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The Armchair Investor's Guide to Real Estate

by Geof Fllson

129 pages; quality trade paperback (softcover); catalogue #06-0637; ISBN 1-4120-8881-X; US$13.11, C$15.08, EUR10.77, £7.54

Only 9% will retire comfortably. The rest are considered financially impaired. Most with freedom and security have learnt the secret of becoming armchair investors. This book will show you how.

Read more!

About the Book

About the Author

Excerpts

About the Book

The Armchair Investor's Guide to Real Estate is written by Geof Filson from over 21 years of investment experience in virtually every aspect of the real estate industry. After a personal bout with cancer, Geof decided it was time to pass on this knowledge, especially to the many he saw approaching real estate investment in all the wrong ways.

This book is not for the casual dreamer looking for a get-rich-quick scheme. It will not teach you how to buy loads of real estate with no money while passively amassing personal fortunes. This book will teach you however that it is possible with a long-term strategic understanding to secure personal freedom from the comfort of your own armchair.

Becoming an armchair investor is about a mindset. Your tools are all found within these pages. You will learn in a straightforward and simplified fashion about:

• The Six Kinds of Real Estate From Residential to Commercial
• Understanding Debt Investments and Why Some Money is Worth More than Other Money.
• An Overview of the Six Kinds of Investment
• The Seven Ways To Own Real Estate
• There Are Really Only Two Key Factors Affecting Real Estate Valuation
• Maximizing Your Profit in Residential Rental Properties Including the Three Ways Money is Earned...
• Investing in Commercial Property
• Investing in Construction Projects
• Giving Yourself the Edge by Understanding the Mindset of the Borrower and the Lender
• Ten Mistakes For Investors To Avoid
• Understanding Taxes
• Top Investment Picks

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About the Author

For the last 21 years Geof Filson has been involved in virtually every aspect of real estate. He spent ten years working in new home sales, sales and general management for housing companies in Saskatchewan. He has been involved in seventeen multi-family projects including conversion and recreational projects in Saskatchewan, Alberta, and British Columbia. He has owned housing, land and real estate companies and has worked with an RTM home builder. Recently, Geof has been involved with creating a successful syndication team which raises capital for the purchase of commercial investment buildings. As a result of cancer surgery, Geof intends to spend more time enjoying his boat in the Caribbean with his wife Sue and less time at the office. He is publishing this real estate investment book to assist others looking to build wealth from the comfort of their own armchair.

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Excerpts

Foreword

Wealth is cash flow and equity.

Investment is the exercise of putting capital to work to create cash flow and equity. What follows is a guide to how and where capital can be invested in real estate. Why, you may ask, should I invest in real estate? The answer, I say, is that you should invest in whatever makes sense to you; commodities, art, stocks and bonds, comic books, Hummel figurines, real estate or anything else that interests you. In Canada, only 9% of us will retire comfortably. 91% didn't invest enough or diversify enough or miscalculated the value of their pension plans.

However, eventually, we retire whether we want to or not. We have no choice because our bodies either can't or won't continue to do what they have been doing. Eventually we have to let our money go to work for us. Where it goes to work and how hard determines the kind of a retirement we get. A friend once told me: "There are only two problems with money. Either there isn't enough or there's too much." If too much is your problem, you want to preserve and increase it. That means investing it. This book is for the armchair investor; the individual who wants to invest in real estate but doesn't know much about it.

Most people make their money in one place and invest it in another. My objective in writing this book is to give a passive investor the inside perspective on what happens in real estate investments and how to match up investment goals with the right opportunities.

This isn't a how-to book on buying rental properties although that is a part of it. It is geared to the non-specialist who wants to protect and nurture his hard earned cash.

What I describe in the book are some of the real risks and rewards in owning different types of real estate.

Enjoy. Invest. Do well.

- Geof Filson

Introduction

Everyone knows the old classic real estate rule; 'Location, location, location', but what does that mean? The meaning is that real estate rises in value where people want to be. Where they migrate to, where they collect to raise their families, where they see opportunity for prosperity and the services that we have come to depend on.

The average home price in Canada is well over $200,000 as I write this. There are still many places in Canada where I could buy a perfectly serviceable home for less than $10,000. The average price reflects the value of homes where people want to live. This means cities where the jobs are and where the schools, hospitals, shopping and all of the modern conveniences are located.

Over the last century and more, the increased productivity of agriculture has meant a long term trend to depopulating the countryside as fewer people produce more food. Fewer agricultural workers mean fewer support workers. Businesses in small towns close, schools and hospitals are consolidated or shut down, the kids go to Calgary or Toronto or Vancouver or any centre that can give them a shot at the good life.

The nature of work has changed dramatically in my lifetime. In fact the nature of nearly everything has dramatically changed.

My grandfather farmed with horses and a plow, much as his family had done for centuries before. My children don't even recognize the economic tools that I grew up with, and I have some trouble keeping track of the new economic devices that pour out regularly.

It's getting harder to find anyone in this country who remembers what it is like to grow up without electricity.

But I digress.

The point is that the larger the market, the better the market where real estate and other commerce are concerned. Also growing markets pay better than shrinking markets. Supply and demand are in charge of value.

Real estate is land in the process of achieving its highest and best use. We see it as static only because the process is slow.

This is important to note. Real estate is not a liquid commodity. It takes time to develop, build, finance, lease and redevelop. This is both a blessing and a curse. The relatively long-term nature of the investment means that you don't dare put the grocery money into it. You have to be prepared to give the investment time to grow. The good news is that some real estate is so good that you should own it all your life and pass it to your children.

The third point that needs to be made about real estate is that it costs a lot of money. The guidelines that banks use to purchase a home are that you can put less than one third of your gross annual income to mortgage a home. A substantial portion of Canadians don't qualify to buy one, even at that. Every city block in a Canadian city is worth millions of dollars. As a result of this high price, there are two basic effects that are important to you as an investor.

First, there is an enormous industry that has grown up in this country dedicated to lending you money to buy real estate. Lenders know that real estate is an enormously profitable and secure business and they are keen to throw money at it. That is why a mortgage is the easiest loan to get.

Second, the effect of using borrowed money allows you to leverage your capital to an astonishing degree to generate wonderful profits.

Just to give one simple example, it is possible now to buy a personal residence without a down payment. That means that as an owner, starting with virtually nothing other than closing costs and a job, you can make thousands of dollars of after tax profit by just living somewhere; and the best part is, you were going live somewhere anyway, and make payments for the privilege. What a great country!

The Armchair Investor

Most of us make our money doing something and invest it somewhere else. This is an element of the diversification strategy that we have all grown up with. We don't want all our eggs in one basket. But, we do want to know what our eggs are up to and whether they are going to hatch swans, ugly ducklings or turkeys.

Most of us don't have the time energy or inclination to learn a new discipline so that we invest wisely. We want to be advised.

In real estate investment we don't want to argue with tenants, we just want the rents.

This book is intended to advise the armchair investor of some of the risks and rewards of various kinds of real estate investment without putting him or her through the hoops of learning the hard way. We'll start by looking at the various types of real estate in which you might have the opportunity to invest.

You are said to own real estate in Canada when you have title to it in your name. Titles are registered with the government land titles offices in each province and are guaranteed by the government to be a true representation of ownership interest.

A title may have a number of registered interests on it. It will be issued to the owner but could be encumbered by mortgages, liens, caveats, rights of way etc. which can have a significant bearing on the owner's interest.

Real estate can only be lost be failing to meet the obligations stipulated on the encumbrances or through expropriation by municipal government acting for the perceived good of the greater community.

Chapter 1

Finding Your Investment Style
A Study of the Six Kinds of Real Estate
To thine own self be true.

Over the years you have developed a certain way you like to do things. Everything from your hair style to the clothes you wear to the car you drive reflects that certain way "that things ought to be." Some people like to put the tea in first, while others insist that the milk should be the first step of a great cup. The same is true in investing. Everyone who has experienced a modicum of success in investment has a certain way they like to do it. As surely as there is no right way to make a perfect cup of tea or a clear cut solution to the dog vs. cat problem or import vs. export cars there is also no "right" way to invest. How you invest may be as individual as how you dress or even how you like to prepare your tea. While the strategies of investment may change from person to person there is one thing that is certain. You had better invest in a way that makes sense to you. Now, I'm not suggesting you need to understand every aspect of the investment, but I am saying, in principal, the investment must seem like a reasonable one to you. It must match your style if you will. After all, it is your money that you worked hard to earn. Plainly, you cannot invest it in a way that you don't think will make you more money. There are two main types of investors. They are seen in the stock market, in real estate, and any other industry you can name. First, the day trader. This type of investor is interested in quick turn-arounds and instant success or failure. In real estate they can be seen buying houses and "flipping them" back on the market after a few minor improvements have been made. The second is the long holder. This type of investor wants to see big growth over longer periods of time. Warren Buffet is the quintessential long holder investor in the stock world. In real estate long holders tend to purchase into income properties or land where the profit may not be recognized for many years. Whether you tend to behave as the day trader or as a long holder, if you hire someone else to manage your investor, you can consider yourself an "arm chair investor."

The arm chair investor is likely the style that most people reading this book will appreciate. They don't want to argue with tenants, they just want to collect the rent. This book is intended to advise the armchair investor of some of the risks and rewards of various kinds of real estate investment without putting him or her through the hoops of learning the hard way. From the comfort of your couch you can learn from the mistakes of investors who have gone before you. Isn't it lucky that you just had to buy this book to avoid their pitfalls?

As we review these six kinds of investment it is of paramount importance that you think through some key questions. Ask yourself: 1. Would I be interested in managing my real estate on a day to day basis? 2. Do I have the capital to become involved in development deals? 3. Am I prepared for the time or risk involved in land assembly? 4. Is debt or equity ownership what I am looking for? 5. Do I want to be the sole owner or do I want to just be a participant? Even though you may not have realized it you likely have your own investment style already -a certain way you like to do things. As you read this chapter you will be better able to define this style and be in a better position to assess which type of real estate investing best fits your style.

This understanding will be crucial because you are an important part of the investment process. Without an investor there is quite simply no investment. Things may accidentally improve in value, but only the investor can purposefully and deliberately act on an investment. The more you are interested in your investment, the more your investment fits your style, the more likely the project will succeed. After all, you have a style or a way of doing things because it has worked for you in the past and will likely continue doing so in the future. Again, this is the same as in real estate. Your sense of style regarding investing may very well work in real estate because it has been constructed from past experience where that style has also worked.

It is a widely held opinion that risk and reward are directly related. High risk means high reward. Low risk means low reward. This is the kind of thinking that sells lottery tickets. To be a successful investor, you must first gain knowledge about specific investments. Only then can you accurately judge the risk reward ratio. Ignorance is what drives investors into Ponzi schemes and Nigerian bank frauds. This book will give you the information you need to understand how investing works you may wish to invest on your own or take this information to an investing firm who can take care of the little details. We'll start by looking at the various rules that apply to all real estate and then look at the specific types of real estate in which you might have the opportunity to invest.

Swans, Ugly Ducklings or Turkey's? Understanding Your Investment Most of us make our money doing something and invest it somewhere else. This is an element of the diversification strategy that we have all grown up with. We don't want all our eggs in one basket. But, we do want to know what our eggs are up to and whether they are going to hatch swans, ugly ducklings or turkeys.

Whether investing in real estate, there are a certain factors that will always be present. They are time, location, element of risk, principal required, and of course, profit. If you are going to invest in real estate, the question of what you should buy and how you should buy it is critical to your success. You have to know what your tolerance for risk is and how you want to manage the time and money problem of the investment.

When you were little you may have had a lemonade stand on the street. Your time frame to make a profit in was likely that afternoon, or until you got tired, or perhaps, until you drank the product yourself. Your risk level would have varied on the benevolence of your neighbors, the traffic flow, and how cute you looked -these factors are all ultimately tied to the location of your stand. The principle required for your venture was likely nothing more than some lemons, sugar, and water. Of course, this is a very simple example of investing, but it has all of the elements that go into any kind of investing. Of course, as the profit potential goes from $4 over an afternoon to millions over several years, each element becomes more complex.

Before we get into the actual examples of the kinds of real estate, it is important to note that most of us don't have the time, energy or inclination to learn every aspect of investing. Using advisors is the way to get the results you want without having to learn the entire industry. After all, investing in high rises or raw land is a tad more complex than running a lemonade stand!

TABLE OF CONTENTS

Foreword

Introduction: The Armchair Investor

CHAPTER 1: Finding Your Investment Style: A Study of the Six Kinds of Real Estate

• To Thine Own Self Be True
• Swans, Ugly Ducklings or Turkey's? Understanding Your Investment

CHAPTER 2: Not All Money Was Created Equal!: Understanding Debt Investments and Why Some Money is Worth More than Other Money.

• First Mortgages on Residential Homes
• Mezzanine Financing
• Second Mortgages

CHAPTER 3: An Overview of the Six Kinds of Investment

• Equity Investment
• Your Personal Home
• Vacation Property
• Investing in Residential Revenue Property
• Investing in Land
• Investing in Commercial Property
• Redevelopment
• Conclusion and Summary

CHAPTER 4: Understanding The Seven Ways To Own Real Estate

• Equity Ownership
• Undivided Interests
• Shareholding Interest
• REIT
• Limited Partnerships
• Pooled Ownership
• Land Banking

CHAPTER 5: There Are Really Only Two Key Factors Affecting Real Estate Valuation

• Appraisal
• The Effect of Interest on Value

CHAPTER 6: A Guide to Maximizing Your Profit in Residential Rental Properties Including the Three Ways Money is Earned...

• Every Rose Has its Thorn: Managing the Property
• Selecting Residential Rental Property
• Buying Residential Real Estate

CHAPTER 7: If You Can Write a Cheque for Hundreds of Thousands of Dollars You May Be Interested in Investing in Commercial Property

• A Warning...
• With The Basic Warnings Covered, Where Should You Start?
• Buying to Flip
• Buying to Improve and Flip
• Buy and Hold
• Whether You're Flipping or Holding, Your Steps to Purchasing are the Same
• Making an Offer on a Commercial Property

CHAPTER 8: Raw Land: A Dreamer's Play Ground

• Introduction
• Land Development
• Conservative Land Investors
• The Sole Practitioner: Looking for Gems...
• Understanding the Stages of Development

CHAPTER 9: Investing in Construction Projects

• Debt Investment
• Equity Investment

CHAPTER 10: Giving Yourself the Edge by Understanding the Mindset of the Borrower and the Lender

• Where Will the Money Come From?
• The Lender's Mindset: Using Banks and Mortgage Brokers
• The Borrowers Mindset

CHAPTER 11: Ten Mistakes For Investors To Avoid

• Introduction
• Don't Forget to Ask These Questions About the Seller Before You Buy:
• Mistake One: Listening To The Wrong People
• Mistake Two: Lending Money on Land Without The Required Expertise
• Mistake Three: Running Off To Become a Real Estate Agent
• Mistake Four: "Low Down Payment" Real Estate
• Mistake Five: Undivided Interest
• Mistake Six: Unregulated Investments
• Mistake Seven: Taking Second Mortgages Lightly
• Mistake Eight: Forgetting That You're Subject to the Market When Buying Presale Condos
• Mistake Nine: Forgetting That Land Deals Are Highly Speculative
• Mistake Ten: Failing To Adequately Research The Builder In Construction Deals

CHAPTER 12: Understanding Taxes

• Answering the Question, "How Much For Me and How Much For Them?"

CHAPTER 13: Top Investment Picks

• The Good, The Okay and The Brutal
• Investing in Land Developments
• Investing in Construction projects
• Investing in Existing Buildings
• Investing in Debt Instruments

CONCLUSION

ACKNOWLEDGMENTS

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