February 2022 - The Money Machine - Keep Your Eyes On The Prize

There are a lot of instructional sources these days for investing in real estate. Some are encouraging the participation in a particular project. Others are claiming to show you how to spot opportunities in the marketplace where you can buy below market value. Still others want to show you how to ‘fix and flip’.  

My particular approach, as outlined in ‘The Money Machine’ seminars is simply this. Buy one property a year for 10 years. Never amortize for more than 15 years, and never sell. Of course, you can modify and improve on that simple plan, but the goal always remains the same. To develop an investment portfolio that will provide you a generous stream of passive income upon retirement. That’s the goal. Never lose sight of it. To retire in prosperity with continuous rental income.
 
These days there are forces at work that can derail that plan if you are not careful. Let me highlight just a few.
 
1. CASH IN MY CHIPS
 
We have enjoyed an amazing run in real estate over the past five years. Here in Niagara prices are up in excess of 130%. And that upward trend in prices hasn’t shown any signs of a let up. That means that if you bought a property back in 2017 for $500,000 it’s probably worth in excess of $1,150,000 today. This is not news to you, I’m sure. Every day it seems we hear new reports of record real estate prices. That means, if you’ve owned a property over five years, with price gains and principal reduction of your mortgage, you’ve got a huge amount of equity tied up. It’s tempting to sell so you can get your hands on the money. But don’t! Keep your eye on the goal. Retirement income. That equity is still there, except now it’s in the property instead of the bank. But net worth is net worth. You need to invest your money somewhere and it is. It’s in real estate. If you must release some equity, re-finance. Don’t sell.  

2. THE BUBBLE MIGHT BURST

 
Whenever the real estate market is hot, the naysayers come out of the woodwork and predict a crash. They have done it for years. And yes, at some point after a very robust run, there may be a temporary price correction. But so what? Two things to keep in mind. It will come back. In 1990 I bought a property for $160,000. By 1992 it was worth $142,000. Today it’s worth around $825,000.
 
The other thing to keep in mind is that a temporary downturn will have absolutely no impact on you in your Money Machine property plan. Keep your eye on the goal. You aren’t going to sell. As long as people need a roof over their head, and they do, you can keep your properties rented, service your debt from the rent proceeds, and carry on. How did the fact that my property dropped by $18,000 affect me? It didn’t. And if and when a dip occurs, it won’t affect you either.  

3. PROBLEM TENANTS
 
Rents, along with prices have skyrocketed in the past few years. It’s a wonderful time to be renting out property. And with today’s real estate prices, there are a lot of quality tenants that will remain so, because it’s harder to get into the market. That’s good news for Landlords. But there are a lot of problem tenants out there as well. And regardless of how carefully you screen, sooner or later a ‘bad tenant’ is going to slip through and end up in one of your units. This more than anything else is the cause for a lot of Landlords to sell out. Don’t do it! Weather the storms. Like a stone in your shoe, you’ll get that tenant out and replace them with a good one. But while you are doing so, enduring headaches associated with evictions, keep your eye on the goal. You’re in it for the long haul.  

4. DELAYED GRATIFICATION
 
This goes hand in hand with the reality that your properties are going up in value. Along with the hands-on care, the maintenance, the occasional bad tenant, you really don’t see much payoff from your labours. Sure, your properties are going up in value, but that equity is locked into the ownership. And most, if not all, the rent that isn’t needed for operating expenses is going into paying down the mortgage. You’re experiencing delayed gratification. One day benefit, but not now.
 
Here more than anywhere else, you need to keep your eyes on the prize. You’re in it for the long haul, but there is a very viable benefit up ahead. In the meantime, keep yourself encouraged by doing regular and at least annual net worth statements. See how much your property has increased in value. Calculate how much you have paid off the mortgage. What have you gained in equity?
 
I remember many years ago being at my Aunt and Uncle’s farm and seeing a plastic hen’s egg on the fridge. I asked what it was for and they explained to me, that if they keep taking the hen’s eggs away every day, eventually it’ll get discouraged and quit laying. The plastic egg gave it hope and it kept laying and stayed on the nest.
 
A net worth statement is your plastic egg. But the best part, one day you’ll find out that all the eggs along the way, and then some, are being kept for you. There is a payoff ahead for retirement. A huge one! Keep your eyes on the prize.