You Don't have to be Smart: Some Basics

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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A Recent Coffee

I tend to do a lot of my thinking and learning at a coffee shop not far from my house in Calgary. It provides me with undisturbed space and time to do more than I can at my home office. Earlier today, as I was getting ready to leave, I overheard the group of people sitting next to me talk about a lot of problems they are either experiencing or hearing about as real estate investors. I quickly found myself becoming a little frustrated as I heard a few of their frustrations. I became frustrated at the fact there is so little reliable education helping average people with their investing. The group sitting next to me sounded far from average; they were very well spoken and intelligent people, but they spoke of problems I hear about consistently from investors who don't have a full understanding of real estate. In the end, consistently profitable real estate investing is not about how intelligent you are, but rather about how much you know.

Who NOT to Learn From

I highly encourage anyone interested in real estate (whether the goal is one door or hundreds of doors) to learn as much as you can and spend time talking to those who are highly successful because of how they invest. Some people are successful in real estate because they start with a ton of capital or because they can supplement their mistakes with a very high paying job... these aren't the people you want to learn from. Learn from those who started with almost nothing and understand every aspect of the business. One group of people I recommend you stay away from is family and friends. Spend quality time with your family and friends (and not only in the holiday season), but unless they are successful in the real estate industry themselves, they more often than not can derail you with advice they have picked up from popular news media instead of sound investors.

A Beginning

I'm going to throw out a few ideas for you to think about if you are investing in a place even as busy and high priced as Calgary in order to get the juices flowing. Take it for what it is and, if you are interested, read more of my blogs for more information. I will share a few basic rules of thumb with you to give an idea of what is possible in real estate. My goal for buy and hold properties is a 1% rent to value ratio. That means the ideal for me is to have a property that pays its investor 1% of the property's purchase price each month in rent. An example is that if I purchase a place for 300k, I would like 3k/month in rent. I know what many of you are thinking right now: IMPOSSIBLE! I can assure you that these numbers are very possible. If I was investing in the United States right now my goal would be a 2% rent to value ratio. I didn't say this was easy, simply very possible. It is always good to know an insider in any local area because they can give you both an idea of what you can find in an area as well as how to find it. Any local wholesaler is worth every penny of what they charge for a good deal.

It is hard work finding great prices on properties in an up-trending market like Calgary right now and, depending on how much time and marketing money you have, it often is a great investment to simply find a reliable wholesaler. If you don't know what a wholesaler is or how to find one... Ask a local successful investor. Most will know. If the investor you are speaking to doesn't know what wholesaling is or how to find one, this may not be the investor you should be learning from. In today's market I may purchase a place with a .85% rent to value ratio (at the lowest), but only if it meets all my other criteria. The reason is that I will only purchase a property that pays not only all the fixed expenses, but also the maintenance, property management, and vacancy costs and then, after all of those expenses, the property must also put some money into my pocket. If a property does not command enough in rent to give me cash flow after all expenses, then it is not an investment. An investment, by my definition, is something that gives me money each month whether or not I am paying close attention to it. A liability is anything that demands my time or money when I may not have a desire to give either of those. I will write another post either today or tomorrow that explains how to properly calculate expenses.

One more rule of thumb, this time for property management, as I want this post to be shorter. Again, this is simply given you in order to get juices flowing and set your expectations higher for the way you are investing. If you ever have uncollected back rent of more than 10 days you need immediate help. If you ever have uncollected back rent of more than 30 days it is most likely a sign you need much more education before continuing in the type of property management you are doing. I often hear horror stories of 'bad tenants' but, while most investors with experience have a few stories themselves, the majority of these stories are easily preventable. If you consistently have bad tenants (I will put this bluntly), you are a poor property manager.

This Blog Attempts to Help Everyone

Every individual is at a different level of understanding investing in real estate and I have attempted to tailor my posts in the hopes of addressing those differing levels. I encourage you to look through those posts that interest you and use them as a spring board from which you can learn much more. None of my posts are exhaustive. It is my desire that they kick start you toward successful investing not only until the next down turn, but until you decide to do something different on your own terms.

Happy investing!


If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

7th Dimension: Hedge Against and Profit from Inflation as well as Deflation

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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***please read: The first section of this blog is fairly long and explains the background needed to understand the other sections. If you don't need the help of the definitions, please fast forward to the end.

Definitions

Supply and demand are terms you must have an understanding of in order to take control of your own economic situation. For those new to this concept I will explain quickly here. I will give an example rather that giving definitions here because a real life example makes more sense of this phenomenon. If you live in a growing city where there are a lot of new jobs, but the city doesn't have enough housing for all the new immigrants who want these jobs the price of the houses will go up. This is because supply is low (the houses) and demand is high (the people who want to purchase these houses). The reason the houses will move up in price is because when a house goes up for sale, maybe 2 or 3 people will attempt to purchase the house and the highest bidder tends to win. In Calgary around 2005-2007 there were annual increases in house values by over 35%! At that time if a house came up for sale, within a few hours there might be 10 families interested in that house, which drove prices extremely high in a very short period of time. The opposite is also true. If you live in a small town that had a main employer move somewhere else, there are now people leaving the town, not coming in. What this does is drive the prices down in that area. The supply (houses) is high and the demand (people wanting to buy these houses) is low. Every time a house comes up for sale it might sit like that for a few months or even a few years. In order to sell the house, a family will be willing to lower the purchase price, but now that seller is competing with other people trying to sell their houses quickly and the opposite of a bidding war begins. Each family will try to lower their house quickly enough to sell it fast rather than keep a house in that town AND own a house in the new city with jobs.

Inflation is a normal part of everyday life in North America. A simple understanding is basically that when money is printed supply and demand kicks in and fiat currency is devalued; when a government prints more money and sends it into the economic system, there is more supply (money), but demand will suffer somewhat and this devalues the buying power of each individual dollar. Official government sites tend to talk about the rate of inflation as under 3% annually for the last 20 years. Many people take issue with this reporting of inflation, however, because the CPI (customer price index) that measures how much inflation is taking place does not account for everything that people are buying, so it is skewed to the low side. Many people believe the real rate of inflation is actually about double what is reported. I will leave you to be the judge of your opinion, but as a starting exercise you can quickly look at how much money you are making now compared to how much it costs to live (I'm talking about basic living expenses in Canada like rent, groceries, gas, etc.)

Deflation is the opposite. This is when the stuff we need on a yearly basis actually decreases in price. Another way to understand deflation is when money in an economy becomes more valuable. This can happen for a number of reasons, but the most common are: 1) when the people of an economy don't buy enough goods. When people start saving money instead of spending it, the cost of goods comes down and 2) if the pace of population growth is greater than the rate at which money is printed. Again, this is easy to understand with a basic understanding of supply and demand.

Governments are terrified by deflation. Why? Because if the currency is worth more each year it means the debt that country owes to other countries actually increases on top of the interest rate. This is actually the main reason countries print enough money to keep inflation rates 'healthy'. This is really important to understand because governments have a crazy amount of control over their own debt up to a point. If a country, like the US, starts getting into trouble with how much debt they owe other countries they can begin printing money at a faster rate. This causes inflation (devaluation of the dollar), which in turn helps in paying down the debt for two reasons. The first reason is that the value of the debt in year 1 is higher than the value in year 5. I'm not sure I want to explain all of this here because it will get wordier than this blog already is and I still have to make my main point! A simple explanation is that if you have an inflation rate of 6%, the value of the dollar will decrease by half in 12 years. So... if a government owes 1 trillion dollar to another country and can devalue their currency by 6% per year, they will only owe 500 billion dollars after 12 years. The other reason printing money helps in paying down debt is that there is little initial cost to the government for printing this money and paying down the debt. If a country owes 1 trillion dollars it could simply print 1 trillion dollars and pay of the debt. A country has to be careful, however, because if it prints too much money, the money won't be worth anything and the economy will suffer in other ways.

Some people ask me: how can the US possibly get out of the debt they are in? The answer is simple. The US government will attempt to devalue its currency to help manage the debt load. They have been doing this for the last 5+ years with 'Quantitative easing'. The numbers are mind boggling. I don't have any definite numbers, but some people claim the US has printed over 10 trillion dollars in this time. What does this mean for the economy in the near future? That there will be inflation rates much higher than 3%.

Fiat currency is important to understand as well... Fiat currency, for our purposes, is simply paper money. The money doesn't have any value in itself other than the cost of the paper (or plastic now in Canada). The value of fiat currency is in how much it represents and whether or not people trust its worth. A commodity of any kind is not fiat currency because it has value in itself; intrinsic value. This is why gold and silver are spoken of as good currencies by some people; they are valuable on their own no matter what value is placed on them by a government.

Today's market

As I just mentioned regarding the situation in the US (a similar situation is happening in Canada because the US economy influences us greatly... Maybe I'll take the time to explain that in another blog), we are at the beginning of a highly inflationary market. For any individual in the US or Canada the wage you will be paid in the next decade will not grow as fast as the price of goods. This is scary, but you can take steps to avoid big problems.

The best thing you can do in this type of economy is to have all of your savings in commodities. Some people purchase gold and silver or other precious metals, but I invest in real estate. The worst thing you can do in this type of economic situation is to save dollars. Even if you save dollars and receive an interest rate of 3% (hard to find these days at any bank), if the rate of inflation is at 6% it means your money is actually shrinking by 3% per year. I highly recommend finding better ways to save money than putting it in a bank. The practice of saving money by purchasing commodities is called hedging. If you buy a hard asset (gold, silver, a house, etc.) then inflation doesn't affect this asset negatively. If inflation goes up by 5%, then the cost to purchase the house you have also tends to go up around the same amount (keep in mind I am simplifying these concepts so I can get to my main point somewhere in this blog:). Paper assets (stocks) are not a hedge against inflation because they can go a completely different direction than inflation. It's true they will tend to go up as inflation rises, but they are disconnected from intrinsic value (their worth isn't tied to commodities. Some may argue they are tied to businesses, but this is debatable because as companies increase or decrease in value the stocks of these companies are governed instead by public opinion of the stocks themselves which is why a company can have a great year and yet their stock tanks).

Quick summary so far...

The rate of inflation is most likely going to increase in the next few years, but even if it doesn't the way to hedge against even normal inflation is to have your savings in physical (hard) assets rather than fiat currency. In an inflationary market your paper money is devalued. In a deflationary market your paper money goes up in value (you can buy more with each dollar). What should you do, then? Should you invest in gold hoping the economy won't do well? What if the market doesn't realize high inflation but rather deflation? What could you do in that situation? This is where another beautiful aspect of real estate comes into the picture.

Profit from inflation AND deflation

When the government prints money inflation happens, but deflation is consistently taking place as well in certain sub markets. An example is computer technology. Do you remember how much a 286 PC computer was costing 20 years ago? It was thousands of dollars and all it did was crunch numbers. Now we have quad processors that can do almost anything we can imagine and yet they cost a measly thousand bucks! At times, the real estate market is devalued for a period of time (think 2008 and 2009). This provides a fantastic opportunity to purchase real estate. Not when real estate hits its low (you'll never be able to gauge that until after it has passed anyway). Purchasing real estate on the down swing (a buyer's market) is an ideal time to make money. When you have purchased this real estate you now are in a position to not only hedge against inflation, but make money (quite a bit of money) from it. If you purchase with borrowed money (a mortgage), then you can pay back this loan with depreciated dollars. In the late 70s and early 80s, this was how much of the baby boomer generation made hundreds of thousands of dollars. When inflation rates hit 6% or higher and you are paying off debt at 3% you are making 3% simply by holding the loan. On top of this the money you owe is being devalued each year so that after 12 years that $200,000 that you did owe is now worth $100,000 and you are being paid more nominal dollars in wages as well as collecting more nominal dollars in rent. Wait another 12 years and if inflation continues at 6%/year you will owe $50,000 even if you were only making interest payments.

If you understood what I just wrote you are either an experienced real estate investor that understands the depth of how real estate works for owners or fireworks are going off in your head right now thinking of the possibilities!

So.. what now?

Don't get me wrong, I won't only purchase an investment property in a buyer's market. I will look to purchase a property whenever it's a great deal (notice I didn't say 'good deal'), but when the market is falling I realize there is even more money to be made from other dimensions of real estate. The reason I present more and more dimensions of real estate is to teach anyone who will listen that real estate is as close to a can't miss investment if it is done properly; when you cover your risk by capitalizing on each and every profit centre.

If anything wasn't clear in this blog or you want to learn more please email me: mfrentz@akerahomes.com and I would be happy to call you and explain anything you are desire to understand better. If you live in Calgary I'll even buy you a coffee so we can sit down for the chat.

Have a fantastic week!



If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

Why I'm not a fan of RRSPs

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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The Fundamental Problem

The Canadian government created registered savings plans in order to help people 'save in taxes now and pay less later'. The idea is that, while in your greatest money making years, you save money (because you are taxed in a high income bracket) and invest with it in order that later on in life when you retire you will be able to take out this money at a lower tax bracket. Do you see the problem?

The major problem with this help from the government is that it was developed for people who PLAN to live on less money in their retirement than they do now! I don't know about you, but I don't want to live on less in retirement. I want to maintain my standard of living later in life, not have to settle for less.

My Personal Plan

My plan is obviously different than that of those who, maybe unwittingly, choose to settle for a lot less in their retirement. I invest in real estate and receive tax benefits every year (the exact same concept of paying less now while investing) so my investments will pay me just as much if not more in the future. I have no problem paying high taxes later on in life if I am making more and don't have to work every day for that income. I use the money I save in taxes, now, to reinvest in real estate. This means I will actually have more investments for the future (again, similar to RRSPs).

Why settle for less later on in life? I get riled up when I think of how many families actually plan to take a dive in their standard of living! With just a little bit of knowledge and planning you can take control of your savings and invest in ways that will still pay less in taxes, but will take care of your future consistently better than those the media tends to preach.

I am planning to start a series of blogs on how to invest your RRSPs if you already have money in them. I DO NOT encourage individuals to pull all their money out of RRSPs if money is already in them. Always speak with a competent accountant before making these decisions for yourself. I am not attempting to take away from other advice. I simply desire to give you some ideas so you can take more control of the money you have worked so hard for.

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

A Different Perspective on Taxes

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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A basic understanding of tax incentives

Today's blog will not be long. I intend to give a different perspective of taxes you can use to your advantage. Please talk to a great accountant about the ideas I am presenting. That means that many readers will need to talk to a different accountant than they are currently using. Remember that, as in every field and profession, there are very few competent accountants compared to the many who simply do their job in a very basic way.

Not all taxes are like death

Most have heard the phrase "taxes and death are the two constants in life", but I would like to challenge the idea that we are helpless in how much the government taxes us. Not long ago Warren Buffet made the comment that he pays less in taxes than his administrative assistant (percentage-wise). This seems unfair to most people, but not to those who understand why the government gives tax breaks.

So, why does the government seem to help those who are already wealthy?

You'll need to step into the government's shoes for a minute in order to understand the coming perspective. Government's are terribly inefficient and discovered a very long time ago (at least in some ways) that the economy will grow better when they aren't involved in the minutiae. If the government tries to stimulate the economy it is faced with a choice: Should we develop business and run them ourselves, or should we give incentives to others for the development of business. Governments our slow moving ships, but businesses tend to move and change directions quickly. Governments understand that the economic advantages of giving tax incentives to a company far outweighs the actual incentives themselves; individual companies will find more creative ways to grow a business quickly than the government can.

Government controls economic development by incentivizing the sector of the economy that needs stimulation. If investing in the energy sector will help the economy, they will give tax benefits to companies that grow the energy sector. If having more housing for families will keep home prices a little lower and encourage families to move to Canada, it is beneficial to give tax breaks to companies who will build condominiums. If a province wants to have more head offices move in, they can offer tax incentives for large corporations.

A question for the reader

Why wouldn't a government give tax benefits to companies in Canada? Everything is a balancing act and a country, province, or city needs income from the wealthy as well as the middle class, but economies grow faster when capitalism is freer to govern itself in some ways.

Instead of envying the wealthy in our great country why don't you make the choice, today, to take control of your own tax situation and start paying less! In a future blog I will discuss the differences between an internal locus of control versus an external locus of control, but for now I will simply state that it isn't the fault of others that you pay more in taxes. With education you can receive free of charge (ok, not completely free... you will need to spend the money for an internet connection and must make the choice to spend some some time learning) you can make significant changes for the better to your personal tax situation. The secret is in learning what the government wants.

Did you know that the majority of the tax code is focused on ways to save on taxes rather than ways you need to pay? Talk to a great accountant to learn more. In a future blog I will interview an accountant who will help make some of these concepts clear and offer the perspective of someone who deals with taxes on a minute by minute basis.


If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

Kiyosaki's Cash Flow Quadrant

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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4 ways to make money (Kiyosaki's cash flow quadrant)

Robert Kiyosaki made his cash flow quadrants famous for good reason. There is so much wisdom in understanding how people have generated wealth for hundreds of years. I am going to give a quick run down of each quadrant here to whet your appetite. I highly recommend "Rich Dad, Poor Dad" as I consistently meet people who claim it was a complete paradigm shift for the positive in how they view both their current and future financial outlook.

The employee

The employee is someone who tends to desire safety above all else. They pay a high price for this 'safety' however in the form of higher taxes than any of the other 3 quadrants. Many people complain that the wealthy pay less taxes and this is true (percentage-wise). The dominant mindset of the employee is "fear of instability" (translate this into simply 'fear'). The problem with this mindset is that there isn't any stability in being an employee. Employees can be laid off even if they work hard and are valuable to a company and pension plans consistently disappoint by not delivering what they promise. The mirage of security is paid for dearly by not having any control of your own finances. The employee is taxed before they receive their income.

The small business owner

A small business owner is anyone who works extremely hard and needs to have their finger in every aspect of their business. They tend to be control freaks and their mindset is: "If you want to do it right, do it yourself". While these individuals can receive some benefits with their taxable income, they also tend to have a ceiling that is difficult to get past. They pay high amounts of taxes because they tend not to have any way to distribute their income. They also tend to limit their own growth because they refuse to or cannot delegate jobs; these individuals spend much of their time doing easy work others could do for a lower wage. This group includes doctors, dentists, and lawyers as well as the typical trades-people we see so much in Calgary. There is a limit to how they can save in taxes.

The big business owner

Big business owners receive fantastic tax benefits and are in an ideal place in many ways. Their mindset is: "how can I teach someone to do my job so I can get paid whether I'm working or not". One of the benefits to being a big business owner is they can go on a holiday and still be paid every day their are gone. They tend to very good leaders and delegators as well as teachers. A major difference between these individuals and the former two groups is simply an understanding of how to structure their finances. Anyone can be profit from big business with just a little education and training. These individuals are gifted, by the government, for the ways they grow Canada's economy by receiving great tax benefits. There are some big business owners who pay as little as single digit taxes annually! This is because they pay taxes after receiving their money and have a choice as to what to do with their money before they pay these taxes.

The investor

The investor is any individual who understands s/he can benefit from delayed gratification and how the government rewards those who contribute to the economy. Investments in real estate tend to be paid the best for the needed understanding and work. The crazy thing about this quadrant is that it is fairly easy to gain the rudimentary understanding needed to succeed (anyone can do it) yet very few individuals are willing to learn how to invest properly. The investor's mindset is in direct opposition to that of the typical employee: "the world is full of abundance rather than scarcity, how can I learn what I need to in order to have my money work for me in the future". Investors will benefit from multiple tax breaks and will often retire with a higher income than they had while working full time. Many investors are also employees and/or small business owners or big business owners, but they have also consistently invested a portion of their time in understanding how an economy works and how to benefit from this information. Investors do not make decisions based only on emotion and have long term perspectives. They typically receive fantastic tax breaks.

Summary

While the prospect of developing a big business may be daunting it is fairly simple to start investing a portion of your hard earned money in ways that will pay you back exponentially later on in life. Robert Kiyosaki encourages individuals to invest a portion of their money consistently in ways that will enjoy tax breaks and set up an individual to have residual income later on in life. I will give a quick example of how anyone can do this. Save a portion of your annual income and when you have enough purchase an investment property. Repeat as necessary! I have a close family member who has always been found in the first two quadrants, yet has purchased three properties. In 25 years these 3 properties will no longer carry a mortgage and this family member (and his family) will enjoy monthly income that will pay a significant income for as long as this individual lives. A positive here is that this individual can choose to purchase more houses or not as well as choose to manage the properties or hire someone else to do so. The key word here is 'choice'. While an employee has very little choice now and later, the investor is able to make a lot of choices later in life no matter what choices they have today.

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

When is the best time to complete a real estate transaction?

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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The typical real estate cycle

The typical real estate cycle goes up and down with higher highs each cycle as well as higher lows so that the market appreciates over an extended period of time. In a typical market there is usually a complete cycle every 10 years or so, but this is an average over many years. I often hear investors talking about making sure to buy when everyone else is selling and sell when everyone else is buying and I'd like to speak to this for just a short time. I've blogged in the past about how there is no 'good' or 'bad' market in real estate. When the market is appreciating quickly it is a sellers market and when depreciating quickly, a buyers market. I don't disagree with the investors who desire to purchase in a down trend and sell in an uptrend, but I also have a slant I would like to posit in order to help you think in different ways when thinking about real estate.

The best time to purchase real estate

When is the best time to purchase real estate? I'm glad you asked. As I just mentioned... I don't disagree that a great time to purchase real estate is when the market has fallen or is falling. The problem with this idea, however, is that spawns innumerable prospectors, not investors, because nobody knows when any market is at a low. When you begin to take on the mindset that you must get the best possible deal when the market is absolutely at its lowest, you will start to take unneeded risks because you are thinking about how to make money in the same was as people typically make money on the stock market (buy low and sell high). Few people tell you about the commissions for real estate agents or lawyers fees that go into purchasing and selling a property (just like a brokerage helping you with stock transactions). Because of these extra expenditures many investors don't make as much as they think they are making. If you miss the low by a bit and miss the high by a bit and give a ton of money for the transaction, then you aren't making as much because there is less room for error. 

My 'deep thought' for today is to suggest the best time to purchase real estate is when it is cash flowing; when it makes risk-adverse sense to do so. Read my former blog on cash flow as the #1 criteria you need to look at when purchasing real estate. If it's cash flowing, there isn't a bad time to purchase real estate because it will take care of itself. Even at the peak of a market if I buy something that cash flows well and hold it for 10-30 years, I'll do extremely well no matter what happens in a market (barring WWIII of course). Forget about timing the market perfectly and start investing! Find a great deal today and then purchase it instead of wasting your time procrastinating while all the good deals are taken by clearer thinking investors. This is one reason I don't typically find property on the MLS system. There is too much competition on the MLS and all the fantastic deals have 10 offers within 24 hours. The highest bid often wins out and the place that was listed at 20k less than fair market value is now sold for 20k more than fair market value (that isn't the kind of deal I get excited about). Having said what I just did, there are times when using the MLS system does make sense, and many times when using real estate agents make sense. Know when these times are and use them to your advantage.

The worst time to sell real estate

By far the worst time to sell real estate is when you have to sell. There really is no argument about this among savvy investors. When I look to purchase real estate from someone else I'm usually looking for someone that needs to sell her/his property quickly because I know I can negotiate a better deal. This isn't the only type of deal I do, but why would I not maximize my time by simply looking for the deals with the greatest potential. I never want to be in a place where I am over-leveraged or in a tough spot and then must give my property away for any reason. 

What is the solution? If you know me, you know what I'm about to write. Two words: CASH FLOW! If you have good cash flow, you should never be in a place where you need to sell your property because it is not only taking care of itself, it is also contributing to your income.

Conclusion

Start thinking like an investor who will have long term wealth instead of only short term gambles that sometimes pay off. Real estate is very forgiving and you can make a ton of mistakes and still do well, but why tempt risk by taking so much of it on? Go out and find a cash flowing property today. I know of many cash flowing properties that could be bought right now even in Calgary's strong current market. If you need help contact someone, but don't make the mistake of never doing what you need to in order to take care of your and your family's future.

Happy investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

Renovating for a sale

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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Renos: boon or bain for a sale?

I have met many families who have invested thousands of dollars into their house only to discover they aren't able to sell the property for what they expected. The true experts in the area of which renos build in equity and which actually cost more than they are worth are realtors who do high volume. There are many realtors out there, but extremely few who see enough business to offer expert advice any day of the year. I recently interviewed Andrew, a realtor who does high volume in Calgary and is able to give advice you can rely on when preparing to sell your house and make extra money when you do without putting too much work into the project. His contact information is below if you are in need of a competent agent.

It is easy to spend money in renovations, but while costs add up quickly, many people put $50,000-100,000 and 6 months of time into a renovation project only to see their property value increase by only $30,000-60,000. Remember, just because you like what you are doing to the property doesn't mean everyone else will. I encourage you to read the following tips and put them into action before selling your house.

What you should stay away from

Going overboard - When you are in a neighbourhood with houses all worth $300,000, but install every upgrade imaginable, it doesn't fit. Match the upgrades you are putting in with the area of the city and house. The reason you cannot add a lot of value to your house when installing granite and hardwood everywhere is that there is a maximum amount a family will pay in most neighbourhoods.

Not doing enough - This is the opposite of the first statement. If you live in an area where every house is worth more than $1 million, then not to put in granite and hardwood would be a mistake. If your house is outdated and falling apart, then let a developer purchase your house and tear it down. If you want to reno the house, then put in the upgrades that those wanting to buy it will value.

Doing a job that lacks finishing - If you paint your house and install new flooring, but cheap out on light fixtures and light switch and electrical outlet covers by not installing new fixtures and covers you are telling the potential buyers you are cheap and they will question the other work you have done. Light fixtures don't have to be expensive and covers are extremely inexpensive. For a few dollars they will match the new paint and flooring. Paint finishing is also important... Often it is worth hiring a professional because a smudge on the ceiling or floor will scream "Quickly and poorly done job! Stay away!"

Few people want a home that needs a lot of work - Even handy people don't necessarily want to live in a continual reno project. You may know someone who does, but don't confuse these individuals with the general public. Don't do nothing unless you want to attract companies who demolish houses and put up a much more expensive infill.

What you should always consider doing

Focus on cosmetic upgrades -  People purchase a house on emotion. This means they will buy a house they can see themselves living in. If everything looks good, it will leave a family with a good feeling.

The importance of lighting cannot be overemphasized - Without spending a lot of money, you can upgrade all the lighting so the house is bright when a potential buyer comes for a walkthrough. While it may be a good economic investment to purchase 8 watt bulbs, make sure they put out the same amount of light that older 100 watt bulbs do. Economic light bulbs have been coming down in price and it is worth the small difference in cost to have buyers fight each other and drive up the price of a house they all really like. Bright lighting makes a huge difference.

It is difficult to over-upgrade some homes - If you live in a high-end area of the city, spend the time and money to upgrade everything to suit the houses around you. Why will someone buy your house with laminate when they can buy another with hardwood? Again, this is for high-end homes.

Focus on labour intensive, but inexpensive renos - I've already discussed light switch and electrical covers as well as light fixtures, paint, and flooring. These are the three areas you should always begin with. After these three areas the rest is up to you, but consider talking to a real estate agent before doing the work. Most will be happy to give you sound advice, but remember to consult only realtors who are selling at least a couple of houses each month. Many realtors survive on a few deals each year and won't be seeing enough houses to give up to date information.

Use quality paint - Don't use the most expensive paint money can buy, but don't cheap out, either. Good quality paint will look good and be easier to apply. Also, use neutral colours. Even if you have impeccable taste in matching colours there will be a limited amount of people who will truly appreciate (and therefore pay for) your taste. There are people out there who talk about emphasizing living space by painting certain walls a different way. While it is true this can help, keep in mind that you are appealing to a wide range of people in most cases. Keep things neutral and hire a professional photographer and stager and you will be much better off than colour matching and then staging things yourself. Bold colours tend not to sell as fast or for as much as neutrally done homes.

What rooms are most important to focus on?

Great question to ask yourself before you begin a project. The rule of thumb is while bathrooms and kitchens are the most expensive to reno, they can also be done relatively quickly if done properly and make a big difference to resale value. People often buy a house for the kitchen, bathroom, or master bedroom. Don't reno everything if the existing rooms are fine, but if they need work anyway it may be time to think of a larger project. Remember that, as stated previously, you can make a big difference by focusing on inexpensive accents. Painting existing cabinetry and installing new doorknobs and hinges will be noticeably appreciated. If you are not going to redo flooring and paint throughout the house, you are probably shooting yourself in the foot by renovating the kitchen and bathroom.

More general rules of thumb

Match you renovations with your marketplace - I've mentioned this already. Always ask yourself: why is someone purchasing this place and what will they expect? If you live in Calgary... Granite doesn't fit Falconridge or the properties!

Steps to success that are logical - Start with new paint and flooring, next move to kitchen, bathroom, and master bedroom, and lastly renovate the entire house. Never focus on one bedroom without repainting the house. Remember there is a natural progression that you should focus on.

Get an expert opinion first - Before any renos, get an expert opinion of what your pre-renovation value is, what the post renovation value will be, and what the cost of renovations will be.

Overestimate your costs and time and underestimate the improved value - If the reno still makes sense after these considerations, then it may be a great idea to go ahead with your plans. If it no longer makes sense, then you simply aren't valuing your time better spent elsewhere; like a week long trip with your family for time together:)

Time the sale of your home - Understand local market trends. Know that people will typically pay more for a house in the spring than at other times. This is due to supply and demand. Most families want to be settled before a new fall school term and few want to move in the middle of winter. The best time to purchase a house is usually winter (if price is a key consideration) while the best time to sell is April-June.

Last words

The focus of this post is on renovating your home before you sell it. If you want to renovate a house for your own enjoyment you may not want to follow much, if any, of this post's advice. My parents recently renovated their house in a lower end neighbourhood of the city. They will never get the money out of the house when they sell it, but that's not why they renovated. Their purpose was to make the house fit their desires for the next few decades. In this case I have zero problem with what they did. A home is not only a basic human need; it can also be a place of comfort to go to when you need space or rest in some way. Always ask yourself: What is the purpose of this renovation? It isn't a bad thing to enjoy where you live.

Sometimes it is best to simply sell your house quickly without any, even needed, renovations. This seems to go against former advice given in this post, but if you are in a down trending market, you can easily lose money with each passing week of renovations. Again, this is a great reason to consult a local realtor who knows the market well before you plan renovations.

Want more information or help with your home?

If you would like more tips from Andrew before you sell your home or are in need of a competent real estate agent, you can contact Andrew at: andrewfrentz@shaw.ca and/or 403-483-3092.

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

6th Dimension: Instant Equity

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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What is instant equity?

Instant equity is having more equity in a property than you have put into it yourself at the time of purchaser. I'll explain in a clearer way... If you find a 'great deal' where a property is worth 350k, but you are able to purchase this property for 320k, you now have 30k more in the property than you put in yourself with your down payment. In a regular real estate transaction this takes place on a regular basis, but a real estate agent might argue that what you pay for the property is really what the property is worth. On a normal real estate transaction for a single family home the seller (called the vendor) is trying to get as much as possible and the purchaser is attempting to pay as little as possible. They will negotiate and attempt to arrive at a price that works for both parties. If there is an unlimited amount of to time to bargain and both sides want the deal it will usually get done at a 'fair market price'. There are circumstances, however, that work to strengthen the purchaser's position or the vendor's position. Let's look at these in turn.

A seller's market

Most investors don't tend to say 'what a great market' or 'the market is terrible right now'. When the real estate market is up-trending (as it is in Calgary over the past few years) investors call it a 'seller's market'. What this means is that, typically, the seller has some bargain power on her/his side. Why? Because if the purchaser doesn't want to buy the property quickly, it ill be easy to sell to someone else. In supply/demand terminology this is where supply is more scarce and demand is high. The reason I would not call this a 'good' or 'bad' market is because it depends on a personal investing strategy and what you would like to do. Some people call this a good market, but it isn't necessarily great for the people wanting to move into their first home or get a deal on a house. It's good for people who are practicing fix/flip deals; they purchase the house for 100k today, fix it for 20k, and sell it for 150k in a few months. The reason this is a strategy that fits is that it takes out risk. If I want to fix a property before selling and it takes a little longer than I anticipated... no problem, the house will most likely be worth more anyway.

A buyer's market

A buyer's market is what investor call a market that is down turning. Prices of houses are dropping because supply abounds and demand is low. Why isn't this a bad market? Because it is a great time to buy a house for less than it was a year ago as well as what it will be in a few years from now. It's the time to get a 'deal' on a property. This is the perfect time to do a wholesale deal or purchase a house for a long term hold. 

Back to instant equity

If you want to eliminate more risk from a purchase as well as make more money from the property you may have heard the phrase 'you make money in the buy'. What this means is that if you get a great deal at the beginning of a real estate investment, it will most likely make you money later on. If you overpay for a property, you will now have to hold onto the property and make money in other ways to help the numbers work and make a good return on your investment. A quick example: If you overpayed for a property in 2006 in Calgary, you most likely lost a lot of money if you needed to sell the property in 2009. If, however, you under-payed for the same property in 2006 you now may not have lost as much or even any money if you needed to sell in 2009. Also, if you under-payed for the property you will also be in a position to sell the property immediately (if needed) and still make money.

I have made the mistake of overpaying for a property in the past. I will attempt not to do so again in the future! Now that I know much more about investing what I will tend to do is make sure I'm getting a good deal. This doesn't mean I take advantage of other people and make sure they lose. I have no desire to have anyone lose. But the numbers need to work for me to get into an investment and the risk needs to be lowered in multiple ways. I only purchase properties that are good deals because I am looking in places other people aren't, negotiating well, and am willing to understand a market and area better than other professionals in the area. 

A tip for building instant equity

Today's post isn't wide enough in scope to give you every method I use to find good deals, but I will give you one general tip to purchasing a house that is a good rule of thumb as well as a professional that can make a huge difference to any investor. When you are looking at properties you need to be willing to move fast. Be pre approved or have cash when getting ready to make offers so that if the right deal comes up, you can jump on it. Next, have a realtor look through data and make sure you are only putting in an offer to purchase if it is already a good deal. Remember to give your realtor very specific information. The more you tell your realtor, the more your realtor can help you. If you don't have a good realtor let me know and I can put together a future post on how to find a great team to help you in investing wherever you are. 

But the real tip and instant equity is made possible when you find deals in creative ways. There are people called 'wholesalers' in every major city in Canada and the US. Find these people! What a wholesaler does full-time is find great deals. Contact this individual and tell them what you are looking for. If the wholesaler believes you are serious about buying a house when it is ready, you will be notified as soon as they have a good deal. You still need to make sure the deal works for you, but if it does... this is a great way to get good deals without doing a ton of work yourself. If you don't know what a wholesaler is you can puruse my former posts. I have one that I wrote late summer this year that explains the process and how this can work well for everyone involved. 

Summary

What instant equity does is take away risk as well as give you immediate money you didn't put into the house you bought. It removes risk by putting you in a place where, if you have to sell quickly, you can sell without taking a loss. It gives you immediate money because the house is worth more than what you paid for it and if you need financing at a later date you will be able to pull out more money than you would otherwise be able to do. 

The way some people build instant equity is trying to cheat other people out of money. They lie about what the house is worth or practice other, unethical, techniques. I find the best way to do business and have a clear conscience is by telling everyone the truth and simply working harder to find the great deals. If I can honestly help a family that is having trouble selling their home while explaining how I make my money (in other words, if I offer something other people are not offering a family) and this works well for everyone, I now have instant equity. If this can't all happen in a deal, then it is often best to simply not purchase the house because there are always other deals to be found if I'm willing to work hard and put in the effort. 

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

Single family investing vs. multi unit investing... which is best?

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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SFH vs. MFH: Is one better than the other?

At time, I hear someone speaking of a certain type of real estate investing as being much better than another type. I know people who would bet their first-born child that Single Family Housing (SFH) will always be a better investment than Multi Unit Housing (MFH) as well as those who will argue the exact opposite. Is one better than the other? In short... Yes. Which is better? That depends.

Why the cryptic answer?

The decision to go into SFH or MFH needs to be one that is informed by your individual investing plan. SFH tends to appreciate faster, so if you are simply investing in real estate for future appreciation it may be the way to do. MFH tends to cash flow better, so if you want money throughout the investment maybe this would suit your needs in a more fitting way. What I hope to do in this post is handle the major reasons why people might choose one or the other. In the end, I hope you work hard on an investing strategy that best meets your individual and family goals rather than investing in the 'shiniest object' at any given time. Before I get into the major points I would like to admit that some of the information in this post came from a book by Julie Broad (More than Cash Flow), but that all of these points are pretty standard and every professional real estate investor should know and understand them. 

SFH

1. I made the statement that SFH tends to appreciate faster than MFH. The reason is that SFH is valued differently than MFH. SFH is valued at current supply and demand and real estate cycles of the centre you are purchasing in and it tends to be an essentially emotional decision more often than not. As an example: The average family that purchases a house in Calgary is doing so in order to live in that house. This family will choose a house that fits their needs, but is also buying because they like the location or floor plan. Families that choose a house do not purchase because it fits their budget perfectly or because it is in a location the city is investing infrastructure into over the next 10 years. SFH is also valued by supply and demand in a city or an area of the city. The Canadian average appreciation of housing tends to be around 5% annually, which is higher than the posted rate of inflation. MFH is valued at its CAP rate. If you don't know what a CAP rate is I will attempt to give a great description as well as the perils of trusting CAP rates in a future post. The brief explanation is that MFH is valued by how much revenue the property generates on an annual basis. In other words, when rents go up and expenses stay low MFH will increase in value independently of what SFH is currently doing. 

2. SFH is more liquid than MFH. If your plan includes purchasing AND selling real estate frequently, then SFH may better suit your plan. If you have a house to sell, there is a huge pool of people who may be both willing to look at it and be able to afford it, not so with an apartment building of 35 doors (they tend to cost more than just a few hundred thousand dollars). 

3. SFH tends to be easier to manage if you only have one building. In MFH you will often need to manage many people, not just one family. If your plan is to self manage, this may be easier. If you have a full time job, it may be difficult to self manage MFH (even just one building with 12 doors). 

4. There isn't a lot of tenant to tenant problems with SFH. When tenants aren't sharing a building there simply isn't as much friction (this is another management consideration).

5. It is so much easier in SFH to have your tenant pay for all utilities, which is difficult to do with even an up and down duplex. 

6. Financing is much simpler and easier to obtain than MFH. By the way... if you are having trouble financing an investment please give me a call or email. I work with a few fantastic mortgage brokers who may be able to help you much more than your current broker (and definitely can help you more than any bank). If you haven't financed a lot of properties, this may be less daunting at the beginning of yoru investing plan. 

7. There are fewer big ticket maintenance costs. You don't have a huge parking lot on your property that needs snow removal in the winter by a professional contractor. Worst case scenario is that you go over and shovel the driveway yourself a few times a week, but tenants will often be responsible for this upkeep. If big ticket costs scare you, it might be better to stick with SFH (where the biggest cost tends to be a new roof for $5,000).

8. There tends to be less turnover with tenants in SFH. I currently have a family who has signed another 2 year lease after already living in our place for 2 years. Our next door neighbours have rented their current house from their landlord for 18 years! Again, this is a management issue... if you don't want to deal with renting out a place consistently, SFH can be simpler.

MFH

1. I wrote about the appreciation of SFH... well, MFH has a decent advantage for forced appreciation. Either investment will be worth more if you fix the place up, but MFH will be worth more by simply managing the property more efficiently. If you purchase MFH that is only 50% filled and hasn't seen rents increased in a decade you can appreciate the property by simply filling to capacity and increasing rent. What I'm saying is that if you know how to properly manage property and aren't afraid of the work, you can easily force the appreciation of your property. 

2. Continuing with the theme of management... if you are hiring a company to manage your property for you, the companies will typically give you a discound per unit on MFH because they have 25 units all placed together and it is easier to manage than 25 separate houses. 

3. MFH tends to cash flow better than SFH. If you purchase a house in Calgary right now it is very difficult to have rent cover all expenses as well as put money into your pocket at the end of the month whereas MFH will, in a good scenario, cash flow quite well and, in a worst case scenario, not lose as much money each month. Rent to value ratios are higher in MFH than in SFH. Here I need to bring up something I have a strong opinion on... If a property, or any 'investment' does not put money into your pocket consistently... it isn't an investment, its a liability! Don't ever purchase property that costs you money each month. It is both highly risky and unwise for future growth. 

4. There is less vacancy risk in MFH. When you have SFH and your tenant leaves for a month you will have 100% vacancy that month. In even just a 4plex, when a tenant leaves for a month you only have 25% vacancy. The advantage here is that you still have 75% of the normal rental income to cover that month's expenses. You can also wait for a vacancy and reno one unit without high risk because you are still bringing in rental income from 3 other units!

5. It can be easier to find tenants because of the lower rental costs (you will have a larger pool of tenants to draw from). 

6. Maintenance costs are lower per unit than in SFH. When you replace all the windows it is a large cost, but cheaper per unit because you can get a discount on the amount of work you are doing. An aside.... you should always be including future replacement and renovations costs in your month expenses! That way you will have money sitting in the account ready to be used when the costs comes up rather than scrambling to come up with the money on short notice. I only ever calculate cash flow (money in your pocket after all expenses each month) after including these extra maintenance costs. IF you aren't planning for the future, you aren't an educated and risk adverse investor. 

7. MFH is often built closer to major population areas like malls and universities, so accessibility tends to be easier/better, which helps with filling vacant units. 

8. MFH has financing perks as well, they're simply different. Did you know that with SFH you have to personally qualify for financing (ie. the lender will determine if your annual income can support the mortgage payments). With MFH over 4 units the property can qualify itself (ie. if the net income is stisfactory, the lender will be quite willing to qualify the mortgage). There is another qualiification for MFH; lenders are typically looking for the purchaser to have a networth of over $100,000. 

So... who is the winner?

Maybe a mix of both can work best in Calgary. An example is up and down suited detached houses. This has the MFH benefits of less risk with vacancy (50%) and rental income that covers expenses while retaining a lot of the SFH benefits (liquidity, appreciation, time commitment of self management). 

Here are some questions to ask yourself when it comes to deciding which strategy will work best for you:

-Who will manage the property and respond to late night squabbles and maintenance issues?

-Can I carry vacancy costs?

-How long do I plan on holding the property? Is the purpose to keep it forever or sell each property every few years?

-Do I more value appreciation or cash flow?

Before you invest in any type of real estate do a ton of research and make sure you have a strong and specific plan put together. Investing without a plan is never recommended by anyone as it is similar to taking a road to travel somewhere without understanding where the road leads. I will leave you with a quote I have often heard. It is attributed to Lewis Carrol and I have paraphrased. 

"If you don't know where you are going, any road will get you there"




If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

5th Dimension: Leverage

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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A quick definition

The first image that comes to my mind when I think of leverage is a picture of using a crowbar to pry a nail out of some flooring. I don't know why this is what comes to mind, but it is great example of one type of leverage. With the use of a tool like a crowbar I am able to do very difficult things without very much effort. To pull a nail out of a floorboard is extremely difficult with my bare hands or finger nails, yet with a crowbar I don't break a sweat, I use about 5 seconds of time if the crowbar is handy, and I do no damage to my body or the crowbar itself. A simplified definition of leverage is: The use of a tool to maximize the assets available to you. In the case of the crowbar I am maximizing my strength and understanding of leverage (2 assets) through the use of a crowbar (tool) in order to get a lot done with very little expenditure. 

How does this apply to real estate?

Real estate is THE investment that makes best use of monetary leverage. The only other investment class I can readily think of with leverage of any real kind is the stock market, but only when investing with calls and puts (options) and the greatest leverage potential I can think of with these is about 3:1. Also, as leverage is more used in stocks (ie.futures or even options) the risk factor tends to skyrocket. When I was learning about futures the mentor teaching me said the rule of thumb is... IF you haven't lost EVERYTHING you have invested after about 6 months you may have a chance of doing alright in the future's market. 

Compare what I just stated with real estate. First, you can quite easily make you first investment using 20:1 leveraging, but even after this first investment you can fairly easily receive 5:1 leveraging. Secondly, the risk does not need to increase with increased leverage. Real estate covers its own risk in many ways if it is done properly (as discussed in previous blogs... I will cover this more fully in a future blog). Thirdly, when investing in stocks, you are paying everything off with your own money when all is said and done. If you make money, you can pay off debt with your earnings and if you lose money you need to come up with more of your money yourself. With real estate your debt is paid off by others. That original investment is, typically, the only money you need to put into the property if you have done your proper due diligence because the tenants will not pay off all taxes, insurance, financing (mortgage), management costs, and even future vacancies and maintenance expenses (like your roof, furnace, and hot water tank replacement). This is why I refer to real estate as 'magical'; it far outpaces other investments when all considerations are taken into account. 

Ok, I just used a lot of jargon so I'll make it a little simpler for those who are new to investing and/or investing in real estate. Many people don't have enough money buy a house to rent out. For a smaller starter single detached house in Calgary you need to come up with around $250,000 at the time of writing. The way you leverage the money you do have is by asking a lender (banks as well as other companies... there are about 25 lenders in Alberta) to come up with most of the money. If you don't yet own a house or want to move into another house (that you can rent to others in the future) you can borrow 95% of the money needed for the purchase! That's crazy! For that $250,000 rental property, if you want to just make a start in real estate and are willing to live in it for a year or two, you only need to come up with $12,500! Now, if you are living in the house you will be paying off the mortgage yourself, which is a potential hurdle. Even this can be changed, however, if you are also willing to buy a house with a suite and rent out the basement to someone else (who will give enough in rent to take out your monthly mortgage payments). If you don't want to make the inconvenient sacrifice of moving into a 'future rental property', you can still borrow 80% of the money needed for the property. In the example above you would only need $50,000 to purchase the $250,000 house. Then the tenants will make all the rest of the payments for you (Please recognize I am making simplified statements to make my point). 

What is one of the perceived advantages the stock market has over real estate? That you need less money to get into a deal. This is mostly true. Yes, you can get into stock investing for less than $10, but remember you will need to pay fees every time you sell or purchase more stock (often the cost of even one trade can be around $15, but easily higher). If you don't have the $50,000 needed for a rental, you can always invest what money you do have with a professional real estate investor. I will cover this topic more fully in a future blog, but be extremely careful before you invest your money with someone else. Nobody cares about your money and its growth as much as you do. The three dangers with investing your money with someone else are: 1. They could be a crook and steal some or all of your money, 2. The could be a fool and simply not invest your money well, or 3. Even if they are honest and competent, they will be making money by investing your money (same as mutual funds or most people you go to invest your money in stock markets) which means you won't be making as much return. The best option for making an incredible return on your investment is always to control everything and manage everything yourself. The best option when you don't have the time, energy, understanding to do everything yourself is to make sure you have someone who is honest and competent. The beauty is that there is so much money in real estate that you can find a trustworthy person to do all the work and still make much more than other 'safe' investments (no investment is 100% safe; each carries some kind of risk). 

A summary

Basically what I am saying is that you can use a small amount of money to make a large purchase in real estate. This is called leveraging your money. If you do it properly, you will not be taking on a lot of extra risk and the return on your investment will go way, way up. I'll give a final, quick example: If you use cash to purchase a property worth $250,000 and the property appreciates in value by 5%/year (the Canadian average), you will make 5% on your investment plus the cash on cash return from rent (in that property you make another $10,000, a conservative number after expenses, each year which would give you a total of around 9% total return on your investment). With the same house, if you used $50,000 of your own cash and borrowed the other $200,000, the house would still appreciate at 5%, but that $12,500 will give you a bigger return on your money because you put less money into the deal. Yes, the house appreciated at 5% in both cases, but in the second case you would be making a 25% return on your invested money. There are two other advantages... you are still making money from rent (not as much now because you have a mortgage payment each month), but part of the money you are paying toward the mortgage debt will be put back in your property (the principle payment) which will be, on average over the course of the mortgage, about $7,200. In total, if you are using the bank's money to help purchase your rental property, you will be making almost 40% return on your money, on average, year after year after year! I haven't even included other ways you make money with this type of investment. If you read my last blog in this series, you know you can also be paying less in taxes, which is similar to paying yourself more money each year. At the end of this series on the multitude of ways to make money in a normal real estate deal I will break down a typical deal and how much you tend to actually make on your original investment. I'm convinced it will blow your mind.

Are you beginning to see that very high rates of return in real estate are possible if you do everything yourself, without taking on very much risk? If you went to your financial planner and told them you wanted a 40% rate of return on an investment that also gave you tax breaks they might first laugh or choke on their saliva for a few minutes and then inform you that you would need to take on extreme amounts of risk in order to make that kind of return. With real estate these numbers are not fantastic... they are average. The ways you can make money in real estate are so varied and great that you can hire someone to do all of this for you and even after they are paid well for their services, they can still offer you a really good return on your money. 

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

4th Dimension: Depreciation/Taxes

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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Depreciation is a Good Thing?

With real estate, depreciation can be one of your greatest assets. Did you know that real estate is, as far as I can ascertain, the most tax advantaged investment in Canada? I could be wrong with this as I don't know the ins and outs of the energy sector and everything going on there, but as far as what the average person can afford and get into, there is no competition. Not only do I receive a monthly paycheck for investing the banks money, or gain from an asset that acts as a hedge against inflation, or have someone else paying down my borrowed money and the interest on that borrowed money... I also am able to pay less in taxes each year because of my investment in real estate.

I would like to warn you at the beginning of this entry that I am not an accountant. What that means is that I cannot offer accounting advice, nor should you base any decision on what I am attempting to teach you on. What you should do is take these ideas and speak with your accountant about them. If your accountant doesn't have any idea what you are talking about or simply shoots down the ideas as terrible, maybe it's time to find a new accountant. The reason I suggest this is that full time (and very successful) investors are using this strategy. If they are using it and your accountant doesn't know or understand the idea, they may not be the right person to work with when it comes to investing in real estate. 

Each property has two parts that you are purchasing: land and structure. The land value goes up and/or down with the market and offers little in tax incentives, but a portion of the structure can be written off as a business expense each year; 4% per year of the remaining value to be mroe precise. I'll give an example:

If you were to purchase a piece of property for 300k and it was determined the value of the structure was 200k, you could write off 8k worth of income in the first year (4% of 200k is 8k). In the second year the remaining value of the structure is 192k, so in the second year you could write off $7,680. In the third year, $7,372.80, etc. You can also write off any of the interest you are paying on the mortgage (remember that interest payments are highest in the first few years of ownership and that someone else is making these payments for you). A third area you can write off is maintenance expenses. There are others, but those are the main three. The beauty of this is that you are only counting the income you make from a rental property over and above all of your expenses. If, after all expenses, you make 5k in cash flow in your first year of ownership, you could write off the entire amount through depreciating your asset. What could you do with the other 3k available in tax breaks? Well, one idea is to write it off of your other income that year (earned income from your regular 9-5 job). Are you beginning to see what I mean by depreciation being a good thing?

Some Ideas to Take into Account

I have briefly outlined an idea here in very simple terms. With taxes few things tend to be as simple as they appear and this is true of depreciating your property for tax purposes. Remember to speak with your accountant!

Something I often hear from people is that if they depreciate the asset at 4% per year, they will have to pay more in capital gains taxes when they sell the property. While this is true, the fact is your depreciation strategy should depend on your overall investing plan and not on fear. If I save money on taxes for the next 25 years and then sell the property, I can always use the money I've kept from taxes in the meantime to purchase more investments. I can also reinvest the money I make at the end of those 25 years and depreciate my new investments to offset taxes. Another ideas is that I may not want to ever sell my property... If it is cash flowing and is finally paid off and I am making a lot of money from the property each month and year, why would I sell it? It doesn't really make sense to sell off property that is giving you money each month without much work from yourself if you ask for my opinion. What I would do is keep each property and will it to my wife and kids. If my kids need to sell off one of their inheritance properties to pay for the taxes from another 4 or 5... are they really going to complain about that situation? They've just been given 4 or 5 cash flowing properties and I don't see that as a negative at all. 

Another idea to consider is how you own the property. If you incorporate and structure everything properly, you can take even greater advantage of real estate investing by being taxed in a lower bracket. You are rewarded for simply owning and renting out houses. Again, talk to your accountant and learn all you can about this so you can make it work best for your individual situation. 

Some people are afraid to make money in real estate. Why? You can make tax free money, so why would you not take advantage of it? I have heard of many individuals who purchase properties that don't make any money because they want to use the property for its tax advantages without having the property eat into those tax advantages. While there may be reasons I don't fully understand, my basic response is: why not make money that may not be taxed while receiving tax advantages in other ways as well? Both paying less in taxes and making more money sounds like a better idea to me. No criticism for those choosing to do this, it simply doesn't make sense to me. I've even heard of people who will purchase property that loses a substantial amount of money each year! Like I said, I've heard some of the reasons, that doesn't mean I understand why someone would choose to lose money when they can make it instead.

I invite your response to this blog. Please make a comment and challenge me or share what you are finding helpful. I'm hoping to begin conversations, not end them by pretending to know all things. Let's talk.

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

3rd Dimension: Principle Paydown

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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What Is Principle Pay Down?

For those who are new to real estate investing... When you purchase a property using a lot of the bank's money, you sign an agreement that you will not only pay back all of the money borrowed, but will also do so with an agreed upon interest rate tacked on which is mostly paid up front. The longer the amount of time that has passed since the beginning of the mortgage, the less your monthly payment of interest and more your monthly payment in principle. I'll give an example to make this clear.

There are two parts of what you owe the bank. Principle and interest. If the bank lends you $200,000 at an interest rate of 4% and you agree to pay it off over a period of 25 years, by the end of 25 years you will have paid the bank a total of $316,702.10. The principle of this was the original $200,000 and the interest was $116,702.10. That sounds bad initially, but I'll explain why it is actually good very soon. Every month of having this mortgage you will have a payment of $1,055.67. Part of this payment is principle and part is interest, but in the first month of the 25 year period you pay more interest than in the last month. The reason why this takes place is beyond the scope of today's blog. I'm simply focusing on what happens in general terms. In the first month of holding this mortgage $666.67 of the total is paid against interest and $389.01 is paid against the principle. In the last month of the mortgage $3.51 of the $1,055.67 is paid against interest and $1,052.17 is paid against principle.

The bank does this in order to make more money up front, which takes away some of the bank's risk. If you own a home for a short period of time, most of your payments have gone toward interest payments and when you move into a new home the bank can begin a new mortgage with high interest payments in the first few years in order to make a lot of money again. This is a great reason to hold properties long term rather than short term. The longer you own a home, the less money the bank is making from you in interest payments.

To summarize in an interesting way... in the first year of your mortgage payments to the bank/lender you will have paid off almost $5,000 of principle. This will basically remain the same for the first few years, but in the 10th year of holding this mortgage you will pay off over $7,000, in the 20th year it will be around $10,500 and in the final year it will be over $12,000.

How Can $116,702.10 In Interest Payments Be Good?

In the paragraph you just read I made a huge error. Did you pick it up?

I said 'you' paid off principle. While this is technically true, a more accurate statement is that your tenant has paid off the principle as well as the interest of each mortgage payment if it is good investment. Isn't that crazy? You have an investment that is not only paying you a chunk of money each and every year (often the cash flow on a good investment is already paying you more than the percentage you receive for you RRSPs or mutual funds), but you also have an investment that is increasing in value at an alarming rate and someone else is paying off your debt! That's crazy! That's magic! That's real estate if done properly.

I love certain types of debt. Debt that is paying me every month with extremely low risk is the kind I like. Realize I am very careful about what the definition of good debt is. Bad debt is when you pay every month. Good debt is when you are paid every month, and I mean every month. If you are paid some months or most months, this is still bad debt.

But what if a property is vacant for a month or two every once in a while, you ask? That's why you need to go back and read my blog on cash flow. If you only consider being paid after vacancy rates are taken into consideration, it means even when the place is vacant for a short period of time you will be paying yourself out of the money you have saved for this very purpose.

Back to my question.... How is $116k in interest a good thing? Because others are paying it for me. What are they getting in return (this is important)? They are getting a basic human need; shelter. They are also having this basic human need met not by being given the basics... they are actually given a safe, comfortable home that is well maintained. This is important. Next door to me there is a property owned by a slumlord. The property isn't taken care of even when the tenants ask for help. If the tenants leave, the landlord simply finds new people to make empty promises to. This isn't good investing. Rather, it is short term thinking for many reasons (but I again am getting carried away with topics outside of today's scope).

How Does Principle Pay Down Make Real Estate Different?

I have told you before I am biased. It's true. I honestly believe other investments cannot touch real estate when it comes to how diverse this particular strategy is in how you take away risk while building wealth. Principle pay down is a major component of how we build wealth through real estate. I have mentioned, and will mention in more detail again, that real estate can't be compared with gold. I consider gold a solid way to save money as a hedge against inflation, but it is not an investment, simply a savings account with zero percent interest. How is real estate better than gold as an investment?

First, when if I buy gold I can't ask for a mortgage on it. Which means I must pay 100% up front every time I purchase gold. Secondly, if I borrow money to purchase the gold I can't download this debt to anyone else. If I offered to rent my gold out to other people for a substantial monthly payment I wouldn't have a lot of replies, and for good reason. Why would anyone rent my gold? With real estate I can both borrow money to purchase the investment as well as charge enough money for others to live in the property to pay down every penny of my original debt plus the interest charged on that debt AND cash flow on top of these advantages (Just wait until after I've blogged every major dimension I can think of... It'll take me months).

While I've picked on gold a bit here, there are other investments that have the same problems as does gold. Stocks are an example. It isn't typically highly leveraged (when it is leveraged, it doesn't touch the kind of leverage real estate easily obtains) and it definitely cannot be rented out for any more than a low sum (with inherent risk). The reason a lender/bank won't take on high debt with stocks is due to the high risk factors. Not so with real estate. Banks have decided it is a low enough risk that they can give anyone with a half decent credit score a ton of money even if the borrower has no experience with managing this type of investment.

What Difference Does Principle Pay Down Actually Make?

 Let's use the example I gave earlier on. If you have properly invested your money and have a cash flowing property, you should already be receiving a decent percentage on your investment simply from rental income. Secondly, over a long period of time you will most likely receive money due to property appreciation. Lastly, and the focus of today's article, you will be receiving another $5k each year on top of rental income in the form of principle pay down. You owe $5k less to the bank in year one, which is similar to putting $5k in a safe, long term savings account. Not only are you making decent money this year and able to spend it, you are also putting a good chunk of change into a savings account that is growing over the long term.

Ok, last question... Why aren't you investing in real estate yet? In just these first three dimensions it should be easy to see that real estate is a fantastic way to build wealth. Not convinced yet? No problem:) I have many more blogs to write that I am sure will argue strongly for real estate over other common investments. Have a fantastic week. I wish you the best in your investing education.

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html