How To Invest In The Real World

Investing in real estate has this mystical allure to it.  It seems exciting and has always had hidden promises of wealth and riches.

So naturally it's fun to think, plan and plot about it!

Our family has been involved investing in real estate in one way or another since the late 1980's.  In this post we want to share some of our experiences with the hopes of getting you to think differently about your own investing.

How it Began...

In the late 1980's the real estate madness was in full swing in Ontario.  "Flipping" houses was becoming a popular fad and our family started buying a selling single family homes in Mississauga, Ontario.

It proved quite profitable and relatively simple.

Buy a property from a new home builder.  Wait six months to take possession, sell the property for 20% to 25% more than you bought it for.

Cha-ching!

Beginner investors started getting into the act, which was a sure sign the party was almost over, and began buying and selling everything they could find.

It became the topic of every backyard BBQ.

Large properties, land, condos, you name it.  Everyone was getting into the game.

Then the music stopped.

A severe economic recession hit Ontario in the early 1990s.  Even a full four years after the recession began Ontario's employment did not rebound to the pre-recession highs.

Employment in the Greater Toronto Area fell almost an entire 10%.

That was a very big deal.

The NDP party oversaw a period that had Ontario's debt grow to approximately $60 billion dollars.  That was a anohter very big deal.

In 1995 Mike Harris of the Progressive Conservatives came to power and drastically cut social programs to begin control spending.

It was a pretty horrible time and I'm sure many reading this remember it in detail.

When the bottom fell out our family was left "holding the bag" on one propery in particular that would prove to cause us major grief.

And we weren't alone.

We personally knew people who bought condos in the Mississauga area for $220,000 in the very early 1990's only to see the prices drop drastically.  It took more than ten years for many of them to get back to those same prices.

Our family had purchased a $750,000, three car garage, 4,400 square foot house to "flip for profit" in Mississauga only to have its value fall several hundred thousand dollars within a year.

Interest rates went up multiple percentage points at a time.

We couldn't sell it and rented it out for a monthly loss.

And that very same time, during that recession, our family construction business went from screaming growth to a dead stop.

Our real education around real estate had begun.

The Lessons...

Over the next ten years we learned how to manage property.  And many of the lessons have served us well but at the time they were bitter pills.

1. We learned that you can't trust tenants.  Sounds harsh and isn't the type of "positive thinking" that we prefer.  But its practical thinking and it's the truth.  We had executives rent that house from us who skipped out on last months rent ... literally moving out in the middle of the night with their baby grand pianos and Persian rugs.

Today we hope for the best with all our tenants but plan for the worst.  We hold back extra cash to cover several months of vacancies - even with tenants who are great people and have great jobs.

We believe our tenants are good people but even they have unexpected things happen to them.  They may not have planned to change their behavour but their own personal reality can turn upside down overnight.

2. We learned that sometimes your friends ... aren't. Sheesh, how bad does that sound?  A close friend to the family was a Realtor who was partially involved in finding those tenants who fled us a brand new place to rent.  When we asked where the tenants were, so we could go after our losses, they denied to help.

3. We learned that there's no easy money. Compared to working the construction business, flipping property seemed easy.  Well, we learned that easy money doesn't exist.  It's funny how after running a "real" business we fell for the hype of making "easy money".

4. We learned to trust and believe in ourselves. We learned how to advertise and rent out property.  We learned about leases and the laws in Ontario.  We learned to verify employment and get the addresses of tenant's employers.  We learned to build up cash reserves and to under promise and over deliver.

5. We learned that no "theory" could have taught us as much as real world experience did. You can spend years reading books, attending seminars, researching and preparing but you'll never have 100% of the information you'll need.  No two environments or properties are the same.  It's the same reason that 100% of MBA's don't go on to start or run successful businesses.

We sold that property about ten years after it was purchased and about 9.5 years after we had planned to.

We tell people that the only good that came out of that property was that without our parents knowing, we had great parties in there while it was vacant!  Gotta live, right? 🙂

But the stress on our family, both financially and emotionally, hurt badly.  The financial ones have gone away but some of the emotional scars are still with all of us.

It wasn't a fun time.

But luckily we survived and learned some very practical lessons for our next property purchases along the way.

How to analyze better.  How to invest to control risk.

And we learned some surprising lessons that had nothing to do with real estate ... that have proved to be the most valuable lessons of all.

We'll share all of that in Part 2 next week...