That’s not really a fair statement though. MOST of our direct financial investment in our deals is limited. What we invest in our deals is our expertise, time, tons of time actually, and my team which has taken me years and years to build. The value I bring to the deals isn’t financial. We typically put in less than $5,000 on each deal and in most cases I get that back in the first year, if not double it. Our Joint Venture Partners, however, will have to wait about 5 years for their money to double but they are doubling a $70,000 investment not a $5,000 and, more importantly, their return on their time is infinite (as they only have a few hours of due diligence and writing the cheque).
So, when a writer for Canadian Real Estate Magazine interviewed me looking for my tips on how other readers could double their money in three to five years I found the question tough to answer. It really depends on what ROLE YOU WANT TO PLAY.
And, to be really frank with you, Julie and I invest $30,000 to $40,000 a year into coaches, courses, networking and mentoring and have done that consistently for several years now. We also have costs like our office space, our office manager, office materials, websites, marketing materials, parties and other expenses that aren’t directly applicable to a specific deal but are all business expenses we incur as part of generating the income we do with our real estate. So we don’t REALLY double our money every year (although it is growing beautifully!).
Assuming you do want to be the active investor like we are, here’s our formula to finding the deals that are going to be most likely to double the initial investment required in 3 to 5 years – whether you’re doing this with a partner or on your own. Our model for buying rental properties is simple. We only buy properties with a CAUSE:
Convenience: Is the property near schools, hospitals, shopping, public transportation, a university – the more convenient the location, generally the more in demand it will be both for renting and for selling in the future. It also increases the potential rent rate and the quality of the rental pool we’ll draw from.
Attracts families: Areas that attracts families and that fit all the other CAUSE categories tend to be the easiest to rent, with less turnover, and lower maintenance and lower risk.
Under the average price: We focus on buying homes that are 10% below the average price in our chosen market. Why only 10% below? Because if you go much below that you tend to get into tougher neighbourhoods and rougher houses – and just because we buy in areas that are 10% below the average house price for our city doesn’t mean the houses we buy are only 10% under – we’re bargain hunting!!
Starter home: Determine what type of home in your chosen city/market is a starter home (single family detached house, townhouse, condominium) and then buy those types of homes. This is the entry level home and tends to be the most liquid, most price stable and generally the easiest to rent out too. People move up from them and down into them.
Economic fundamentals: Find a city that you are near and that has good market fundamentals (people are moving there, more jobs are coming, amenities and infrastructure are growing, government is pro-business, rent rates are stable or increasing).
Once a property meets all the criteria above, we do the following:
- Find someone looking to make a great return in real estate without having to invest the thousands of hours we’ve invested to become experts, and use their money and finance-ability to close on the property.
- Find great tenants, manage the property and enjoy the benefits of mortgage pay down, cash flow, and appreciation.
The big thing I want to point out is the fact that so many people get hung up on finding the perfect investment market. The market we’re investing in does not have perfect fundamentals but no market ever does (even the coveted Edmonton market which so many investors run to does not have perfect fundamentals). We’d rather become area experts and stay focused where we are and know that we can control our investments because we’re nearby.
By doing deals just like the two we show below, even if you put in all the capital yourself you will double your money over 5 years, easily. But, you have to focus on buying properties with a CAUSE, otherwise you might end up going through the pain we went through as early “quick cash” investors!
Two recent deals we have done:
Purchase Price: $321,000
Cash required from us: $10,000
Cash required from JV: $75,000
Rental Income (Rent To Own): $2,750
All Expenses: $1,300
Net Cashflow: $1,450 split between us and JV Partner
When Tenant purchases in two years, total cash return will be: $50,000 split between us and JV Partner
ROI on our $10,000 = 250%($25,000 / $10,000) over 2 years
Purchase Price $303,000
Appraised Value: $330,000
Cash required from us: $4,000
Cash required from JV: $70,000
Rental Income (Buy and Hold Rental): $1,650
All Expenses: $1,300
Net Cashflow: $350 split between us and JV Partner
If property appreciates, on average only 3% per year for next 5 years, total cash return will be: $110,000 split between us and JV Partner
ROI on our $4,000 = 1,375%($55,000 / $4,000) over 5 years