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?


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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