Expert advice, market reports, and tips from the Niagara Region real estate professionals.
On a couple of different occasions over the past few weeks I have come across articles written by different financial advisors and investment specialists advising people to NOT own their own homes, but rather to rent.
I’m a big fan of diversifying an investment portfolio. Mix it up. Single family, duplex, triplex, semi-detached, condo and the odd small commercial property. There are a lot of reasons for this. Condos for example are among the easiest to manage. You don’t have to worry about lawn care, snow removal, exterior maintenance. But they are among the toughest to cash flow. You pay for those services through the CAM fees which takes a big bite out of your rent. Having one or two in your portfolio can be carried by the surplus rent generated by your multi-families but it’s hard to make your profit/loss statement work if you have too many
Removing an unwanted tenant is difficult. Very difficult. The Residential Tenancies Act sets out the framework of expected behaviour on the part of both tenants and landlords in the Province of Ontario. And the Landlord and Tenant Board is the bureau that enforces the Act. However, you need to keep in mind that the Residential Tenancies Act is a piece of Consumer Protection legislation. Its rules are very slanted in favour of the tenant. And the Landlord and Tenant Board functions heavily in favour of the tenant. Recently I spoke to a landlord who had taken a problem tenant before the board for continued destructive behaviour. Many of the actions he had captured on CCTV. He was seeking an eviction order. The adjudicator didn’t question the destructive behaviour. However, since the videos depicted actions that had taken place over the past month, the Board ruled that, since the offences hadn’t occurred in the last 7 days, they had to assume the behaviour had been corrected. Case dismissed.
I remember the first house I ever sold as a Realtor. I was at a small house party and a young man came up to me and said “you’re in real estate I understand.” “Yes I am.” I replied. “Well, I’m interested in real estate.” I thought he meant he was interested in getting into real estate as a career. That’s all I knew. I had just gotten my salesman’s licence that day. I started to explain to him how to take the licensing courses when he said “No, I’m interested in buying real estate.”
A lot of people are living paycheque to paycheque. It seems that regardless of their income level, each paycheck goes to pay living expenses and the odd luxury along the way. The problem is, what happens when the paycheques stop coming? Layoff, plant closure or retirement? I read recently that the average senior had about $1,500 cash saved up. Not much with today’s cost of living. Of course, with our social network, there will be some money coming in, C.P.P., Old Age Security, maybe even a small company pension. Just enough to get by. Not enough to really enjoy life.
Real estate should always go up in value, right? I mean, that’s what we’ve always believed and come to expect. And there are good reasons for that. The first reason is that, in general, inflation continues to bump up the cost of living. Governments use their resources to combat that, generally by increasing interest rates, so that inflation doesn’t get out of control. But they recognize a little inflation is good, and they target a 2% - 3% range. Well, if real estate didn’t at least keep up with the cost of living, it would be cheaper and cheaper, relatively speaking, to buy a home. That just isn’t what happens.
We sometimes think net worth is king! It’s the gauge we use to rank individuals by wealth. We’ve all seen postings on Facebook showing us the top wealthiest individuals on earth. Or the number of billionaires in Canada. Those numbers are based on net worth. And if you recall net worth is the difference between the value of everything you own and the total of all the debt you owe. But net worth doesn’t tell the whole story. It makes a great deal of difference what type of items comprise your net worth. Let me explain by way of a personal example.
The Money Machine espouses a plan whereby an investor is encouraged to acquire 10 rental properties. Generally, a mixture of single-family, duplex and triplex. And, of course, that can branch to encompass condos and even commercial and industrial. But there are reasons for a minimum of 10. The first, obviously, is an adequate income upon retirement. Suppose, for example, you bought one investment property. A duplex, perhaps. That’s great! But suppose you stopped there. You simply can’t retire comfortably on two rents. Suppose they produce a gross monthly income of $3,600. After taxes and expenses, that might net you $2,900/month. A real help, but not enough to support a lavish lifestyle.
Warren Buffett, one of the richest people on the planet, celebrated his 95th birthday recently. Celebrating that event, he quipped, “I’m one of the richest people in the world. I can buy anything I want. But I can’t buy time.”. How true. As a young man, he set out in life with lots of time but very little money. Over the years, with clear goals and vision along with shrewd investing skills, his wealth grew and grew. And during the process, the grains of sand trickled down through the hourglass. He amassed vast amounts of wealth, but it took time.
Last month we looked at how the residential rental market is shifting from being a market where rental units were in scarce supply and tenants had a tough time finding adequate accommodations to one where there were a relative abundance of vacant rental units and tenants had choice. And looking at the forces that were bringing about that shift, it’s safe to say that trend is likely to continue.
Real estate goes in cycles. I think we all realize that. Sometimes as was the case during the covid era, properties are in hot demand. Buyers are frantic to get their hands on them. Sellers are reluctant to put their homes on the market knowing they will be quickly snapped up, but they are fearful they won’t find one to buy. Multiple offers are the norm on most listings. People outbid one another and sales generally go for above asking price. We call this situation a seller’s market.
The Money Machine seminar boiled down to its simplest form is a three-step process. 1. Buy one property a year for ten years. 2. Never amortize your mortgages for more than 15 years, and 3. Never sell. Stick to that exact formula and you’ll never have to worry about cash flow in retirement.
