Some Money Making Magic from 1944

As a real estate investor it’s important to know the basics.

You need to have a long term goal for your real estate business.   You must decide on some strategies.   And you need to figure out what tactics to use.

For example, “I want to create $10,000 a month in cash flow so that I can focus on my true passion and I’m using a combination of single family homes and commercial real estate with long term leases in growing communities to do it.”

Having a blueprint for your business is key.

But there’s something that’s often missed.

And it’s a big deal.

Too many investors ignore anything outside the world of real estate.

In the past we’ve shared how important it is to know how the economy works.  How things like interest rates and inflation can monkey with you assets.

Why it’s important to understand the impact of changes to banks overnight lending rates.

And there’s something else you should know.

You must know how currencies work.

Why?

Well if you’re investing in Canada but plan to retire in Tuscany, Italy it’s a big deal.

Let’s say you invest in some nice cash flowing Canadian real estate.  It goes up in value 50% over 10 years.

Now…

What if the Canadian dollar loses value against the Euro over that same time period.

You think you’ve made 50% on your money and you’re planning to use that cash to help you buy that dream villa in Tuscany.

But when you go to convert those Canadian loonies to fancy dancy Euros you realize that you’re losing out because the Canadian dollar has lost value against the Euro.

You’re $170,000 Canadian dollars no longer gets you the $100,000 Euros.

It only gets you $75,000 Euros.

Not good news for your Tuscan getaway.

So currency is a big deal.

Get it?

The example above isn’t any kind of forecast, just an example.

And to be clear the Canadian dollar is likely in much better shape than the U.S. Dollar right now.

But there are ways to make currency forecasts for yourself if you know what to look for.

And we need to start at the beginning.

It’s really important for you to know what some old guys did in 1944.

We believe it’s impossible to have an understanding of how the economy works without knowing what these “gentleman” did in 1944.

Ready for it?

Great, let’s go…

If You Don’t Know History You’re Destined To Repeat It

You know what?

There’s always money to be made.

Sometimes it’s easy to make money … think Tech Stocks in 1999.

Boy, that was fun, wasn’t it?

And think the Real Estate market from 1999 to …. well, that party is still going in Canada isn’t it.

And sometimes it’s harder to make money. Think the Real Estate market in Toronto from 1990 to 1994. And think the Stock Market from 2007 until 2010.

This week Nick and I were in Downtown T.O. meeting with a really bright investment advisor.

Young guy, but already experienced and smart, really smart.

You know why?

He knows his history better than his peers so when stocks were tanking in 2008 he was already looking at alternative investments.

He focused in on quality Real Estate via Real Estate Investment Trusts (REITs) and he plays the bond market rather aggressively.

Remember, there’s money to be made in any market.

His parting words to us were … “Today it’s all about cash flow.

We almost had a heart attack.  He understood that but it seemed he was implying that idea was big news to some of his colleagues.

Some of you may know that we’re students of financial history because knowing what has happened in the past gives us insight and confidence in our decisions today.

For example, in the late 1800’s there were canal bubbles and railroad bubbles.

Before that George Washington had his own financial bubbles on his hands when gold money was being debased to fight wars.

This week we wanted to share two charts that should be interesting to any savvy real estate investor.

We speak with many investors who think interest rates below 5% are normal.

They forget that in the early 1980’s you were paying 16.5% for a mortgage or higher.  And if you had a mortgage renewal at that time you would be in for some serious pain.

Can you imagine having signed a mortgage in 1978 for 7% and then 5 years later being faced with renewing it at more than double?  Sheesh.

If you were financially stretched at the time then getting a mortgage for more than double your initial rate would be disastrous.

But wanna know something cool? My father-in-law locked up some GICs at 18% (yes, 18%) during that same time.

Some people were suffering others were profiting.

Remember…

There’s money to be made in any market.

18% Guaranteed Investment Certificates? Are you kidding me? Where do we sign-up?

Now, here’s the fun part.

The Bank of Canada recently raised rates three times this year. Is this the start of a massive string of rate hikes or a temporary blip?  Media screaming of stalling real estate.  Economists and politicians screaming of a stalling economy.  Condo developers screaming of unprecedented demand.  What the heck is going on?

Tough call right? Well, let’s go further back in time.

Buy For Cash Flow But Plan For Debt

This is part two to this post we shared last week about one of the more emotional experiences we’ve had as a family investing in real estate.

This week, we’ll share some of the real estate rules we now live by and some of the not-so-obvious observations about ourselves that we’ve made.

But first, let’s share how that particular story ends.

We held onto that “quick flip” for ten years and then finally sold it.

After ten years we sold it and broke even.

That’s right, it took ten years for the property to regain its value and when we sold it we were able to recoup our losses.

However, that doesn’t take into account the opportunity cost of the money that we were using to plug the monthly losses for ten years.

And, as mentioned earlier, the emotional scars from that experience will never go away.

Do you know what it’s like worrying about losing money every month – for ten years?  Not fun.

But here’s the interesting part.  It was during that experience that we made some critical observations.

We realized that there were smaller properties in Mississauga that had also lost a ton of value but because the debt (the mortgage) on them was much smaller those owners were able to rent out their properties and either break even or be very close to breaking even.

And because they had smaller properties they weren’t stuck trying to find U.S. Executives in Canada looking to rent out 4,400 square foot McMansions with three car garages like we were.

So the owners of smaller properties had zero or much less monthly negative cash flow than we had and had more demand for their properties.  That meant that as tenants left their properties didn’t sit vacant for nearly as long.

And then we noticed that if the owners of those smaller residential properties owned them in areas with growing population (e.g. Mississauga in the 1990s) with good income levels (Mississauga is a bedroom community to the job-rich Toronto) that made things even better because the demand and ability of tenants to pay rent was high.

That may seem embarrassing to admit but until then we hadn’t realized this.