Earlier this week we took this brief video asking Brad to reflect back on when he just began investing and to analyze his fears.  Which fear about real estate investing came true?  And which fear didn’t?

Enjoy…

(UPDATE: If the video doesn’t work for you, then click here and play it on YouTube and it should be fine…fingers crossed!)

The G20 Summit is just around the corner and we thought what better time than right now to take a peak behind the curtain to see what these guys and gals will be talking about.When we analyze what asset classes we like to invest into we always come back to real estate … for many reasons.

Although we’re fans of commodities as a valuable asset class, especially over the next decade, and do invest in them … they don’t produce cash flow.  We look at them as “wealth preservers” but not “income generators”.

And you need income to pay for your daily living costs.  

We used to like equities/stocks but the last fifteen years has proven to us that we don’t have control of them.

No matter how great a P/E ratio may look you’re ultimately at the mercy of what someone else will pay for your share.

And they can shoot up and shoot down on a whim.

Even if we only focus on stocks that produce cash flow via dividends … we’re still not in control.

Dividends can be canceled or reduced without your input.  Just look at what’s happened over the last few years and for a recent example you just have to look at how BP has halted its dividend payments for the reminder of the year.

We don’t like the idea of building our wealth on a basket of dividend stocks that we don’t have control of.

What has happened to all of those people who live on the fixed income of their dividends only to have them reduced or canceled unexpectedly?

Doesn’t sound like fun to us.

So although equities can play a role for us their never our primary asset class.

We always end up with real estate as an asset class to produce cash flow for us.  And, of course, even real estate takes work, requires research and discipline and can throw you curve balls.

But we haven’t found a better answer.

There’s actually only two ways to build cash flow into our lives that we can figure out.

Build businesses that produce cash flow.

Own real estate that produces cash flow.

That’s about it.  

So how does the G20 play into this?

Well, to master the art of investing and owning real estate its useful to understand what’s going on in the world economy.

It’s almost generally accepted across all financial analysts that the world’s financial system is now 100% interconnected.

This “new order” of financial markets is unlike anything the world has ever seen.

So how do we monitor these developments?

1. First, we look at the Bank of Canada and what its up to.  Its the central bank in Canada … the bank that backstops all other Canadian Banks.  It controls interest rates, which directly affects our real estate…so we watch it closely.  

2. We then look at the IMF.  The International Monetary Fund acts as the World’s central bank.  It’s the bank that backstops countries.  It controls the International Monetary System.  Together with the U.S. Federal Reserve, the IMF plays a big role in how the World economy works.  The decisions made here can change what the Bank of Canada does, so naturally we’re interested.

3. How does the IMF get its power and money to hand out?  The G20 gives it to them.  Canada is part of the G20, so in effect, you and I are giving money to the IMF.

So naturally we want to keep abreast of what’s going on in the corridors at the G20 meetings because ultimately their decisions can affect how much our mortgage payments will cost six months down the road.

The decisions they make have a direct impact “on the streets” in places like Vancouver, Edmonton, Halifax, Toronto, Cambridge, Brantford, Hamilton, Barrie etc.

And forget the formal meetings … those are great for pictures and press, but like any conferences I’ve been to, the real business is happening out in the hallways and corridors.

So what’s going to happen behind the scenes at the Toronto G20 meetings?

Here’s our best guesses….

1. First, China wants to play.  If this group of guys and gals is controlling how the world money system works then its natural that China wants a seat at the table.  For that to happen someone else has to give up some of their voting powers … sounds like great drama to us because its highly unlikely any other country wants to give up some control.

2. Second, they’ll definitely be chatting about how to get more control over the fragile state of the economy.  Although we all read and hear how great everything is, behind the scenes the discussions are very different.  No one actually believes anything has been solved in the credit markets … only postponed.  We’re still left with 1,000 point plunges in the stock market, countries that run out of money and fear of more of the same.

If you’re really interested in the details of the International Monetary System and the suggestions that the IMF is making to the G20 then you’ll want to check out this paper that is dated April 2010 and was released to the public on June 4, 2010.

It is the IMF’s very latest thinking on how to fix the fragile system … both short term and long term.  You’ll learn about U.S. Reserves and “SDRs” as a new possible currency between countries.  

Fascinating stuff, if that’s your cup of tea.

Here’s the actual paper…

Reserve Accumulation and International Monetary Stability

This will definitely be part of the closed door discussions at the G20 meetings in Toronto and will likely lay the framework for some big announcements at the next G20 meeting in South Korea this Fall.

If you hate this stuff and want to focus on buying properties and creating cash flow … we can’t blame you!

But if you want a peak at the inner workings of the discussions that will be going on then this paper will be very insightful.

And as we mentioned earlier, no matter what changes are coming down the road over the next decade we always find ourselves coming back to real estate because we can:

Own it.

Control it.

And Cash Flow it.

And even more importantly, no matter what happens over the next couple of decades we believe a hard asset like good real estate will always have value one way or another.   Whether that value is measured in Canadian Dollars, Gold Bullion or IMF “SDRs” really doesn’t matter to us.

Onward!

Until next time…..Your Life.  Your Terms

And it is even better when we have some of our members from other parts of Canada or even other countries join us.

Of course, we couldn’t let this opportunity go by without getting some insight into what type of investing is working in Meteghan right now. As a small fishing town with a focus on lobstering their economy hasn’t been as robust as other areas in Canada.

But Todd King has found his niche and is making it work. Thanks for sharing Todd……we love the shirt!!

Most real estate investors graduate from Stage 1, “I want to make a Million Dollars by yesterday” to Stage 2, “OK, I realize this is work like anything else and I want to educate myself about proper real estate investing”.

The lag between Stage 1 and getting to Stage 2 varies from investor to investor.

Some people get caught in Stage 1 for years and face the endless treadmill of frustration always searching for the quick and easy money.

We have news for those people … there ain’t any.

It takes a sophisticated investor to capitalize on a good opportunity and make, what may seem, like “quick and easy” money.

The reality is that it took that person years to develop the skills to pull it off … and the process to get to that point wasn’t easy.   There were battle scars involved in getting to that point.

When you realize that real estate investing is like any other business then you spend your time and energy learning to master the craft – just like anything else.

And often you end up singing the mantra of “Cash Flow, Cash Flow and more Cash Flow”.

It becomes your “Cash Flow Song” that you sing to yourself daily.

The song includes phrases like, “the more cash flow the merrier” and “cash flow is king!”

That’s what we did anyway.

We sang the cash flow song all day long … and we still do.

Positive cash flowing real estate is obviously the way to go.

It’s easy to hold onto properties that pay for themselves through good times and bad times.

But along our journey we noticed that this belief in positive cash flow sometimes distracted us from two even more important points:

1. That “Exit Plans” are critical to long term survival.  

2. And that “Ownership” trumps cash flow.

We now think the words “exit plans” and “ownership” should be added to the cash flow song.

Let us explain…

Recently a real estate investor cornered us and aggressively pitched us on the idea that his duplexes were much better investments than our single family homes.

Well, first of all, to each their own.  There’s no single right answer to investing.

But upon questioning him about his management of these properties we uncovered that the utilities were “shared” and that this often caused problems between the tenants who argued about who had to pay what.

That wasn’t the important discovery though.

Shared utilities are often a sign that a property is “non-conforming”.

A non-conforming duplex can mean that the city has grandfathered the property and its fine to operate it as a duplex as long as the use of the property doesn’t change.

Or, it may mean that the city doesn’t allow them and will actually enforce by-laws to make you, the landlord, convert the property back to single family use.  And you may even have to spend the time and money to find the tenants new places to live.

And in this case, it was the later.  The city isn’t completely aggressive about it, but they get out there and enforce their by-laws occasionally.

The city even posts some risks and warnings on their website:

Risks of an illegal or unsafe basement apartment:
 
Increased liability – You, as a homeowner, are responsible for meeting established standards for a second suite. If anything, such as a fire, happens, you would be liable, because you failed to meet requirements.

Loss of insurance coverage – Building a rental unit in your home is a major change to your home. If you don’t let your insurance provider know that you have changed how you are using your home, you could, in fact, make your coverage “null and void”. (This means that you would no longer have any insurance coverage.)

Limited damage recovery – An insurance policy does not cover the costs for rebuilding your home to meet current standards. Your insurance company is only required to cover the costs of restoring your home to the state that it was in when you bought your policy, before any damage.

Prosecution — If you do not meet City codes, you are breaking the law. You run the risk of being charged and can face fines of as much as $50,000 — or even a year in prison — for each charge.

Financing – Banks and other lenders don’t generally consider income from an unauthorized basement apartment when you try to qualify for a mortgage loan.

Tenants – You are a landlord. You must maintain your basement apartment in good operating order and you must follow all fire safety laws. Tenants may apply to reduce their rent if the unit fails to meet municipal health, safety, maintenance and property standards.

Tenant insurance – Your homeowner’s policy will not cover property that a tenant of an unauthorized apartment owns.

This is important information.

You see, although that particular property cash flows very nicely we don’t have the flexibility we need with them.

If for some unforeseen business or personal reason we need to sell the property quickly, for whatever reason, we may not be able to.

We may have to somehow get one tenant out of there … which can be tricky of course, and then convert the property back to single family usage in order to make it attractive to the largest pool of buyers possible.

During the the last decade Canada has been a real estate investors dream … and its caused some investors to get lazy.  They miss the big picture, which is LONG TERM THINKING.

Many people have forgotten the chaos of the early 1990′s when GST came out, NAFTA came into affect and interest rates were rising like an oil gusher.

That essentially froze the real estate market.

And the only properties that were selling with any ease were the very nice little single family starter homes.

We know this because our family was caught holding the bag when the floor under the market fell out and we were eating negative cash flow like it was going out of style.

We had it for breakfast, lunch and two scoops for dinner.

And it tasted like crap.

So for us, having a very clear and well defined exit plan is crucial to every single real estate decision we make.

And that brings us to our next point….ownership versus cash flow.

We go into every single investment, whether it be a flip or a lease/option or a regular rental with the mentality that we’re owning the property FOREVER.

So if we’re doing it a flip it better be on a property that we can rent out easily if the market changes during our renovations.  And that property better be in an area that meets our criteria.

Same for lease/options.

Same for everything.

Because when we go into each property thinking we may own it forever we don’t get caught up in the hype of “this property cash flows at $1,000 a month and we gotta have it!”.

That’s a rookie mistake.

So if our “flip” doesn’t work out we can rent the property for a monthly amount that we’re comfortable with and be happy adding it to our real estate portfolio.

Although “cash flow” is at the top of every investors mind we alway supplement it with idea of “ownership”.

Would we be comfortable owning the property through any type of real estate market?

If the answer is yes, then we proceed.  If not, we bail…no matter the cash flow.

All it takes is to lose a good tenant and then the cash flow that was glorious on day one turns into a negative cash flow that may be difficult to turn around.

And if the property gets shut down by the city, or the property isn’t in an area that can attract equal quality tenants easily, then, to us, it’s not a good investment.

Please don’t think this applies to only non-conforming duplexes.  This thinking applies to absolutely everything.

For example, if you’re buying 5 condos in downtown Vancouver or Toronto to make a quick flip … what happens if there’s 40 other investors in the same building all doing the same thing?

What’s your exit plan then?  There’s likely many other options but you’d better run the numbers and cover those bases before you get in.  No?

So the next time you hear someone singing the “cash flow song” add the words “exit plan” and “ownership” to the lyrics.

It makes for a nicer tune and it may save you a lot of grief one day.

Until next time … Your Life. Your Terms!

I couldn’t understand the numbers behind a horse as an investment but at a recent Grand Prix in Ontario Jp Gulbis helped explain how a horse can generate both cash flow for their owner and equity build up……who knew??

You know the type, the ones that call for real estate to fall in value for so many years in a row that one day they’re right. 

Well, we ourselves have been scared off of the Toronto Condo market for some time and although investing for appreciation isn’t our “cup of tea” we continue to be amazed the strength of the Toronto condo market and shot this quick update…

And then, right after the video someone literally jumped on us … one of Nick’s old high school mates lives in the neighborhood and is part of the Indie Music scene.  He gave us the local updates that we love and can only get from someone living in the neighborhood.

Enjoy PART II to this video!

Good, with that said, let’s continue.

We *think* there was once a day where the stock market was a place that actually helped both large and small businesses.

Wall Street facilitated the selling of stocks and bonds so that businesses could access capital to help them expand and grow.

Investors earned interest payments on their bonds or equity in their stocks.

Stock traders earned a commission.  Everyone was happy.

We’re not sure when the stock market went off course but we do believe that that was the original intent of it.  A place where Wall Street helped Main Street.

Maybe it was just an “idea” and maybe it never actually worked as we’ve just described.

It certainly hasn’t worked that way since we entered the game in the mid to late 1990′s.  That was the era of “irrational exuberance” and the tech bubble took us on a ride that we’ll never forget.

But even in the late 1990′s it *seemed* that you could find businesses that met your criteria as good investments…

A business that seemed to have good, universally needed, products.

Products that were cheap to make, cheap to sell and had huge profit margins.

Products that made the world a better place to live and didn’t ruin the environment.

Management that had the best interest of the owners in mind and were also honest.

Today the world has changed.

Today, with very few exceptions (like Apple) no matter what company you find to invest into, it’s highly likely that their stock price is going to be affected by large global economic factors.

So no matter how well they do on an individual basis the larger winds of change will determine the direction of their stock price.

Things like “Sovereign Debt” (the debt owned by governments who sell bonds to raise cash) which were barely even mentioned 12 months ago are all over the news -daily.

The economy has officially moved from a banking debt crisis to a government debt crisis.

1,000 point drops in the Dow Jones Industrial Average and countries banning “naked short selling”, as Germany did this week, is the new normal.

So even if you fully understand all the fundamentals of the stock you have purchased, much larger forces are now at work.  Huge macro economic events are sweeping their way around the markets that can alter a stock’s value no matter how good its “fundamentals” are.

Fun, eh?

Mark Cuban has one of the better rants on this exact topic.

Now let’s turn to real estate.

It’s not perfect either.  These same large macro economic forces can have devasting affects on real estate as well.

Just look at the U.S.  

30% declines across the board.

Not fun.

But there’s something real estate has that other investments don’t.

Shelter is fundamentally a need.

If you own property in the right “category” you will always have demand for it.

Obviously, owning the right property in the right category is important.  Many will ignore this, they won’t put in the work necessary to learn what the right properties are and those will be the same people who waive their arms in disgust when the winds of change come.

And when managed properly, good real estate produces something critical to your economic life, cash flow.

The value of the property may swing wildly but with tight managment and smart control of your costs, like mortgage rates, you should be able to ride out even the most terrible of economic storms.

“Should” is the important idea here of course.

“Cash, cash flow and credit” are excellent daily mantras.

Most real estate investors are scared to buy properties because its value may fall.

That’s inaccurate thinking in our books.

Your goal is to own real estate free and clear.

You should EXPECT changes in value and plan accordingly.  At some point in your ownership of it … it WILL fall.

Your path to getting to the end goal of “free and clear ownership” may involve many different strategies and styles but at the end of the day you’re looking to flat out own your investments.

That’s what gets you out of the rat race forever.

So wild swings in value are to be expected.

Accept that right now.

The question should be, how will you prepare for them?

When the downward pressure in Canada comes what will you do to protect your investments?

Will you sell?  At a loss?   Or wiill you have the proper reserve funds to carry you through a tough period?

Will you have polished up your marketing, negotiation and “action taking” skills to the point where your are ready to jump into action?

In the early 1990′s our family went through an extremely difficult time and if it wasn’t for some reserve funds we would have lost property to the bank.

The good news is, that although there were difficult days, we came out the other side.  We survived and it made us stronger.

Here are some of things we personally enjoy with real estate investments:

1. We’re the board of directors.  So we can take personal responsibility for results.

2. Our product always has a need (starter homes).

3. We can control where we own them (what community, with what fundamentals – population, employment, transportation, infratstructure).

4. We can closely watch the global economic landscape, increase our financial education, and have plans for multiple different economic changes that could come sweeping through.

Here’s the interesting part.

For years, numbers 1 – 3 on this list were the most important factors when investing in real estate.

Knowing your “local” market was the key to success.

And it’s still important.

But in today’s world, number 4 has become critical.  Essential even.

If you’re only watching the “local” fundamentals you are not watching enough.  You are not preparing enough.

The days of just knowing the population trends, employment sources and transportation routes are over.

Huge macro economic trends are here.

It’s a new world.

Get ready for it or get out of the way.

Until next time … Your Life!  Your Terms!

We made a recording of the call, if you missed it you can click here to access the MP3 recording of it.

 During the call we announced that we’re re-naming our “Real Estate Pain Free” program, which is over 6 hours of us sharing Real Estate Investing Strategies and Tips.  

And because of that we’re clearing out our existing inventory and offering a 50% discount on the program, but only until Wednesday May 5th, 2010.  Once our existing inventory is gone, it’s gone!  You can learn more about it here.