or owners vote to replace single pane windows with double pane. To pay for it, the Condo association has the power to assess a special levy on all owners. Meaning, you’re obligated to pay your share of repairs whether you want the repairs or not.

Typically, it will be a lump sum payable by a certain date. In the Pacific Northwest, during the past twenty years or so, many buildings constructed of wood in the 1970s or 80s needed to have the entire building enveloped and repaired owing to structural water infiltration. The cost per owner? Somewhere in the ballpark of $30,000 to $60,000. Not pocket change.

And once in a while, a rebel owner would put on their complaining pants, state their objection, and refuse to pay their share of the Assessment. What happens then? The Condo Association has the right to put a lien on Rebel Owner’s unit that may prevent future sale of the unit. Okay, all fine and good and just and fair but, in the meantime, funds need to be raised for repairs. Who shoulders the extra cost? The other owners.

  • Condo Association Finances

Before buying, you absolutely must review Condo Association finances. Even better (and highly recommended) is if you have an experienced condo lawyer review the books because they will know exactly what to look for, and what to flag.

Common issues include:

Financial Reserve. Does the Condo Association maintain a financial reserve? If so, how much is the reserve? If the reserve is on the teeny tiny side or there is none, don’t be surprised to receive occasional assessments for major repairs.

Condo Fee Steady. If the Condo fee hasn’t risen for several years, expect an increase soon. And if the fee was recently raised, find out why. It’s possible that an increase reflects a need to raise more funds to pay for repairs.

If The Purpose Is Investing, Think About A REIT Or Two Or Three, Instead Of A Condo 

If you’re not too keen on expending the time and energy required to run your own property investing business, i.e., manage repairs, attend to tenants, fill vacancies, arrange a mortgage, and pay property taxes, then consider investing in REITS.

A Real Estate Investment Trust (REIT) is a company that owns or finances income-producing real estate.

Many REITS are publicly traded so owning shares is a simple matter of paying under $10 to your discount broker and making the buy. Yup, it’s that simple. And you get to keep your evenings and weekends free (instead of fixing the toilet in the condo or meeting with the bookkeeper) while earning a monthly dividend of anywhere between three and ten per cent (the dividend yield depends on the particular REIT) and reaping the benefits of any share price increase.

So what’s not to like about a well managed REIT? Well, before I blather on about the benefits of REITS, here are two potential downsides when compared to being a property owner:

  • First, you’re not in control of the property. Instead, you’ve outsourced control to the REIT management team. Personally, I don’t see an issue here, to farm out management to people who are skilled and experienced in the real estate investing game. That said, property owners enjoy doing business their way, they want control.
  • Second, REIT share prices don’t zoom to the moon. So, if you own property in a neighborhood where prices are skyrocketing, then your property investment will likely perform better than a REIT.

For those of you who do not wish to speculate on property prices, are not built to be a landlord, and prefer a virtually stress free property investment vehicle, choose REITs because …

Diversification

REITS offer diversification in that they hold many properties situated in different geographical locations. And they operate in all sorts of property related businesses including: office, industrial, healthcare, shopping centers, mortgage/finance companies, student housing, hotels, self-storage, and apartment buildings.

Steady Income

A solid REIT provides stable monthly income and annual dividend growth. Think of each dividend increase as a rent increase charged to tenants – the beauty of it is that you don’t deal with any tenants.

Outsourcing Management

Instead of you taking care of buying, managing and selling property, with all its attendant costs and demands on your time, REIT owners are investing in the company’s property management expertise, and their ability to effectively run a public company, including improving its share price and cash flow.

Low Stress

Every month, the REIT drops a dividend payment into your investment account, and occasionally you check the share price. Stressful? As much as a day on the beach.

Liquidity

On any given day that stock markets are open for business, you can sell shares in your REIT for a total transaction cost of under $10 (assuming you’re using a discount broker). Not so with real estate. Rather, it takes time to find a buyer. There is a waiting period up to ninety days before closing. And you need to hire a lawyer and real estate agent, at a minimum, and often pay a government land transfer fee in the thousands. Typically, closing costs run anywhere between four and eight per cent of the sale price.

What Works For You

If you haven’t guessed by now, I’m more of a fan of owning solid REITs instead of income producing property.

REIT ownership is simple, and I don’t have to bother with (re: stress) buying, managing and selling property; which leaves more time for life outside of investing such as hanging out with my kids, going for a walk with my wife, hiking and yoga. Balance.

Still, it’s not a matter of one being ‘better’ than the other. If you enjoy being a landlord and all its responsibilities, and are committed to making your own property investment business a success, then go for it. For those who want exposure to real estate but do not have the time and/or inclination to be a landlord, REITs are an excellent alternative.


ps. huge thanks to American Advisors Group for their permission to use the image introducing this post!

Property Investing: Need To Knows

Long, long before Duddy Kravitz’s (The Apprenticeship of Duddy Kravitz by Mordechai Richler) father told him, “A man without land is nobody,” investing in real estate was one of the best games in town. You bought property, rented it out, collected monthly checks, and watched your wealth grow. Historically, price appreciation was a bonus since the primary objective of most property investors was to generate income.

Today, investing in real estate remains a heckuva game.

[Chewy Bit: this post is limited to discussing investing in residential real estate, such as a condo].

And though income potential may be appealing, during the past decade or two many markets in North America, and the West in general, have seen property values increasing at a far higher rate than the historical average of about three to six per cent.

Sounds enticing, yes?  Then why doesn’t every investor diversify their portfolio outside of ETFs, stocks, bonds, and find themselves a bricks and mortar investment? Well, the thing is … while property investing has strong potential upside, making money at it is by no means a slam dunk.

Lord Of The Land Material?

Sure, there’s something emotionally appealing about owning land, about being able to stand tall, chest puffed out, arms held wide open, proudly announcing, ‘Welcome to my Land!’

But I’m here to tell you not to buy into that silly ego nonsense. Being a landlord is not a simple role and its not for everyone. Rather, it’s more like a part-time job: dealing with tenants, property maintenance, unexpected costs, and guaranteed headaches now and then.

And like any investment, before you dive in, you have to do your research and figure out not only whether a particular property is suitable but, as importantly, whether you are suited to real estate investing.

Things To Be On The Lookout For

Most definitely, rental property may provide you with a stable source of income. But like any investment, you need to fully and completely and absolutely understand what you are getting into before you sign on the dotted line.

And you really, really, really, have to think hard about a bunch of issues (see below) that must be factored into purchase deliberations before you get all antsy in the pants and rush out to buy:

  • Financial Might. As a potential buyer, you should be financially secure. If your job security is in question or the purchase might compromise financial goals that are higher on your list of priorities, then you shouldn’t be considering the purchase of investment property.
  • To Mortgage or Not To Mortgage. If you’re not paying all cash for the property purchase, then you’ll be arranging financing. Which means, naturally, that much thought must be given to the issue of whether or not to take on debt.

It’s not that all debt is BAAAADDDD. It’s not. Especially when you’re borrowing for the purpose of earning income, and that income will be sufficient to cover financing payments, property taxes, monthly condo fees and repairs. And every time you make a mortgage payment, you’re increasing your equity stake in the property. Bonus!

But Debt still equals Risk. And if you already have a mortgage on your home, or your financing a car, or the kids are off to university soon, or you otherwise carry large debts or expect to incur large expenses in the near future, you have to run the numbers and objectively consider whether it’s wise to take on more debt, i.e., more risk.

  • Interest Rates. We live in a wildly low interest rate world but that’s going to change, sooner rather than later (so says BuddhaMoney’s crystal ball). As interest rates go up, so will your cost of borrowing. In turn, higher financing costs will reduce your net return unless you’re able to raise rent.
  • When To Buy. All investment markets are cyclical. And just like buying stocks, you want to buy real estate when prices are low, when the market is weak. Because buying low increases the odds that the principal value of your property will appreciate in price over the long haul.
  • Property Taxes. This is just one of many costs of ownership. Before you purchase, find out how much in property taxes are to be paid during the year in which you buy. Then take a look at property taxes for the five preceding years, to see if there is a trend or a typical percentage increase.

Sure, this information will better inform you of overall costs, but you still  won’t know with any certainty how much, if any, property taxes will increase next year or any year thereafter afterward. So do the wise thing: to minimize the odds of there being any financial surprises, and ensuring the property is affordable, plan for taxes increasing at a percentage rate higher than the past typical increase.

  • Wear and Tear, Grin and Bear. In the usual course of owing a residential property, maintenance and repairs are needed. Whether you need the washer or fridge repaired, walls freshened up with paint, or the hot water heater replaced, you will incur maintenance and repair costs. And if you’re not the kind of gal/guy who cares to get your hands dirty and callused by undertaking repairs your self, then repairs will cost you that much more.
  • It’s the Tenant Calling … Again! Okay, what do you think of this scenario: tenant calls you at two in the morning. Apparently, the toilet overflowed and there’s now a rising lake inside the condo.

Or … tenant is late with their rent. Then simply stops paying rent. And you’re not familiar with local laws so you higher a lawyer (i.e., money out of your pocket) and pop Tylenol for the next thirty days because you haven’t off-loaded property management to someone else because that would eat into net return.

Or … something innocuous like tenant calling at nine in the evening asking you to drop by to change a light bulb that they cannot unscrew despite their two university degrees.

Hey, that’s reality folks. You may be Lord of the Manor but that doesn’t mean you’re always walking in the rose garden. From minor annoyances to major inconveniences, there is a price to pay and time to give. So don’t underestimate the amount of work involved in dealing with your tenant.

  • Evil Renter Person. You may have heard a story or two about renter’s doing serious damage to a condo. Though I tend to believe that most renters act honestly and respectfully, there remains the possibility that your condo is leased to Evil Renter Person. And when damage happens, guess who’s going to pay for repairs?

If Evil Renter Person escapes from your clutches, never to be seen or heard from again, then you, Property Lord, are responsible for paying repair costs.

Or … you may get lucky and Evil Renter Person may accept responsibility and reimburse you for repair costs.

Or … your insurance may cover the damage.

Or … the security deposit may be sufficient to cover repair costs.

However it works out, dealing with renter caused property damage is a headache of varying pain thresholds.

To best protect yourself: (1) before agreeing to lease, meet with prospective tenant at least once if not two or three times to get a feel for who will be living in your property; (2) before agreeing to lease, thoroughly review all information concerning prospective tenant; (3) retain a lawyer to review the lease agreement, ensuring the agreement covers damage caused by the renter and; (4) require a security deposit, minimum one month’s rent, two is even better.

Ya, Ya … So There’s Risk … How Much Money Will I Make?

You’re in the property investing game to earn money. And with rental properties, income is earned via rent payments. Once you’ve assessed applicable risks, and decided they are manageable, you’ll need to calculate how much income this baby’s going to drop into your account each month.

Here’s a straightforward example:

  • If property cost is $400,000;
  • And the property rents for $2000 / month;
  • Then you receive $24,000 annually (i.e., $2000 x 12 months = $24,000), which works out to 6% gross return

[Chewy Bit: gross return means we have not yet calculated expenses].

That said, you should know that rent payments are not guaranteed from the day you purchase the property.

What I mean is that there may be times when the property sits empty earning bubkus!  Such as (1) if the rental opportunity is typically seasonal, not year-round; (2) those times you’re searching for a new tenant; or (3) Evil Renter Person refuses to pay rent and you have to jump through legal hoops before evicting tenant.

Spend Money To Make Money

That $24,000 I mentioned above, that’s also known as the property’s cash flow.

Deduct all expenses from cash flow and, voila, you figure out how much money gravitates to your pocket, i.e., net return.

What kind of expenses are we talking about?

  • First, you have Fixed Expenses. Meaning, expenses you’ll incur every year, i.e., property taxes, insurance, and common maintenance and repairs.
  • Second, there’s your Surprise!-wasn’t-planning-for-this-expenses, like replacing the roof or air conditioner, or a pet shredded the carpet.

Now, as an example, if expenses run you $5,000/ year, this leaves you with a net return of $19,000 ($24,000-$5,000) or a 4.75% return. When considering whether the investment is worthwhile, you’ll want to calculate the approximate net return.

And when you’re doing so, be sure not to underestimate  expenses. Because it’s no fun if you go into this investment thinking you’ll make money and then you don’t.

[Chewy Bit: most common mistake among novice real estate investors is to inaccurately minimize costs of renovation and ongoing maintenance].

Streams and Streams of Cash

The thinking goes that rental properties provide a stable income stream that is separate from all of your other investment and retirement accounts and not necessarily subject to the same risks. And if you understand the risks involved, can afford to make the purchase, and are willing and able to wear the Landlord hat, then odds are you’ll have one solid investment supplementing your income each month, building equity, and contributing to a financially secure retirement.

But you know what? For me, I’m thinking: is it worth the effort to buy an investment property? I mean, there’s a simpler way to gain exposure to the real estate sector if that’s what I’m looking for.

I pay my discount broker $9.99 and buy a Real Estate Investment Trust (REIT) that pays me a monthly income of anywhere between six and nine per cent.

Sure, REIT units may go down in price, just like real estate value may decrease. But if I’m holding for the long run, I’m quite comfortable taking the risk that the REITs principal value will not decrease, and in fact will likely increase. In the meantime, I’m earning my six to nine per cent every month with the added pleasure of not having to take on any of the risks involved with purchasing an investment property such as managing a tenant, financing a property, learning home repairs, or tying up a boatload of capital in the property.

Bottom line: If you want a piece of real estate, then it comes down to deciding not only which investment will provide the better return, or which investment will save you money on Tylenol, but as importantly, which one is a better fit for you: REITs or bricks and mortar.

 

 

 

Build Wealth. Buy Real Estate.

My grandmother (let’s call her NaNa), a shrewd businesswoman with a big heart, invested her family’s minimal excess income in real estate.

She started by buying a duplex. Her family lived in one part of the duplex and rented out the other half. Rental payments covered her mortgage, general expenses, and allowed for a bit of extra cash. Maintenance costs were held to a minimum, as my grandfather took care of repairs.

In time, NaNa saved enough for a down payment on a second duplex. With much of the rental income being deposited into a savings account, she soon had enough to buy a third property. Eventually, the family was rewarded the luxury of not worrying about taking care of their basic needs.

Nana Teaches The Son

Ever a keen and interested observer, my father learned from NaNa. She taught him a whole lot about property investing, including:

  • What issues to consider when evaluating a potential purchase.
  • Benefits of maintaining a property’s value.
  • Importance of being fair and respectful to tenants.
  • How to draw a budget.

Having the advantage of NaNa’s tutelage, a university education, and an extraordinary work ethic matched by ambition, by the time my father reached middle age, he had assembled a decent-sized portfolio of apartment buildings that he referred to as his retirement fund.

And all of this was accomplished in his spare time, outside of regular work hours. That’s just who he was. Some people play tennis for fun, others get their kicks out of working, building, creating.

The Next Generation Adds A Twist

In my late twenties, starting to accumulate savings, I considered following in my father’s footsteps and buying apartment buildings as a way to build wealth. But I didn’t. Not because I didn’t want to but because the cost of apartment buildings had rocketed out of my financial league.

Small, independent property owners like my father had been bought out by deep-pocketed corporations who owned and managed thousands of rental units across the country. These corporations are known as Real Estate Investment Trusts (‘REIT’).

The Beauty of REITS

Instead of taking on the risk of a huge mortgage to finance the purchase of an investment property, and spending time learning the nitty gritty of property management, I turned to REITs as a way to dive into real estate investing. But before I chatter on about why REITs are an excellent investment, one worth getting to know better, I’d like to offer a few chewy bits about this asset class:


Chewy Bits

  • A Real Estate Investment Trust (short form: REIT, rhymes with ‘eat’), is a company that owns or finances income-producing real estate.
  • Most REITS trade on public stock exchanges (i.e., New York Stock Exchange; Toronto Stock Exchange).
  • REITS are income oriented and usually offer a higher dividend yield than most common stocks (the income component is one part of their attraction).
  • REIT shareholders earn a share of earned income, and participate in capital gains (yahoo!) or losses (boo!) just as with any other company trading on a stock exchange.
  • Commonly, REITS have a specific focus, such as apartment buildings, hotels, industrial facilities, office buildings, retirement homes, shopping malls, storage centers and student housing.
  • REITs typically provide investors with a monthly income stream; most paying dividends anywhere between 2.5% – 9%.
  • Think of REIT investing this way: the monthly dividend you receive is like collecting rent without the attendant headaches of managing your own property. Really, after you click to buy the REIT stock with your online broker, you can just sit back and watch your monthly dividend be deposited into your account each month. Sweet.
  • Since 1991, as a group, U.S. REITs have outperformed the S&P 500, 11.2% to 9.1%.
  • REITs are not highly correlated to the price of stocks and bonds. Meaning, since the price of REITS do not necessarily follow stock or bond market movements, they may play a part in smoothing out portfolio volatility.

For all these reasons, you may want to start a love in with REITs, in the wealth building sense that is. Ahem. That said, know that, like other asset classes, the finance gods did not create all REITs equally.

Hint, Hint: Be patient, and diligently research which REITs are a good fit for your portfolio.

Apartment Building REITS

Personally, I’m a big fan of Apartment building REITS, and not just for sentimental reasons. Rather, my crystal ball brings up images of a North America that is heading in the same direction as some Western European countries, where home ownership is much less prevalent.

Look at Switzerland, with home ownership at 38%, Germany at 41%, France at 55%, compared to about 68% in the US and Canada. Why the difference? Because property is so, so, so expensive in these countries that most people cannot afford to buy. And for a good percentage of those who do own a home, it was passed on to them by their parents, or grandparents or great-grandparents, etc.

So people rent. And that’s just fine. In European countries, there is no stigma to renting like there is in some pockets of North America where ‘the dream’ of home ownership in a white picket fence neighborhood is relentlessly marketed to us by the usual suspects: banks, mortgage lenders, home builders.

Not to mention the social pressure we feel from friends and family (after all, we are encouraged to live our life in a similar if not the same manner as those who came before us). And, our own dark angel contributes to the desire for home ownership: the human propensity to covet thy neighbor.

Now, this isn’t to say that there are not thoughtful, legitimate, excellent reasons for owing a home such as:

  • Control. The house is yours. Do whatever you want with it, repairs, renovations, etc.
  • Stability. Unless you go into default on your mortgage, no one can force you to move.
  • Capital Appreciation. You benefit from any property value increase.
  • Forced Savings. Each mortgage payment gives you more equity in your home. Especially important for those who are challenged in the … I Really Don’t Want to Think About Investments Because It Hurts My Brain department.

Okay, so you see, I’m not anti-homeowner. Not one bit. To borrow a phrase from two creatures who live with me known as ‘teenagers’, I’m ‘just saying’ that renting is a viable alternative, sometimes a preferred alternative depending on several factors including how pricey property is in your town.

And as property values continue to increase, outrageously in some urban centers such as San Francisco, Vancouver, Manhattan and Toronto, more people turn to renting. The result being that apartment buildings maintain high occupancy rates, which is good for apartment building REITs, and puts a smile on the face of REIT shareholders as they reliably collect monthly dividend payments.

Crunch, Crunch, Crunch the Numbers

My friend, Condo Lover, doesn’t agree. He says the better investment is a condo that you rent out. With a small down payment and mortgage financing to cover the balance of the purchase price, you’re now the proud owner of a condo.

But you don’t live in the condo, you rent it out. The rent payments cover your mortgage, maintenance and repair costs, and property tax. If you’re lucky, there’s change left over for spending money. So cash flow to cover condo costs isn’t a problem, and you sit and wait until property values increase to the point where you can sell the condo and cash out a sizeable capital gain.

I get it. I see the potential benefits of buying a condo as an investment. But if the condo is used solely for investment purposes, not as a second home, then I would take a pass.

Here are the primary issues, and the risks, I see:

  • Assuming I don’t have enough in the kitty to pay all cash for the condo, I’m taking out a mortgage. What if I can’t find a solid, upstanding tenant who pays their rent on time each month, or who pays their rent at all? Will I still have enough to cover mortgage payments?
  • If I’m going in with my eyes open, I’m factoring in repair costs, general maintenance, property tax and increases in property tax. Ideally, a steady stream of rent checks pays these expenses. But what if they don’t? Do I have other resources to cover expenses?
  • What if I want to sell the condo but the real estate market is weak, the timing of sale is unknown, and I have to drop my asking price, possibly taking a loss? Am I prepared for this scenario? Could I absorb the financial hit without breaking stride?

Compare this to being a property owner via a REIT. I buy shares in the REIT with cash held in my investment account. I don’t borrow to pay for the purchase.


Chewy Bit

Buying on Margin. This is an investment term that means you pay for a certain percentage of your stock purchase and borrow the balance owing from the investment brokerage. DON’T DO THIS! EVER! Leave buying on margin for the speculators. It’s not for reasonable investors.


As a REIT shareholder, I don’t have to worry about bad tenants destroying my property or not paying any expenses associated with the property. And when it comes time to sell, well, I only buy fundamentally sound REITs, meaning there is always a liquid market (i.e., sufficient volume of buyers and sellers), so I can sell any time I like. I collect a monthly, purely hassle-free dividend (amount of dividend dependent on the individual REIT), and if I purchased a REIT when it was out of favor (i.e., price was down; we here at BuddhaMoney love buying investments on sale), there’s the opportunity for capital gain when I sell.

Now, tell me, what’s not to love about REITs?