Real Estate as a wealth building strategy

Dan, I am writing out of the blue today, because I need a change. I took a glimpse at an investment book last night, and one thing that it said is to talk to those in the know about investments.

Could I pick your brain about real estate? Is there still a lot of potential in our market for house flipping? Is it worth getting involved in flipping or would it be better to find real estate (commercial) to invest in? What is your opinion on flipping? Where does one start, to minimize headaches/failures? My book suggests having good team players, and you have always been a strong player when it comes to real estate.

Interesting that you have dropped a note of this flavour as I have been dealing with quite a few clients that are curious on how to move forward as a real estate investor to assist them in wealth building, as a matter of fact, I think this note may very well turn into a Blog…

There are many "real estate investment groups" books and seminars that can give you a lot of insight and different takes as to their investment strategies in the market, both long and short term. I am not a member, nor do I support any of these groups, however, I would suggest exploring some of these may be a good start for your quest. I would also suggest there are literally thousands of "potential investors" that have been through seminars, read books and joined organizations giving direction on how to go about investing in real estate (especially with little or no money down.) There is rarely a corner I drive by that doesn't have a sign that says "we will buy your home"… I would also suggest you take whatever information you gather from these self-proclaimed "guru's" with a grain (or a pound) of salt!

Don't get me wrong, I am definitely a proponent of real estate as an excellent wealth building strategy, as a matter of fact I believe there are none better. What I am saying is that one needs to take a conservative stance on returns on your investment, especially in our current world economy. There will also be opportunities for short term gains, however, most of these will have a very high risk factor. Taking a gamble with your hard earned cash is something I would never adhere to and certainly an avenue I would not personally advise for anyone.

Flipping, renovating, developing, modernizing, updating and such for short term profit is an extremely volatile and risky position to be in today, I suppose without some risk there would be little potential for gain. I have a variety of developers that are constantly on the hunt for ideal purchases for redevelopment and/or quick renovations for profit. I often consider developing, especially in the city core, myself. True developers often have a variety of "holding" properties at any point in time in anticipation of the value in a certain area going up at a future point in time to meet their profitability criterion. Spending a lot of time and effort researching where a potential future development or rebuild would be most profitable should be a major component of a developers protocol. There are no guarantees as to where the next popular or trendy place will be, and I would suggest that if you were consistent in making those predictions you would do very well for yourself.

Let me give you an example… five or ten years ago it was fashionable for the "upper middle" and "higher" wage earners and wealth builders to move to the outskirts of the city to large acreages and huge homes. Great examples of this would be Elbow Valley, Springbank and Bearspaw. We still see a certain amount of activity in these areas, however, there has certainly been a shift in paradigm for the wealthier echelon of our society. If we could have seen this coming more clearly we could have profited from the current trend - and that trend is a movement to the city core. A few years back we saw smaller builders and developers buying properties with 50' frontages to tear down and rebuild high end attached homes and infill's. This was (and still is) quite popular, but here is where things have changed… where in past it was investors and developers buying to redevelop at a profit, a good portion of the purchases and redevelopment are now for personal use. Why is that important? Quite simply, profitability. Where an investor needs to analyze a profit margin, someone developing simply for the pleasure of living in a specific area, profitability takes on a more minor role. If you have deep pockets and do not anticipate selling anytime soon, analyzing the bottom line is less fundamental. So prices in these pockets (such as Altadore) rapidly increase, purchasing land for development and profitability becomes more of an issue, so spec home builders start to look for other areas that may be more profitable.

And this has certainly happened… many small builders have looked into other communities in anticipation of the "next thing". And here is where the issue lies… finding that next area to develop is quite complex, and often accurate predictability is difficult if not impossible. I have seen many start up builders move to areas such as Highland Park, as an example, in anticipation of seeing the same popularity blossom in that community as we have seen in others. Cost of land in an area such as this is considerably less than somewhere like Altadore, and they feel they can develop and sell for a larger profit. What we have seen in this situation is that potential buyers are not willing to pay the same premium as the builder anticipated. We have seen many, many small builders fall by the wayside as they have invested into areas that did not support their expectations. I would suggest that an area such as Highland Park may do well in future, however, that time is not necessarily now. Perhaps purchasing a holding property in a community such as this would be something to analyze and consider for a future development.

Another interesting example of an area that showed promise, but slowed considerably is Bowness. Early this year there were quite a few homes for sale in the mid to light $300k's. Many of the homes in the centre part of the community are quite similar in size and land (50 x 120 lots with similar sized bungalows). At the same time there were some "upgraded" homes that were selling in the mid $400k's in the exact same area. Investors looked at this and thought they could sink $40k - $60k into the building, then "flip" the home for a decent profit. Here is what happened… quite a few investors purchased the fixer uppers at the same time with the same end goal… fix up the run down and dated property, then bring them to market at the premium price point… however, many came back on the market at about the same time. What they did not consider was the sustainability of the volume of potential buyers for that higher listing price. A pure example of supply and demand, there were too many renovated homes in Bowness for the demand. Now many of the investors will need to make some important decisions. Will I sell for the current market value, and possibly lose money, or should I hold this property for a while in anticipation of an upward swing in values in future? If they decide to hold on for a short term, perhaps waiting until the spring rush, they may face further decline in market value over the next few months… Alternatively, they may decide to use the development as a rental property and look at it as a more long term holding property.

Holding the property for a longer term than anticipated now brings a new issue to the forefront. If this redevelopment was originally put together as a short term project, they will now have to lock up some of their operational budget and funding. That means less (or no) cash for a future project. I believe we have more and more of these scenarios happening and what that does is slow much of the potential future development we could have if the market continued to more upward, or even if it stayed the same. I wonder how many "I am holding but wish I didn't have to hold" properties there are today?

So I guess that brings me to your next observation, would it be better to find commercial properties to invest in? I absolutely am a proponent of long-term holding properties whether it is commercial holding, or residential rental properties. There are many opportunities that present themselves in any market as far as a long-term holding and also in terms of profitability. Perhaps one of the hottest holding properties would be a self storage facility, I would also suspect there are a great many investors looking for such an animal. Warehousing, apartment buildings, office space, strip malls, the list goes on and on. A major component of a holding portfolio is the money necessary to put financing in place. Regardless of which financial institution you work with, they will expect you to invest a portion of your own assets into the project. Many of the organizations, seminars, books and speakers that preach long term holding or short term flipping talk about using "other people's money" (OPM) for securing the property. Financing, and especially "creative" financing, is way beyond my area of expertise, however, I do adhere to the old saying, "if it sounds too good to be true…" I have been to seminars that encourage you to utilize the equity in your home or other investments to secure a new real estate direction. Regardless of how you leverage or liquidate your current wealth and assets, let me remind you that money is not free and there will be a premium on what you borrow, and that needs to be addressed when deciding to move forward with your business plan and wealth building strategies.

The unique and beautiful aspect of a real estate investment is that there is the opportunity to have someone else pay your mortgage, or at least a good portion of your mortgage. I think you will have difficulty finding another investment that gives you that opportunity. And as you slowly build your portfolio and pay down the mortgage, you can then access that new equity to borrow against for new investment properties. Keep in mind it takes time to pay down your loan, patience - in this case - is very important. Time will also start to increase the value of your investment, accelerating your equity. We are currently in a very volatile market, and we will most likely see some short-term downward movement in real estate values (see my last Blog, Downsizing and Building.) However, you need to keep an eye on your long-term goals to help weather the storm. We cannot predict exactly what will happen in future, and if we keep waiting for the "perfect" time, "perfect" plan or "perfect" opportunity, we may never make the commitment that is needed to move forward in building our wealth.

What one needs to do is plot out your long term goals and forecast, and that is where aligning yourself with an experienced and diverse circle of influence will assist you in making informed and educated decisions and choices that will assist you in moving forward. I would, of course, be happy to assist you any way I can. Do not hesitate to ask if you have questions or concerns you feel I can help you with.

Good luck with this new life direction!