An alternative title for this post could well be “Making the big bucks in real Estate is simple and here is how to do it.” or “Selling listings is half my income, but I am willing to tell you not to do it to help you get ahead. Why don’t people trust me more?”

A piece of advice that I have long been sharing is that it is generally wiser to buy real estate than it is to sell it. Most don’t do this for one reason or another but those who have gone through with it have made tens or hundreds of thousands of dollars once they’ve waited the five to ten years. It gets even better after that. It amazes me that more people don’t have enough of a long term vision to make the big income in real estate by doing this. The Realtors sure do. From what I can see, holding on to Property and finding a way to rent it out is how Realtors make most of their money in the long term, but it’s something anybody with a stable income can do. Even if that income is fairly modest.

The first thing everyone should understand about real estate is that you have to pay your mortgage or bad things happen. I think everyone gets that. The second thing everyone should understand is the long term patterns of real estate prices. Most people don’t seem to get this which is why I bring it up so much in this blog.  I really feel like I am a nag about this but I also think that society needs to hear this. If more people appreciated this, society at large would have a very different relationship to real estate.

The reasoning is quite simple. Real estate values increase over time, there is a lot of anecdotal info to support this and statistical information as well. I have long noted that the monthly rent for a property at the time of purchase is similar to total cost of ownership. The maind difference being that ownership requires you to get that downpayment and an approval together first. It’s common for the monthly rent to be a couple of hundred dollars below or above the monthly payments, but generally speaking it’s not far off. Over time, the value of the property goes up and so do the rents.

So why not buy today at lower prices and rent it out tomorrow at higher prices?

If you are patient, you can allow the Rental income to increase as the years pass while your mortgage payments decrease. This way, someone else will pay most of, or with a bit of luck, all of of your mortgage at first and it probably won’t be more than a few years before they are covering the whole mortgage. It won’t be much longer before profit arrives and just grows from there. That said, I do recommend that your plan assumes no rise in value for five to ten years. Those are worst case scenario numbers for if say, you bought sometime around market peak and we don’t really know when market peak is until at least a few months after the fact.

There are various ways you can structure this. It’s not all that complicated, it just takes long term planning and the will to see it through.

Allow me to spell this out in a way the lets you plug this info into your life plan regardless  of where you are in real estate ownership:

Situation A: Right from the start, with the first time you buy real estate:

Maybe you’re reading this and you haven’t even bought your first property yet. Maybe you’re a first time  Buyer on a tight budget. That’s all good because you’ve found this info really early in the process. It’s a wisdom most people don’t have until they are older, if at all.

Making money off of rental properties doesn’t need to start with you buying a place that is designated as an investment property from the start. However, it’s ideal to make it part of your overall plan from the get go.  If you have this kind of thinking right from the very beginning you will have an easier ride later in life.

If following this kind of vision, the first property you buy to live in will likely become your first rental property when you move into your next home. Have this in the back of your mind when you buy to help you choose wisely. For example, it’s useful to know that a lot of strata properties don’t allow rentals. You may even decide to rent out an extra bedroom while you are living in whichever property you choose to give yourself a boost. You can use the few hundred dollars a month from rental fees to help make that transition into a bigger home easier by using it a means to create savings. If you are renting out a room it would of course help you save faster, but even if you don’t, the rental fees you will get from renting the property once you move out is income that helps you pay for the next place, again, making life easier.

You can also choose to refinance your home once the equity has grown, allowing you to take out some of the equity to help with the downpayment of the next one. This will of course increase your monthly payment a little on the property you are refinancing but if you think things through, taking rental incomes in to account, in many cases this is totally worth it and may not even affect your monthly budget in the end if you, and here’s that word again, plan it right. You may decide to stay in your current home or you may decide to buy something a little nicer and rent out the one you are in. If you work things out things right with your Mortgage Broker, it’s not unlikely that you will be able to upgrade your lifestyle by moving into a nicer place without having to increase your monthly costs.

If that sounds like pie in the sky type thinking to you, then you really need to keep reading this post and the ones I am linking to. This is much more than something I have just cooked up as something to write about, it’s core to my perspective of real estate that I’ve been building since I became a Realtor in 2006. If you remain skeptical, go have a chat with your Mortgage Broker. I don’t imagine they’ll disagree with me, but rather add depth to the conversation by telling you some of the can’s and can’ts of the current lending rules and some input on interest rates which will help you figure out what you may qualify for.

Situation B: You already own a home

Maybe you want to move into something nicer or maybe you want to buy that investment property now and stay where you are.

Just like I mention above, you can save up the whole down payment or you might want to explore the idea of refinancing your existing home once the value has gone up and take a bit of equity out to use as a downpayment for the next place. Either way, you’ll still need mortgage pre-approvals first so… talk to your Mortgage Broker.

We’ll skip past the process of buying for brevity’s sake, and point out that you have the option of either handling the rental yourself or having a property management company do it for you. The going rate for having it managed, for as long as I’ve been around, is 10% of rental fees. It’s a pretty sweet arrangement because although you are on the hook for maintenance and things like that, you basically just get some money sent to you every month. They do all the work of finding tenants and dealing with them. Maybe the 10% is worth it to you, maybe it’s not. It depends on your lifestyle and your personality.

The plan is that a few years after setting yourself up with a rental you can use the income to help you move into a nicer place. At this point  you will have two properties that you bought at some point in the past when prices were lower but rents have gone up so you have hundreds of dollars,  or more, coming in each month as income that is mostly passive.

If you choose a modest enough property as your next step, your monthly bills may not even have to go up despite having moved up in lifestyle. Over the years, as those rental fees increase they will only further help your lifestyle. You can repeat this pattern as many times as you like until you expire or decide to cash all your chips in by selling all the properties. If you sell after many years of ownership you could go on a spending spree with hundreds of thousands of dollars later in life because you decided the kids will get no inheritance since you’re sick of their snivelling. Or… you could keep the properties and coach your kids on the plan hoping they follow it too. After all, doing this multigenerationally would only mean that you have started a situation that allows your kin to become one of those money having families that run things and don’t really need to work. Maybe that’s a good thing or maybe you think it’s better for them to have to make it in their own way. That’s an individual choice based on your values and what kind of adults you think they’ll turn out to be.

Situation C: You own a home and want to move far away:

This is much like situation B except you will certainly need to use a property management company. In this modern era, moving money around isn’t as hard as it was not long ago so I think you should be able to find a way to use the income in your new life wherever you are.

Situation D: You inherited a home:

Some people just want to cash in the chips of their inheritance, or just plain have to because the other siblings or beneficiaries insist on selling the place to do just that.  Me, I’d opt to rent it out unless the home was too big or too nice to make sense as a rental. If I did sell it, I’d almost certainly use the proceeds to buy, you guessed it, more rentals.

Situation E: You own your home and a rental property:

Well, you’ve already started down the path. After a few years, you should be starting to profit form it and you have gotten used to the system of dealing with tenants a bit. There have no doubt been some ups and downs with one or two of them by now but you’ve got your head around the system of that and things are starting to feel easier. So, now, you can just use the tips mentioned above to do it again and start to feel like the battle is finally a downhill one.

This is a long term plan, expect it to take five, ten or even more years to come to fruition based on  whatever stage of the real estate price cycle you got in at, but it’s a pretty safe and pretty easy way to make your later years an easy ride. Chances are that you won’t have to wait that five to ten years before it starts to work out for you, but my philosophy is to plan for the worst, hope for the best. That way, whatever surprises you get are good ones.

And yes it’s worth pointing out that  you’ll no doubt get some nonsense phone calls or some issues from tenants once in a while but that’s the cost of doing business. Also, if you choose your tenants carefully this won’t happen as often.

My position is not shared by all, and it’s certainly not something that every Realtor will promote because listing properties that need to be sold is the best kind of business we get. Also, the mainstream media will probably never tell you this because they are usually peddling drama and fear as this sells their ad-space better than informing people on how to get ahead. I mean, have you noticed that there are basically only two kinds of real estate articles? The vast majority are either “Prices are going down, it’s a crisis!” or “Prices are going up, it’s a crisis!”. If you are reading this you are already well beyond that kind of short term thinking. You know that it’s all part of the cycle of things and it’s something you use to your benefit rather than recoil from in fear because you haven’t had the few minutes of education required to realize that there is more to the story.

And that, is exactly what has set the tone for this blog. I want people to be better informed about how real estate really works and I want them to be able to make their own lives easier using this knowledge. Although I have met others who say they share this sentiment I am thus far the only one I know of who is taking the time to lay everything out for the public. I think the info in this post is so potentially useful for so very many people that I’ll restate my point in another way. Not because I think my readers of are dumb, but because I really want to drive it home and make sure people remember this stuff from among the firehose of info they are force fed every day.

So, looking at it one more time in a different way; The golden rule is that real estate prices go up and down in the short term but up in the long term. It rises faster than inflation in the long term. Until the population starts to decrease in our corner of the world, of which there is no sign of happening yet, I can’t imagine it going any other way without a war or some other catastrophe taking place. Let’s say you had bought a property ten years ago and know it to now be worth a little more than twice what it was worth at the time. (This is often the pattern.) Instead of selling it before buying again, you can rent it out at today’s prices and receive an income from that property which you can use towards paying for your new one. Should you decide to do this again in a few years, it will be even easier. This way, you will accumulate wealth throughout your life without having to work much for it. The hardest part is getting the first downpayment and mortgage approval.

Most people sell their existing home before buying the next one. This is understandable because the proceeds from the sale gives you more buying power for the next property, but in the long term it holds you back. In the process of making that move you have to pay for a variety of things like lawyers, any fixing up you have to do in order to make the property more appealing and Realtors too. Us Realtors are expensive. I will defend the notion that we’re worth what we charge to my last breath but, for you and your interests, that money is better left in an appreciating asset that generates income than giving it to us. I mean, I’m happy to take it but I want you to know that you had this other option because I think it’s the right thing to do.

Obviously, there are exceptions where this plan doesn’t make sense for someone’s life situation. Like if you’re having kids and you can’t afford a big enough place for the new larger family without selling the existing one, or if you are retiring and want the cash, or if you have just lost your job and can’t make the payments… these are good reasons not to follow my formula. Conversely, reasons like “I am moving overseas” don’t matter so much because I have a number of clients who are in that position and they own property here which they are renting out via a property management agency and use the income to help them in their new life.

Finally, I’d like to say that the above would not be my entire investing plan. Although history has long shown us that real estate is a safe investment if you think long term, the pattern could potentially change and you don’t want to be forced to sell because for some crazy reason rental fees went through the floor and you don’t have enough other money to make ends meet while you wait for them to come back. I’m not advocating that anyone put all their eggs in one basket, but I think this would be my main basket.

Ryan Coffey