real estate investing made easy how to get rich, for real bruce m firestone
Post on 17-Dec-2015
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Bruce Murray FirestoneB Eng (Civil), M Eng-Sci, PhD
Ottawa Senators founderCentury 21 Explorer Realty Inc brokerwww.profbruce.tumblr.com www.EQJournal.org www.DramatisPersonae.org www.brucemfirestone.com@profbruce@quantum_entity“Making Each Day Count”
How I got Started in Real Estate
Working for GOC Bought existing company from group set to retire Asking price: $350k
“Where did you get the $10k?”“I borrowed it!”
1025 Merivale Road
Plaza part of package of assets End of 25 year lease with IGA at $1.65 per s.f. Sell for $1.1 million 18 months later
Nine Year History
Revenues went from $300k per year to $120m Some trading/some build and hold Office buildings/shopping plazas/land development Moving up value chain/staying away from large
competitors Bought 600 acres/purchased NHL franchise/built NHL
caliber arena Land value went from $12k per acre to $450k
¼ billion valuation today
45 Minutes to Change Your Life
Own Your Own Home Buy Some Residential Rentals Adding Additional Value Being Green Adding In-Home Apartments or Granny Flats Buy Some Commercial Property Buy Some Land
Why Bother?
Bank of Montreal poll 34% of respondents said retirement “plan” win
lottery some plan 40% counting on inheritance for retirement 28% expect financial assistance from children
Why Bother?
three classes people, mostly government workers, with defined
benefit pension plans top 1% who in 2012 had 19.3% share of US
national income (up from 7.7% in 1973) remaining 80% who need to save millions for
retirement & can’t
RETIREMENT INCOME OF $72,000 ANNUALLY WOULD REQUIRE SAVINGS OF $4.8 MILLION AT 1.5%/YR IN T-BILLS
Why Bother?
everyone selling you life insurance, term insurance, mutual funds, hedge funds, LIRA, TFSA, GIC, term deposit, savings account, gold, stocks, stock indices, bonds, derivatives, art, collectibles, coins… is looking for a sucker IMHO
Why Bother?
out 100 richest families in Canada, 61 had all or substantially all wealth in real estate
what do Holy Roman Catholic Church, Emperor of Nippon and House of Windsor share in common?
Have bulk of wealth in real estate
real estate is business model for dummies
Make Money When You Buy
In real estate, you make money when you buy not when you sell
1. buy when everyone else is selling2. sell when everyone else is buying3. buy what no one else is buying4. sell what no one else is selling5. buy before the bottom of the market6. sell before the top of the market
buy low/sell high
Own Your Own Home
Pay off mortgage ASAP Get unearned rent Forced savings Inflation protection Rainy day fund
Sally Supersaver
“How many of you can save $775 a month?” “How many of you can pay rent of $775 per month?”
Sally Supersaver
Sally saves $775 per month for 3 years “Power Savings Account” Yields 0.7% p.a. in interest Total saved is $28,095.76
iPhone/new car/trip to DR over following 2 yrs eats all of Sally’s savings
Holly Homeowner
Uses savings ($27,830) to buy starter home for $220,000 Puts 10% down/uses balance to pay for legal fees,
transfer taxes and surprises In 5 years, paid off $19,766 of principal on mortgage of
$198,000 (forced savings) Real estate inflation increased value of property by 3.5%
per year
Holly Homeowner
On 5th anniversary, Holly sells for $261,000 After paying realtor 5%, attorney $783, nets $247,000 Pay back lender: mortgage face amt $198,000 less
principal repaid during 5 years Nets around $70,500 from sale Cash-on-cash return of about $1,250 per year
Total cash on hand > closing $75,443.33
Holly Homeowner v Sally Supersaver
Sally Supersaver did well for 3 years before spending splurge
Holly Homeowner turned $27,830 into $75,443.33
Hard to save $75,443.33 Harder to resist urge to blow it
Holly Homeowner v Sally Supersaver
There are 4 types of returns in real estate—
1. cash-on-cash returns2. real estate inflation3. forced savings4. unearned rent
Holly Homeowner v Sally Supersaver
Holly invested total of -$27,830 Cash-on-cash return ~ 4.5% p.a.
Cash-on-cash, money you can touch, feel and spend
Holly Homeowner v Sally Supersaver
Home up in value by $41,290.99 Value increased by more than actually realized via sale
Warren Buffet School of investing—buy and hold
Don’t pay transaction costs (legal or realtor fees) or capital gains or income taxes
Actually make more money by not selling Average 29.67% p.a. return
Holly Homeowner v Sally Supersaver
Ms Homeowner “forced” to save $19,766.23 over 5 years (pays down of mortgage)
Nets Holly another 14.2% p.a.
Holly Homeowner v Sally Supersaver
3 types of returns not strictly additive Best way to measure rates of return probably IRR,
Internal Rate of Return
IRR is discount rate that makes future cashflows exactly equal to initial investment
Higher discount of future cashflows to exactly equal initial investment, better project is
Holly Homeowner v Sally Supersaver
Solved by iteration Spreadsheet program
Holly’s IRR = 23.2% p.a.
>> than what Sally gets on Power Savings Account (0.7%)
“Most people can’t save their way to wealth, they have to invest their way there.”
Buy Some Residential Rentals
Rent control in many US cities e.g., New York City RTA, Residential Tenancy Act in Ontario Harder to get rid of horrible tenants or raise rents Generally have to re-lease/make move-in ready once per
year Costs money in terms of maintenance, lost rent due to
vacancy
Buy Some Residential Rentals
Some large landlords love rent control > 36,000 rental units Single best thing ever happened to company Created artificial scarcity of rental product Drove competitors out/bought them at fraction of cost of
building new Reduced vacancy rates Allowed to pass on “government-approved” rent increases
(padded by flow through for maintenance/repairs/improvements
Free cashflow from portfolio north of $40 million per month
Buy Some Residential Rentals
thoughts:
1. Get property manager who vets tenants carefully or, if you are your own property manager, make sure you are thorough/do background checks (employment/personal/credit/criminal check)
2. Don’t buy property that doesn’t cashflow 3. Use all leverage available to buy > 1 unit4. If you own 5 units & 1 becomes vacant, vacancy rate
jumps from 0 to 20% but if only 1 unit, vacancy rate leaps from 0 to 100%
Buy Some Residential Rentals
more:
5. Leverage more cashflow, more forced savings, more wealth effect
6. Visit each rental, 1 per month/don’t be lazy7. Tough neighborhood, co-opted locals, hosted FREE BBQ 8. Make sure sound, smell, fire separate your units and
comply with building code, health code, fire, safety code
Adding Additional Value
Things I like:
basement apartment with separate entrance landscaped paving stone area suitable for parking in
front yard, side or rear yards bench seat with storage beneath foundation stone blinds
Adding Additional Value
Tech package
Internet/wi-fi large screen TV Netflix and basic cable Magic Jack
“lipstick” to otherwise improve curb appeal/add DV
Trusted Team
deal-making attorney residential realtor and commercial realtor home inspector + commercial building inspector impartial appraiser mortgage broker who gets deals done creative designer talented group of contractors competent property manager home stager landscaper
Name Things
Henderson House Palladium Blue Heron Storage “Outta Site” Robertson Mews Briarbrook Dunrobin Lake
Names Branding Marketing Trust Sales
Being Green
All-off button Get rid of grass/substitute local flora (xeriscape) or hard
surfaces Low flush toilets with two flow settings Solar hot water Solar panels Solar air wall
Being Green
Additional insulation Heat recovery unit Heat pump Water-saving faucets LED lighting Intermittent spin washer Low energy-consumption appliances
Being Green
Install motion sensors to turn off lights Get a programmable t-stat that doesn’t require PhD Install blinds/keep closed at night Caulk everything Ceiling fans Daylighting via skylights, light shelves, wall cuts,
clerestory windows, light tubes & light bottles
Adding In-Home Apartments or Granny Flats
Santa Cruz, California 1011, 1011 and ½
Oceanside Avenue High ranch style
bungalow/attached garage Ground floor, ½ level up, 2-
bedroom, 1-bath unit Lower level, ½ level down, 2-
bedroom, 1-bath apartment Separate side entrance
Adding In-Home Apartments or Granny Flats
Single utility space w/ shared washer/dryer
Addition of 1 door or removal two, 2-bedroom, upper and lower apartments or one single family, 4-bedroom, 2-bath home
Over time, use can change
Single Mother Strategy– Retirement Plan
Owns principal residence Bought 1 investment property/added basement flat Bought at good price taking into account work needed Good location w/ excellent rental prospects Area experiencing strong asset growth Goal: buy 2 more units/pay off mortgages on all 3 rental
properties as well as principal residence/live on proceeds
Started at 36 Halfway to goal
Single Mother Strategy
Expected income from (present & future) rental properties ~ $80,000 annually by 71
Inflation protection—first, increase rents at or above inflation rate and second, capital appreciation of real property tended to exceed CPI
Her only hope since no IPP
Perspective: she would need to save $11,428,571.43 to generate $80,000/year in income at 0.7% p.a.
Buy Some Commercial Property
Small scale real estate investors think:
“I can’t buy commercial” “I don’t understand commercial” “It’s too big for me” “That’s just for Banks, Pen Funds, REITs, Publicly
Traded behemoths and Insurance companies”
Buy Some Commercial Property
Nothing could be further from truth/parts of commercial real estate dominated by little guy including:
Mini storage Small retail plazas Office, retail and industrial condos Travel apartments Land development New construction
Buy Some Commercial Property
No rent control/commercial landlords distrain Parties to commercial transactions, both leases/sales,
supposed to be sophisticated & equal in terms of information/access to resources
3 to 5 year leases Capitalization rates in commercial trend higher Low intensity property management/industrial tenants
very independent/stable Low vacancy rates in industrial sector
Buy Some Commercial Property
Some @profbruce projects:
Village Plaza
Storage Building (Front Units for RVs/Boats)(note the skylights on the front roof)
Industrial Condos
Buy Some Commercial Property
Stay out of way of big guys institutions COC (Cost of Capital) < 1.5% If you give competitors that advantage, they’ll demolish
you
You can buy $229,000 industrial condo to diversify real estate portfolio
Land Development
Clients bought small 15,000 square foot commercial site on busy thoroughfare
Small house on property demolished Angela, tech CEO, spouse Simon, mother, Nora Simon therapist private practice Nora to live on top floor Angela longterm investment
Land Development
Major risks: financing phase and construction
For Angela, Simon and Nora (not real names), cash-on-cash returns are decent (11.4% p.a.) but overall IRR ridiculous 41.5%
Buy Some Land
Not making any more OK to “lose” money every month Lowest management intensity Cut grass/pay property taxes Externalities—when city grows around you/value goes
up
Be wary of downzoning
Conclusion
Real estate has unique attributes—
1. Rent to third parties2. By renting to third parties, you benefit from wealth effect3. You receive unearned (and untaxed) rent on self-
occupied property after mortgage retired4. When city builds infrastructure, demand for your property
increases 5. In many countries, allowed to deduct capital cost
allowance against income
Conclusion
6. Doesn’t go out of fashion7. Land, unlike, say, ideas, in fixed supply with many cities
further restricting supply by limiting urban expansion8. Amount of real estate consumed per capita steadily
increasing almost everywhere/average household size shrinking
9. In-migration to urban areas from rural areas continuing 10. Develop sustainable business model even if you aren’t a
genius
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