As I travel across Canada speaking to new investors, I am always asked one question in particular, “what type of property should I buy?” May answer is always the same from coast to coast,” I don’t know.” I don’t know because what you should buy depends on a number of factors unique to your situation. I have a website called PushPast.ca where you can find a FREE video called “The Most Important Question in the World” that will give you a better explanation but let’s see if we can answer some of those questions here.
DETERMINE YOUR FINANCIAL SITUATION
1. Create a personal Balance Sheet highlighting what assets you own and what liabilities you owe. We are not looking for balance, but to make sure that your assets are greater than your liabilities. You also want to know if you have enough liquid assets (can convert to cash within 30 days) in reserve for emergencies.
2. Create a personal monthly Income Statement to determine if you are bringing in more than you are spending. Some businesses prepare this once a year which is like driving across the city with your eyes closed. This also helps you to determine the amount of monthly cash flow required to achieve your lifestyle and the type of property you should seek to make it happen.
3. Create a personal Budget Sheet with amounts that you need to achieve monthly to end up with the Balance sheet and Income Statement that you desire. You can see what assets you can leverage against and what debt you have to reduce to look better on paper for financing. Also create a contingency budget highlighting the cutbacks that would have to be made in case of an emergency.
4. Place all of the financial information totals (not including any credit card, loan, line of credit, lease, or mortgage identification information) on one sheet and have handy when you meet with your financial advisor, banker or JV partner. This dashboard has information organized in an easy to read layout so that you look competent and organized. Make sure that this document has no account identification information that can compromise your accounts if lost.
DETERMINE PROPERTY TYPE
1. Create a profile for 6 types of properties in the area that you would like to invest. Profile a townhouse, in-law house, 4-plex, 6-plex, 24-unit residential and a 6 unit convenience plaza. Include a picture, dimensions, neighbourhood needs (grocery store, drug store, bank, café), area family income level (lower, middle upper), perceived safety, average days on market at FMV price, and estimated area appreciation.
2. Record the averages for property size, price, closing cost, rents, and expenses. Calculate for each 20% down with 80% financing (residential) and 35% down with 65% financing (commercial). Record the estimated dollar amounts for the 3 profit centers; cash flow, appreciation and mortgage pay down. Project and complete this calculation for 1, 3, 5, 10 and 20 year intervals. The future intervals give you a perspective of where you will be and a goal to achieve.
3. Now take a look at each profile and determine which one is attainable with the current financial situation that you are in. Also determine how much is required from a JV partner to make it happen.
This process gets the cheese out of your head so that you are not wasting time visiting properties you can’t acquire but instead focusing on ones you can.
ANALYZE THE PROPERTY
1. Use a spreadsheet to record the closing costs, debt service, income, vacancy rates, expenses, and property management to determine if the cash flow, price per unit, cap rate (commercial), and cash on cash investment makes sense based upon your financial situation and the type of property you require.
2. Create a few “what-if scenarios” to compensate for changes in offer price, closing costs, interest rates, financing, revenue, vacancy rates, expense, and property management costs. This provides a first offer price, a fall back offer price and a reserve offer price.
Now you are in a great position to know what type of property you should buy. The next step is to view, offer, investigate, finance and close. We can chat about that in my next letter. Don’t forget visit PushPast.ca and view the FREE video, “The Most Important Question in the World” to give you a better perspective on investing. I am hoping that you find the most important thing there….you!