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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Reader Question #1

Andy over at Thoughtful Consideration emailed me the following question and, with his permission, I thought it would be better to answer it here.

“My wife and I are interested in getting into investment real
estate, but we’re having trouble identifying properties with which we
could generate a positive monthly cash flow. We have some (but not a lot) of
money that we could put down; unfortunately it’s not enough to bring even
the most basic expenses (mortgage, taxes, etc.) to a monthly dollar amount
below what we could rent the units for.


Did you run into that problem, or is that just our market (Boston suburbs)? Do you have any ideas on how that might be overcome?”

I guess I am lucky because the city I live in is heavily populated by students, and enjoys relatively low real estate prices.  The average home in my city costs approximately $250,000 CDN, but you can find town-homes and a lot of smaller homes in the $150,000 range.  My first home is a war-era home converted from 3 bedrooms to 5 bdrm, 2 bath.  My second income property is a 3-bedroom townhouse converted to 5 bedrooms.  Furthermore, I charge per bedroom since I am renting to students. This works out to $2000/month rent.  Expenses are kept low ($1200-ish) including mortgage payments due to the low cost of the homes, so the mortgage payments are reasonable.

I’m not really sure what the Boston market is like.  You may
wish to consider leasing out a property, or flipping a house or two to generate capital.  However, flipping is a risky business and one must very carefully plan out every eventuality prior to purchasing a house to flip.  I think flipping will become even more dangerous in the coming years as some of the air gets let out of the housing bubble.  For a light-hearted view of the Flipper Nation, check out this online video series. (It is worth a watch!)  There is also the question of flipping in a market which has a good potential for downturn.  I, for one, think it is still possible to flip a house as long as you do it right…  What does that mean?  You need to get in and out quickly, get the house on the market ASAP, know your market so that you can guarantee the house will sell fast, and keep in mind all of your expenses including depreciation of the market value.

Another idea would be to attempt to buy up some foreclosures.  There are several ways of doing this, and it does require a fair bit of legwork, however, you can often get the house for much less than market value.  I have not attempted this, so I really don’t know how to go about it.  I have some ideas… but untested ones, I’m sure a trip to your local Chapters would dig up some good information here.

Either way, the more down payment you can scrounge up, the more cash-flow you’ll have.  Ideally your yearly cash flow will be able to pay for all of your repairs, and other miscellaneous expenses. Otherwise, these will be out-of-pocket expenses, and I wouldn’t recommend getting into a situation like that.

Here are some questions for you, maybe you could chat them up in the comments:

  1. What is the average cost of a house in Boston? 
  2. How much do you think you could rent it for? 
  3. How much is property near the colleges? 
  4. College students pay exorbitant amounts of rent (because they are much shorter term usually).
  5. Have you set up a spreadsheet to compare properties (more on this later)?

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Foreign investment homes for retirement or vacationing

I’ve been toying with the idea of investing in a vacation home abroad for about a year now. There are many suitable countries for such an investment such as Costa Rica, Portugal, Chile, Brazil, etc. Right now, this is just an idea, but here are some links and information I’ve located on the topic.

I watched a program on one of our specialty channels on investing in Rio de Jineiro. Evidently, you can purchase a condo 5 minutes from the beach for in the neighbourhood of $150,000 USD. Not a bad price given that you would only need to come up with the down payment, and the place would be yours.

Costa Rica:

  1. LandShareProfits answers the why of retiring to Costa Rica? The website is 100% focused on Costa Rican real estate.
  2. Free the Drones posts a lengthy article with some nice details on the legal aspects, and includes some real estate listing sites to-boot. They also have a few other posts on the topic .

Thailand:

  1. Free the Drones also posts about retiring to Thailand. It is mostly an outline various travel guides to the country, as strict retirement guides are not available in print. However, the author states that he’s working on a collection of what the internet has to offer on the topic. Visit the Retire Abroad tag for more goodies.
  2. Good news , the coup has not significantly affected real estate prices.
  3. More good news , if you’re American, you might find better healthcare in Thailand and neighbouring countries than at home, so why not retire there?

Furthermore, here are some other ideas:
1) Invest with friends and time-share the home
– this spreads the inital cost out
– a recurring yearly fee would take care of the regular expenses
– in short order, I’m sure it would be easy to find enough interested parties to fund the home
2) Rent the house for most of the year, while owning it yourself
3) If you find a house in the right area, it could appreciate significantly in value as more and more people consider buying up property in areas where tourism and trade are only just beginning to take-off.

To be continued…

Review: “I Will Teach You to be Rich”

Author: Ramit

Subject: Financial advice, interviews, etc.

Verdict: Good site, fun to read, sarcastic and synical.

Details: Ramit has a good sense of humour, likes pens, and thinks he’s better than everyone else (not that there’s anything wrong with that). This interesting mix makes for an interesting read, and the fact that Ramit is indeed knowledgeable in terms of becoming financially successful means you can learn something at the same time.

The best part of Ramit’s site are his weekly features. Every Friday he interviews a successful entrepreneur. These interviews have been very enlightening as the inverviewees run the gambit from owners of a small specialty pen distribution company, to Pam Slim of Escape from Cubicle Nation who blogs about how to successfully start your own business. Every Monday he will also be posting a new way to renegotiate one of your service contracts to save money (the first post showed us how to save on automobile insurance). We’re still waiting for the next installment which is due today.

Anyway, I strongly recommend checking out Ramit’s site. His site was a major contributor to my desire to start blogging about real estate, so it must be good. There is a wealth of useful information in the archives, so be sure to surf around.

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Emotions vs. Decisions

Today Frugal wrote:

The bottom line is when you find a business that is trying its best effort not to give you any possibility of doing apple-to-apple comparison, you should know what it is up to.

Don’t forget about emotion!  Emotion is the single biggest factor affecting people’s purchase decisions.  The unfortunate thing is that emotions can be hard to get under control because they are instantaneous (since they originate in one of the most primitive parts of the brain).  Basically, your emotions kick in right away, and begin changing your decision making ability.

Take for instance, the standard couple investing in their first home.  They have no idea how the system works.  Furthermore, the banks, lawyers and real estate agents are usually behind schedule, so the documents don’t show up at the lender until the last minute.  Rarely do the lenders explain all their fees before-hand, and so… the couple finds themselves sitting in an office at the bank faced with a pile of service fees that they don’t understand.  And, the deal on their new home closes in a few hours…

They have options, I guess.  They could not sign the papers, but then they would risk losing the house that they’ve been dreaming about living and starting a future in… or they just bend over, take the fees and move on with their lives.

So, often times, the stores, banks, etc have the upper hand in this type of negotiation.  This is a major focus of advertising as well.  1) Develop an emotional attachment in the prospective customer for your product and 2) Develop a feeling of need in the customer (can you say iPod), so they’ll pay almost anything for it.

Of course, keeping yourself out of this trap is easier said than done!

NG