All Forum Posts by: Kevin McGuire

I invested in Ottawa because of stable market and employers (government, high tech). That said, I’m not sure today you can find the deals to cash flow, seems the market is booming. Canadian Real Estate Wealth magazine does annual nationwide reviews.

It’s hard for me to imagine that you can get equivalent returns but assuming you can: I think of getting into rental real estate as building a business. I want that business to have diversification in order to mitigate risk, and to have a critical mass so that I can invest in repeatable processes which scale and reduce my effort. I think if you’re going to have one rental, you should have like three. To your specific scenario, if you only have one property and it’s vacant you have zero income to pay the bills, but with two chances are both won’t be empty at the same time. And it’ll encourage you to build repeatable processes like inspection checklists, accounting methods, as well as a team of real estate agent, property manager, accountant, etc., which will allow you to scale and put the business on auto pilot. Thus my advice is to buy two, on your way to more.

@Patrick Froehlich I started in my 50’s.

I’m curious why you posted the question. It’d be helpful if you elaborated on your concerns.

As some here said, if one's time horizon is short then REI isn't a good choice due to low liquidity, granularity, and transaction cost / effort. The rule of thumb I've heard is 5 years and I assume your investment horizon is longer.

After that, the numbers work great versus alternative investment choices. Since my goal was financial security in retirement via passive income, my target was to purchase properties with a 4% cap rate. I picked this to match the 4% rule for retirement, but in this case I never have to draw down the capital which removes the risk of running out of money, plus the capital appreciates, plus cash flow is indexed to inflation. I've arrived at a balanced portfolio of stocks, bonds, and REI which combined provide me with a good combination of growth and stability.

The one difference I see in when you start is that generally one needs to consider risk management for a lessening time horizon. That's true of all investing but liquidity, granularity, and volatility require more strategy to mitigate in REI.

@Joe Villeneuve Personally, I’ve always used leverage. But the original poster asked why someone would, and these are all reasons I’ve heard and I find all are valid depending on the circumstances of the individual. I know of a very successful real estate investor who retired in her 40’s with over $5M net and paid off the bulk of her debt to have the cash flow. Debt and risk go hand in hand and I can’t make blanket statements of what people *should* do without understanding their overall risk exposure and personal risk tolerance.

As for the notion that the tenant pays the interest, I think that confuses the issue: the tenancy generates income, the property has expenses, one of which may be interest (and which may have tax advantages). It’s like saying the tenant pays for upgrades, but that doesn’t alone mean I should make them. As a business, you optimize according to your goals.

Some reasons that come to mind:

1: As mentioned above, easier and more favorable closing.

2: If the buyer is seeking cashflow from the start (e.g. for passive income in retirement).

3: If the buyer is already leveraged elsewhere (perhaps overly) and wants to reduce their overall leverage risk.

4: If the buyer has already exceeded the amount their bank will lend and doesn’t have time or inclination to shop around.

5: If the ownership timeline doesn’t support leverage as a strategy (perhaps the fees and effort exceed the opportunity, maybe a fix and flip).

@Nathan G. Thanks for the factual approach, there are lots of opinions on this topic! I allow pets, no restrictions. My properties are in Canada which is less litigious so there’s not as big an issue of landlord liability. My tenants with pets are responsible and appreciative. I simply put in more durable flooring. I’ve not had any problems.

One of my properties had cats in it prior to purchase and the cats sprayed the walls and carpets, it was extremely difficult to get out (henceforth referred to as the “the cat pee place” by my property manager). Everyone thinks of dogs as a problem but in my experience cats can cause a more difficult to remedy issue and you may want to adjust your damage deposit accordingly.

@Roy Nash my property manager recently has focused on Facebook since it allows him to get a more comprehensive view of the applicant (e.g. they say they don’t have pets but their profile pictures are all with their cats). He found the response rate good.

@Joe Villeneuve I’ve definitely been known to over complicate things so you’re probably right!

@Joe Villeneuve my example of money market was to pick something that was equivalent low risk to make the decision one of value of money versus agility for equivalent risk (low). I was looking to quantify the opportunity cost. As soon as you bring leverage into the discussion you’re changing the risk adjusted return. My understanding of the original question was about short term use of funds while leaving the door open (should he hold onto the cash until he feels more comfortable buying another property or use it to pay down the current mortgage then tap the capital later with a heloc). I was trying to show that the actual dollar cost to sitting on cash is small while one makes a decision on how to apply the capital. How leveraged one wants to be brings with it different factors around risk tolerance, etc., and the value of money comparison now becomes one of a margin account. Since the person wasn’t seeking to change their risk adjusted return, then to me the most prudent move is to sit on the cash since the dollar cost is low.

@Joe Villeneuve agree. Put another way, it comes down to opportunity cost. That cost can be measured as the difference between the mortgage rate on the existing property and the return on a low risk investment (e.g. money market). There’s also an opportunity cost of missing out on a deal because all your cash is tied up, but that’s hard to measure, so I’m going to stick with the return differential for this analysis. Functionally let’s say it’s 3%. What it buys you is the agility to pull the trigger on a new deal. That agility has business value. If your time horizon is a few months then the 3% is trivial actual problem dollars. If it’s a few years then it matters and paying down debt may be more effective. If you’re unsure then you’re paying 3% for the option to not have to decide. Time horizon is thus key. Paying down the mortgage to then turn around and borrow the money makes that differential cost permanent. It’s like borrowing money to buy bonds.

Incidentally, I’m in this exact situation, sitting on some cash parked while I decide if I should invest more or pay down mortgages.