Hello Hamilton Real Estate Investors!
Do you remember that movie – The 6th Sense – where the little kids say to Bruce Willis, “I see dead people?”
I’m not gifted like that, but I do see risk everywhere, LOL
My last corporate job was for seven years at that mega computer technology company called “big blue.” More specifically, I worked in a risk management software company as a division of big blue, where we created and sold million-dollar risk management software.
Combining that with my interest in math and statistics, jobs-wise, I was in a good place.
Back to how I see risk everywhere…
I’ve interviewed hundreds of successful investors for the podcast, master-minded with some of the best investors in Canada, and we have 500 investor clients.
I’ve seen a lot of what works and what does not work; hence I keep my investing as boring as possible.
Thankfully that’s been a wonderful strategy for our clients, Cherry and I, to keep things boring.
And not just in real estate, either.
Just yesterday, I was at a golf tournament well attended by investors, and the discussion went to Private Lending, where in our community, flippers will borrow at higher interest rates to finance the renovation or 1st mortgage or more.
Personally, I don’t private lend; it’s too much risk for my preference.
I understand why many do, and it’s for cash flow, but as an idea, I’ve shared with many Stock Hackers, why not get a 5-6% dividend-paying stock?
Combined with some beginner Stock Hacking strategies, I could get my returns up to 10% very passively where the underlying asset is, for example, a Canadian Bank. I have more faith in a bank being around for decades to come vs. an individual real estate investor.
How one builds a large enough portfolio of dividend-paying stocks, however,… is the question 🙂
Living freely off of passive income is the dream of most real estate investors.
After all, there is no greater sign of a successful investment than the ability to sit back and enjoy your life, knowing that you set yourself up for success.
So, how do real estate investors achieve this passive income?
The answer is CASH FLOW.
What is Cash Flow?
In short, cash flow is the remaining cash earned from a property’s rental income after all expenses have been paid.
This is the profit – or loss that investors have to work with each month.
As a result, it is frequently used as a key metric to gauge just how profitable and reliable an investment will be.
Calculating Cash Flow
When calculating the cash flow on a property, you start with the rental income.
For this example, let’s say a home you are renting out brings in $2700 per month in rental income.
From there, you need to calculate all of the expenses that you need to pay on the property, which includes the mortgage, property taxes, insurance payments, maintenance fees, property management costs and utilities (if they are paid for by the property owner).
In this case, we will say these expenses totalled $2350.
That means that in this case, the property would earn you $350 each month in cash flow.
What is Negative Cash Flow
Sometimes, a property will have more in expenses than it receives in rental income. This is known as negative cash flow.
A property can sometimes have negative cash flow due to vacancies or late/missed rent payments. However, some properties simply do not make enough rent to break even.
These properties cost money to hold on to but may be worth it if the appreciation and equity are substantial enough.
Many Toronto Properties Have Negative Cash Flow
One of the biggest things you need to be wary of when investing in real estate in Toronto and the Greater Toronto Area is the fact that many properties in the region generate negative cash flow.
This is not a problem for investors positioned to cover the costs and wait for the property’s value to rise, but if you are looking for cash flow, you need to be careful of these investments and learn how to avoid them.
These properties produce a negative cash flow for a variety of reasons.
These can range from rising interest rates, the historical inflation rate and the disparity between rising property values and the current demands of the rental market.
The Relationship Between Cash Flow and Risk
As the scale of your investments increases, so does your potential to generate cash flow.
A single-family house does not share the same potential for cash flow as a triplex or an apartment building.
However, as your investments grow, so does the risk you take as an investor.
While it is true that your potential profits from larger real estate investments are much larger than that from smaller investments, the expenses associated with making the investment grows as well.
This includes higher monthly mortgage payments, higher insurance costs and more intensive property management needs.
The same holds for high-traffic investments such as retail properties, Airbnbs and multi-student rentals.
With each of these properties, the increased volume of people accessing and utilizing the property increases the risk of the property suffering wear and tear or requiring sudden property maintenance.
How Risk Impacts Your Buying Power as an Investor
When you apply for a mortgage, the lender will determine the level of anticipated risk associated with providing you with funds to purchase the property.
This is usually determined by looking at your debt-to-income ratios to assess how much of your income goes towards paying off recurring expenses and pre-existing debts and analyzing the property you wish to purchase and the potential profits the property can generate.
Sometimes, even if you are in a strong financial position, lenders may not want to lend on certain real estate investments because of the high risk that comes with the property.
Student rentals can be incredibly profitable but are also notoriously much more likely to suffer sudden property damages due to the perception that they will be more likely to damage the property or skip out on rent payments.
In the same vein, lenders will be much more willing to lend against low-risk properties because they are more confident that they will see a proper return on their investment.
Structuring Your Investments to Manage Your Risk
Naturally, you do not want to take on too much risk as an investor; otherwise, you risk losing your hard-earned investments.
However, the solution to this is not avoiding high-risk properties altogether. After all, you do not want to avoid the high returns that some of these investments are capable of generating.
So, what are you supposed to do?
The answer is to structure your investment portfolio to have a healthy balance between high-risk properties which generate significant amounts of cash flow (or appreciate significantly), and reliable properties with lower levels of risk you can use to support these other investments.
That way if your high-risk investment has a rough month, your low-risk properties can work together in order to cover the losses.
It may also be a good idea to diversify your properties across different types of real estate and other regions in order to avoid individual market downturns from causing serious harm to your investment portfolio.
The Key to Making Profitable Investments
If you would like to pull together your investment planning and strategy into a single clear, integrated system like our 500+ investor clients, including 45 self-made real estate investor millionaires, our Vision Architect Program™ is right for you.
Please email us at firstname.lastname@example.org to speak to one of our investor specialist Coaches at iWIN Real Estate, the FOUR-time Realtors of the Year to Investors in Ontario.
If you are just looking to learn more and not ready to move forward on an investment, get the new FREE book titled “The Canadian Real Estate Investing Playbook,” teaching you the 8 most powerful real estate strategies to help YOU retire early.
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I hope you enjoy it.
Until next time,
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