Re-printed from Ontario Industrial Magazine

How is it done? Is it right for you? Where should you begin?

For this purpose we will ignore the get-rich-quick schemes.  Certainly we all hear about the guy who bought a bargain and ‘flipped’ it for a fast capital gain but the reason we hear about it is because it is the exception rather than the norm. You always hear about what someone won at the casino, seldom about what they lost the time before. The speculative coups do happen, just like winning the lottery. However the question to ask when someone tells you about a  property  available at well below market value is ‘Why didn’t he buy it himself?’

Similarly the Canadian investor should be wary of ‘Power of Sales”. Canadian law is entirely different than U.S law so what you see on U.S television is misleading…… quite aside from the question of why a person making millions of dollars buying distress properties needs $99 for telling you how to do it ! Canadian lenders acting under power of sale must make every effort to get full market value, including giving the property broad exposure for an adequate period of time, so discount any “inside information”. You won’t get a bargain and you’ll face substantial risks due to the absence of any type of warranty and the ‘right of redemption’ by the party in default on the mortgage.

You should also be aware of the difference between power of sale and ‘foreclosure’. If someone uses these words interchangeably he does not know his business. The fact is that Canadian institutional lenders hardly ever ‘foreclose’ on a residence. It is bad for public relations and offers no business benefit to the lender.

That being said, there are solid, tried and true approaches to creating substantial wealth through Investment Real Estate. Your Investment can be as modest or as substantial as you wish and the benefits can take the form of regular cash flow, capital gains or a combination of both.

An income real estate strategy is remarkably similar to what you do in your business. The typical business has a certain amount of owner equity and a certain amount of debt. So long as the debt bears a rate of interest that is lower then the business’ Return on Investment, the owner benefits from the debt leverage and receives a ‘return on equity’ that is much higher than the overall return on investment.

For income real estate, your equity consists of the down payment and closing costs ( legal fees, land transfer tax etc ) while your return on equity has 2 components, the net rental income after expenses and interest costs and the capital appreciation of the property.

A good start point is to decide whether you prefer to invest in residential property or in commercial real estate. Generally, with the exception of small commercial condo units, commercial is better-suited to full-time property managers  as the moderate investor may wish to avoid the generally higher unit values, the more limited number of suitable tenants and the high cost of any vacancy period .

For the new investor the next consideration is how “hands on” you wish to be. If you have the time for interaction with tenants and are prepared to get involved with exterior repairs and maintenance, freehold properties can be considered. However if ,like many investors, you are looking primarily for a good financial investment with a minimum of  work, then apartment buildings with on-site management or condominium units may be your best choice.

The advantages of condominiums are substantial. First, you will have no involvement with exterior repairs and maintenance as these are covered in the monthly fees. Second, you can buy individual units and start with a minimum investment. Third, there is a steady demand for rentals, a readily identifiable market rent and fixed monthly costs so your cash flows are easily forecasted. Fourth, these may be readily financed at fully discounted interest rates. Fifth, you have the option of using your Realtor, or in some cases the condominium corporation, as your ‘property manager’ to ensure that you always have reliable creditworthy tenants and all the details are taken care of. Lastly, providing that you buy the right units in the right buildings these can quickly be converted back to cash when required.

A sensible approach is to have your Buyer Agent  identify properties which provide the best ‘Net Rent to Capital Cost Ratio” and then rank these according to their forecasted capital appreciation.

A common strategy is to manage each unit so that it is ‘cash neutral’ i.e the  down payment is sufficient to make the Net Rent after expenses exactly equal your mortgage payment. The lower the percentage down payment that is required to achieve this, the greater the leverage of your equity.

As time goes by and Net Rental gradually increases you can of course use the surplus to pay down the mortgage more rapidly . Your tax advisor can guide you on how to minimize tax liability and your Realtor or Mortgage Broker will show you various financing alternatives. If you have kids aged 18 or over who do not yet own real estate you might consider buying in their name in order to avoid Land Transfer Tax and to spread the Capital Gains.

No matter what route you choose the end-result should be that a small investment is leveraged so that your tenants pay the bulk of your purchase price while you benefit from the Capital Appreciation on well chosen properties.

Please feel free to e-mail for more information on the Greater Toronto 416/905 Area or for referral to someone reliable to help you in other parts of Ontario

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.  Please direct your questions to paul@buyerscall.com or to his direct line, 905-607-4400