Friday 21 June 2013

A Busy Week

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

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A Busy Week

I have been working on a deal this week that will be fantastic for whoever ends up purchasing it. It is a one bedroom apartment in a highly desirable area in Calgary close to an LRT line station. This property is worth a significant amount on the open market as soon as it is renovated, but currently is gutted. I've been working to put a package together for investors this week and will be offering the apartment for 115k. It needs about 30k in renovations and the reason I'm writing about it this week is two-fold: I have been busy putting this deal package together for potential investors and I'm excited about sharing with my readers what kind of deals exist in the world of real estate (yes, in Canada. Yes, everything legal. No, there wasn't anyone taken advantage in this deal).  I often hear people say that it is impossible to get these kind of deals or that, if they do exist, they are either illegal or I need to hurt somebody in order to do something like this.

An Introduction Into One Facet of Investing

I wrote about cash flow and its importance in my last blog. Calgary is becoming quite an expensive city and many individuals who want to invest don't understand how consistent cash flow is possible here. I don't know how many of my readers know what a 'wholesaler' is, but I would like to explain so you can increase your understanding of an individual every investor tends to love.

A wholesaler is an individual who finds deals; properties that can cash flow for investors. These properties tend to be distressed and/or vacant with owners who are having a difficult time selling them or simply want to be rid of the headache as soon as possible. What a wholesaler does is put the property under contract and then he/she sells that contract to an investor for a commission. When the contract has been purchased the investor can now fix and flip the property for a great income in a short amount of time or fix the property and keep it for long term cash flow (it will cash flow because it was bought for such a low price).

I am doing some wholesaling this summer and my investing plan includes wholesaling in my general routine. That way I can keep the best deals for myself and the people who are close to me (those who work with me in putting together a portfolio and are excited about cash flow) and can give the other good deals to other investors for a commission.

How does a Wholesaler Find Deals?

There are various ways. I have a network I use to send me leads and also walk around areas to find vacant or distressed properties to place offers on these properties. Another way is to do some marketing: I tend to use less expensive forms of marketing so that the cost is always slight to myself. When I find someone who wants to sell their home I make sure I can get it at a price that allows the seller to get out of a tight spot, the investor to make some profit, and a commission for myself. It is truly a win-win-win scenario. Some people wonder why the seller would offer their house for less than what it is worth on the open market. There are various reasons, but the two most common are:

1. They live out of province or out of city and simply want to offload their property quickly
2. The property is distressed and they have been having difficult selling it on the open market

Owners will sell their house for less because I'm not a real estate agent and won't take as large a commission as agents do and I can often offer them cash and a very quick close (because I have some great investors I have networked with).

Ok, So... What Does This Actually Look Like?

The property I have can be bought for 115k and is worth 175k when it is finished with 30k of renovations. That leaves another 30k of profit, right? There are holding costs while the apartment is being renovated and some other smaller costs as well, but basically... yes. What a great deal! Why am I not keeping this property for myself? Because I need the cash, not the property right now and this particular property doesn't fit my overall investing strategy.

A Beautiful Option

I'm going to share a secret with you that can be applied to properties that you can get from wholesalers (this is why investors love wholesalers so much). This particular property can be purchased with a very small mortgage (~23k) and fixed for ~30k. That means the investor has put in 53k total of his/her own cash. When the property is worth 175k (after it has been renovated) the investor can now refinance the property with the bank for its new value! I won't go through the numbers here because it would bore and/or confuse most people to death, but I'll explain the general concept. If you get a good enough deal you can purchase the property, fix it up, refinance it for the new value of the property and pull all of your original money out!

Maybe I wrote that too quickly and it will be missed... Please re-read that last sentence until it sinks in. People tell me they don't invest in real estate because of the risk. What is the risk if you are cash flowing on a property with none of your original money involved? The answer is almost zero. There is still risk because you are on title and someone could still sue you or, if you were foolish, you could be foreclosed upon and lose both your investment and your good credit score. But really there is almost no risk at all in this situation. This is how investors think about real estate. They take away almost every possible risk and are left with a cash flowing property that is virtually worry free!

Back to the Win-Win

I briefly mentioned this is a win-win scenario... It really is! The family I am helping out with this property have wanted to get out of it for quite some time. I asked them how much money they wanted for the property and then put in an offer for that full amount! I didn't negotiate them down until they almost broke under the burden or take advantage of them. I gave them exactly what they wanted and helped them out of a difficult and costly situation (they still carry a mortgage and are paying on a vacant apartment). If you want more information about this, please contact me.

If you are someone who has always wanted to know how good real estate can be, but haven't had access to information on how real estate can work for you, keep reading. The posts that will follow this are meant to help understand the almost limitless possibilities of real estate investment.

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

Thursday 6 June 2013

1st Dimension: Cash Flow

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

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Disclaimer

I have no idea how long I will be on the current topic of the multidimensional nature of real estate because I can think of 10-12 topics I would like to cover off the top of my head. Let's see where it takes us:) While I am covering these topics feel free to add your own ideas and thoughts. We can dialogue about all of these topics and I will be intentional about not covering every facet of each topic because my purpose is to get wheels turning rather than giving encyclopedic entries and sub entries. I hope that works for the majority of people reading the blog.

Cash Is King
The first topic is Cash Flow. When I hear people talk about real estate I most often hear comments about appreciation. “We're at the beginning of a rise in the market”, “When the property is worth _____ and I refinance, I can purchase more property”, and “My total holdings are worth _____” are all examples of how many people think first and foremost about appreciation when focusing on real estate. While I will cover appreciation in my next blog and have nothing against it, by the end of this entry I hope you will see that it isn't the most important aspect of long term wealth creation through real estate and focusing on appreciation actually gets a ton of potential investors in trouble at some point in their carrier because, in the end, appreciation cannot be counted upon in real estate! If you are counting on appreciation in real estate you are not an investor, you are a prospector (ie.gambler; think of a mining hat and dirty, unshaven face beside a river with a pan of sand in your hand).

The reason I place cash flow as the single most important aspect of getting into a real estate deal is that regardless of what the market does, if you are making money each and every single month you can hold the property long enough for it to generate true wealth for you. Let's play out a few scenarios.
  1. The market continues to move up and everyone is happy with their investments
  2. The market is stagnant
  3. The market is going through a down turn in the normal real estate cycle or, even scarier, we have another time when few people can handle debt loads like 2007-2008 in Calgary (and across North America).
Without Cash Flow

In the first scenario everyone is happy and looks like a genius. In this type of market it is very difficult NOT to do well in real estate no matter how many mistakes you make. It is the equivalent of when the stock market is rising and every individual investor looks pretty good because you can't lose at this point unless you are doing a great many things wrong. As real estate prices shoot up you can take out a HELOC and reinvest the money into other properties and continue over and over again. While this sounds fantastic in this paragraph, if you aren't cash flowing on each and every property throughout this process, you have a good chance of losing your properties.
In the second scenario what happens depends on your personal financial situation. While in the first scenario you can lose your job and still have seemingly no problems at all because you could supplement your income with the growing equity in your property, in this scenario you may be in trouble if anything happens (including rising interest rates). If interest rates rose even a little (with them being at all time lows there is a very good chance they will) would you be able to handle your mortgage payments? Will you now need to cover mortgage payments with your salary? Can you handle a cut back or downsize or layoff or retirement? Maybe and maybe not. This is a precarious position to be in. Not one that I favor at all.
In the third scenario a ton of 'investors' default on their mortgages because they had debt up to their eyeballs with no way to cover that debt load if anything goes wrong. In this scenario many people are willing to simply leave everything for the banks to mop up because they are looking for any way to cut loses. In an economic downturn or falling market it is difficult to justify putting a lot of money each year into a property that isn't costing you money as it is devalued. After 07-08 the Canadian government joined with the 5 major banks to implement changes that would protect 'investors' and homeowners from themselves. Unfortunately this affects everyone who is responsible and practices due diligence with investments just as it does those in real estate for fast money.
 With Cash Flow

Lets play these three scenarios (over simplified of course) out if you were cash flowing on your property or properties (when cash flowing properly it doesn't matter whether you own 1, 100, or 1000 homes). Keep in mind that what I mean by cash flow does not mean that your income outpaces your mortgage, taxes, and insurance. When I say cash flow it means that you are covering each and every expense that exists on a piece of real estate. Expenses include those mentioned above as well as maintenance expenses which includes future furnace, shingle, and hot water tank replacement as well as anything that can and will go wrong with a home like plumbing, as well as future reno costs (replacement of flooring and paint). What will you do when your property is sitting vacant for a month every once in a while? This is an expense that should be included with everything else mentioned. One last item (are you overwhelmed yet? If so, don't worry. There are spreadsheets and people like me to think through all these details for you). If you have a company managing your property, this would also fit into the expense column. After all of those if you have at least $100 going into your bank account each and every month you can say you are cash flowing. Now, I prefer more than $100/month and probably won't do a deal that barely cash flows because it is too close to breaking even (unless I have a long term locked in interest rate of 10 years), but for the purposes of this blog a simple explanation it will do.
In the first scenario you definitely would have nothing to worry about. You are just as happy as anyone else in the real estate industry, but with the assurance that when something changes... you're still fine.

In the stagnant market... no worries. You ride it out knowing that the market will eventually rise again and that wealth through real estate is for those who plan long term.

In the third scenario... again no worries. If the market is crashing it can be a very good thing for those who have planned well. I won't go into great detail right now, but will offer a quick explanation. If the market falls as great as it did in 07-08 in the states, many people will not be able to afford homes and will be foreclosed upon. This means there will be a larger demand for rentals soon after (as there is now in Calgary as well as the US). Also, if there is a huge economic downturn not only is there more demand for a rental, often interest rates will fall as well and this can be a fantastic time to lock in at a long term lower rate. Even if everything goes wrong, you have planned ahead and can allow your investments to play themselves out even if things are a little tighter for a period of time. You lose your job? Although this is never ideal, you won't have to gnaw off your finger nails when you think about your real estate investment portfolio because it is taking care of itself. You will have a reserve fund at this time that can take care of extra expenses for a period of time (I'll explain in a later post).

Cash flow is also, in my mind, the best way to rely on real estate as a wealth generator. What happens when you own 50 doors? If each door is paying out at least $100 this means you will have passive cash generation of $5,000 each month. When this happens, do you really think you will be as concerned about your networth as the individual beside you? If you think owning 50 doors worth of real estate is impossible, you simply haven't learned enough about real estate yet! When we are a year or two into this blog, I will be shocked if you still think you cannot own 50 doors (although financing will definitely take more than a few blogs to cover).
But, But, But...
But what if the world falls apart? I know the naysayer out there is thinking this or something like it. In answer... if the world falls apart, I probably have bigger things to worry about than my real estate portfolio and am probably no better or worse off than anyone else in the middle of a world war or Armageddon.

Comparisons? HA!
Cash flow is also important because this is an area where real estate outpaces almost any other investment. What other investments can you think of that pay you cash month after month after month? Two come to my mind almost immediately. The first is a bank, either through interest on a savings account or GICs. The best return you can hope for in today's market is around 2.25% as of this writing. Can you honestly even use the term 'investment' with that kind return? The government consistently reports average inflation of 3% or higher. This means that you are actually losing money by keeping it in a bank with a GIC. I won't even go into further detail because this is obviously such a foolish thing to do with your money if you want to have it grow. If you were to even simply put your money into a physical investment, such as gold or silver, at least prices would somewhat follow inflation. Something else to consider with inflation is that both the Canadian and US governments are printing money very quickly right now. I recently heard someone tell me the US has printed more money in the last 3 years than it has in the past 30! If this is true (or even half or a quarter true) it means we are in for much higher inflation rates in the near future. Inflation is something I really want to cover more fully, so I will stop here and continue at another time.

The second investment I can think of that pays cash returns is any stock that pays out dividends. There are companies that consistently pay out a certain percentage (not guaranteed, because no real investment is) at set times throughout the year. While this qualifies certain stocks as an investment in my opinion, it does not measure up to real estate because of leverage and having someone else pay off your debt (but I again am getting ahead of myself here. I'll cover these topics in later posts). As you read through the dimensions of real estate in the coming weeks I would like you to pay attention to how many other 'investments' we hear of can do the same. For each topic I will cover here there a couple of others that can do the same, but there are fewer that can do half and I do not know of even one other investment that can do all of what we will cover (not by a long shot).

The next topic we'll focus on is appreciation (and you thought I discounted it, didn't you?)

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

Saturday 1 June 2013

Why Rethink Investing?

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

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What connotations does retirement bring up for you?

When I think of retirement it brings up images of spending time doing when I truly desire to do rather than what I believe I must do to help my family. If you read my introduction you might even be able to guess what I want to do in my retirement. As of this writing I receive money for my services in counseling. My dream is to help people for a very nominal charge (just enough for people to believe they are receiving something of value and investing themselves in the process).

How about you? I have not idea how old you are or how often think about retirement, but I would encourage you to take a few moments and do so now. Are the connotations pleasant, or frightening?

I will share some stats I was recently given by someone. Be careful with stats.... A famous man once stated: "There are three kinds of lies: lies, damned lies, and statistics", so take these numbers with a grain of salt (especially because I've looked around to validate these numbers and have had a difficult time with some of them).

These are the stats:
-Only 40% of Canadians contribute to RRSPs
-The average contribution to RRSPs in Canada was $2,790 in 2010
-The NY Times reported that in 2010, %75 of Americans would retire with less than $30,000 in savings (I realize this is the US, but it still scares me)
- 49% of the middle class will retire poor or near poor in retirement living on a food budget of $5/day
     -This stat was also in the NY Times. The article can be found on their website at: http://www.nytimes.com/2012/07/22/opinion/sunday/our-ridiculous-approach-to-retirement.html?_r=0
-Half of retirees in Canada will realize a 25% decrease in their standard of living
-58% of Canadians expect to be working full or part time jobs at the age of 66.
-The maximum combined Old Age Security and CPP is less than $16,000 per year
     -This is the most anyone can receive from these two public financial helps in a year at the age of 65!

 Questions Rumbling in my Brain

Some of the questions that pop up in my mind when I read these numbers are: With the governments of Canada and the US printing vast amounts of money (in economics this is the very definition of inflation), how will retirees keep up with the consequent rise in inflation rates coming in the next decade or two? What percentage of return on an investment will a couple need in order to even keep up with inflation? How about if they want to beat inflation? Are RRSPs the only way people are investing? What kind of returns are people receiving from their RRSPs? What will happen to the people who cannot afford to retire? What other investments are people focused on in order to retire without worry?

I have a personal goal for how much I want in my 'retirement fund' when I retire. This number is substantially higher than what I hope to be making annually for the next 15 years. Why is it higher? For a few reasons. First, with inflation rising I believe I will need more future devalued money than I currently will need. Secondly, living costs can often rise in retirement if there is any need for medicine or assisted living and I don't want this cost to fall to my family members. Third, there is a very good chance my wife will survive me for up to a few decades (Teresa has some long living blood in her veins) and I want her to be fully taken care of no matter when I pass. Lastly, I don't want to live with a budget that restricts how I live. I prefer to live with a budget that enables me to invest in others (both with my time and with my money). If I have more than I need coupled with a spirit of giving to others and helping others, the term 'retirement' has extremely favorable connotations to me. I choose to think and plan for my retirement years as those when I am most able to invest in others because I have the life experience, wisdom, and money that frees me to be valuable to others.

So What?

You may ask 'so what'? So what if this is your retirement dream, Mark? Everyone has something different, what makes yours relevant to the conversation? I write these musings because I have a long term focus, not short term. Anything can happen in the short term, but history has proven that there are investments we can rely on over decades with less risk than others. Real Estate is an investment that fits this bill. Do you want to become a millionaire next year? Go into high risk stocks or purchase lottery tickets and hope beyond hope that you'll win. If you want to financially secure in 30 years, understand real estate and make wise purchases that allow you to be in that position in the future after someone else has paid off all the debt of that real estate.

In my next post I want to begin to focus on the multidimensional nature of real estate. While I will attempt not to hammer on negative aspects of other investments, I will focus on the positive aspects of real estate that most other investments cannot touch because I believe there are more ways than one to reach desired goals. There is a way I know, however, that works extremely well for those willing to learn a little each year and plan ahead.

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