A Canadian Real Estate Investor’s Perspective on the “Doom and Gloom” of American Real Estate

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Is the American economy on its way towards recovery or is it poised for another meltdown? And will they ever figure out this “fiscal cliff”? I’m sure everyone in North America and around the world for that matter are hearing the constant “noise” through media outlets. The big question on a lot of minds are “is there money to be made in American real estate”? I believe there is.

However, I feel the sophisticated investors who do their due diligence will continue to do well while the ones who speculate (hope things work out), could get into more trouble now then ever. Although these rules generally apply to any market, they are especially true in the US. So, what would my strategy be if I were an American real estate investor buying a rental property?

1. Specialize

I would be specializing in a state that’s growing faster than the national average. I would be looking for 1. GDP growth 2. Job growth and 3. Population growth. It’s surprising how many “real estate investors” never look at these 3 simple indicators before buying a rental property. Once I found a state that is performing well, I would narrow my focus even further to ONE particular town within that state. Again, I am looking for the 3 key economic drivers (stated above) but this time, I want these numbers to exceed that of the particular state’s averages.  What’s next? You guessed it! I would narrow my focus even further to a neighborhood with the lowest vacancy rates based around the type of investment I specialize in i.e. Single-family, condo’s, multi-family etc. Every real estate investor should have this memorized: GDP growth leads to job growth, which leads to population growth, which leads to rental demand. A great tip I learned from Don R. Campbell, president of the Real Estate Investment Network here in Canada.

2. Buy for Mortgage Pay Down

What I mean by buying for mortgage pay down is to invest in a neighborhood where you will have no problem keeping your rental filled all year long. If you’re investing in long-term real estate, mortgage pay down should be priority number one! Your primary focus should never be appreciation or buying in an area because homes are “cheap”. Buy for cash flow TODAY! The appreciation is just the cherry on top when you’re ready to sell or refinance.

3. Cash Flow is King!

Now that you are an expert in your niche market, be sure to buy property that will cash flow immediately upon finding a tenant. Don’t buy a property because your buddy or realtor said it was a good deal. Run the numbers before you visit the property to avoid wasting your time, or have your specialized realtor learn your system. Here’s how a sophisticated investor calculates for cash flow. Add up your mortgage payments, taxes, condo fees (if applicable), insurance, property management, 5% vacancy and 5% maintenance. The 5% vacancy and maintenance gets stored in what I like to call your “rainy day fund” for emergencies. Store that money in a separate account and never touch it unless you have to! Because you are an expert in your market, you know exactly what rents go for in that area. If the rent is higher than these calculations and your property cash flows to your liking, you may have a great investment.

 4. Ride the Wave!

Despite all the real estate and economic “noise” there are still many markets that are doing well. I am by no means an expert in US real estate but I do know when to “look behind the curtain” when reading newspapers. Look for areas such as Miami, which has seen great population growth due to immigrants (many of them Canadians) buying second homes as well as Phoenix. Do your due diligence, focus on cash flow and “ride the wave”. The markets will go back up, they always do. As Warren Buffet always says “Be fearful when others are greedy and greedy when others are fearful”. Hint, everyone is fearful right now, so provide them with a place to rent!

Photo: Purple Slog

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About Author

Mat Piche (G+) is a real estate investor, certified carpenter and RE/MAX Realtor in Kitchener, Ontario, Canada specializing in single-family investment properties.

10 Comments

  1. Although you have some good points, I’m a Canadian who buys the US market right now and have been doing so since last year. We buy and flip or buy/fix/add value and flip SFR’s as well as multi-family. There is a whole lot more money in this methodology than just renting and a lot less risk because we don’t need or rely on tenants or market appreciation to pay our bills and make our money. We buy so low that there is effectively no risk. That’s the better way of making money in the US markets. I don’t care about the market because it doesn’t affect our model, and I don’t need to worry about a tenant paying me (been there and done that!). I only care about, “what’s it worth today” and, “what’s it worth when I’m done”. For those that want to buy and hold and “hope” for market appreciation, then I wish you the best whereas in our method, there is an absolute measure that is very much quantifiable. Our last SFR flip we bought for $27,000 and sold for $85,000 in just under 3 months. Our direct marketing campaign uncovered this off-market gem. We put in about $2,000 in very minor fix-ups. Now that’s how you make money folks in SFR’s.

    • Welcome

      I’m in the united states as well looking at investing, I think it’s great you bought for 27k and sold that high, but which state are you buying so low in? and you must really have a great Direct Marketing Campaign to uncover such a Gem, anything you can share with a fellow Canadian looking to do the same in the states, we have done some letters to homeowners no response so far, would you care to share what you are sending to help me to moving forward with investing. Warm Regards Wendy

  2. Hey Alex,

    Thanks for your comment. This blog was intended for those who are doing buy and holds. There’s a great amount of money to be made over time if the proper due diligence in place before investing in a particular town. The strategy you are doing is more short term i.e picking up properties and flipping them or wholesaling. While you can make large amounts money in just a few short months, you are also vulnerable to volatility in the short term market. That may be too much speculation for some investors. It’s not that a short term strategy is better or worse than a long term buy hold, it’s just a COMPLETELY different business and it depends on what the specific investor is comfortable specializing in. Congrats on your recent successes!

  3. Very nice write-up!

    I talk to investors daily here in Greater Los Angeles, and the “cash flow is king” model is, to me, the heuristic that makes the most sense. If you’re in a position to get + cash flow basically out the gate you’re in a good place to be.

    What’s going to be interesting is when 2015 rolls around or if 6.5% unemployment is reached. I think the market may be surprised by how heavy the investor’s hands — particularly in the outskirts of this city.

  4. Mat,

    Nice article, welcome to BP. I have noticed a lot of Canadian investors operating in the US. This brings me to several questions.

    Is the Canadian market so high that they must invest in the US? If so, what happens when the Canadian market weakens and Canadian investors must pull out of the US to preserve their interests at home. Does that put markets such as Miami in great risk to the Canadian economy.

    Does the US simply have that good of deals that it beats anywhere else?

    Is the currency play in your mind when choosing the US? What is the long term strategy, is there a metric that would lead you to pull out?

    I appreciate your insight. This dynamic interests me. I know you could prolly write an article on each question (and I hope you do). Welcome again. Thanks.

  5. Hey Kyle,

    Thanks for the welcome and compliments. Canadian real estate prices are only “too high” in certain major cities such as Toronto and Vancouver and even then, sophisticated investors can find deals. There are many fantastic areas to invest here in Canada.

    What seems to be the main attraction for Canadians to invest in the U.S are the extreme discounts, foreclosures etc. While these can be great investments, many are buying solely on speculation (guessing and hoping things work out because they got such a great “deal”) and that’s where people are getting into trouble. They are ignoring their due diligence i.e looking for things like GDP, job and population growth. I personally wouldn’t invest in an area where vacancy rates are high, people don’t have jobs and are moving elsewhere, no matter how “good” that deal is, whether my strategy was short or long term. They also ignore the tax implications and what happens when a Canadian owns property in the U.S. You’re right, this could be another blog post, haha.

    As for the Canadian markets “slowing down” is fairly unlikely to happen in the markets where the economic fundamentals make sense. Canada has done extremely well during the “economic downturn” and is regarded as one of the best countries (financially and economically) in the world. We have TONS of immigrants i.e China, India and the U.S, catching on and are pulling their money out stocks etc to buy Canadian real estate. This might sound biased because I am Canadian, but this country really has some great things going on. Our 2008 was extremely minimal in comparison to a lot of the American markets.

    As for your currency questions I can honestly say I don’t know. Like I said in the article, I am in no way an expert in buying American real estate and the tax laws within that, but I do know what it takes to invest in an economically sound area and that’s working with a specialized team who knows more than you. :)

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