- Hey, it's Nolan Matthias from Mortgage 360
and today we are discussing real estate investing in 2020
and whether or not it's a good idea.
But, before we get into it,
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Okay, so let's get into it.
This one's gonna be a little bit more in-depth than normal,
but we're gonna talk about real estate investing in 2020.
And let me tell you this first,
uncertain times, call for conservative investing practices.
And today, that's what we're gonna talk about.
We're not gonna say don't invest in 2020,
but what we're gonna say is,
be more conservative in how you do it.
And we've got some pretty practical tips
on how to, one, assess the economy,
how to, two, assess properties
and, three, how to assess your personal financial situation,
in order to figure out if now is the right time
for you to invest.
So let's get into it.
We wanna start with this real quick
and that is by asking this question,
does real estate investing make sense in 2020?
And the answer answer is, maybe.
It definitely requires
a little bit more conservative thinking.
But it's definitely not a no.
And there's some pretty practical things
that we can do to make sure
that we're making the right decisions
from an investing standpoint right now.
And there's three types of investments
that you can make in any sort of economy in real estate
and one of them is really risky,
one of them is one of the safest forms
of investments you can get
and one is right in the middle.
And let's talk about those first
before we get into talking about the economy
and talking about individual properties
and your personal finances.
So, let's talk first about speculating.
Okay, no bueno.
Don't do this.
Uncertain times, speculating is the thing
that can make your net worth shoot
from whatever it's at, past zero on the way down.
We don't wanna be doing any sort of speculating.
What speculating is,
is it's buying and holding a property
for the short-term,
expecting that the value is going to go up.
So, ways you can do that is just buying a property,
buying land for development,
buying condos, for example, on prebuilt.
So, whether they're gonna be built two
or three years down the road,
putting your money down today
and hoping that the value would go up.
With the uncertainty in the economy right now,
these investment strategies,
speculating, specifically, makes no sense.
Don't do it, period.
Now, getting into a little bit more
of a middle of the road sort of strategy, is flipping.
Now, flipping is something
that can be done in any sort of economy.
What it comes down to is buying properly,
making sure you know what you're doing,
with respect to renovating
and making sure you get it done as fast as possible,
so you can get out of it as fast as possible.
And we've been doing a lot of research,
a lot of reading on this lately
and one of the best methods of determining the value
that you should pay for a property
that you're going to flip, is this.
So you take the property value
that you expect it to be as complete,
so as renovated,
let's say it's $500,000
and you multiply that by 70%,
gives you a value of $350,000
as the baseline of what you should pay or your margin.
And then you deduct any of the expenses
that you think are going to be pertinent
for doing the renovation.
So, let's say you're gonna do $30,000 in renovation,
the price that you should be paying for that $500,000,
as complete property is about $320,000.
That leaves you with about 30% margin.
It also leaves you with enough padding and enough room,
so that if you are flipping a property
and prices come down,
all you have to do some price reductions,
or maybe you overestimate the value,
then you've still got lots of runway,
with respect to profits on the property,
so great way to look at flipping.
Now, the other thing about flipping,
is you always wanna make sure you have a backup plan.
And that backup plan is actually our favorite strategy
of investing in our next strategy of investing,
which is buy and hold.
So, buying and holding real estate,
is one of the simplest real estate investments
somebody can make.
It's simple to understand, anybody can do it.
You basically buy a property,
you get renters for it
and then you gradually have the renters
pay down the property.
And as the renters pay down the property,
your equity increases,
your net worth increases,
until such time as there's no mortgage,
it's free and clear
and then it basically gives you income
for as long as you hold that property after that.
Super simple, super safe.
And from a long-term perspective,
things like what's happening in the economy right now,
25 years down the road are just a blip on the radar.
So that's what makes it so appealing
as a long-term investment strategy.
Now, when it comes to doing buy and hold real estate,
there's three criteria,
especially during a downturn
like what we're in now, that you need to assess.
And the first and foremost, is obviously, the economy.
The second, is the property itself
and the third, is your ability to weather a storm.
So, in other words,
your ability if things go catastrophically wrong,
to make sure that you don't have to declare bankruptcy,
or that you end up losing a bunch of your properties.
So let's talk first about the economy.
Let's talk about where we're at right now,
because where we're at right now,
is in this place of uncertainty.
And with respect to real estate values,
even the person with the best crystal ball,
can't tell you whether the values are gonna go up,
whether they're gonna go down,
or whether they're gonna stay the same.
There's evidence to support all three
and there's people that have all three opinions
of where the economy is going to go
and where real estate values are gonna go.
So trying to speculate on it, again,
is what gets people in trouble.
But, what we do know about the economy right now,
is that the damage has not been done
to the real estate market yet.
If there's going to be damage done,
we're six to 18 months out before we see the full,
long-term effects of what's happening right now.
And the reason for that,
is quite simply that there is unprecedented support
in the economy from government,
both American and Canadian,
both from the perspective of deferred payments,
or payment forbearance on mortgages
and also from a wage subsidy perspective.
So those things are gonna prop up the economy
and they're also going to leave the real estate market
looking fairly stable for at least the short term.
And there is a possibility that all of this stuff
that's happening in the economy,
is going to be managed so beautifully,
that we come out of it to an economy
that is increasing in value,
where GDP is increasing
and where property values have remained stable
and we don't lose a significant amount of equity
on real estate investments.
And that is the best-case scenario
and what we're hoping for.
And the good news is, that back in 2008,
everything that happened in the American economy,
was basically a test run for what's happening now.
And we know what happened
and how that was managed back in 2008
and we can use the lessons from then,
in order to manage it going forward
for what's happening in 2020.
So there's good news on that front.
And here's the thing,
for closures that do happen,
are only gonna happen to those who were already there,
when we entered the lockdowns,
when we entered this shrinking timeframe in the economy,
they were already struggling,
they were already on the cusp of not being able
to make their mortgage payments.
And those are the people
that are gonna be largely affected,
because for most people, yeah,
there's wage reductions
and they may not be making as much
as they were making before.
However, for a lot of people,
there's also reductions in expenses.
And reductions and expenses
and being able to defer your mortgage,
means that most people who are in good financial shape
are gonna be able to weather the storm
through this shrinking of the economy.
So I don't foresee
that there's going to be massive catastrophic issues,
but for the most part,
the steps that the government are taking,
is going to be a good thing and a positive thing
and if managed properly,
in a lot of cases, for a lot of people,
we could come out of this better than we went into it.
So now, let's talk about properties
and how to assess the properties
because this is the key piece at any time.
Whether you're investing in a bad economy or a good economy,
if you get the property right,
you get the investment right.
If you get the property wrong,
well, you get the investment wrong
and it can be catastrophic.
So, here's what we look for
when we're looking at investment properties.
We look for properties
that appeal to a certain type of renter.
And the type of renter that we're looking for,
my wife and I and that I recommend,
is young professionals.
People who are coming out of university,
aren't ready to buy a house yet,
but have jobs where their incomes are about to start rising
and that have good credit,
pay their bills, are clean, are quiet,
young professionals, smart, educated people.
And what we do, is we basically go through a property
and we go okay, is this the type of property
that we, as young professionals,
not as young as the people that were renting to,
but that we as young professionals, would like to live in?
And if it is, that's the type of property we look at buying.
And then we market to that young professional demographic
because, again, we think they're great renters.
The other thing we look at,
is for properties that are walkable.
Are they close to amenities?
People like to be able to walk out their front door,
be able to walk to a train station,
the yoga studio, the gym,
restaurants, the grocery store.
The closer you are to amenities,
the better the property will rent,
not just in good times,
but in bad times.
And people who live far away from amenities,
when there are bad times,
will always look to move to places
that are closer to amenities,
when they can get them for cheaper in downturns.
The third thing we look for,
is recession resistant properties.
So in other words, properties that sell,
or sorry, not that sell,
but rent, regardless of what's going on in the economy.
So an example of that,
is we will always look at two bedroom condos
over one bedroom condos.
The reason why,
is because when the economy starts to shrink,
people will look to their friends, say,
okay you need a place to rent,
I need a place to rent,
let's get together and rent the properties.
Together, we'll split the cost
and therefore, lowering our personal monthly output.
And you can't do that with one bedroom condo.
But with a two bedroom condo,
you'll start to see more of a demand
for people who wanna share those types of properties.
Types of properties we wouldn't look at,
obviously, one bedroom condos,
we've mentioned that,
but also, a million dollar property in the suburbs,
would not be a property we would wanna rent out
during a bad economy
because quite frankly,
it's gonna be a hard time finding somebody
who wants to rent a million dollar property.
So, you wanna make sure
that when you're looking at the property as an investment,
that it is something
that will be at least a little bit more desirable
during a downturn.
Again, we like to bedroom condos,
professional managers, easy to manage,
that's just our preference.
So last but not least,
let's talk about your ability to weather the storm.
Now, this framework is something
that I've developed in the last few months
and it came because before all this stuff
in the economy happened,
I was sitting in a real estate investment seminar
and the group that was putting on the seminar,
brought out their head researcher.
And when somebody says to me,
who is in the real estate industry?
We're gonna bring out our head researcher,
I hear economist.
Now I'm an economist.
So I'm thinking that's the type of person
that you wanna have come out
and do a presentation,
not somebody who doesn't necessarily know
much about economics.
And they bring out this girl
and she starts talking about lead indicators
and lag indicators.
And she starts talking about how she can predict
what's going to happen in the economy
and I'm going wow, this is good.
'Cause if she's got a crystal ball like that,
she's got a crystal ball that's clearer
than anybody I've ever met.
And then she starts talking about GDP
and she starts talking about the fact
that GDP is a lead indicator for real estate
which is kind of is, but it really isn't.
And the reason why,
is because real estate is a piece of GDP.
So, therefore you're trying to use GDP
as an indicator for something
that is included in GDP, it doesn't make sense.
It's like trying to say,
you can predict Connor McDavid scoring,
based on what the Edmonton Oilers are scoring as a team.
Well, Connor McDavid is an input,
he is part of the Edmonton Oilers team
so predicting what he's gonna score,
based on what the rest of his teammates are going to score,
doesn't really make a ton of sense.
What would make more sense,
is if you're saying,
okay, we're gonna predict
what the Edmonton Oilers are gonna score as a team,
based on what his other teammates
and Connor McDavid are scoring.
That's a more accurate indicator.
So, I did some research on this girl,
found out that her degree,
she has a master's in communications,
so, basically writing sales pitches.
So, what that led me to realize,
is that when we're teaching people
how to invest in real estate,
the first thing that we should be teaching them how to do,
is how to backstop themselves
against a downturn in the economy,
how to do it safely.
Because if you got people
out there masquerading as economists,
telling you you should invest
because of the research that they did
and put into a PowerPoint presentation
and people are taking that advice
without having any sort of backstop,
that gets dangerous.
So I developed this framework
and basically, it's a way of making it,
so that anybody we do any sort of investment,
advising for, can basically do it
with complete confidence that they can weather a storm.
So here's what it looks like.
First thing we say is,
you wanna have at least one year's worth
of salary available in either savings,
or available to you in something like a line of credit.
So let's say you have $100,000 a year in annual income,
you wanna have at least $100,000 available to you
in liquid investments,
whether it be an RSP, TFSA, 401k,
whatever it is in the States,
you wanna have at least $100,000 in liquid assets available,
so that if things go bad,
you can backstop your investments.
Now, this is before the downpayment.
If you need $40,000 for a down payment,
you need to have $140,000 available to you or investments.
Now, I mentioned lines of credit.
We also see it as being okay,
that if you have $100,000 available
in a home equity line of credit,
that is essentially the same
as having $100,000 available to you in liquid investments.
That being said,
it's always better to have it in the liquid investments,
than to have to borrow it.
But, just having that access to cash
in case you need it,
is hugely important when you're investing in real estate.
Second thing that we wanna look at,
is the values of our overall portfolio.
So in other words,
if our entire portfolio were to drop 30% in value,
that means the home we live in
and all of our rental properties were to drop 30% in value,
would our net worth still be positive?
And we're using 30%, again,
ultra conservative number,
nobody is expecting real estate values to drop by 30%.
But, if you use that number,
and you say, okay, if those property values drop by 30%,
here's what I have left in mortgages,
here's what I have in equity,
is my net worth still positive,
and it is,
then you're fairly safe.
Because, if in a worst-case scenario,
you had to sell everything
and start at zero, you totally could.
But let's say property values go down by 30%
and you all of a sudden got a negative net worth
of $200,000, well,
that is leading to a bankruptcy, or foreclosure,
or things that we don't even wanna talk about.
So, being able to weather a decrease in property values,
again, hugely important.
Third thing and this I think is important,
especially when you have uncertainty in an economy,
is being able to get
at least 5% cash-on-cash return on your investment.
So what that means is,
let's say you put $40,000 for a downpayment,
you need to be getting at least $2,000 in cash flow
from your property per year,
or about $165 per month in cash flow from your property.
Normally, what I would say in an economy
where we had more certainty was,
if you can buy a property, it breaks even,
you should probably do it.
In this case, what we're saying is,
you wanna get at least that 5% cash-on-cash return.
The reason for that,
is just in case rental rates start to drop,
we wanna be able to make sure
that we've got some buffer in there
to make sure that we aren't having to subsidize
a whole bunch of properties that we've invested in,
because of a downturn in the economy.
And, I think if you have those three things,
if you've got that one year worth of salary put away,
or available to you,
if you've got the ability to take a 30% hit
on real estate values
and also still have a positive net worth
and if you've got that little bit of room
in your cash flow to make sure that you're still safe,
if rental rates go down,
I think you're looking pretty good.
Knowing that you've got that sort of security
in that backstop,
you can basically go through
and start looking at properties
and start trying to find deals
because there is a good chance property values
are gonna rise.
There is a good chance that they're going to stay the same.
And if they stay the same, or they start to rise,
then the best time to buy real estate is now
and knowing that you've got that backstop,
gives you the ability to go out and buy it confidently.
And I highly encourage you,
if you've got the ability to buy confidently,
to go out and do it,
because it makes sense.
These are the times when fortunes are made.
So, going back to that original question
of does real estate investing make sense in 2020?
I think yes, absolutely, it does.
With the right strategy,
with the right safety
and a conservative strategy built
into what you're trying to do,
you can absolutely make money in this economy
and again, 20, 25 years down the road,
this whole economy in 2020,
is just gonna be a blip on the radar.
Buying and holding for the long term,
will absolutely generate you fortune over the long run.
So, if you found this video useful,
if you thought it was good information,
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And we'll see you here soon on the very next video, cheers.