Essential Insights For Investors in Canada’s
Real Estate Market
1. Distinguish Salespeople From Advisors
There is a significant chasm between those who seek to advise
and those who seek to sell - knowing the difference and adapting
your investment strategy in favour of legitimate advice will
drastically improve your investment results.
Many of those we rely on for real estate investing advice, such as
bankers, real estate agents, and mortgage brokers, have a vested
interest in a successful transaction, not your long-term financial
well-being. Many of the people whose advice investors have
come to rely on have incomes that are directly tied to maintaining
an overvalued market (has a real estate agent ever advised you
against purchasing a property?); their ‘advice’ may be free, but it
comes at a cost. Alternatively, consider advice you pay for from
someone with a fiduciary duty to represent your interests, such as
a lawyer; the advice you receive will not always be what you want
to hear, but it will be in your best interest. There is no such thing
as a free lunch, and never more so than when it comes to
investment real estate. Consider carefully the free ‘advice’ given
by those whose income is dependent on whether or not your
current deal goes through, not your long-term financial health.
At Anthem, we specialize in helping our clients profit during
market corrections by acting in a fiduciary manner, not as
salespeople purporting as advisors.
2. Know an Asset From a Liability
This may seem straightforward and common sense, but you
would be surprised at the number of people who confuse the two,
typically to their detriment.
Think of your home: On a balance sheet, a home is considered an
asset; however, on a cash flow basis, it is a liability, as it requires
cash outflow each month. There are ways in which you can turn a
home into a cash flow-generating asset, which will increase your
income and essentially pay for your liability. Many people believe
they know how to do this but in actual fact, they are simply buying
large amounts of liabilities they merely perceive as being assets.
Know your assets from your liabilities and ensure you are one of
the few turning your liabilities into true assets.
3. Be an Investor, Not a Speculator
Speculators invest based on emotion while investors invest based
on sound, logical principles - guess which one outperforms in the
long-term?
While most speculators believe they are investors, their
investment strategies are not based on sound, trusted investment
principles, but instead are driven by emotion and typically
influenced by what is popular at the moment. Conversely,
investors have a set formula and criteria they follow that is
independent of market movements and unencumbered by
emotion. By basing their investment choices on fundamental logic
and not allowing themselves to be swayed by mass market
movements, investors will undoubtedly outperform, regardless of
market conditions. Speculators are simply banking on the
appreciation of an asset, an investment strategy that is about as
sound as an all-in bet at the roulette table.
4. Be a Leader, Not a Lemming
Leaders stand out for a reason: They have the courage to find
their own path, even if that means doing or thinking the opposite
of everyone else. Leaders have the strength to go against the
herd, while lemmings look to see what others are doing and follow
the crowd. In the animal kingdom, this typically leads to all the
lemmings running off a cliff that no one saw coming - the financial
world is often no different.
If you want to outperform the market in the long-term, you must
be able to act independently of the masses and not be influenced
by popular or mass behaviour.
5. Focus On Your Portfolio, Not Transactions
When you seek advice for a particular real estate deal from your
bank, real estate agent, or mortgage broker, be aware that they
will base their response simply on that transaction, not your
portfolio at large and certainly not on how it will impact your future
ability to invest. Jumping into a purchase without considering the
long-term implications can lead to significant problems and
wealth-erosion for future transactions. If your first move is wrong,
undoubtedly your next several will be as well. It is only a portfolio
view, not a transactional one, that leads to long-term investment
success.
At Anthem, we think and act differently. We don’t simply look at
how one purchase will affect you at this moment, we look at the
purchase holistically and see how it fits with your overall portfolio
and the impact it will have on future investment opportunities.
6. Understand the Difference Between Debt and Leverage
Many people make the erroneous assumption that their debt is
actually leverage. Debt is something that is taken on to finance
liabilities while leverage is used to purchase assets. It is crucial in
any transaction – especially real estate – that you have a
comprehensive understanding of exactly what the terms of your
loan are to determine whether or not you are acquiring debt or
leverage. The terms of your loan – and whether or not you are
taking on debt or leverage – is often times more important than
the underlying asset itself.
7. Know Whether You Have Ownership or Control
While an investor may be the owner of a particular property, it is in
fact the bank, or the lender, that has the ultimate control of the
asset.
When times are good, it is difficult to see the distinction between
the two; however, in times of hardship, it becomes quite clear that
ownership is inherently more risky than control. Unless you own
your property or asset free and clear, it is the lender who holds
the ultimate control. Many people who have ownership, but not
control, make the erroneous assumption that their income and
expenses are set and within their control; most discover to their
peril that this is not so. Someone who has borrowed money to
finance an investment property has no more than conditional
ownership, and if any of the underlying conditions are not met, it
becomes acutely obvious who truly has control. Understanding
the terms of your mortgage or loan agreement is an essential step
in safeguarding your investment interests. (This topic is
discussed further in Tip #9: Know Whether Your Mortgage is
Conventional or Collateral).
8. Financial Awareness > Financial Literacy
While the importance of financial literacy should never be
overlooked, keep in mind that in 2008 the majority of financially
literate advisors lost a tremendous amount of money - it was only
a small minority who were also financially aware that made a
killing.
A person who is financially literate has a general knowledge of
how markets work, a basic skill anyone involved in financial
transactions should have. A person who is financially aware is not
only financially literate, but also has an acute awareness allowing
them to link information from the past, present, and future to gain
a truly holistic financial perspective. Those who focus on financial
literacy but neglect to develop financial awareness are only able
to see what’s directly in front of them. No matter the level of your
financial literacy, without awareness you will never be able to truly
see the advantages and disadvantages of various asset classes,
losing out on valuable wealth-building opportunities.
9. Know Whether Your Mortgage is Conventional or Collateral
When it comes to mortgages - the devil is in the details. While
many people believe that what they hold is a conventional
mortgage, what they actually hold is a collateral lien - and this is
not optimal. If you hold a conventional mortgage, your mortgage
is governed by mortgage laws and contains terms you would
expect; conversely, a collateral mortgage isn’t really a mortgage
at all and is actually considered a loan, providing much less
favourable terms. Think collateral mortgages are rare? They are
not - in fact, one Canadian financial institution offers only
collateral mortgages. Those holding collateral mortgages will find
themselves at a distinct disadvantage if (or when) interest rates
rise.
10. Return of Capital is more important than Return on
Capital
A rising tide will float even the least sea-worthy of boats. The
same is true for a speculative bubble. Investors often focus so
much on yield and growth in an up cycle, becoming greedy and
complacent, that they often pay too little attention to risk. In other
words, they understand risk aversion not risk assessment, and as
such their confidence and belief in their own skills becomes
skewed. First rule of investing: don’t lose money. Do this by
focusing on the quality of the investment and the exit strategy of
getting your money out not only while the tide is high, but also
when the market corrects.
Bonus - Value Experience Over ‘Things’
Studies have shown that how you spend your money has a direct
correlation to your overall happiness. Those who invest in
experiences (such as a trip to Bali with their family) instead of
material pursuits (such as a new watch) tend to be happier and
lead more enriched lives. Lifestyle and happiness are really at the
core of investing in assets; those with a more positive attitude
tend to make better investment decisions and experience greater
profitability in the long run.