During our experience investing in real estate, we have often been asked: “How can I learn to do this too?” It motivated us to put together a basic guide to multifamily real estate investments.
Real estate has always been a popular investment venue and is used by many pension funds and large retail companies as a major portion of their investment portfolios, due to its predictable and non-volatile returns. If you are new to the idea of real estate investments and becoming an active investor (building your own portfolio), rather than putting your money in the stock market, you will need to assess your time commitments and determine your monthly cash-flow expectations, investment time horizon and risk tolerance.
Do you have or can you make the time to:
– Learn about real estate investing in order to understand the many facets of it or partner with an experienced real estate investor to minimize the learning curve?
– Research your area of investment interest?
– Manage the properties yourself, or hire a property manager?
Additionally, you must ask yourself:
– What are your passive cash-flow expectations per month as an income source?
– Will this be a part-time activity until the portfolio produces enough cash-flow to do it full-time?
– Can you sleep at night if you have placed personally signed guarantees on mortgages for investment properties?
Begin with an end-goal in mind, and then work backwards. For example, if your goal is to generate a passive income of $3,000 in cash-flow per month, you may need a few rental properties over a period of time that comprises a total of 30 rental suites. We suggest you start with three-plexes and four-plexes first before moving up in size. Based on 25 per cent down payment and 75 per cent mortgage in general and assuming that the property is bought right, each normalized rental unit should produce approximately $100 of free cash flow per month, after paying all operating expenses and mortgage. Now you can see how the goal of generating $3,000/month would require ownership of approximately 30 rental units.
Keep in mind, above and beyond the cash-flow you generate, the properties typically appreciate and the mortgage is always being reduced. This is equity growth. We will show you, during the series, how you can tap into this equity growth, allowing you to expand your portfolio as needed by your investment goals.
From this, you will be able to figure out how much cash you need to complete the acquisitions over a realistic period of time.
Imagine you are focused on Barrie, Ont., one of the fastest growing cities in Ontario. On average, your price per rental unit ranges between $100,000 and $130,000, depending on building size, suite mix, condition and other factors.
At 30 per cent down (25 per cent down payment plus five per cent start-up/working capital) and a 30-rental unit target at $100,000 per unit or door, you will need approximately $900,000 to reach your end goal. Thirty doors at $100,000 per door would equate to $3 million and your capital needed is $900,000, which is 30 per cent of $3 million.
This may seem like a large undertaking, but if you begin now and take 12 years to build the portfolio, it no longer seems as daunting. You can break down this target by buying one property with four to six apartments every two to three years, until the target is reached.
Now that you have a goal in mind, in our next article we will delve into selecting an investment area while selecting and building your team.
Real Estate Rangers is a real estate investment team that locates, operates and maintains properties for investors. Eddy Boudiwan ([email protected]) and George Hill ([email protected]) are the co-founders of the company. They have partnered with Taft Forward Management as their acquisition arm. www.realestaterangers.ca