The Road Ahead: Investment Goals

For the next part in this series, I would like to discuss my investment strategies over the coming 12 months. First outlining investments over the past 2 years, followed by my aspirations for 2007.

In 2005 we purchased our first rental property for $143,000 CDN. The property rents 5 bedrooms at $400/month for a cap rate of 16.8%. This, I figure, is a pretty good investment. Unfortunately, it has been a struggle to find student renters for 12-month leases and thus, the property has under-performed over the summer months. However, we have consistently made money off of it to the tune of approximately $5-6000/year.

In August of 2005, we purchased a new primary residence which included a 3-bedroom basement apartment. The rooms are again rented for $400/month. The cap rate of 4.36% on this home is not as nice, but we have the added benefit of living in a nice house, in a very desirable neighbourhood.

Then in May of this-year, we purchased a second rental home. This time it was a 5-bedroom, 2.5 bathroom condominium for $145,000. Leases were already signed from May 2006 – May 2007 for $395/month. Thus, the cap rate is 16.3%. Overall, the property nets about $600/month plus the principal payments which is about $10,000/year.

So… 2007. Since I invest with my wife, it is a bit more difficult to plan perfectly, however I’ll take a stab. We should be able to save $30,000 this-year and I would like to pour that into one more investment property, a new Etrade account, and our 5% savings account. I’ve seen a few ads around for hard-money at 0% down, so I might investigate this, which would enable us to get another property with only 5%. Why 5%? I like to own a bit of the property off the bat just in case the market tanks, I don’t want to be stuck owing more money in uncertain times if I need to sell the property in a hurry. So, investigating my funding options is a primary task.

I also want to investigate starting a small REIT, or even a LLC selling shares to small-time investors. This way I can use OPM to really start getting into bigger, more diversified real estate holdings. I’d like to investigate commercial property opportunities.

My take on the impending housing burst, is I think that property values will not crash, but will correct. I hope that they will drop no more than 10-15%, and I hope this process will take a few years to pan out. If I’m lucky (i.e. correct), we will be able to weather the storm, and ideally will still be pulling in positive cash-flow throughout.

In my Etrade account, I’d like to get into some blue-chips, as well as some iShares index funds from Barclays. Hopefully the portfolio will do well, and it will balance my bond investments through my ESPP, and all of my real estate investments. There is a REIT iShare that I am very interested in as well.

I hope that my diversification strategy pans out, and most importantly, that the real estate market in London remains strong through 2007. The forecast looks good, but it really depends what happens south of the border.


Tomorrow: Organization… How can I conquer my natural tendency towards distraction?

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Part of the writing project over at BiggerPockets.

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3 thoughts on “The Road Ahead: Investment Goals

  1. Why are you looking to protect your assest(s) with a 5% ownership interest? If the market tanks by 10-15%, then you just lost all of your investment and the bank lost 5-10% of theirs. If you come in with 0 down, and the market tanks, you loose $0 and the bank loses 10-15% of their asset.
    If a 10-15% decrease in home prices is what your are expecting in your area, then your 5% wont matter if you have to sell; you’d still be looking at a short sale or foreclosure to get out of the deal.
    The only good reason to put in your own money that I can think of would be to enable the property to cash flow. And if it cash flows, you wont want to sell it in a down market anyway.

  2. Hi Joel, I appreciate your comment, thanks.

    My question to you is what about our credit scores? In your scenarios the property will foreclose or sell short, and will the bank not report this?

    In my personal case, I am in this for the cash flow. It is a steady trickle right now, but I plan to apply all cash flow to capital improvements and further investments for the next 5-10 years. This way my rental business is self-sufficient. I have 3 properties now, 2 take care of themselves with a $600/mo net income and the third is my principal residence with a 3-bedroom apartment that pays my primary mortgage.

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