Safe Investing in Real Estate

Investing is about making your money work for you. For many of you the latter part of 2008 and the first five and a half months of 2009 have seen you trying to salvage the funds that you worked so hard to get rather than building your wealth.

Many people in the financial sector have undoubtedly been telling you not to panic. The economy is cyclical. It will recover and over time you will get the money back that you have lost. Look at the charts and graphs.

They don’t lie. There have always been high and low cycles and recovery has always occurred. Holding the line probably will get you back to where you were.

However, what is going to move you ahead and help you get to where you should have been through the months lost to the recession and recovery? Loyalty to one’s financial planner, broker or banker is admirable. However, what would you do if you had a job where every payday your employer was to tell you he couldn’t pay you and then asked you to keep on working on the hope that someday you will get all of the money that is owed to you for the work completed? You need to be able to stay in your comfort zone and therefore you need to be proactive whether it is with your job or your investments.

Working for someone who doesn’t pay you or having investments that are losing money is not acceptable, especially when there are safe alternatives available. The corrective action for the employment issue is easy. You change employers. However, the alternatives for the investment issue may not be as easy. What is a safe investment? The best way to illustrate the answer is through an example:

You purchase a revenue property and pay cash for it. You find a tenant who you know will take care of the property, has an excellent income and who will sign a long term lease.

You do your due diligence and find that the tenant is financially strong and has an impeccable character.

The client moves in and you collect the rent. Because you have no mortgage and the tenant pays the utilities, taxes, and general upkeep of the property you are able to put the net rent in the bank and then use it to invest again and again compounding your return. Is there risk in the above investment? All investments carry some risk.

The strength of the tenant in the above example suggests the risk will be minimal. However, not all people can afford to purchase a revenue property and pay cash for it. What is the alternative? Consider the following:

You have $1,000 cash each month that basically will be spent and you will have nothing to show for it. You have an RRSP secured by mutual funds totaling $39,000 down from original $50,000. You have been dealing with the same financial planner for years and he is a friend you don’t want to upset. Your total $40,000 is not sufficient to purchase a revenue property free and clear. This situation presents a few issues that you have to deal with:

1) How can you invest in safe real estate when you don’t have enough to buy a property outright?

2) How much of the $1,000/mo. do you want to put to work for you?

3) How much of the $39,000 should you move to a self directed RRSP and invest in real estate?

4) How do you invest in something that your financial planner does not offer and still retain his goodwill and friendship?

5) How do you find an investment you can get out of if you need your money?

The answers for safe investing in this case are simple:

1) Investing in property has been made easy by syndicators. An investor joins a group of like-minded investors who want to own real estate that has no mortgage. Jointly they have enough money to make the purchase. A debt free private mutual fund trust accomplishes this goal and can have entry levels as low as $1,000. The group owns the building. The tenants pay basic rent and operating expenses with the remaining funds becoming the investors return. The syndicator completes the due diligence and reports to the investors. The challenge may be in finding the right syndicator. The degree of transparency that the syndicator offers will help you make that choice.

2) The portion of the $1,000 you want to put to work for you is your personal choice. You may not want to give up any of the funds as they represent a lifestyle you want to maintain or you may want to make the full amount productive now which will allow you to spend more in the future. A few private mutual funds allow you to make monthly contributions to your account. It may be as low as $100. Surprisingly, $100 per month will compound relatively quickly.

3) There are people in the financial sector who will tell you to invest the whole amount into their investment product. However common sense should tell you that spreading the risk is a wiser choice. Some so called experts suggest that 25% of your investment dollars should be working for you in real estate. Who came up with 25% is anybody’s guess. You should look at your investment portfolio and determine which investments have performed the worst. Those are the ones that you must deal with first. “Stop the bleeding!” Then you should look at the remaining investments and compare their returns to what you will make from receiving your share of the rent in the building your group is purchasing. You may want to move more dollars into that project or perhaps the next building being purchased.

4) True friendship should never stand in the way of business and investing should be treated like a business. In your review of your existing investments choose the ones that are giving you the best returns and keep them. Your financial planner will appreciate your confidence in his products and will understand your need to move losing funds to something which generates a positive return.

5) Getting out of an investment in times of need is essential. Many investment companies have penalties if you want to take your funds out of their investment. Be careful when you are investing. Ask about exit strategies and costs for early exit. The bottom line is that it is your money and you should be able to take it back when you need it. However if you do not deal with this issue up front you may have a problem down the road. Investing safely hasn’t changed over the years. Real estate has made many millionaires and will continue to do so. Recession creates fear. Fear leads to bad decisions. You should never have to play catch up with your investments. You must manage those investments intelligently in both good and bad times. Sitting doing nothing is the worst thing you can do. Making your earnings earn more is the key to becoming wealthy. Recovering what you have lost is really a step backwards Consider investing in real estate. Keep moving forward...