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Canadian Real Estate Investing 101

  1. CANADIAN REAL ESTATE INVESTING 101 By John W Carter, CEO Parkhurst Asset Corp March 2013
  2. Content Background on John Historical returns vs. other investment options Why invest in real estate Hurdles and challenges, and how to overcome How to run the numbers on a property Options for investment in real estate Questions
  3. Background on John W Carter John has over 10 years of experience managing his personal portfolio of single family properties & apartment buildings as well as a number of joint venture holdings. He has done so successfully through all market cycles. Since 2002 he has transacted business volume with clients and his personal portfolio of over $70,000,000 and over 100 property transactions.
  4. Historical returns vs other options
  5. Historical returns vs. other options
  6. Why Invest in Real Estate
  7. Why Invest in Real Estate “Ninety percent of all millionaires become so through owning real estate.” -Andrew Carnegie Leveraged appreciation Equity repayment – tenants pay down your mortgage for you Tax advantages Cash flow Should achieve 12-20%+ ROI on cash invested. Depending on financing strategy, breaks down as: 3-5% cash on cash return, 5-8% with equity paydown, and overall return includes appreciation over 5 years+.
  8. Leveraged Appreciation
  9. Equity Repayment & Appreciation Income Grows too
  10. Long Term Appreciation Formula Research provided by Real Estate Investment Network &
  11. Tax Advantages & Cash Flow Tax advantages: Can write off interest on debt used to buy investment property Depreciation of asset value against other income Growth of capital is tax deferred until sale Tax on sale treated as capital gains, and thus only 50% of gain is taxable Cash Flow Should always invest into positive cash flow from day one Debt should be positively leveraged (explained later in numbers) Invest in growth areas, and where high demand for tenants. Ideal property types are 2 bed condos, 3 bed townhouses, or 3+2 bed suited houses
  12. Hurdles and Challenges
  13. Hurdles and Challenges Overcome “You make your money real estate investing on the appreciation, but you need cash flow to wait for that” - John Carter Not enough cash Friends, family, business associates to JV with you Qualifying for mortgages Get co-signer Finding viable properties Hire a Realtor that owns investments properties themselves Target growth markets where numbers make sense Fixing toilets, tenant horror stories, and 2am phone calls Hire property managers, have cash flow to pay for them by structuring investment properly up front, and do annual inspections yourself.
  14. The Numbers
  15. The Numbers Key terms: What is NOI? What is a cap rate? What is positive and negative leverage? Proforma examples
  16. The Numbers Net Operating Income (NOI) Income after all expenses, but not including debt payments. Is an equalizer to compare investment properties, and the primary value of an investment property Capitalization Rate Simply put, it’s the NOI divided by the purchase price. Represents the return on investment assuming purchasing the property with zero debt. Is the equalization for comparison of various properties. Positive and negative leverage Positive leverage is where the interest rate for debt on a property is lower than the cap rate. The result is the investor achieves an ROI on the banks money as the spread between cap rate and interest rate. Negative leverage is where interest rate is higher than the cap rate. This means cash flow is reduced to pay debt payments, and can result in the investor being short on cash to pay the mortgage and potentially losing the property to foreclosure in future.
  17. Proforma Examples
  18. Proforma Example
  19. Options for investing in real estate
  20. Options for real estate investment Equity options: Buy rental property – 12-20%+ Invest cash as a joint venture partner with a successful real estate investor – 10-20%+ Invest cash into a limited partnership or private REIT – 7-15%+ (some are RRSP eligible) Invest in public REITs – 7-18%+ (avg. 18% in 2012) (RRSP eligible through self directed account) Debt options: Invest in private first or second mortgages – 8-12% MICs (mortgage investment corporation) – 8-12% RRSP eligible
  21. Options for real estate investment If have $40-50k, and ability to get debt, buy a rental property If not, invest cash with JV proven investor (amount varies) If less than $10k, invest in public REITs If over $10-25k, invest in private REITs, but do diligence Best options for starting out
  22. Real Estate Investment Success Plan 1) Own your own home 2) Keep your first home as a rental, and move up 3) Buy single family properties with secondary suites 4) Real life monopoly… buy 4 houses, then move to apartment buildings Focus on tenant screening up front, effective management, cash reserve Slow, strategic moves. Buy and hold min. 5 years Refinance when possible to bring debt costs down. Use caution when refinancing equity. Must still be cash flow positive, and use equity for re-investment only Increase rents with market, but keep tenants better
  23. Additional Resources: – Download investment guide and review ‘Learn’ section. Signup for our email newsletter REIN – take the ACRE system intro. course and signup for newsletter Any Questions?