80 Lessons Learned .. on the Road from 80K to 80M

What have we learned in 12 years

2012-01-25T11:49:00.000-08:00

Since ourinception in the year 2000, Prestigious Properties has successfully grown to around 600 investors and an asset baseapproaching $90M (we actually managed over $100M before we recently sold assets worth around $15M in PowellRiver, BC and Yorkton, SK .. and adding all the other buildings we've since sold we transacted well over $125M worth of asset to-date). Our strategy of buying under-managed apartment buildings in areas of growth, sensibly levered with cheap mortgages held up well even during the market correction of 2008-2010 that saw many of our then competitors fail miserably. Of course, returns will be lower for LPs opened just prior to the recession than our previous LPs or joint ventures that we started as early as 2000. However, our recent investment opportunities are targeting a respectable annual return of 10% as evidenced by this third party report. Our priorities, in this order, continue to be:

A)return OF your capital, followed by

B)return ON your capital, followed by

C)regular cash distributions

Manyfailed banks, hedge funds or real estate firms forgot this very basic lesson.

Whatelse have we learned for new LPs, such as the current LP open for newinvestment, KingsCastle LP:

a) We willavoid smaller towns. This will afford us lower risk purchases and staying power if marketsgo sideways for a while with low to very low chance of property value decline;

b) We willuse less leverage. This means we will put down more cash and thus, have a lower mortgage.Until 2008 we used up to 80% loan-to-value mortgages, which is a great way toenhance your cash-on-cash ROI in fast growing markets. However, it has higherrisk and much lower cash-flow, frequently negative once one deducts operatingexpenses of an LP and required, ongoing property upgrades. The recent 120 suiteCalgary purchase is a prime example: we have a mortgage at 4.14% for 5 years atless than 69% loan-to-value, and we might go lower still going forward to beeven more conservative and have better cash-flow in these fairly flat,uncertain, volatile and deleveraging times;

c) We willprovide early exit options in case of changes of mind or life circumstances.Some of our previous LPs are locked which proved hard on a few investors thatwished to get out early. This restriction has since been removed on new LPssuch as PRISM A or KingsCastle LP;

d) We willprovide an optional 5% annual distribution, paid quarterly, (to satisfy aline-of-credit perhaps or for retirees seeking income in addition to equitygrowth) or 6% equity creation through our DRIP program. To produce a 5%cash-flow far lower leverage is required. Most REITs are in that vicinity, manyare lower due to far higher overhead. Anything over, say 7% is a high risk REITwith a likely erosion of principal or dubious valuations of remaining asset.Give me $100,000 and I too can deliver 10%/year for 5 years for sure .. butthen what ? Thus, look at remaining net asset values (NAV) which are often farfrom honest.

e) We willhave low fees, especially initially, but also ongoing. It is critical that thevast majority of your investment goes into income or wealth producing assets.Some folks charging a 10% commission and a 3% acquisition fee, for example, ona 30/70 levered asset, means 20% of your cash goes to the syndicator or salesteam (or Exempt Market Dealer), right up-front. Add the necessary legal feesand the usual marketing expenses and as little as 65-70% of your dollars getsactually invested. To get from 65% invested to just your original investmentone needs a 50% cash-on-cash ROI and that is very difficult in today’s market.That is why so many syndicators have failed and will continue to fail. Inaddition, ongoing salaries or overhead costs should be as low as possible. Wecharge a very modest annual 0.5% fee plus have a staff of only two in ourCanmore HQ for accounting and administration, spread across 6 LPs, or roughlyonly about $3000 per $1M in assets managed. Very very low !

Inaddition, we will continue with our commitment, like all six LPs orprior joint ventures to:

1) Focus onhigh demand apartment buildings in cities with jobs, diversification andgrowth.

2) Add a smallpercentage of slightly riskier asset classes, say industrial buildings or landdevelopment to juice up the return, but never more than 25% of the moneyinvested. Preferably all cash, with almost no or a very small mortgage.

3) Not upliftasset values before syndication to investors; This is a major profit killer forinvestors. Great for the syndicator: get paid upfront. Beware of landsyndicators or commercial property syndicators that take their vast profitsupfront. What is their incentive to perform ?

4) Continuewith open communications about successes, major events but also misjudgments;We hate to send bad news but we do it (occasionally)

5) Provideaccess to president or LP executives for any questions about your investment orany real estate related documents, or for any issue that you may have;

6) Ouruncompromising due diligence on area and property, before property acquisition;

7) Sensibleproperty upgrades to increase rent levels and thus, the value of the asset formedium- to long term ownership, and;

8) Impeccablymanage our properties with a focus on customer service, tenant selection andtenant retention.

Ifthe points above resonate with you and you have capital you're interested ininvesting, we have a current opportunity for investors with $25,000 and up to invest. If you would liketo learn more about this opportunity, please reply to this email or follow this link to request aninformation package. Our info package contains everything you need to know tomake a sound decision and of course we're available to answer any additionalquestions you might have.

As always, ask any real estate related question !

Thomas Beyer, President
Prestigious Properties Group
T: 403-678-3330

www.prestprop.com

P.S.: Feel free to follow the latest news affecting your investments or my personal market commentaries on Facebook or on Twitter.

Why real estate prices in Ontario will FALL to 2014

2011-12-31T18:07:00.000-08:00

I love real estate .. especially in rising markets with perpetual income .. and thus, the vast majority of my personal net worth is in it.

Where are the markets rising ?

Where there is job growth, with (at least flat or better,) rising wages, with a growing population. That exist primarily in two provinces today in Canada, in SK and in AB, and in some BC pockets. See here, for example: http://www.vancouversun.com/business/Energy+revival+fuels+another+boom/5918015/story.html

However, much of Ontario will likely see FALLING real estate prices for 3+ years because of:

a) a left leaning, taxation heavy, debt increasing, union friendly, top heavy, recently re-elected government

b) vastly increasing utility costs due to poor feed-in-tariff decision (for "green" energy such as bird killing wind mills or very expensive solar energy) and nuclear reactor upgrade costs

c) some further expected tightening of mortgage rules

d) falling wages & employment levels in both the high-tech and manufacturing industry .. see notice here about Caterpillar strikes & Ottawa's decline in the high-tech area.. expect that to happen in the auto & general "high tech" industry too (if one can call a BlackBerry high tech). Ontario's manufacturing might was built on a low Canadian $ and low utility costs. Those two crucial main competitive advantages are now gone. For now, the work force remains highly productive and well educated, but new job prospects are very slim locally, and the upwardly mobile will move south to the US (with lower wages, but also far lower housing and living costs and better weather) or west in Canada, for higher wages and better job prospects.http://business.financialpost.com/2011/12/27/how-ottawas-tech-sector-lost-its-edge/http://business.financialpost.com/2011/12/30/caw-votes-in-favour-of-london-caterpillar-plant-strike/

e) curtailed federal government expenditures around Ottawa [far too slow in my opinion, as federal and most civil servants have far too high defined pensions, and thus, far too high total wage package compared to the real decline in earnings in the private sector in recent years]

f) failed immigration policies of too many uneducated immigrants draining the social welfare & healthcare system, creating undue high unemployment and increased crime

g) a fairly high Canadian $ making wages uncompetitive as we see in the Caterpillar example. Likely those 400 jobs will be lost, moved to Alabama, and the 400 people will join the unemployment line in the affected town.TD Bank agrees by and large and see -2 and -6% for Toronto (and less, but also negative for Ottawa) here: http://business.financialpost.com/2011/12/22/get-ready-for-housing-market-correction-td/

To me the only thing that makes sense is rental (apartment) buildings in stable Ontario towns in the 50-70/door range with a 6-8% CAP rate with a steady flow of rental income, sensibly levered with cheap sub 3% debt.

In fact, I see no reason whatsoever that real estate prices (for houses and condos) in Ontario will rise, except in a very few isolated instances in cities with job growth.

Do you ?

Until some or all of these 7 issues mentioned above are substantially corrected, Ontario will join the ranks of Greece, Italy and Ireland as failed states with too high debt levels, higher unemployment and thus, falling real estate prices.

Read this article here: http://www2.macleans.ca/2011/10/17/why-ontario-is-poised-to-become-canada%E2%80%99s-greece/

Or look at these debt to GDP ratios across Canada: http://worthwhile.typepad.com/.a/6a00d83451688169e20153926ea5eb970b-pi

Thus, if you invest or own in Ontario check the local employment developments very very carefully, and be very VERY selective where you invest !

Oh yes, I forgot to mention: too many condos are being built in Toronto. Don't buy those as an investment, unless at clear out deeply discounted prices on bankruptcy sales nor invest in those indirectly, such as some syndicated mortgage investments being marketed right now. 2013 or possibly even 2012 will see quite a few of those towers under construction in bankruptcy.

Thomas Beyer, President
Prestigious Properties [@facebook .. @twitter]
T: 403-678-3330 or E: tbeyer@prestprop.com

www.prestprop.com

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Comments on "Occupy Wallstreet"

2011-10-22T10:32:00.000-07:00

While I like the free expression of opinion in democratic states, what we are seeing over the last few weeks is another entitlement thinking: The state OWES ME .. free pension, free education, free assembly on privately owned property, free food, free policing, free public toilets ... well developed and nurtured by left-wing politicians over the last 30-40 years .. vote for me and I give you X .. no wonder we have such high deficits in cities, municipalities, provinces and on the federal level.

While some initial protesters have expressed legit concerns, most multi-day "occupiers" have nothing else to do ..

Yes there are legitimate concerns about corporate greed such as high frequency trading, the lack of a financial transaction tax, poor securities fraud enforcement, or ratings agencies that rated junk AAA, ... Yes, there are legitimate concerns about political meddling in the financial system, such as CMHC allowing 5% down for home purchases in Canada (at the state's expense), such as the US forcing irresponsible lending practices to folks who should never buy a home or Europe forcing private banks to loan recklessly to indebted governments ..

Where is individual self-responsibility still taught ? At churches (where 70% of population never attend) ? At schools (with often left wing teacher in a forced unionized environment) ? At home (with 2 parents working so they can afford a big house) ? By peers in school or university ?

The (ever poorer) "state" cannot afford to fix every ail of society or individuals. Individual responsibility is critical and needs to be re-taught again .. in schools, in churches, in blogs, in the home ..

Shalom !

Thomas Beyer

The Stock Market: A platform for gambling, trading or investing ?

2011-09-04T11:28:00.000-07:00

Have you noted that the stock market is quite volatile lately .. say the last year or 2 ?

Have you also invested in stocks and seen unusual price movement for no good reason ?

Have you owned stocks, that after a surge fell sharply, sold by you in disgust to prevent further loss, just to see it rise again days or minutes later to prices higher than your entry price ?

Have you also wondered, perhaps quite frequently recently: is this how I fund my retirement or my kids' education ?

The stock marked used to be a source for funding of new firms or their continued growth, with a platform that allowed investors to co-own large firms, and to get in and out with relative easy, at fair prices set by buyers and sellers !

Lately it has evolved into a casino mentality almost uncorrelated to real economic activity of the market or the specific company.

In my (humble) opinion, the main reason for extreme stock market volatility of late is a) the many internet and trading enabled devices like PCs, laptops and cell phones, b) the lack of transaction taxes and c) the lack of massive (close to 100%) capital gain taxes to reduce incentives for short term trading! And the main reason for b) and c) is the "tithing" of these profits with US politicians, i.e. the dependence of the US electoral system on large donations.

Wall Street is the US politician's main street !

Some developments though:

Europe is now at least starting a discussion to introduce a transaction tax. See here .. http://www.cnbc.com/id/44163841/Financial_Transaction_Tax_for_Europe

High frequency code is being looked at by the SEC, see article here: http://business.financialpost.com/2011/09/02/sec-takes-aim-at-high-frequency-traders/

Canada should take a lead here in my opinion, and introduce a 2% trading tax - like real estate in ON or BC - and a "greed" or "day trading" tax as follows: 90% tax on trades held less than 1h, 80% tax on trades held less than a day and 75% for trades held less than one month - DEDUCTED AT SOURCE .. directly from your trading account !
This high frequency or day-trading benefits no one except a few trading houses and is essentially theft from medium to long term investors.

The stock market needs to return to an investment vehicle.. and not a trading vehicle benefiting few at the expense of many!

Related post, by Texas Maverick billionaire owner Mark Cuban, comparing high frequency traders to hackers or thieves: http://blogmaverick.com/2011/08/08/what-business-is-wall-street-in-2/

What these two changes (transaction tax, high greed tax on short term profits) will do is re-establish is a foundation for stock market investing .. as opposed to merely trading ! It will allow people to get in and out of the market, it will allow companies access to funds for IPO's or growth, it will reduce intra-day or very short term stock market manipulation, it will create valuable government revenue and it will restore trust in the stock market as an investment platform that has been lost by me and millions of others !!

Will politicians go there ? We'll see ! I hope so !

Your thoughts on this ?

Thomas Beyer, President
Prestigious Properties: www.prestprop.com
T: 403-678-3330
E: tbeyer@prestprop.com

Something is changing in the world. What is it ?

2011-08-09T20:13:00.000-07:00

I too was enraged this weekend at the stock market collapse, the UK riots, the Greek riots, the Syrian riots and all the capitalistic greed that caused so much money to disappear from real estate investments such as Shire, Concrete Equities, Libertygate and the increased difficulty we face raising money into our fairly safe and still quite lucrative investments due to recent changes in the exempt market.

Something is changing in the world. What is it ?

I think it is the realization that a) democratically elected officials cannot protect us any longer and b) that Wall Street and its extension does not provide benefits for investors anymore.

People across the developed world are starting to realize that the welfare state, the reliance on public healthcare, clean financial markets, safe investments, guaranteed pensions, Freedom 55 doesn’t exist anymore ! The “state” is not all powerful and gives us far less benefits we hoped for.

To the second point, read this article here by Mark Cuban, the billionaire owner of the Dallas Mavericks on “What business is Wall Street in”. The ONLY parties that make money in the financial industry are traders and banks, trading on extreme volatility. With several billions shares traded over the last few days of extreme volatility alone, with no transaction tax, there is no benefit to investors nor governments, only to trading houses. Why does the BC or ON government charge a 2% real estate transfer tax, but no share transfer tax ? Surely, that would reduce volatility and be one good way to boost Ontario’s, Ottawa’s or Washington’s empty coffers. Additionally, banks can borrow money at next to nothing and buy treasuries with a 1% (or 100% profit) uplift or lend it to homeowners for 3.5 to 4%. Why risk lending to a job creating small businesses such as software start-up, a real estate land deals, retail outlets, manufacturing or bio-chemical firm if a bank can make money almost risk free. No wonder so little jobs get created in North-America anymore.

The financial industry is systemically flawed when for TEN YEARS the market is essentially flat .. from a DOW Jones of around 9,000 to now around 11,000 .. a 20% total return on the index and that is before mutual fund fees of 2% or so per year. Thus: ZERO return if you had followed your advisor recommendation of buy and hold. Marginally better on the TSX where you could have eaked out a 40% ROI in 10 years. So that is the new reality: 4% in stocks ! Don’t believe in all this 7-9% stuff if you invest in the stock market. Your financial “advisor” is making money, your stock brokerage firm is making money, your bank is making money, but you do not. But hey, 3 out of 4 ain’t so bad ! Why change it ??

Well, you have a choice: continue down that same insane path of “investment” or try s.th else. Why not co-own some land or income producing real estate in one of the most advanced and prosperous parts of the world, namely W-Canada. We have what the world wants: oil, gas, coal, wind, water, uranium, potash, agricultural land, clean air, space, scenic beauty, less crowds, low debt, low deficits. W-Canada has high levels of in-migration due to very strong job growth. Our rents in Calgary and Edmonton are going up .. and after only 2-4 years of ownership we have sold a portfolio of 4 buildings in Yorkton, SK at an enormous profit. This deal went unconditional last week .. well into the triple digit on the cash invested !

We at www.prestprop.com continue to believe that opportunities exist in the right markets, such as most cities in Alberta, for apartment buildings, land held for development or for select construction projects. These projects can produce far higher returns than the stock market if they are well selected, impeccably managed and its values skilfully amplified.

Choosing an Advisor for your Investment Portfolio - Or do it Yourself ?

2011-05-14T09:04:00.000-07:00

Many a person wonders: how to manage my money. Do it myself ? Ask an "advisor" ... or 3 ? Every person has a bias (that includes me, of course).

Some thoughts on this below:

Thus: understand their bias. How do they get paid ?

There are three types of "advisors":

1) those that sell only certain products and make a commission and/or trailer fee of investments with them. Most of these advisors are sales people and the fees are VERY HIGH .. VERY !!

2) Those that sell expertise for $s/h. Say $1000 for an initial consult .. and then $200-$500/h ..

3) Those that take a % of asset under management, independent of product (although even those do not include real estate, for example, into consideration). About 1.5% to 2.5% for the first million .. then lower as asset base grows !

Try all 3 types .. maybe 2 people per category .. and see where it goes !

Best is to invest in this 10 cm real estate: the one between your ears. That has the highest yield !! read, blogs, conferences, networking ..

A rule of thumb: allocate $s into 10 buckets that are not too correlated, say
1) 10% real estate,
2) 10% gold,
3) 10% oil / energy / gas / uranium stocks/ETFs,
4) 10% transportation (oil, gas, buses, trucks, shipping, cars) stocks/ETFs,
5) 10% retail firms stocks/ETFs,
6) 10% bonds/bond ETFs,
7) 10% banks/financial institutions stocks/ETFs,
8) 10% high tech stocks/ETFs
9) 10% pharmaceuticals / health care stocks/ETFs,
10) 10% "specialty/exotic" i.e. international currencies or penny stocks or green or coloured diamonds.. as an example.

Then, one year later, sell those that have outperformed and bring it back to 10% .. so if gold has gone up 50% and now is 14% of your total portfolio .. sell some so gold totals 10% again. Buy more of the underperforming one .. so if oil has slumped, buy more oil stocks/ETFs .. etc. a proven and Nobel Prize winning strategy !! Easy to execute from your PC with ETFs .. low cost .. low time investment .. cheap .. no advisor required !!

This way you have a fairly balanced portfolio .. IF this is your goal.

Other folks specialize because they know a market real well or have certain beliefs .. such as gold bugs or oil guys or real estate guys or guys that love gold coins or coloured diamonds.

This is a real estate forum. You don't get advise on "what gold stocks to buy" or "Is Silver at $35/ounce a good buy ?" or "Which ETF is better: ABC or XYZ ?" here !

THIS IS NOT ADVICE !! IT IS AN OPINION !! I AM NOT AN ADVISOR. I AM BIASED.

Other considerations:

I have done very well in real estate and continue to believe in it in the right markets / asset types (with proper leverage and impeccable management and not in all cases/markets) i.e. I believe that a substantial portion (say 30-50%) of your investable assets should be in real estate !

A second asset class is private equity, i.e. shares of private, non-public firms (again it assumes some special knowledge on your end). Co-owing a restaurant franchise or Mr. Lube or a garbage removal firm or internet start-up or software developer or any profitable small or medium sized business is usually far more profitable than co-owing a public REIT or Encana or Microsoft or Google or any other public firm. Private firms trade at a 3-5 multipe of earnings .. wheeras most public firms trade at 10-12+ .. so the same profit costs maybe 1/2 to 1/3 of the same profit in a public entity !!!!

These two investment classes [real estate, private equity] are very poorly served by so called "advisors" .. primarily because they do not get paid on it !! But they are a SUBSTANTIAL form of wealth of entrepreneurs or any successful business person. A substantial portion .. maybe 70%+ ..

of course I also have some ETFs / stock and follow this 10 bucket allocation model .. plus we use an advisor with % fee of (non real estate) asset under management !

With ETFs or stocks, well balanced, you can do about 6%/year .. with bonds maybe 3-5% .. with real estate 10%+ .. but some folks love stock picking and have done better .. but of you look at the stock market over the last 10 or 20 years, after a 2% mutual fund fee, 6% is HIGH .. likely you will do less unless you buy ETFs and have a low fee advisor !!

Many advisors should be called "sales person". Nothing wrong with selling. You do not go to a BMW dealer to get advice on what car to buy. You go there to pick a BMW.

Ask the advisor:
1) how to you get paid ?
2) What do you invest in ?
3) Show me a sample client's [name removed, of course] portofolio and its return over 3,5,10 or 15+ years !

Very few will do that and can show results !

Thomas Beyer, President - wwww.prestprop.com

Wow .. you take 50% and put up no money ? Why is this fair ?

2011-05-09T10:45:00.000-07:00

person A: invest ONLY his money .. and 1/2 h of his time for due diligence (perhaps more ..)

Person B: invests EFFORT, TIME, and EXPERTISE required and the execution of this LONG LIST of tasks here that someone has to do .. and get compensated for:

Investigate location/area of North America to invest in

(recently we bought in Powell River on BC's Sunshine Coast due to low prices and expected upside due to baby boomers retiring – we're also buying in Saskatchewan and Texas right now).

Investigate location once city or metroplex is selected

(we like "B" areas where value can be created fast... as opposed to "A" locations that are often too pricey or "C" locations where rent increases are tough to realize due to bad tenant profiles and management problems).

Screen/filter potential investment properties using realistic rents and/or expenses.

Write offer on selected property (this may involve multiple offers and multiple iterations since typically not all offers will be accepted).

Negotiate terms and conditions of offer.

Finalize offer.

Set up the legal structure/corporation, and co-investor structure usually via a joint venture or limited partnership agreement.

Select property manager, onsite manager and other professionals (such as tax advisors, inspectors, appraisers, bankers, engineers, roof experts, boiler mechanics) that may be required to inspect the property initially and operate the property on a day-today basis.

Will market, rent, fix up, repair, paint, landscape and/ or enhance said property to standards that expert sees fit to achieve appropriate rent and/or resale value.

Will keep a record of such fixtures, repair material and/or landscaping material expenditures and/or of all other expenses, such as property management fees, subcontractors , onsite managers, taxes, insurance, realtor, legal, advertising and/or related expenses to market, upgrade, rent and later sell said property.

Set up WCB (Worker's Compensation Board), contractor, Rona, Home Depot or supplier accounts.

Negotiate and set up preferred vendor, supplier and contractor list.

Negotiate with financial institution to obtain, initially and/or later, re-finance using 1st, 2nd and/or CMHC or FannieMae insured mortgages.

Manage all relationships with banks, realtors and/or 3rd parties.

Set up reporting and e-payment mechanism to investor.

Act as the primary interface to property manager, or may manage properties inhouse.

Adjust rents frequently with market realities.

Invest frequently (but not always) personally into the venture.

Sign all necessary legal documents.

File annual or quarterly statements/documents that may be required by various jurisdictions.

Sign required personal guarantees for required mortgage(s).

-----
is this worth 50% .. yes .. more or less .. maybe 40% .. maybe 60% .. depends on the deal .. but certainly about 50% !!

I have done deals with 1/3 for me/us (I have a team now .. and they all want a share ..) and 2/3 for investors and ALL of them I gave away way too much profit (but of course now cannot change it in hindsight ..)

So, it depends on YOUR perception of the expert's value / time ! It has to be win/win !

not: win / WIN

Thomas Beyer, President - www.prestprop.com

50/50 JV - Is this fair ?

2011-05-09T10:42:00.000-07:00

50/50 seems to be the norm for a joint venture (JV) for a single family homes .. but is this the right split ?

Why not 70/30 ? or 25/75 ? Why not charge a fee upfront when all the work is done .. and a fee as you go along .. or more than 50% over a certain price target or investor ROI ?

Some of my investors have made 200%, or 300%+ ROIs .. so 50/50 in hindsight seems like expensive money .. but then they referred others .. so in hindsight that is the entry price to mutual success ..

first deal is always hardest, 2nd a bit easier, 3rd deal a bit easier .. 15th is easier ..

Hence, usually you have to do your own deals, with your own money, to prove a point or an expertise area !

Hence: sell too early .. to show a track record in deal 1 .. do a 2nd or 3rd deal .. show it again .. then you have the right to ask for other's people's money ..

so give away a little too much in the first deal, take a little more in 2nd deal, a little more in 3rd deal .. until the formula fits these criteria:

IT HAS TO BE WIN/WIN .. both for you and for the investor .. both you and the investor have to feel it is a fair deal and no one gets ripped ..

IT HAS TO BE REPEATABLE .. and as such, you have to make money too while you hold, work, get the mortgage, find the trades, upgrade .. and as such 50/50 works POORLY as you have usually almost no cash-flow while you hold and need add'l income to wait for the big equity pop at the end .. often years away .... why not charge a fee upfront (perhaps it is being credited against your future earning .. perhaps you call it a sales commission or an asset acquisition fee), a fee while you go along (perhaps charged against your future earning .. usually called an asset management fee) .. and then take 50 or 25 or 30% or 80% at the end .. depending on the outcome .. no one usually minds that you make lots of money .. as long as they make a decent ROI .. for the risk involved ..

IT HAS TO REWARD THE RISK ADEQUATELY .. and as such some deals need to show a higher ROI than others .. building brand new homes in brand new markets with no expertise is high risk .. you have to offer high ROIs .. subdividing land and waiting for approvals is high risk .. condo conversions is high risk .. buying pre-sale condos is high risk (especially if you couldn't close them yourself and they wouldn't cash-flow if you had to buy them ..) .. buying lower priced townhouses or duplexes or apartment buildings for rent with rental and equity upside in growth markets is fairly low risk .. perhaps less equity upside .. but high leverage and thus high cash-on-cash ROI .. but loss of capital potential is very low .. so you don't have to offer too high an ROI .. i.e. you can take 50% or more of the profits ..

IT HAS TO BE SELLABLE .. i.e. you have to have a proposition (properly packaged with appropriate legal and marketing material and website and salesmenship and team members that execute with you or on your behalf) that works for the investor .. he wants a track record and assurance that he doesn't lose any money .. i..e they want a return OF their money .. and then a return ON their money .. so the track record, you the person, the risk, the likely or potential reward and the packaging have to be aligned for it to be sellable ..

Happy JVing ..
Thomas Beyer, President - www.prestprop.com

The Long View in Real Estate - 120+ years !

2011-04-01T20:26:00.000-07:00

This image below (or seen bigger here) depicts US home prices over 120 years. It shows that house prices, on average, move with inflation. Some people argue that real inflation is around 5-6% (see: www.shadowstats.com) .. others think it is more like 2 or 3%.

Use 3% if you must. The writer erroneously states real estate is a poor investment therefor.

Why is real estate a TERRIFIC investment with only a 3% annual value growth (on average) ?

It is called leverage. Let's say you buy a property with 25% down, with a 75% mortgage, for example 240K with 60K cash down and 180K mortgage. Assuming a 25 year amortization, in 10 years the mortgage has been paid down 22% to about 140K. The house is worth about 33% more, or 320K. Your initial equity of 60K has grown by 120K to 180K (320K minus 140K) .. wow 200%. 20%/year !!

Using the same math with a more conservative 33.33% down (80K plus 160K mortgage) the 80K equity grows by 115K to about 195K (320K value - 125K mortgage), or "only" about 140%. 14%/year !!

This assume no cash-flow ! Or, all cash-flow is reinvested into the asset for maintenance.

The trick is to
a) hold 5+, better 10 years, and

b) to find an asset that has enough cash-flow to hold with a 75% (or 66.67%) mortgage [many large single family homes do not qualify as they are too expensive for the rent they could command, but many small homes or up/down duplexes or townhouses or some condos or 4-plexes or multi-plexes/apartment buildings do the trick well enough], and

c) stay the course through market wobbles like 2008/2009, and

d) buy in areas that are at least as strong 10 years from now than today [and yes, there are areas of the world that will shrink or are less economically vibrant in 10 years than today, a few in Canada, many in the US or in Europe]

Beats bonds and stocks in my (humble) opinion !

Thomas Beyer, President - www.prestprop.com

Why maximizing RRSP is important: make 50% to 66% "on the house"

2011-03-03T14:23:00.000-08:00

Do you have an RRSP ? if not, why not ? If not maximized, why not ?

Do you pay income taxes ? What is your marginal tax rate ? For most Canadians it is well over 30% and for many it is over 40% ! Therefore, if you put money in an RRSP the government sends you a refund of slightly over 40% if you are in the highest marginal tax bracket !

So, if you put $25,000 in an RRSP by March 1 you get a cheque for over $10,000 ! Thus, your net investment is only $15,000 ! You invest $15,000 and it is worth $25,000 ! A 66%+ return in a few weeks.

If youy are in a 33% tax bracket, and you put $15,000 in an RRSP by March 1 you get a cheque for about $5,000 ! Thus, your net investment is only $10,000 ! You invest $10,000 and it is worth $15,000 ! A 50%+ return in a few weeks.

Wow .. free money .. "on the house" care of the Canadian government ! No other investment gives you such a high risk free return. NONE !

That's why it is prudent to maximize your RRSP contributions, as you get significant free money today, and delay the repayment of it, via taxes on taking it out of your RRSP eventually, for years or even decades !

Once the money is in the RRSP account, you can then decide how to invest it. Of course, we believe that a real hard asset, outside the stock market, such as a high demand and recession proof apartment building, is one of the options you should consider !

The deadline is March 1, Midnight ! To invest with us in an RRSP the money has to be with OlympiaTrust in a self-directed RRSP account, but as an interim step you can move the cash to your existing RRSP trustee to beat the deadline, and then move it in March to OlympiaTrust !

For most Canadians, investing in or participating in real estate can be done inside their RRSP, however there are some restrictions. Either way, inside or outside an RRSP , investing in the right real estate can pay excellent long-term dividends – if invested wisely !

Three broad options exist to participate in real estate within your RRSP !

Option 1: Mortgages or Mortgage Investment Corporations (MICs).

Option 2: Publicly traded stocks that invest in real estate or REITs.

Option 3: Private firms that invest in real estate.

Those 3 options are explained in more depth by clicking here.

Of course, always, always consider return OF capital before you consider return ON your capital when evaluating any investment option ! For example, some of the private REITs marketing high returns have inflated NAVs with impaired or questionable balance sheets that could cause your principal to erode quickly despite payouts !

Prestigious Properties, in conjunction with industry experts, accounting firms and several legal firms has created an RRSP eligible investment vehicle that allows your RRSP to participate in the performance of our apartment buildings, using a bond/share structure. This is explained in detail by clicking here. This link also has a report on ‘8 mistakes to avoid when investing in real estate syndications” that you will find useful to distinguish between swindlers and serious operators.

We have also created a few short videos on YouTube. One is on expected returns for your RRSP investment and a 2nd on our trademark "Become a Landlord - without the Hassles" . A great intro for the novice .. or for folks who love my Alberta accent or haven't seen me yet here's a 3rd one !

Thomas Beyer, President - www.prestprop.com

10 Mistakes to Avoid - BEFORE you invest in the next JV or real estate syndication

2011-02-09T20:02:00.000-08:00

Syndicating a small or very large piece of real estate - be it a JV on a small scale or pooling of your money with others to buy larger commercial real estate projects is a great idea - if executed well. It is a proven path for wealth creation - if bought at the right price and managed well. Not all real estate classes are created equal - and not all operators are equal either - and this recent recession is a case in point. There are 10 typical mistakes in real estate syndication projects / JVs that you must avoid ! What are they ?

1. Inexperienced Operator with NO OPERATING TRACK RECORD.

Operating a business is hard work and takes years of experience .. through the peaks and the valleys of the economic cycles. Many a syndicator has had some success raising funds, sometimes for flow-through tax deals or for other parties. They make a commission only. Hey, let's open up a syndication firm they say. Buy an asset and manage it and take commission and an operating profit. Big mistake in many cases as it takes years to understand how to buy, even more years how to buy well and not overpay .. and even more years to manage an asset well .. especially in a more normal less heated economy !

Ask: Has the sales person selling you the product actually delivered real results on previous products sold ?

Thus: check the operator’s and the sales person’s track record ! Scrutinize the depth of knowledge in the asset space they operate .. and not just before the boom that ended in 2008 .. but through it ! Don’t confuse slick marketing for a great investment ! Talk is cheap .. and sexy marketing with beautiful charts and fancy pictures is only a bit harder bit still very easy ! Delivering hard returns in the harsh cold reality is very hard .. and has been done by surprisingly few !

2. Unrealistic ROIs using unrealistic assumptions or paying you from your own money

“Double your money” .. by gambling in Las Vegas ! Place your money on “red” on the roulette table, and you too could make a 100% ROI in 2 minutes ! But on average, you’ll lose ! Hence: look at the risk adjusted return: look first at the chance of a return OF your money .. then look at a return ON your money !

A common trick is to use unachievable future values of condos or land prices as a high ROI is easily achievable on a spreadsheet or in an ad. However this is now a lower demand world caused by more cautious and financially less wealthy baby boomers.

Although housing has shown feeble signs of recovery, this economy has been a wake-up call to investors who thought they could ride a never-ending real-estate bubble for condo projects, land sub-divisions or international real estate in hot markets like Costa Rica, Mexico or Belize. Then there's commercial and office real estate, where many institutional investors have recently taken enormous losses.

Additionally, often the promised returns are paid from your own investment $s ! It is easy to produce a 20% return over 5 years .. by paying you your money back. Thus: look at the underlying vehicle that produces this return. Thus: are these future values achievable in the timelines advertised ?

3. False sense of security - syndications using terms such as "asset backed" or " up to 18%+ interest on our mortgages" or "secured by a mortgage" .. since in many cases these mortgages are in 2nd or 3rd position and exceed by far the value of the underlying real estate. In construction or land development projects the investors money is often in 2nd or sometimes in 3rd position behind an expensive first position .. hardly security but a sham ! Don't call it a mortgage if it is indeed equity or investment dollars.

Thus: security not in 1st position or exceeding going in prices, based on future speculative possible prices is not security .. it is false advertising !

4. Overpriced Assets sold to innocent investors at a huge premium.

Often an asset is purchased by the syndicator, and then sold to the "innocent" public for a lift up from a low of 20% to several 100% on some land deals. This used to be OK in a very strong market. Thus: check the true asset value if you intend to invest .. and do not accept their excuses for uplifting the building or land value because there isn't any ! Then hopefully you can co-invest with one of the many ethical syndicators out there !

5. Excessive Fees - usually upfront - independent of project success !

Some syndicators charge in excess of 10% sales commission which seems to be the norm but is still very high. Some operators charge an acquisition fee, like a realtor, of up to 3 or 4%. While this sounds low, on a 25/75 mortgaged asset a 3% acquisition fee is actually 12% on the invested cash. Also an annual asset management should probably not exceed 0.5% on the asset value or 2% of the cash invested ... otherwise it is too rigged towards the syndicator and not the investor.

It has to be win/win ! Lower fees (upfront) are better !

6. Improper Legal Structure .. There are 5 exemptions a real estate operator can use to do a syndication in the so called exempt market. They are called exempt, because the issuer is exempt from having to file a prospectus with the security commission. The units purchased are often also referred to as securities. What is a security ? It is an interest in land or a piece of real estate, an undivided interest, voting shares, non-voting shares, REIT units, mutual fund trust units, limited partnership units, a syndicated bond or a share of a mortgage .. all with an unknown outcome. These security exemptions are:

a) friends and family

b) close business associates

c) over $150,000 (so called "aggregate acquisition cost")

d) accredited investors, those that have over $1M in investable assets or an income over $200,000 for the last 2 years

e) an offering memorandum, with certain restrictions (differs slightly by province) such as an investment under $10,000 or for eligible investors (investable assets of $400,000 or $75,000 in income .. a lot lower hurdle than accredited)

Therefore, if you are not a friend or family member of the operator nor his close business associate nor are you accredited nor do you want to invest over $150,000 you should have an OM. This is different if your buddy from high school with whom you golf twice a month is opening his second restaurant, and he asks you and 4 other friends to pony up some money. An OM is not required, just a simple agreement. The line between a JV between 2 or a small number of people (say 12) and a security is not defined .. in a small group scenario a USA (unanimous shareholder agreement) is signed by all parties, which nevertheless should allow for the first 3 exemptions as even a USA could be deemed a security by the various security commissions.

7. Executives that were charged .. by the Alberta or BC or ON Security Commissions or are embroiled in lawsuits with their current or previous investors.

Thus: check out the project and the people and sales people behind the project. What did they do before they did this venture ?

8. Big ads promising huge returns. The advertised return initially are usually paid for with your own money. Big ads are an expense to the business. These marketing fees often approach 12% to sometimes 20% of the funds raised .. plus sales commissions .. plus acquisition fees .. a very high hurdle as it has to be made up through asset performance which takes a few years. A 30% initial cost hurdle (incl. sales commission) assumes a return of well over 40% on the remaining 70% productive cash just to break even ! A 35% cost hurdle needs a return of 50% on the productive cash to break even ! A 40% cost hurdle needs a return of over 66% to break even !

Thus: look for soft costs or marketing costs besides (huge) commissions (and acquisitions fees) too .. 3 % - 5 % of money raised is reasonable .. more is not !

9. Not taking ownership of the asset although promised by their marketing. Ensure that the investors actually own the asset ! Frequently the asset is not held by the investment group but by a privately held company and the money is lent to them. It is now almost impossible to trace the money trail .. especially if this company also co-owns many other assets with many mortgages. Thus, one collapsed and unrelated project can derail your project too !

10. Proper Disclosure .. All relevant facts should be disclosed upfront by the operator: the fees, the intended venture, any uplifts, the legal location, the price, intended timelines etc. ... Therefore if the syndcator buys piece of real estate for $250,000 and syndicates it to 3 investors at $100,000 each, each for 25% of profit and 25% for the operator after he takes a $50,000 fee or "uplift" that is not illegal. It may be a bad venture (or it may not). The security commissions do not care if the commercial nature of the venture is bad. They care about disclosure, filings and forms. It is your job to check all relevant facts, and if the fees or prices are appropriate and if the advertised numbers, usually outside the legal documents, are actually achievable in the real world !

In summary: it has to be win/win Are the operator’s profits aligned with yours, the investors i.e. usually at the end on exit? Or are they lining their pockets upfront regardless of asset performance ?

There are quite a few scams out there .. and many were in the news lately .. but even more exist that just exploit the legal loopholes .. but there are many honest folks too. Use these 10 guidelines to distinguish between the honest and the dishonest operators .. and you too can successfully and profitably co-own a small or larger piece of real estate or a pool of hard assets with others !

Share your positive and especially negative experience here if you wish .. possibly with other related websites.

State facts only to avoid defamation claims or cease-and-desist letters !

no "XYZ are crooks" or "ABC stole my money" .. as this is too vague and potentially libelous ! State "I invested XX $s in ABC firm and now they are in receivership" or "I invested XYZ $s and the firm doesn't answer my emails or phone calls" .. or just state "XYZ firm charges X fee and Y fee and Z fee and ABC equity" or as I have seen in a hotel development project in Calgary: no disclosure whatsoever how profits between A shares (owned by investors) and B shares (by the syndicator) are shared. Nothing whatsoever !

Just because some auditors are crooks doesn't mean all are. Some because some lawyers go to jail doesn't mean many are dishonest. Just because some merchants cheat you not all are dishonest. Same in the real estate syndication business ! Many honest folks trying to make a living and offering a credible product. Some not so honest folks .. and some that operate a ponzi scheme or an outright fraud using legal tricks.

Taking Risks .. and Mitigating Them !

2011-01-24T19:05:00.000-08:00

Any business has risks. Whenever you deploy capital for ANY investment, there is some degree of risk: bonds, shares, mortgage investments, real estate ..

There is also the risk of not acting, namely a lost opportunity. The risk of a (potential) loss has to be weighed in light of the possible gain.

What are the specific risks in real estate ?
a) vacancies
b) values might drop
c) asset has unseen/undisclosed deficiencies (structural problems, leaky boiler, leaky roof, mold, ..)
d) interest rates might rise to a point where even if rented it has negative net income
e) too little cash buffer to pay for expected or unexpected capital expenditures
f) sustained negative cash-flow due to falling rents or higher expenses or higher vacancies

Those risks are very real .. but can be mitigated with

i) more cash at hand
ii) EDUCATION (such as REIN provides)
iii) life experience
iv) prudent assumptions about realistic expenses/value/rents/vacancies
v) thorough due diligence when buying/analyzing city, sub-location and specific property !
vi) the right team members, say hiring a property manager instead of managing yourself, hiring a tax expert as opposed to doing it yourself, using a competent mortgage broker as opposed to going only to the house bank, etc. ..
vii) having a more conservative mortgage i.e. be less levered,
viii) be more patient on the acquisition and exit side
ix) partnering with an experienced firm if all you want to do is write a cheque

It is not a get rich scheme .. it is a get rich for sure scheme .. but it takes a while !

For example, many folks, [including some REIN members I hear/know], paid too much in 2007 in the boom with too little cash-flow, too high rent expectations, too rosy vacancy assumptions and too high a mortgage. The market did correct downwards somewhat in 2008 and 2009 .. a normal correction .. and some folks got too impatient and sold too early, often at a loss. With more attention to items i) to ix) many of those mistakes could have been avoided.

Real estate is a great business .. if executed well along the lines of i) to ix) !!

To repeat: it is not a get rich scheme .. it is a get rich for sure scheme .. but it takes a while .. and the right risk mitigation !
Thomas Beyer - www.prestprop.com

Comments on the new CMHC Changes

2011-01-20T22:00:00.000-08:00

The honourable Jim Flaherty, our finance minister, announced three changes to the CMHC mortgage underwriting criteria a few days ago.

Why do left leaning newspapers such as the Vancouver Sun or Globe&Mail cry "not fair" while many investors and tax payers in general benefit ?

The three announced changes are
a) reduction in amortization from 35 to 30 years.
b) elimination of CMHC insured lines-of-credit, and
c) refinancing reduction from 90% to 85%

These changes will make it somewhat tougher for new or existing homeowners to get a high mortgage. They need to pay more per month, thus they can borrow less based on their existing income.

In essence, it makes it a little more difficult to get a mortgage, and as such we will see a few more renters. Nothing dramatic, just a slight adjustment, but on balance it is good for existing landlords as more renters means: lower vacancies and slightly higher rents.

Allow me some personal comments on these changes: I think they are a step in the right direction, BUT DO NOT GO FAR ENOUGH.The main reason for property bubbles that exploded in countries such as Ireland, US or UK were simple: excessive debt by home owners.

The question is how much subsidies is the average Canadian willing to pay to bail out delinquent mortgage holders, as CMHC is government i.e. tax payer funded.

Also, in most countries far MORE than 5% down is required.

In addition, you can withdraw from your RRSP taxfree as long as you pay it back in 15 years - a FAR BETTER ALTERNATIVE to encourage investment/savings .. and then to use that, if you so chose, to buy a home.

My suggestion: 10% down MINIMUM .. ONCE .. for your first home .. every sub-sequent home 15-20% down !

If you buy a $300,000 home and do not have $30,000: do not by a home .. yet ! Save some more, for example through an RRSP with a 30-40% tax break, scale down the car(s) you drive, how much you smoke, or cut down on latte's and eating out until 10% down is achieved .. then buy a home !

To accumulate $30,000 in an RRSP takes really less than $20,000 net invested !

Somehow Canadians seem to think it is their God-given right to buy a home as soon as they have a job or graduate from college, at 25 or 29. Somehow that "society owes me" attitude is cause for failure down the road. If you're 95% levered plus a 4.5% CMHC premium, i.e. essentially 100% levered, you are putting yourself and society at risk, you become inflexible to move and you are essentially renting: from the bank !

Equity upside, especially considering realtor fees and CMHC premium, is NOT a given in any 5 year period, and as such it is an illusion that the first time homer buyer "builds equity".

A 5% down CMHC insured mortgage really is a subsidy to the banking industry and to the condo construction industry .. wrapped in the illusion of helping first-time buyers! It is a hidden tax as the CMHC crown corporation is hugely profitable on average, so good for Flaherty actually.

I advocate: more modest homes, more savings, less leverage and a higher down payment !

Sincerely + Successful Investing,

Thomas Beyer, President
Prestigious Properties Group
T: 403-678-3330 or 877-434-4345

www.prestprop.com

9% .. 11% .. 14% .. guaranteed .. or not ! The risks of mortgage investment !

2011-01-20T20:54:00.000-08:00

Lately, probably because of the RRSP season that is upon us, we've seen firms advertise high interest rates again .. using such terms as "guaranteed", "mortgage backed", "secured by real estate" or "preferred rate of return" or similar misleading words.

We do understand the desire for monthly income, especially by older folks or retirees ! The financial industry is full of clever marketing people, many with little or no real world investing experience .. catering especially to the uneducated and the retired income seekers.

An annual return in excessive of perhaps 5 or 6% has RISKS ATTACHED. Most normal businesses in the western world canNOT sustain, over a long period of time, 6%+ fixed distributions without exposing you to undue risk !

Many real estate firms or other investment syndicators have gone bankrupt or into foreclosure during the recession of 2008/2009. Just because the recession is over doesn't mean a 12% annual return, paid monthly, is very doable. It is only doable under some very select scenarios - but with very high risk.

One such risky investment class is construction, especially in commercial construction, resort locations, rural areas or in tropical locations. Another one is land development. A 3rd one is poorly performing real estate, especially in unusual, often remote locations. If you are the lender and the project does not sell as planned your capital is at risk especially if your "mortgage backed" or "real estate secured" loan is in 2nd position behind an expensive construction mortgage in 1st position. This lender is in priority to you and may take the asset away, through a foreclosure process, and you lose all your principal.

Therefore, understand the nature of the business, the experience & proven track record of the operator and the position your investment is in - don't look only at the glossy marketing material. Promises and fancy charts and brochures are easily created, but delivering results in the real world is very hard!

Also, have a look at their existing balance sheet. If you see other mortgages with interest rates that are higher than perhaps 5 or 6%, BEWARE. Commercial mortgage terms today are around 5-6% .. lower for apartment buildings, around 4%. Therefore, if you invest with someone that has 8% or 10%+ mortgages on their balance sheet, ask WHY IS THAT .. and the answer should be (but usually is not): "because our business is very risky and no commercial lender would give us reasonable terms !! Therefore we are looking for suckers such as you to be fooled by a 12% interest rate, paid monthly". Best to walk away from such an investment !

Keep in mind that in a 3 year construction project, the "interest" paid to you on a monthly basis is just a return of capital, from your own money .. or from new investments. A modified Ponzi scheme really ! The income in these projects comes from selling land parcels or condos .. years down the road. Therefore, always, always consider return OF capital before you consider return ON your capital when evaluating any investment option !

Consider that you have a capped upside, but can still lose all of your invested principal if the project is not selling as fast as planned or for the prices targeted.

Consider the risk adjusted return, please .. not just the promised return. A bit like gambling in Las Vegas, you can double your money in a few minutes placing it on "red" on the roulette table, but on average, you'll lose. The risk adjusted return is negative, despite the ad "double your money with us" !

If you invest with us, you are not a lender, you are the owner of the underlying real estate, benefiting from all the equity and gains being created through mortgage paydown and value upside.

Our website also has a related report on ‘8 mistakes to avoid when investing in real estate syndications” that you will find useful to distinguish between swindlers and serious operators.

We have also placed two short videos, one on due diligence by our Senior VP Scotty Grubb and another short 2 minute video on YouTube to show why apartment buildings are lower risk than commercial projects. A great intro or for folks who love our European accents or haven't seen us yet !

Thomas Beyer - www.prestprop.com

Real Estate in your RRSP or TFSA ?

2011-01-04T19:11:00.000-08:00

An RRSP or TFSA should be viewed as a basket of investments. In the basket you can place various eligible investments or financial instruments. Some of these RRSP or TFSA eligible investments can include: stocks, bonds, GICs, mortgages, call-options, cash or mutual funds ....but NOT real estate directly.

So, how then can you participate in real estate with your RRSP or TFSA ?

For most Canadians, investing in or participating is real estate can be done inside their RRSP or TFSA, however there are some restriction. Either way, inside or outside an RRSP or TFSA, investing in the right real estate can pay excellent long-term dividends – if done well !

Three broad options exist to participate in real estate within your RRSP or TFSA !

Option 1: Mortgages. Most real estate is encumbered by a mortgage. A mortgage is a loan, secured by real estate. It is not real estate ! However, a mortgage is a safe way to invest in real estate, but you do not participate in the overall performance of the real estate ! Your TFSA or RRSP becomes the lender. You are the bank ! You can hold
a) a single mortgage or
b) a share of many mortgages, called a syndicated mortgage, or
c) shares in a MIC, a Mortgage Investment Corporation. A MIC pools many mortgages and allows the individual investor to co-own a share of multiple mortgages in their RRSP or TFSA.

The risk of this investment, namely payment default by the borrower, has to be compared to the fixed return of this investment, from a low of perhaps 4% to usually in the high single digit range to perhaps the lower double digit range for more risky assets. A second consideration is if the mortgage is on a to-be-constructed property or an existing property. As a broad rule of thumb, a to-be-constructed property carries a much higher risk of non-payment, as the property does not yet exist. As such the interest rate on this mortgage should be much higher to compensate for this additional risk.

Consider return OF your capital before you consider return ON your capital when evaluating this first type of RRSP eligible investment option !

A tertiary consideration is the position of your mortgage on the property title. If you are in 1st position, and the mortgage is unpaid, you are first in line to get paid from a foreclosure action. Even then loss of capital is possible, especially in a construction mortgage. If you are in 2nd or in 3rd position, other lenders get paid first. Thus, the risk of non-payment increases with the increase in position on title. Some trustees or MICs don’t allow 2nd or higher position mortgages, but some do. Therefore, before you invest, do your homework on the risk of the loan .. and then gauge if the offered interest rate compensates for this risk !

Option 2: Publicly traded stocks that invest in real estate. On both the US and Canadian stock exchange there are a number of firms that invest in real estate. Some invest in apartment buildings. Some in commercial properties like industrial parks, office buildings or retail malls. Others invest in hotels, campgrounds, trailer parks or recreational properties. Some invest internationally, all over the world, and some only in certain cities. Some hold existing properties, other invest in land projects or construction.

A common sub-class of these publicly traded firms is a REIT, a Real Estate Income Trust. A REIT pays out the majority of its income monthly, and as such can be an excellent vehicle for retirees or those folks seeking monthly income. In a sub-sequent article I will explore some of those REITs or stocks with specific commentary. There is the expensive brother of the real estate stock or REIT, a mutual fund .. or its less expensive diversified sister, the index fund or ETF.

All these publicly traded vehicles provide the benefit of instant liquidity, quarterly reporting and regulatory oversight, but also the severe drawback of stock investing in general, namely market sentiment, wild, unexpected swings because some politician said s.th. or a report came out that was less positive than expected, buy/sell manipulation by insiders or panic selling due to rumours or opinions by market analysts or newspaper articles (that may or may not be accurate).

Option 3: Private firms that invest in real estate. Many people seek an investment vehicle outside the often irrational stock market. People have to live somewhere if the market is rising or falling. People go shopping, albeit less frequently, if the market is down. Trucks need repair facilities owned by someone. Office workers need space. Etc. ... REAL estate has been around 1000’s of years .. and will be around a further 1000’s of years. Have you been to Rome ? Some buildings were built over 2000 years ago and still exist .. but I digress.

To buy or build real estate much expertise .. and much money is required. Therefore, the idea of coupling expertise with money partners is a perfect marriage. A corporation or partnership is formed. It is not a new concept, though ! England, Holland and a number of nations explored the world several hundred years ago by ship. To finance those fairly expensive shipping expeditions partnerships were created. The captain and his crew got a share, as high as 50% of the profits (spices, gold, slaves, land, ...) and the ships’ financiers get the rest. Write a cheque for 4,000 pounds, and I name a mountain after you, write a cheque for 10,000 and your name is on a new city and you get 2% of the wares. Or s.th. along these lines .. and the idea of limited partnerships were born.

The idea of a limited partnership is that one party has the expertise, say to prospect, analyse, buy and manage apartment buildings. Others have money to invest, seeking a fair return, but lack the expertise, the time or the desire to prospect, analyse, buy and manage assets. One party invests, the other parties does the work and profits are split according to a pre-determined, and annually inspected, formula. Since this corporation or limited partnership owns real assets, in the real world, with real money changing hands for real assets, the values can be established relatively readily, without the often irrational stock market value swings. It can provide a better alternative to investing in the publicly traded market.

Thus, Prestigious Properties, in conjunction with industry experts, accounting firms and several legal firms has created an RRSP and soon, TFSA eligible investment vehicle that allows your RRSP or soon, TFSA, to participate in the performance of our apartment buildings. This is explained in detail on our website. The website also has a report on ‘8 mistakes to avoid when investing in real estate syndications” that you will finds useful to distinguish between swindlers and serious operators.

Is there a real estate bubble ? .. and what it means to real estate investors !

2010-08-31T20:14:00.000-07:00

Several articles and economist's comments in various Canadian major newspapers point out a "bubble" in Canadian real estate.

One article is here: Housing will be banks next sore spot and a related one is here: Housing Bubble.

The argument goes that money was too cheap .. money was too easy to get and people bought too many houses or too large a house. All this is TRUE !

Should this concern real estate investors: OF COURSE IT SHOULD .. as the "easy" money is gone. You can't just blindly buy any real estate piece and expect to make money. Buy Don Campbell's book, one by Ozzie Jurrock and a 3rd by Donald Trump .. and one is an "expert" in real estate investing ??

But what is also true, but not mentioned in these headline grabbing reports is:
a) the average size of a home went up .. thus the price per sq ft over perhaps 2 or 3 decades, inflation adjusted is actually LOWER than in the 70's !
b) foreign immigration or 2nd home buyers in select markets such as Vancouver that drive the average up without any corresponding local employment strength
c) quite a few very large houses or condos skew the average up substantially, as $10M condos in Vancouver or $3M 3 BR condos in GTA did not exists 20 years ago. Today they do to cater to the very affluent few (and frequently non-Canadian)
d) increased new lot municipal fees that make a new home more expensive as the underlying land price is going up disproportionally

The question is: where can you invest relatively safely with cash-flow and equity upside ?

The answer: in many (but not all) Canadian (and even some US) cities or regions where the fundamentals are strong.

What are those fundamentals ? job growth ! diversity of jobs ! in-migration ! Transportation improvements ! low unemployment !

REIN has identified many such cities in the three areas it covers: BC, AB and ON. There are also some decent cities in SK (most in fact) and in E-Canada that are worthwhile considering: Moncton, Frederiction, St. John, PEI .. here's what Don Campbell, the president of REIN, has to say about this "bubble report" in an Alberta Prime Time Interview

One implication for investors is higher down payments, say 25%. Run if someone tries to flog "zero down" as there is usually an undisclosed wart somewhere .. or it is outright crooked.

A 2nd implication is: look for cash-flow .. as the vale of the asset on a yearly basis is not as relevant. Inflation, over a 5 or better 10 year time horizon will lift all real estate boats like the tide, but if you think in 2 year .. or god forbid .. 6 months waves you might buy high and sell low indeed !

A 3rd implication is: there will be more renters as many would be home-owners can't afford a mortgage, get denied by a bank or realize it may not make economic sense to spend $1000/month more than renting for an elusive equity upside. A key beneficiary here are smaller houses and apartment buildings that are designed for renters as opposed to the average single family home. Europeans (where I hail from) recognized this many decades ago: in many cases it is cheaper to rent than to own. Owning a house is a privilege and reserved for folks that have a bit more cash as a down payment and that chose to spend a bit more per month in a more classy abode.

A 4th implication is: it will take a bit longer ! Budget 5-6 years minimum .. maybe even 10 years. it is not a "get rich quick scheme" .. it is a "get rich for sure scheme" .. but it takes some time !!

I actually love these kinds of articles as it means: we get more tenants .. s.th. the articles did not mention !!

Stick to fundamentally strong regions .. buy with cash-flow in mind .. be a bit more patient .. and you'll reap too .. IN TIME !

Yours Sincerely,

Thomas Beyer, President
Prestigious Properties Group
T: 403-678-3330 E: tbeyer@prestprop.com

Don't wait to invest in real estate - Invest in real estate and wait ! ™

www.prestprop.com

Preview book chapters of my new book .. and comment please .. here: 80 Lessons Learned

Investing your LOC, RRSP or cash with us means: Become a Landlord - Without the Hassles ! ™

Do what you love - Love what you do - In a real estate context

2010-07-23T10:45:00.001-07:00

"Love what you do - Do what you love" is written on one of my favourite coffee mugs.

How do you get started in real estate .. as a new REIN member .. or perhaps as someone that has seen the real estate market roar and not participated as one could have ? Here are a few thoughts of mine in no particular order.

Love what you do .. [and delegate the rest]

Take calculated risks.

Have some money to start.

Go slow .. but not too slow.

Build a track record.

Know what you are doing i.e. get educated such as REIN !! .. courses / books / seminars .. i.e. when the student is ready, the teacher will appear .. and then:

TAKE ACTION.

Have a capable team: lawyer, realtor(s), accountant(s), property manager(s), handymen, assistant .. and yes, that includes your spouse .. [even if only to run ideas by, accept your long work hours, or as a shoulder to cry on after the 10th rejected deal]

Sell your abilities .. but don't oversell.

Delegate tasks you're not good at or don't like to do .. and on a related/growing scale: find partners that love to do what you don't and that you can work well with on a human, intellectual, social, energy and value level !

Have enough cash to live on .. and that means a JOB for many years until the portfolio is large enough. (Budget for 5-10 years minimum here .. not 2-3 years !!)

Start with a few small homes, possibly suited .. then scale up to small, then larger apartment buildings or commercial properties.

Musings on Greece, UK election and stock market oscillations

2010-05-10T20:54:00.000-07:00

As the stock markets oscillated the last few days, as the Greek debt crisis threatens the Euro, and as people follow the election in the UK (likely like Canada a new conservative minority government to tackle the huge UK deficit) I can't help but marvel at our existing rock solid apartment portfolio of over 1200 units .. built from humble beginnings over the last decade.

2009 was a tough year and we had higher than usual vacancies, but we are now down to single digit or very low single digit or 0 in many of our assets across the West. The buildings I visited this weekend in or near Edmonton have 3 vacancies out of 167 (i.e. 2%), and the other one in Camrose went from well over 20% (due to temporary closure of a very large pipeline plant) to 3%. In one of our assets, purchased 6 years ago in West Edmonton near West Edmonton Mall, the annual rent roll increased from 960K in 2007 to about $1.0M in 2008 (up over 4%) and over $1.035 in 2009 (up over 3%) .. during a recession.

Some trader today may have hit the wrong button and PG (Proctor & gamble) shares dropped over 30% in a few minutes from around $60 to less than $40 .. dragging the entire Dow Jones down 10% in a few minutes .. only to recover but still close 3% down for the day. What a folly .. and this is what you wish to retire on ?

I love watching our BORING apartment building portfolio grow and throw off cash month after month, retire debt and build equity .. in good times and in bad. Bloomberg hyped up the news and it occurred to me: if an investment style is exciting: get out. Investments have to be boring .. we recommend skydiving or rock climbing for excitement.

Greece is in bad shape .. as is much of the southern half of Europe .. and the Euro may not be the reserve currency folks had envisioned almost a decade ago. Money moved to perceived safe havens: Yen, US dollar, Norwegian Krona .. and Canadian $ .. and the Canadian stock market barely moved today.

At the Edmonton Real Estate Event on Tuesday it was shown that Canada is in far better shape than Europe or the US. W-Canada, especially Alberta and Saskatchewan, is where the highest Canadian growth is and where folks from Ontario, US and Europa are looking to park their ample cash in hard assets in a hard currency: real estate both below the ground (oil, gas, nickel, uranium, potash, coal, water ..) and also above ground. CAP rates are still very low and hardly anyone is selling. Where to place the money with low risk and a decent return many an apartment building owner asks .. and doesn't find a good answer usually and thus, keeps his asset.

It seems The Economist agrees: http://www.economist.com/displaystory.cfm?...tors_highlights

We got a counter for an offer on a large asset in Saskatoon today at well over 100/door .. up over 100% from just a few years ago when those quality assets were trading in the high 40's to low 50's/door .. a similar % increase as our Yorkton assets we bought about 2-3 years ago !

My thoughts: our hard asset class is in demand .. and not nearly as volatile as the stock market .. with rents increasing by 3 to 4% every year and likely more with tighter money market policies (making home ownership more difficult) and continued in-migration to the west ! We are well positioned in SK and AB .. and to a lesser extend in BC where we used to buy but will retreat somewhat and focus back home !

Finally yesterday my 20 year old son and I entered some stock trades for his TFSA we opened over a year ago .. his $5000 cash in it had grown $1.70 only and I was scolding his lack of investment enthusiasm .. and of course today's stock market was a great great lesson why it is risky .. at least 2 of the 4 trades we entered yesterday were REITs as this seems to be the only investment I ever made money on: cash-flowing real estate in its stock market or hard asset form.

Advice: look for cash-flowing real estate in growing communities that we can own at least 5 years or a decade .. the rest, as they say, is history ! Your (wealthy) grandkids will thank you !

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Yours Sincerely,

Thomas Beyer, Diamond REIN member and also
President, Prestigious Properties Group
T: 403-678-3330 E: tbeyer@prestprop.com

Don't wait to invest in real estate - Invest in real estate and wait ! ™

www.prestprop.com

Investing your LOC, RRSP or cash with us means: Become a Landlord - Without the Hassles ! ™

Items to Consider When buying an Apartment Building

2009-12-28T09:07:00.000-08:00

Feel free to read this article here published in May 2009 in the Canadian Real Estate Magazine.

It shows the relationship of price, cash-flow and yield requirements when buying an apartment building.

Of course price/door, cash-flow and CAP rate are related !

But: Complex problems have simple, easy-to-understand wrong answers ..

Buying a building is not that simple (i.e. price/door or CAP rate) as many factors have to be considered such as:
a) CAP rate
b) price/door
c) what is behind teh door i.e. condition of suite
d) what is in front of door, i.e. condition of common areas
e) rents today
f) immediate rental upside
g) long term rental upside
h) balconies ?
i) suite size or price per sq ft
j) views ?
k) macro-location, i.e. future of city/town
l) micro-location i.e. suburb
m) condition of major elements like roof, boiler, windows, balconies
n) interest rate on mortgages
o) cash per door i.e. cash-to-mortgage
p) availability of 1st and 2nd mortgage money
q) condo conversion abilities / potential
r) who pays utilities
s) potential future tax increases or decreases
t) ability to lower operating expenses
u) curb appeal
v) "feel" of suite / attractiveness
w) competition from new construction
x) competition from existing buildings
y) in-migration
z) new jobs coming (or leaving)

.. maybe I forgot 3 or 6 more ..

one of these elements overlooked .. and there goes $100,000 or $1M in potential profits !!

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Yours Sincerely,

Thomas Beyer, President
Prestigious Properties Group
T: 403-678-3330
E: tbeyer@prestprop.com

Don't wait to invest in real estate - Invest in real estate and wait ! ™

www.prestprop.com

Pro's and Con's of Incorporation for Real Estate

2009-11-25T19:33:00.000-08:00

Four reasons to incorporate for smaller residential properties:

1) limited liability, unless personal guarantee is required for mortgage

2) income can be paid different ways, such as dividends to various people (kids, spouse, self) or management fees to various people

3) JV partner can be brought on board without having him/her on mortgage and to protect them from a disaster, via shares and/or shareholder loans

4) different shares % and shares classes allow for elegant profit splitting and separation of "control" from "profit sharing"

Three reasons NOT to incorporate for smaller residential properties:

1) It is more difficult to get a mortgage, as not all banks hand out residential mortgages to small properties held in a corporations

2) you will have to sign a personal guarantee .. so in Alberta, for example, you will be personally liable for a mortgage default if in a corporation, whereas a personally held non-insured mortgage will have recourse ONLY against the property, but not you personally ! This is an Alberta advantage that does not, to my knowledge, exist in other provinces !!

3) annual filing and accounting costs .. probably about $2000 to $3000 or more PER YEAR .. depending on complexity

Things I wished I had known when I was 18 !

2009-11-20T21:21:00.000-08:00

Things I wished I had known

when I was 18 ….

Collected Thoughts for Michael K

on his 18^th Birthday – March 15, 2003

by Thomas B

Every person is good at something (even if he/she appears to be a dork). It might take a while (for you) to figure it out, though. Often: just ask the person, and you’ll be amazed.

Tell people honestly and often what they are good at, what you have noticed and what they do well .. then you also have the right to tell them s.th. that they could improve on such as “Have you considered …”

Time is precious. You can always make more money. You can always find more friends. You can always get more “things” .. but once you waste a day or a moment or a unique opportunity .. it is gone forever (i.e. “carpe diem”)

Therefore, learn to work fast … be result oriented … get things done ... just do it …

There may be higher source / creator that we don’t know. You can start from the assumption: there is no such source / creator and things just “happen”. And then you can start trying to explain all the things in the bible and you must come to the conclusion that these teachings are true, hence that there must be a source we call “God” and connect to him through Christ. Knowing this fact is stronger than “just believing”.

You cannot always trust yourself. You can always trust God and the Bible for insight, through reading and/or prayer, though.

If you need help, or direction: ask.

You’d be amazed what kind of (free) insight into areas of life you receive. Don’t waste your time wandering the aisles of a supermarket if you’re looking for s.th. specific. Ask a clerk and they’ll gladly help you. True also in the supermarket of life …

Acknowledge yourself once in a while for no reason, and certainly when you have done s.th. great.

Do s.th new once in a while … i.e. read a magazine that you would normally not read, go to a restaurant or place that you would normally not go, talk to a person whose view or appearance seems “weird” to you … you will learn s.th.

Say Thank You a lot.

Too much of anything is often not a good thing – especially women, wine, TV or stuff you inhale.

You never finish learning. The world is a complex place. You must keep learning until you die. You learn only in a dis-comfort zone. It is hard work. This is important for growth, though. Some people retire in their 20’s because they can’t leave their rut and have stopped learning/growing. Spend money and effort on education.

Try to combine what you love with what makes money. It is not always easy to have both in the same job/occupation.

Some partnerships are useful for an extended time .. some just for a short time.

If you’re on the wrong train (i.e. if you wandered in the wrong direction), get off at the next station. Don’t sit in the train wondering what to next. Get off the train, and then wonder what to do next.

Don’t trip over the pennies to get to the dollars (i.e. don’t waste your time with unimportant things)

There are great people and bad people everywhere you live or go or travel. Hang out with the positive ones, and try to avoid the “dark” ones.

A positive attitude and laughter are infectious. Try to have an inventory of both.

You can’t help others when you are weak yourself. You must fill your own cup and then help others, too !

You can make some real money in real estate. Look for deals, all the time .. and then act on them …

Dream, plan, execute: dream (big and often) first, then plan out some of these dreams in more detail such as who can help you, what is required, when/how …. , then execute

Owning/running your own business is more fun and often more profitable then working for someone else.

Try to be the best what you are hired for. You can’t be the CEO (or your own boss) or the VP on day one – it may take a while. Do the best at the job you are asked to do, and then you have the right to ask for more (cash, a promotion, different job …)

Find partners that do well what you do not do so well. (This of course, implies, that you have to know what you are good at and not so good at .. make an inventory and re-visit it from time to time, say once a year)

Clean up your messes – this could be partnerships, relationships, financial situations, your desk or your laundry pile.

Have some older and some younger friends …

There is a lot of garbage on TV and in various newspapers/magazines .. don’t believe everything you see/read …

You can learn a lot from your parents, and a lot of what they do/did or taught you shapes you .. however, you have to find your own “self” and it may be different from what your parents taught you and thought was of value …

Wherever you go in life, there you (and God) are ! You better have a good relationship with both !

Don’t be perfect on the first attempt. If it is worth doing, it is worth doing lousy (at first) .. then over time, of course, you have to do it well .. or drop it …

You will fail from time to time. Failure in itself doesn’t make you a failure. Only if you stop trying or learning from your failure will you be a failure, too.

You are what you feed yourself: be it TV, be it newspaper, be it beer, be it junk food .. embrace a healthy life style. Watch what you watch and eat or drink.

If you don’t know where you’re going, every road will do. Hence, have a (rough) idea of what you want and go for it …

Buy expensive / good quality things if you use them a lot: your home, your underwear, your socks, your coat, your shoes, your mattress … this implies that things that you use little could be used, rented or cheap: golf clubs, skis, bath suits, hats …

The gain in self-confidence of having accomplished s.th. after many attempts and with hard work is enormous.

Love hurts sometimes .. love anyway !

Without faith, nothing is possible – with it, nothing is impossible.

Happy Birthday, Michael ! We love you and will always be there to help you. It is OK to ask for help … (I did mention that already, didn’t I …)

Real Estate Syndications - Eight Mistakes to Avoid

2009-10-29T20:35:00.000-07:00

Syndicating (or pooling) of your money with others to buy larger commercial real estate projects is a great idea - if executed well . It is a proven path for wealth creation - if bought at the right price and managed well. Not all real estate classes are created equal - and not all operators are equal either - and this recession is a case in point. There are eight typical mistakes in real estate syndication projects that you must avoid ! What are they ?

1. Overpriced Assets sold to innocent investors at a huge premium. Often an asset is purchased by the syndicator, and then sold to the "innocent" public for a lift up from a low of 20% to several 100% on some land deals. This used to be OK in a very strong market. Let's use an office or retail syndication as an example: An office tower or larger retail center is bought for $10M which was perhaps fair market value in 2006 or 2007 or 2008. It carries a 70% LTV mortgage, say $7M. $6M is now raised .. $1M in cost for commissions and for other soft costs like marketing and legal expenses, and $5M to syndicate the asset for $12M. OK if it cash-flows and maybe can be exited in 5 years for $15M ... however roll forward to 2009 and with rising office vacancies and higher CAP rate demands by banks this asset today is now worth $9M .. down only 10% .. in some cases perhaps down 20% to $8M. Deduct the $6.5M mortgage (now paid down a bit) and you see equity of $1.5M .. a 75% drop in equity from $6M raised !! There are some private REITs out there or some office syndicators that pretend the world still looks like 2008 with low CAP rates and flat values. HELLO. Let's assume the asset was bought in 2006. Roll forward to 2011: the 5 year mortgage is now due. It is now maybe $6M. The asset is worth $8M. Most lenders today would not lend 70% on a retail or office tower. Maybe 60 to 65%. Thus, a $5M mortgage can be obtained .. $1M short in a relatively normal market. A recipe for bankruptcy .. and in any case huge investor losses despite a minor correction of value of only 10% to 20%.

Thus: check the true asset value if you intend to invest .. and do not accept their excuses for uplifting the building value because there isn't any ! Then hopefully you can co-invest with one of the many ethical syndicators out there !

2. Inexperienced Operator with NO OPERATING TRACK RECORD.

Many a syndicator has had some success raising funds, sometimes for flow-through tax deals or other parties. They make a commission only. Hey, let's open up a syndication firm they say. Buy an asset and manage it and take commission and an operating profit. Big mistake in many cases as it takes years to understand how to buy, even more years how to buy well and not overpay .. and even more years to manage an asset well .. especially in a more normal less heated economy !

Thus: check their track record and depth of knowledge in the asset space they operate

3. Excessive Fees - usually upfront - independent of project success !

Some syndicators charge in excess of 10% commission. 10% seems to be the norm but is still high as it has to be made up through asset performance which takes a few years. Also an annual asset management should probably not exceed 0.5% on the asset value or 2% of the cash invested ... otherwise it is too rigged towards the syndicator and not the investor. It has to be win/win !

Thus: Lower is better !

4. Unrealistic ROIs using unrealistic assumptions

A common trick is to use unachievable future values of condos or land prices as a high ROI is easily achievable on a spreadsheet or in an ad. However this is now a lower demand world caused by more cautious and financially less wealthy baby boomers.

Although housing has shown feeble signs of recovery, this economy has been a wake-up call to investors who thought they could ride a never-ending real-estate bubble for condo projects, land sub-divisions or international real estate in hot markets like Costa Rica, Mexico or Belize. Then there's commercial and office real estate, where many institutional investors have recently taken enormous losses.

Thus: are these future values achievable in the timelines advertised ?

5. False sense of security - syndications using terms such as "asset backed" or " up to 18%+ interest on our mortgages" or "secured by a mortgage" .. since in many cases these mortgages are in 2nd or 3rd position and exceed by far the value of the underlying real estate. In construction or land development projects the investors money is often in 2nd or sometimes in 3rd position behind an expensive first position .. hardly security but a sham ! Don't call it a mortgage if it is indeed equity or investment dollars.

Thus: security not in 1st position or exceeding going in prices, based on future speculative possible prices is not security .. it is false advertising !

6. Executives that were charged .. by the Alberta or BC Security Commissions or are embroiled in lawsuits with their current or previous investors.

Thus: check out the project and the people behind the project. What did they do before they did this venture ?

7. Big ads promising huge returns .. usually paid for with your own money as an expense to the business.

Thus: look for soft costs besides (huge) commissions too .. 2.5 % - 3.5 % of money raised is reasonable .. more is not !

8. Not taking ownership of the asset although promised by their marketing. Ensure that the investors actually own the asset ! Frequently .. and I invested in 3 such deals .. the asset is not held by the investment group but by a shadow company and the money is lent to them. It is now almost impossible to trace the money trail .. especially if this shadow company also co-owns many other assets with many mortgages. Thus, one collapsed and unrelated project can derail your project too !

In summary: it has to be win/win Are the operator’s profits aligned with yours, the investors i.e. usually at the end on exit? Or are they lining their pockets upfront regardless of asset performance ?

There are quite a few scams out there .. and many were in the news lately .. but even more exist that just exploit the legal loopholes .. but there are many honest folks too. Use these eight guidelines to distinguish between the honest and the dishonest operators .. and you too can successfully and profitably co-own a larger piece of real estate or a pool of hard assets with others !

Yours Sincerely,

Thomas Beyer, President
Prestigious Properties Group
T: 403-678-3330 E: tbeyer@prestprop.com

Don't wait to invest in real estate - Invest in real estate and wait ! ™

www.prestprop.com

Are you too levered ?

2009-10-25T21:00:00.000-07:00

Leverage is a two edged sword. It works well if the yield (or CAP rate) of a property is higher than the interest rate.

It works especially well if the markets goes up.

It does not work so well if interest rates are on the rise, and thus yield expectations rise and thus, property values potentially fall with lower or even flat income.

When are you too levered ?

Mortgages are usually set for a 5 year term in Canada. Expect 5 years rates to nudge up gradually over the next few years .. from a current high 3% range to 6% or so in 3-4 years ! 6% is what you pay TODAY for commercial non-CMHC money and that will likely go to 7.5 or 8% in 3-4 years .. with higher bond rates but lower spreads !! (spread being the premium the lender charges over their cost of money, which is the 5 year bond)

==> Hence: analyze any deal @ 6% with 25 year amortization .. and stress test with an 8% mortgage. You are too levered if it does not cash-flow at this level.

A highly levered deal at 4% interest rate is risky and works only if proven rental upside is there so that in 5 years you don't say "oops" or hand the property keys to the bank !!

If the property cash-flows at a 90% LTV with a 3.5% mortgage .. great .. but test it with 6% and 8% anyway .. especially if you take a very risky 30 or 35 year amortization as the risk in 5 years is quite high ! Then assess what you would do in 5 years if market is fairly flat and rates are at 6% and your mortgage is not substantially lower than at the start !

With a 25 year amortization you pay the mortgage down 10% in 5 years, so if you are levered at 80% going in you'll have a more comfortable 72% LTV in 5 years if values don't go up in 5 years .. or around 65% if values go up 10% in 5 years. This is our risk tolerance level, with the right blend of great ROI and sleeping well at night.

Those are my thoughts .. what are yours ?

Equity Gain is not the only way to make money in real estate .. or: how to make money in flat or slightly declining markets too !

2009-10-14T15:51:00.000-07:00

Equity upside is always desired. Often the only way to make money in single family houses, raw land or condos realistically is through equity upside, as cash-flow is poor to negative. Hence the focus on strong markets. Let's face it though: not every market is an up market, and certainly not all the time. Many prices in UK, Ontario, Australia, BC or Zurich have risen to a point where affordability is seriously eroded, possibly for a long long time .. hence significant, fast equity upside it tough to get ..

Hence, are there ways to make money in flat to even declining markets ?

Yes, there are, in commercial real estate, storage or multi-family/apartment buildings. These assets are essentially income producers and are usually measured as a multiple of annual cash-flow, also referred to as CAP rates or yield. The CAP rate is the net operating income divided over the price - also referred to as going-in yield. It is the inverse of the P/E ratio used for the stock market. So, in a declining market like Windsor, ON or a flat market like GTA, let's assume you can get a 8% CAP rate, i.e. 8% yield after operating expenses and realistic vacancy assumptions if you paid in cash. Of course you don't pay all cash, so let's assume you get an 75% mortgage (with or without CMHC), so 25% cash down. This is approx. 14% ROI on the cash invested in a flat market with a 6% mortgage [(8% yield - 6%*0.75)/25% down] and still 3.75% in a -2% negative market [(8% yield - 0.75*6% - 2%)/25% down]!
You do NOT need equity upside in multi-family (or storage or commercial) to make money !

Just the going in price has to be attractive enough / the going-in yield has to be appropriate and the vacancies have to be managed ! The higher the (anticipated) equity upside the lower the CAP rate usually (like AB or SK right now ..) but excellent cash-on-cash ROI can be achieved in flat or even declining markets - if the yield (or CAP rate) is appropriate - see chart below !!

We don't really care where we make 15% to 40% cash-on-cash !! Do you ?

Conclusion: buy in Windsor (or GTA or London or Calgary or Texas or Detroit or Ottawa or ..) : at the right price/yield .. and manage the vacancies / rents / expenses .. you'll be amazed ... of course, the higher the expectation for future negative growth the lower the price / the better the yield has to be .. and in some markets the yield with realistic vacancies is not 12% as it should be or as it is advertised but 4% only .. thus be careful with yield assumptions !!
Cash-on-cash ROI + equity upside using leverage
in 3 different growth markets: + 4%, flat and -3%

Left most column is yield (i.e. CAP rate) .. top line is various leverage level

Equity Upside 4.00% - "Normal" Market

Leverage: 0% 50.00% 60.00% 70.00% 75.00% 80.00% 85.00%

06.00% 10.00% 13.50% 15.25% 18.17% 20.50% 24.00% 29.83%

08.00% 12.00% 17.50% 20.25% 24.83% 28.50% 34.00% 43.17%

10.00% 14.00% 21.50% 25.25% 31.50% 36.50% 44.00% 56.50%

12.00% 16.00% 25.50% 30.25% 38.17% 44.50% 54.00% 69.83%

15.00% 19.00% 31.50% 37.75% 48.17% 56.50% 69.00% 89.83%

20.00% 24.00% 41.50% 50.25% 64.83% 76.50% 94.00% 123.1%

25.00% 29.00% 51.50% 62.75% 81.50% 96.50% 119.0% 156.5%

Equity Upside 0.00% - Flat Market
Leverage: 0% 50% 60% 70% 75% 80% 85%

6.00% 6.00% 5.50% 5.25% 4.83% 4.50% 4.00% 3.17%
8.00% 8.00% 9.50% 10.25% 11.50% 12.50% 14.00% 16.50%
10.00% 10.00% 13.50% 15.25% 18.17% 20.50% 24.00% 29.83%
12.00% 12.00% 17.50% 20.25% 24.83% 28.50% 34.00% 43.17%
15.00% 15.00% 23.50% 27.75% 34.83% 40.50% 49.00% 63.17%
20.00% 20.00% 33.50% 40.25% 51.50% 60.50% 74.00% 96.50%
25.00% 25.00% 43.50% 52.75% 68.17% 80.50% 99.00% 129.8%
Equity Upside -3.00% - Declining Market
Leverage: 0% 50.00% 60.00% 70.00% 75.00% 80.00% 85.00%
6.00% 3.00% -0.50% -2.25% -5.17% -7.50% -11.0% -16.83%
8.00% 5.00% 3.50% 2.75% 1.50% 0.50% -1.00% -3.50%
10.00% 7.00% 7.50% 7.75% 8.17% 8.50% 9.00% 9.83%
12.00% 9.00% 11.50% 12.75% 14.83% 16.50% 19.00% 23.17%
15.00% 12.00% 17.50% 20.25% 24.83% 28.50% 34.00% 43.17%
20.00% 17.00% 27.50% 32.75% 41.50% 48.50% 59.00% 76.50%
25.00% 22.00% 37.50% 45.25% 58.17% 68.50% 84.00% 109.8%
Left most column is yield (i.e. CAP rate) .. top line is leverage level
True wealth is built by holding .. with cash-flow !

Line-of-Credit (LOC) .. or Mortgage ? Pro's and Con's

2009-10-13T11:26:00.000-07:00

What is better: a mortgage or a line-of-credit (LOC) ?

A LOC MAY have advantages over a mortgage:
a ) it is more flexible as it is usually interest only
b ) you can prepay any amount, and withdraw it later,
c ) it has no "forced" principal reduction component,
d ) it has potentially lower, usually 0, upfront fees.
e) it can be up to 75% or even 80% of the value of your property, behind a mortgage

A mortgage MAY have advantages over a LOC:
a ) the interest rate may be lower, or
b ) you can get a higher loan-to-value (if this is what you want), up to 95%, or
c ) it can be a fixed interest rate as opposed to a variable prime based LOC,
d ) it cannot easily be changed at the bank's discretion if your payment is current

Item d) is critical as many a LOC has been amended upwards in interest rates or pulled altogether in teh financial crisis days of fall 2008 to spring 2009.

A LOC comes in two flavours: secured by a property or unsecured. A secured mortgage is usually much cheaper, around prime whereas an unsecured LOC is two to four percentage points higher and usually much lower.

Try to get both.

Always always get a LOC when you do not need it. Don't wait until you're disabled or unemployed or have that awesome deal in front of you .. and need cash .. as the bank may not give it to you.

Some banks even allow you to have a LOC behind a mortgage with the LOC increasing as the mortgage decreases, for a total fixed amount, also refererd to as a re-advancable LOC. Ask your mortgage broker about it !

Analyze pro's and con's .. then decide !

Any serious investor should have their LOC maxed out .. even if you don't need it .. it costs nothing until you tap into it !!

But do tap into it once in a while to show the bank's computer that it is "active". So go, write that $125,000 cheque for a day or 3 .. then pay it off with $3.48 in interest 3 days later !

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Real Estate 101: Reap what you sow

2009-10-12T10:44:00.000-07:00

Initial musings on real estate: you reap what you sow !

Real estate is heavily scewed to work UPFRONT: educate yourself, find the area, find the micro-location in a city, find a property, negotiate a deal, find a decent mortgage broker, find a decent lawyer, find an accountant, get the mortgage, find a property manager, do the right initial improvements, find JV partners .. MOST WORK IS UPFRONT (90% or so) .. but then it is downhill form there !

Similar to an airplane: 90% of the fuel is burned on the first few kilometers to get it to 30,000 ft .. then soaring / gliding for the next 1000 km .. then a bit more work / fuel for landing !

Some properties I (co)own provide thousands of dollars per month cash-flow plus mortgage paydown plus at least some inflationary appreciation .. with perhaps 1-2h / month now .. but most of the heavy lifting happened 4-6 years ago !!

You reap what you sow !!

So, sow away big time now .. and reap lots later !!!

It's not a "get rich quick scheme" .. it's a "get rich for sure" game if set up properly with win/win for team members, investors and yourself !

Five Ways to Make Money

2009-10-12T10:40:00.000-07:00

There are really only five ways to generate your own cash for a real estate transaction .. and you can do all five in time .. but you have to take them all seriously !

1) You work

This is the most common way to start. You work, i.e. you exchange your time for money. The more time you give, the more money you get. A pretty linear relationship. Proven though through centuries !

Many people fail at that stage already. They don't take it seriously. They show up late. They chat with friends online. They do personal business on the side. They don't understand the business they're in. They don't give 110%. Maybe 50% or 85% .. or 35%.

Yes, you can hide for a few days or a few weeks. Most employers realize after a while who is an excellent performer and who isn't. If you work hard at your job, you get ahead. Give the extra 10% or the extra 4-5 hours every week. Read up on your industry. Go to industry conferences. Seek a mentor. You get promoted. You get more $s per hour. If you have more skills, you get more $s. So, yes, formal and informal education helps. If you work hard, and get more $s than you spend, you can save some $s. Hence:

2) You invest your own $s.

You buy real estate or mutual funds or stocks or GICs or bonds or whatever seems to fit your risk tolerance, skills and timeline. Like 1) it takes time to find out what a good investment looks like. Take it seriously. This investment could be more passive (say a stock or mutual fund) or more active (say real estate or active stock trading)

3) You invest other people's money.

Once you've mastered 2) you have the right to ask for OPM (other people's money) such as JV partners or money partners or mortgages or lines-of-credit to invest, for example in real estate: Usually a combination of your own time, your own money and OPM (mortgage, LOC, JV money or all 3). You borrow money at, say 6%, and invest it for 12% to 150% ! This assume a modest degree of risk as you must pay the rate your agreed with OPM but invest at a more uncertain, yet frequently much higher rate. This assume 1) and 2) is in ship-shape ! If you invest other people’s money you take a fee or a percentage of the profit – upfront, as you go along and/or at the end of the venture.

4) You use other people's time / employ other people

You have a small or large business where you pay people a wage/salary/hourly wage and then use their time to make money for yourself. This works usually only if you're good at 1) 2) and 3) as usually your have to work hard too to lead by example and have some (of your own or other folks') money at risk.

5) You have Intellectual property (IP)

Intellectual property or royalties make money for you once you have created them: maybe you have written a book. Maybe you have written lyrics or songs or music. Maybe you have painted a picture and it is copied widely for a fee. Maybe you have invented a name and copyrighted it. Maybe you have a patent or a system that can be used for a fee. Elton John makes money in his sleep today - but he was very good at 1) in the beginning of his career.

So, there you have it in a nut shell: 5 ways to make money.

Are you aiming to fire on 5 cylinders ? Or is it only 1/2 ? Try harder .. or try different ways .. but usually they go in that order of: 1, 2, 3, 4 5 ..

How to get Started in Real Estate

2009-10-12T10:17:00.000-07:00

Frequently the issue of any new investor is: where to start ?

First of all you should assess your CASH situation. CASH is a combination of "real" cash, committed friends and family's cash and a HELOC (Home Equity Line of Credit) or short: LOC. On a LOC you have to pay interest only on the portion you use, which is good. So don't use it all immediately to buy a yacht or a fancy condo in Hawaii.

Research the market, decide what AREA of the world you wish to invest in and then what type of property.This is a big world, so is it Lower Mainland, Edmonton and area, S-Alberta, rural SK east of Saskatoon, Northern Manitoba, Florida, Phoenix, Vietnam, Singapore, Venice, Turkey, ... ?

Any area takes time (and a little bit of money for driving time, flying there, donuts, lunches, research material ..) to research. The bigger the area the bigger the time commitment .. BC takes more time to research than Lower Mainland which takes more time than Greater Vancouver which takes more time than North Shore which takes more time than North Van east of Hwy 1 which takes more time than Deep Cove.

I suggest you start with a VERY VERY small area .. say a suburb of one of the Top 10 REIN towns in BC, AB or ON.

Then, decide on a TYPE of property: townhouses ? condos with oceanview ? single family homes older than 50 years ? new sub-divisions ? pre-sales ? acreages ? horsefarms ? trailer parks ? office buildings in crappy parts of town ? high end luxury condos with high end finishings ? land with sub-division potential ? strip malls ? defunct shopping centres ? warehouses ? storage facilities ? fixer upper homes ? ANY of these property types allow you to make money once you know what you are doing.

The best one to start as there is plenty of supply and plenty of seller motivation is a small house or a townhouse. Not a condo as you can't control costs of the condo association. Not a big house either as they are usually more expensive and hard to cash-flow.

Then spend a TON OF TIME BECOMING AN EXPERT the property type in an area. THEN AND ONLY THEN should you start writing offers and buying.And yes, better several smaller properties than one huge one. Many properties allow you to sell one if you have to.

One mistake in a big project .. and this could be the end of this property and possibly the one securing the HELOC.More on why an HELOC (vs. a mortgage) is such a good vehicle is here: http://www.myreinspace.com/forums/index.ph...46&hl=HELOC

The market right now (llate 2009) is NOT so hot in most markets .. so take your time ! Better to pass on a "deal" than realizing 6 months in your paid too much for it and it is both a money and time drain.

For each piece of real estate you have to hang in financially and emotionally.

This means realistic assessment of cash situation (inc. closing costs, vacancies, upgrades required in addition to "normal" expenses like: mortgage payment, taxes, utilities, condo fees, insurance, management fees ..). It also means realistic assessment of mental "toughness" or time commitment. Vacancies will arise. Basements will flood. Tenants occasionally have to be evicted. Maybe the police gets involved. Boilers break .. sometimes at mid-night. Get used to it .. or anticipate it. Be prepared to handle those things yourself, or preferably, hire a property manager that does it for you, but then be prepared to pay this person or company well.

So, ask yourself: who will manage this property impeccably ?Cash to close comes in 2 forms: real cash and a mortgage. To get a mortgage, you need various documents including property documents and personal documents showing the bank that you are credit-worthy. REIN calls this the "networth binder".

Spend A LOT OF TIME preparing this document, find a mortgage broker to get you a mortgage, or at least tell you what kind of mortgage you can get roughly, depending on the type of property listed above. Horse farms are treated differently than trailer parks than condos ..Before closing ensure you have someone in that market to manage the property impeccably. That could be you, yourself, although a professional with in-depth market insight, knowledge of legalities and local knowledge is likely better. Spend some significant time finding that special someone, as good property managers are VERY hard to come by.

Once the deal makes sense .. you got the money (cash + mortgage) .. and the manager .. ask yourself if you will be able to hang in emotionally and financially .. if so: CLOSE.

Happy Hunting !

P.S.: many hours are wasted when hunting and walking through the mud or underbrush .. many more hours just waiting in the right spot .. but then one day: BAMM .. ! Hopefully you were awake then ... as sometimes that moment is short .. and perhaps the opportunity passed or a better prepared hunter got to the target first. So, be prepared .. and ready when you should be ready!

Yours Sincerely,
Thomas Beyer, Diamond REIN member and also
President, Prestigious Properties Group
T: 403-678-3330
E: tbeyer@prestprop.com

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