20 Oct Smart real estate investing means a cool head, even in a hot market
Real estate markets in Vancouver and Toronto are on fire right now. Anxious people are rushing to buy houses without thinking it through. More alarming is the fact that people are willing to pay much more than list price to get the house. Vancouver realtors note that houses are currently selling for 10-15% over list, and if the offer is not unconditional then it doesn’t stand a chance.
At recent presentations for the Real Estate Investment Network (REIN Canada), in Vancouver and Toronto, I made recommendations on how to invest in hot markets, since there can still be great deals available.
1. Target Neighborhoods
Drive around them, walk the streets. Talk to anyone you meet. If they live there, let them know you want to buy in the area. Ask if they know anyone thinking of selling. It’s amazing what neighbors know, and are willing to talk about.
2. Use the Five Door Rule
When you buy a house, knock on the five doors on either side of it. Cross the street and do the same. Let the neighbors know that you bought the house and would be interesting in buying theirs if it fits your system.
3. Explore Expired DOM (Days on Market)
Listings in hot markets expire, as do any listings. In a hot market, they usually expire because the realtor listed it incorrectly. Pull all expired listings and knock on those doors.
4. Coffee Talk
Start conversations about buying local real estate when you meet people in coffee shops and other public places in desired areas. We’ve bought two properties this way.
Real Estate Investing is About Math, Not Feelings
Remember that buying in a hot market still requires a plan plus a level-headed approach, as does any real estate venture.
My wife and I started buying real estate in 2003. Since then we’ve made a lot of mistakes. For example, the 2003 Edmonton market was flat. We could take our time, since there were rarely multiple offers. That year we bought our first three properties. But when we looked to buy in 2005, the market was very different. It was smoking hot! Desirable listings had multiple offers. Housing prices rose 50% in 2005.
We bought 64 properties that year, and regret quite a few of them. That’s because we didn’t always base buying decisions on logic and math. We let emotion get the better of us. I admit that my ego got in the way – I had to win some of those deals. Who needs to buy this many properties in one year? It was crazy.
Always remember to buy rental properties based on three criteria:
1. The Math
Total cash flow must be at least $500 a month. Base your rental amount on the lowest rents of the past 5-7 years, not on current rents.
2. Mortgage Buy-down
Every monthly mortgage payment reduces your principle. That means if all you do is break-even every month, and consistently make your payments, that house will be debt free in 25-30 years.
This is something we have no control over. If the house price goes up, that’s a bonus, but I never recommend anyone to bet on it.
Our real estate lessons of 2005 were hard won. We bought houses then that we would not buy today. Our emotion led to some bad deals. My pencil eraser wore to a nub as I tried to make the math work. It wouldn’t. Now I know that when the math doesn’t work, the deal won’t either, no matter how hot things are.
Save your erasers. Buy with logic and ensure the numbers are on your side. These basic principles will set you on the path to building a successful real estate portfolio.
Hot markets need cool advice. Contact us and ask for Jared. We can help.