Ready to buy your first investment property? Step one: Read this article…
Wondering how the wealthiest people in North America made their fortunes? Last year, 33 U.S. billionaires made their money in real estate, according to the Forbes 400 list. If that doesn’t whet your appetite for finally getting in on the real estate investment train, I don’t know what will.
Now that I have your attention, are you feeling motivated to take action? There’s no reason why you can’t end up on that prestigious list of who’s who. Of course, it all begins with finding the best deals. And while there’s no guaranteed methodology, I’m going to share the blueprint I have successfully used my whole career.
For me, the winning formula is to look for properties that will yield cash flow AND the potential for capital gains. Why? While we aren’t flippers (we believe in holding onto our investments as long as they are generating cash flow and passive income), we do like having options. And someday, we may want/need to sell—wouldn’t it be nice to do so for profit? Of course! So let’s dig deeper.
Spend some time upfront determining the criteria under which all property options must align. That way, you’ll know immediately if something is worth investigating or not. For instance, early on one of my must-haves was a property close to my home. It’s important to be able to get to know that neighbourhood very well, which is much easier when you have access. In fact, my first real estate investment was so close, I could take the elevator down to it—and I did so a few times a week to see if other condos were for sale, what the vibe was like, if there were any notable changes in the area, etc.
When it comes to your first investment, size does matter—and I firmly believe smaller is better. You should invest a lot of time and only a little money in your first deal, however so many people tend to do the opposite. Gee, I wonder why they fail? The smaller the investment, the less risk you face. Isn’t that a good idea when you’re on a learning curve?
Look for properties with problems. I’ll bet you weren’t expecting me to say that! But honestly, one of the best things you can find is a property with a problem that you can solve. When I came across a home that was a burned out crack house on the verge of being torn down by the city I asked myself the following question: “How can I solve this problem?” It turned out the property was being run as a rooming house illegally. The property was more valuable as land value to a local developer, after some research, I realized that getting the property vacant, and selling the home as a tear down to increase the developer’s future development, I sold the lot for a $556,000 profit in less than 3 months. I could have kept it and fixed it up as a 20 unit apartment, but the capital gain was too good, and the best part, I had no money of my own in the property.
Become a pro at reading pro formas. A pro forma is a type of financial statement for an investment property. But unlike a cash flow statement representing current income and expenses, a pro forma is a projection of anticipated income and expenses. Most pro formas don’t show actual operating numbers. Ask the agent, since it’s his or her job to gather the information on a pro forma in order to market the property to potential buyers. Once you understand the basic elements, you’ll always be able to get to the information you need. The numbers on a pro forma will tell you whether a property qualifies for further review. If you decide to pursue the property you will then use the pro forma numbers as a starting point for the financial analysis you will need to perform in order to make your final decision.
Negotiate based on numbers, not emotions. Have a maximum figure, a figure you will not go above, in mind before you begin negotiating. When you reach that figure you’ll either need to pull out of the deal or get other concessions to make the purchase of this property economically feasible. So, don’t fall in love with the property. You must be ready to walk away from the deal if you cannot come to a favourable understanding with the seller. You’re in this deal to make money, after all.
Hope this helps you to make your decision, if you are on the fence, and need someone to speak with, we are always here to help, 416-913-1089, or you can book an appointment HERE.