The 3 MOST COMMON QUESTIONS from real estate investors are:
- How Do I Find a Great Deal?
- How To Analyze a Property?
- How Do I Raise Money?
How do I find a great deal?
This frequently asked question is typically a result of the lack of clarity about what type of investor you are, or what type of investor you want to be known as, and where you want to buy them. Do you want to become “Your city’s most well known Mr/Mrs: Condo Investor, TownHouse Investor, Multi-Family Investor, Rent-To-Own Investor, Fix & Flip Investor, Light Industrial Investor, Strip Plaza Investor”?
There are two key factors that should drive your decision:
- Pick a type of property or strategy first, then select the location where there is plenty of the type of property you want. OR
- Pick a geographic location first, and then look to see what properties are within this selected location.
Personally, I chose the type of property first – multi-family & commercial buildings. This allowed me to focus my research for those properties. These high density properties, happened to be located in and around downtown in growing cities.
Selecting a location depends on the 3 levels of economics that create great long-term buy and holds properties:
1. Market Economics
How does Ottawa perform economically vs Toronto, Quebec, Calgary, BC, Winnipeg, or any other town/city in the country? Which market is entering a housing boom phase? Which city is growing economically, with a population that is quickly rising?
2. Neighbourhood Economics
If you were moving to this city/town, where would you want to live, and why? Which neighbourhoods are in transition from run-down to trendy and up-and-coming? Which areas are “sexy and established”? The transitioning areas, and the most appealing neighbourhoods near work hubs are the best neighbourhoods to invest in. Forget everything else. Lastly, if you are clear and focused on your preferred neighbourhoods, it will be easier to get real estate agents to help you find properties.
3. Property Economics
Can I find an undervalued property, in a growing market, in a strong neighbourhood? I want to make the most of my money in the first 1-2 years. This is because these first two years are fairly predictable based on current knowledge of what is going on in the market and the current status of neighbourhoods.
You need to make money from your property today, not in 10 years. In other words, I want to buy the worst property, in the best neighbourhood and market.
In short, if you buy an okay property, in a great neighbourhood, in a great city, the market will do all the work for you. If you buy an amazing deal in a terrible neighbourhood in a declining market, you may not survive in the long run.
How Do I Analyze A Property Quickly?
Assuming you know to only buy positive cash flowing properties, use the 14x Rule to filter properties quickly. Caveat, this works best for higher income properties, and works less for townhouses and single family properties. This is because value is not 100% dependant on income.
The 14x Rule
Investigate further if:
- Price < 14 x Current Gross Operating Income (GOI)
Why The x14 Rule Works
In most 1M+ cities in Ontario, the Residential Cap Rates are between 4.5%-5.5%
Assuming an income property has: $1 GOI, with approximately 30% Expenses = $0.70 NOI
$0.70 NOI / 5.5% cap rate = 12.7x
$0.70 NOI / 5.0% cap rate = 14.0x
$0.70 NOI / 4.5% cap rate = 15.5x
Therefore, using a 14x GOI you will have a quick estimate of what the value of a property should be using only the gross operating income (GOI), at a 5% cap rate.
You have to look at both the price and the income of a property when deciding if you should purchase. Can the price be lowered significantly? Can the income be dramatically increased? Oftentimes, the best deals are found when you can both get a good price and dramatically increase the income.
How Do I Raise Money For My Deals?
There are 56 Principals of Raising Capital:
- Relationships: It’s who you know. Your Net worth is proportional to your Network!
- Trust: People have to trust you before they will invest with you. Consistently meeting your commitments is the best way to build trust.
- Like: Do people like you? Do they want to be in a personal, and possibly business, relationship with you?
- Results: You need to have a track record/experience, as to minimize costly mistakes. If you have no track record, join forces with someone who does.
- Deals: Really, really good deals get funded quickly and easily. Crappy or marginal deals don’t.
- Alignment: Your deal needs to align with the goals of the investor (short vs long-term; secured interest vs capital growth; amount of funds, tax structure, etc).
Happy Investing!
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Building Investments Inc. is a real estate development and investment firm that buys, builds, rents, and manages multi-family and commercial buildings in the Ottawa market. For our clients, we act as the Project Managers for their Major Renovation, New Construction, of their Rental Building.