experts: real estate column Thursday, April 12, 2007

Make Your Investment Plan Personal

When it comes to your personal real estate investment action plan, the key word here is 'personal.'

By Ozzie Jurock

The following is the first of a two-part series on how to create a real estate investment plan.

When it comes to your personal real estate investment action plan, the key word here is "personal." Any investment plan that is not personal to you is like wearing somebody else's tailor-made suit.

No matter what you do, it isn't going to fit as well as the suit that you have made for you.

In real estate, or any other investment, the average person looks for formula solutions.

We try to take the shortcut of finding somebody else's solution, rather than one we devise for ourselves.

Most of us go through all phases of our lives looking for somebody else to give us the answer - some guru to follow. We want to be relieved of the responsibility for making decisions.

When we think we've found a person we can trust, we cheerfully hand over all our money and hope he or she will do a good job. Such a course of action is fraught with danger - but the way to avoid that danger is relatively simple.

Note that I didn't say "easy;" I said "simple."

All you've got to do is to sit down with a piece of paper and list some of the serious questions:

  • What do you want to be a real estate investor for? What's your objective?

  • Why do you think it's a good thing to do?

  • Are you trying to emulate someone, or is it what you want?

  • Are you biased towards real estate investing without really knowing why?

Know the answers to these questions - and the source and reasons for them - because that will give you the basis for understanding yourself in these matters.

You have to ask yourself what is it you're trying to accomplish.

Are you buying for cash flow? Do you need to make an investment that brings you a cash-on-cash return, or are you more interested in building equity?

And that is really important for out-of-town investment.

People often want to buy a recreational property "for our own use" and then rent it out "to pay the mortgage."

Won't work. Every time you want to use it (Christmas, holidays, spring break), you get the most rent - so you will be torn. It is always be one or the other.

There are all kinds of variations.

Your objective might be to create a portfolio of mortgage paper where you buy a property for a lowdown payment, and turn around and sell it to a suitable purchaser for a very lowdown payment.

You take your profit in the form of a second mortgage.

By doing this repeatedly, you would build a portfolio of second mortgage paper. I know of many "average Joes" who, over a period of time, have built up one- and two-million-dollar portfolios.

There are really just a few basic concepts when it comes to real estate investments. It is the various combinations and permutations of how they interact that are infinite.

The key is in taking the action. The person who acts, even if he's only 90 or 95 per cent right, is always further ahead than the person who waits to be 100 per cent sure.

Remember, if you wait for all the traffic lights to be green between your house and where you're going, you'll never leave your driveway.

The next big question is what kind of game do you want to play? Are you clear on what your risk tolerance really is?

Almost nothing is worse than thinking that you are sitting down to one kind of game and then finding that you are in a totally different one.

If you have purchased a property in that cute small town - and you find out after the fact you have to feed it $500 per month because what you are grossing after expenses falls short of what the mortgage payment requirements are ... or you can't rent it ... or the tenant leaves you with a lot of repairs - can you take that?

It just isn't a matter of taking it financially. Do you have the temperament to deal with those kinds of things psychologically?

There is also the question of all the interpersonal management problems that property management requires. There are those collect long distance calls of: "My toilet is flooded, or my washer is leaking, or the furnace is out."

How many of these calls can you tolerate?

Try to get these factors delineated on paper. Take as much time as it needs.

The answers will tell you what kinds of property you can buy. You need to be able to match up your investment objectives and your temperament in the properties you buy.

This is really a case where it's "different strokes for different folks."

If you don't need cash flow and want plenty of safety - but at the same time you want to build equity - you might want to make a larger down payment on a smaller property and let all the rental income go towards paying down the mortgage.

But if you think, like me, that we live in the most unreported inflation of all times, you might want to go for maximum leverage and buy the biggest property you can find for the lowest down payment.

For that, if you're going to avoid negative cash flow, you might have to go further afield geographically and go to one of the smaller towns in one of the more active areas.

The message I'm trying to get across here is that you have to take a good, hard, serious look at yourself. You've got to do that from a variety of perspectives - financial, intellectual, and temperamental.

Published in the Calgary Herald, April 7, 2007

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Related Links:

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