The Canadian Real Estate Action Plan

Proven Investment Strategies to Kick Start and Build Your Portfolio

Peter Kinch

• Publisher: Wiley
• Year: 2010
• Print ISBN: 9780470158012
• eBook ISBN: 9780470676226
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Real estate, like any other investment, is a means to an end: that end might be a secondary source of income, a strategic plan for your retirement, or a way to attain complete financial independence. Whatever your goal is, you've decided that real estate is a tool you want to use. So how do you use it? How do you make it work for you and avoid getting burned in the market? And how much of it do you need to fulfill your ambitions?

Peter Kinch is one of Canada's top mortgage brokers and has helped thousands of investors clarify their dreams and turn them into reality. In The Canadian Real Estate Action Plan, Peter walks you through one of his investor workshops, helping you develop not just a plan, but your plan, including:

• Defining your end goal, and how much real estate you need to achieve it
• Determining the kinds of investments that are right for you
• Identifying obstacles to your success, and overcoming them
• Discovering financing options and solutions, including recent changes that affect investors

New investors will get the thorough background information they need to get started, while more experienced investors will benefit from exploring alternative options and lesser-known strategies. Both will see how long-term thinking is the key to their portfolio's continued profitability.

The best way to achieve your goals is to plan for your success, and there's no better tool to help you do just that than The Canadian Real Estate Action Plan.

Part I

CREATING YOUR LIFE ON PURPOSE

Chapter 1

Why Are You Buying Real Estate?

“Oh no, no. I was just wondering
if you could help me find my way.”
“Well that depends on where you want to get to.”
“Oh, it really doesn’t matter, as long as . . .”
“Then it really doesn’t matter which way you go.”

—Conversation between Alice and the Cheshire Cat,
Lewis Carroll’s Alice in Wonderland

BRIAN: Can you help me get financing for my next real estate investment?

PETER: Well, what is your goal over the next five years?

BRIAN: I want to buy real estate.

PETER: Why?

BRIAN: So that I can make more money.

PETER: What is your definition of “more money”?

BRIAN: Well, I’m not exactly sure . . . .

Brian was quite surprised when he first walked into my office asking for a mortgage and I started by asking him about where he wanted to be in five years. Much like Alice, he wasn’t clear on the direction he was heading. The truth of the matter is, for many Canadians, it is not uncommon for them not to know where they want to head either financially or otherwise. People know that buying real estate is a good thing to do—after all, that’s what all the financial experts say. We’ve all heard the quote “The greatest number of millionaires have been created through real estate.” The fact that you are reading this book indicates you believe real estate would be a good addition to your financial portfolio. The question isn’t “Should you buy real estate?” but rather the question is, “Why should you buy real estate?” The more I could learn from Brian about his goals, the more I could help him achieve them. There is a big difference between simply buying one rental property and building a rental portfolio.

During a television interview in the summer of 2009, the question posed to me was whether or not it was a good time to buy a cottage or recreational property. I found this question quite interesting. When I probed a bit further, the interviewer suggested that many Canadians have become disenchanted with stock portfolios and were turning to real estate as a safer, more secure investment. The thinking was that since we were in the middle of a recession and prices had fallen off a bit, now might be a good time to purchase a cottage in the lake country or a cabin at the ski hill. That was when I realized something that I’ve taken for granted for many years—many Canadians don’t realize that real estate “investing” can be much more than simply securing a recreational property for your family’s future. In fact, the term “real estate investment” conjures up different impressions and definitions for various people. This was also when I realized just how valuable “goal-oriented” planning is before taking your hard-earned money and throwing it against the proverbial wall, hoping that this investment would work out better than the last one. Exiting the stock market to enter the real estate market can produce equally poor results if you do not have a plan. This was the reason I needed to ask Brian some questions before I simply processed a mortgage for him. The first thing I asked him was, “Why are you investing in the first place? What results do you want or need from your investment?”

It’s important to note that I wasn’t attempting to turn Brian into the next Donald Trump and he didn’t need to show me a plan to conquer world hunger. In fact, it didn’t matter how aggressive or conservative his goals were, but what was crucial was that he had a clear goal that his real estate investments needed to produce for him.

Brian’s answers helped me to clarify what type of investor he was and, therefore, how I could best structure his real estate portfolio. Having worked with investors for over a decade, I’ve discovered that there are three basic types of real estate investors:

1. The “Mom and Pop” investor who likes to buy one or two rental properties as a way of diversifying their financial portfolio and supplementing their retirement pension. Also included in this category would be the couple who want to buy a cabin on the lake or a recreational property that will provide an immediate lifestyle benefit for their family, as well as appreciating over the long-term, adding to their net worth and, ultimately, passing it on to future generations. These individuals see real estate as an important, but complementary, part of an overall financial and retirement strategy.

2. The second group is made up of those individuals who use real estate investment as their primary vehicle for wealth creation and a major component of their retirement plans. These individuals want to increase their net worth, move towards financial independence and create wealth that can be passed on to future generations. They are not full-time real estate investors, but focus on creating sufficient cash flow from their investments over the years to potentially replace one of their incomes.

3. The third group comprises those individuals who not only see real estate as their primary vehicle for wealth creation, but also as their full-time job. These individuals want to build their real estate portfolio to the point where they will be able to quit their current employment and devote their energies full time towards developing a large real estate portfolio. The majority of the individuals in this group not only see real estate as a way to create financial independence, but also as a way to achieve larger goals, some of which are charitable in nature and go beyond just a larger house or a nicer car. These individuals will need to build a large portfolio with a significant number of properties that include both the potential for increasing their net worth and developing a significant monthly cash flow.

It really doesn’t matter which of these three groups you fall into—you may, in fact, see yourself evolving from one group into another. The point is, regardless of which category you fit into, it is critically important that you are honest with yourself about what you require the real estate investment to produce for you. For example, if you see yourself in either category two or three above, then the answer to my television question would be no—this is not a good time to buy the cottage on the lake. That type of real estate investment would not be the best use of your investment dollars based on your goals. If, on the other hand, you fit into category one, then now may very well be a great time to buy that cottage/family investment property. The key is understanding that there is no right or wrong answer—it’s simply a matter of determining what role real estate can play in order for you to achieve your goals. Not sure? Don’t worry—that’s the whole purpose of this book.

This book will walk you through a process I have developed over the years called the Real Estate Action Plan. It will not only help you to determine which category of real estate investment you are in, but will also help you clarify why you are buying real estate, what results you need to achieve from your real estate investments and allow you to put together a three-phase action plan to achieve those results.

WHY YOU NEED A PLAN

Generating wealth through real estate is not about simply purchasing one piece of property then sitting back and relaxing. Creating wealth through real estate requires a serious commitment to developing a portfolio that will produce long-term results.

To successfully accomplish this, you must have clarity—a thorough understanding of what you are doing when you buy real estate. You must also have purpose—a set plan based on clear goals. Without clarity and purpose, you’re simply taking your hard-earned money and saying, “Okay, I’ve got this money but I’m not really sure what I’m going to do with it. This sounds good, I sure hope it works.” You’re throwing mud against a wall, then sitting back and praying that some of it sticks!

With the real estate action plan you won’t have to “throw mud against the wall.” The plan provides you with the knowledge and understanding you require to make sound real estate investment decisions. You will gain a clear understanding of:

• Why you are buying real estate; and

• How you are going to accomplish the goals that you set.

Before you start to roll your eyes and say “I don’t need to read another book on goal-setting or creating a business plan,” let me share with you the background on how the real estate action plan was developed.

Originally, I came from a teaching background and was not in real estate. What is obvious to me today was not obvious to me when I was studying for my mortgage broker’s course in Japan. When I returned to Canada and began brokering, I realized that many people were in the same boat. They had a concept of what mortgages are, but their knowledge was really nebulous—almost a necessary evil. You know you need to get a mortgage to buy a house or property, but you probably don’t really understand a great deal about it. After two to three years in the brokering field, I came across a company that bought townhouse or condo projects at wholesale, stratified them and then sold them at retail to investor clients—much like buying a whole pizza and then reselling it by the slice. I agreed to work on one project with this company and, before long, I became one of their key brokers. Without even realizing it, I had entered the world of financing for real estate investors and nothing would ever be the same for me.

As a broker, typically when I receive an application from a client, I plug in the numbers based on textbook formulas and ratios to determine whether the client qualifies for a mortgage. I approached these “investor projects” the same way, but then two things happened that would change my career forever.

The first happened when I received an application from one of these condo investors. I did the formulas using the textbook method that I had been trained to use, and the result concluded that there was no way this client should qualify for a mortgage—the ratios were totally out of whack. I decided to send the application off to the bank anyway, and was completely shocked when it came back APPROVED. I didn’t want to question how they approved it; certainly, I didn’t want them to realize their mistake and reverse their decision, but I had to know why. I asked the underwriter, why her ratios differed from my calculations; after all, being the good student that I was, I had followed the textbook calculations to a tee. She simply said, “Well, we have this thing called a ‘rental cash flow analysis,’ which calculates the debt coverage ratio. It’s a system used for real estate investors only.” It all sounded quite complicated, so I asked some of my broker friends if they knew anything about rental cash flow analysis and the majority of them had never heard of it before—and those that had, knew very little about it. That’s when I knew I was onto something. I could create a niche specializing in brokering for real estate investors. So, I decided to study, learn and write about financing for real estate investors. In the process, I began to learn that real estate investors were unique. That’s when a second significant event happened in my mortgage career.

Randy, another investor client, came to me one day and said, “I’ve got this great deal, but I don’t have much money to put down.” He was very excited about the deal and I was trying to figure out how to arrange financing for that particular property. The ratios wouldn’t work with a conventional lender, so I looked at some of the sub-prime options and, sure enough, I was able to find one. The interest rate was higher and he had to pay some fees, but he got the mortgage. We managed to arrange the financing and Randy was able to purchase the property, so everyone was happy—right?

Well, we were happy until Randy returned three months later because he had just found another property and needed another mortgage. Suddenly, I realized that due to the higher interest rate charged on his previous deal, the lack of cash flow wasn’t helping his debt service ratios, and now it was even harder for Randy to qualify for a conventional mortgage. The sub-prime lender we had used for the previous mortgage would only allow one mortgage per client (something I didn’t know while arranging the previous deal), and due to the poor cash flow on his existing property, any subsequent high-cost solutions would only serve to create a downward spiral—especially if he ever wanted to buy more real estate in the future.

Then I asked the magic question: “How many purchases do you plan to make over the next few years?” Randy answered, “As many as I can afford.” If I had asked Randy that question when he first came to me, I would have structured his first mortgage differently. By not taking the time to ask the right questions in the first place, I had inadvertently put Randy in a mortgage situation that made it extremely difficult and complicated for him to get another mortgage. And that’s when it dawned on me: I can’t simply treat a real estate investor the same way that I treat a regular home buyer. Investors have unique needs and it is critical to determine their goals before forging ahead with their financing. How you structure each deal can have a major impact on their ability to accomplish their goals. It was a painful lesson, but a valuable one.

These two events shaped my mortgage career. First, I realized banks have different programs for investors, but more importantly, not every bank and not all brokers are aware that these programs exist. This is what motivated me to step into the world of real estate investors, creating my niche area of expertise. Second, I realized the importance of learning more about my clients’ goals and looking beyond their current deals. From that time forward, I have made a point of asking every single client questions.

It started with sitting at a Starbucks and asking my clients how many properties they planned to buy in the future. The more questions I asked made me realize that, although each individual was unique and had different goals, they all faced similar issues and challenges. By asking questions and writing down the answers, I was helping my clients really analyze where they were going (or where they wanted to go) and what their unique needs were. I asked questions such as, “Where do you see yourself in five years?” It quickly became apparent from their responses that everyone had their own individual story and plan. I was quite amazed by the fact that the majority of their goals, dreams and visions were not simply materialistic in nature. I met people who wanted to help their aging parents. Some were very passionate about their church or a charity that they supported. Others simply wanted to provide their children with better opportunities. There were many examples among the investors I met, but one thing they all had in common was the fact that they all looked to real estate as their investment vehicle of choice to generate the cash flow necessary to finance their visions. I began to come to the realization that this was about something much greater than simply getting a mortgage, and my role as a mortgage broker took on a much deeper meaning. If only half of my clients actually achieved what they hoped to do, then they could make a positive impact on the world.

Put simply, it wasn’t about the real estate or the mortgage—real estate was just the vehicle—it was the result that real estate could achieve for them that was really important. The mortgage was just a necessary instrument to accomplish something far greater, but without it, their goals would be unattainable. So, if I...

Table of contents

• WHAT CANADIANS ARE SAYING ABOUT PETER KINCH AND THE 5-YEAR ACTION PLAN:
• Title Page
• Copyright Page
• Foreword
• Mission Statement
• Introduction
• Part I - CREATING YOUR LIFE ON PURPOSE
• Part II - THREE-PHASE ACTION PLAN
• Epilogue
• Why visit www.peterkinch.com?
• Websites in Canadian Real Estate Action Plan
• Acknowledgements
• About the Author
• Notes
• Index