Unless you have a stock pile of money or started with a large source of funds, to make it big in real estate you must look beyond cashflow. Most Canadian real estate investment classes, books or buzz words are all about cashflow, cashflow, cashflow.
The majority of people believe that successful investing is only about cashflow. Perhaps this idea might have come about from the “Rich Dad Poor Dad” book series by Robert Kiyosaki, or maybe it was Grant Cardone who promoted this strategy and really pushed it to the masses. Don’t get me wrong, it is very important, however in my experience, the big real estate money does not come from cashflow. Cashflow is only the minimum criteria an investment should present when analyzing a deal. In fact the current cashflow of a property can often be irrelevant in some cases.
Real wealth in Canadian real estate comes from the repositioning of an asset through forced appreciation and/or potential future uses.
Take for instance the following scenario: You spend several months reading and learning from various sources in an effort to time your entry into the market. Then you spend another 3-4 months trying to find the right property and another 2-3 months before you close. After almost a year, you’ve secured a duplex in Niagara falls. At first you’re happy with the little positive cashflow which helps to cover the monthly expenses. But suddenly, the furnace blows, the roof leaks, the bathtub leaks, maybe you have worst luck and the main water pipe backs up and the basement needs to be sanitized and re-done. Let’s not begin to mention landlord and tenant issues. At this point, any positive cashflow that you had has been completely alleviated and left you in the red.
The importance of having the right perspective as a real estate investor is a necessity. Otherwise, at the first sight of issues, there is a good chance you’ll want to sell and run for the hills. Cash flowing real estate as a sole metric has been so drilled into peoples’ minds, that they are not aware of the other pieces of the puzzle which allow you to gain real wealth in the Canadian Real Estate Market.
My first projects were a triplex in Hamilton, Ontario and St. Catharines, Niagara. I knew from the beginning that I wanted a combination of appreciation and cashflow or at least a property that would break-even. My concern was not only cashflow, but as long as these properties were financially self-sufficient and didn’t cost me from month to month it was a viable investment. I wanted to create wealth without the market dictating what my gain would be and I knew I couldn’t do that with cashflow alone. I also knew that by creating a projected financial proforma, a good metric to look at would be the final or ultimately cashflow after the real estate is repositioned and the forced appreciation has been created.
Initially, on purchase I had very little equity. But by repositioning the asset and raising the rents, the value doubled. Do not underestimate the importance of ensuring that you analyze the value of your properties correctly. In most Canadian markets, the reward of refinancing a property is not the slight improvement of immediate cashflow, but rather the several hundreds of thousand of dollars that you stand to create in equity. That equity, provided me with the opportunity to purchase more and move to larger projects. This is called the snowball method, rolling one investment into another. Coined by the most successful investor of all time, Warren Buffet.
When looking at real estate deals, you must be able to reposition the asset and/or have a long term plan to increase density or add units. That can be done through an existing apartment, single family home, small commercial plaza that can be rezoned for a condo project or a piece of land that currently has a small home on it but can be rezoned for later residential development.
Consider the following when looking for properties to build wealth in real estate in Canada:
- Find properties that are underperforming and under valued that you can force the appreciation without external factors like the market.
- Ensure that these properties can be repositioned with higher rents that will allow for positive cashflow or break-even – as long as you have a long term plan.
- Do your due diligence to see if density can be increased or units can be added. You can do this by visiting the documentation from the Canadian investment city of your choice.
- Buy real estate in up and coming neighbourhoods. Ensure that the asset is an area of gentrification or has future economic growth.
- Thoroughly understand the areas value. On purchase (As-is) and after repositioning (as-complete).
- Picture any business, some businesses take years to become profitable, and some never do. The same applies to real estate when you’re growing. Imagine a world that you could jump in and immediately retire by purchasing a piece of real estate. Apart from some lucky people, It’s not realistic and it is not where real wealth is created.
In life and in business (especially in real estate) you will have ups and downs but it’s important to stay focused or you will always end up losing money and time. If it didn’t take dedication, hard work and perseverance, everyone that ventured into the industry would be incredibly wealthy.
In order to be successful, you need to think long term and be able to survive the ups and downs of the real estate cycle and above all you need to take the market out of the equation when investing in commercial real estate. Surviving the tough times is just as important as riding out the good times. Take the bull by its horns! But always remember everyone must live somewhere regardless of the economy. Shelter will always be a necessity.
So while most people analyze the current cashflow, I plan for equity gains along with ultimate cashflow after the asset is repositioned and/or density has been increased.