Last week, we talked about learning from those who have already done what we want to achieve. This week I will discuss the “Fat Bear” strategies of Real Estate, and why this is a chosen investment vehicle for most wealthy people.
We have all heard of statistics thrown around like “90% of self made millionaires achieved their wealth through real estate.” I found it difficult to verify the data that supports the exact % of millionaires made through real estate, but the truth is that real estate is a cornerstone building block for the wealth of many “Fat Bears.” Lets take a look at a Fat Bear’s meal.
- – a 2011 Deloitte report has 9% of top millionaires in the U.S. had over a third of their wealth in Residential Real Estate. For the top 1%, this is true for almost a quarter of their wealth. (even after the 2009 U.S. housing crash!)
- – there is about 1 millionaire per 13 people in the U.S., and 1 millionaire per 50 people in Canada.
According to a National Bank Marketing Research and Market Intelligence report, the asset allocation breakdown of the average Canadian millionaires is as follows:
– Business equity (28%); – Residential R.E. (21%);
– Domestic stocks (21%) – Foreign stocks (11%)
– Domestic bonds (11%)
I do not suggest real estate “because everyone is doing it.” Not ”everyone” is using real estate in their financial toolbox, and property ownership is not for “everyone.”
However, the fact is that residential real estate represents a large part (21-44%!) of millionaire wealth, even after a huge crash. This means to me that the proper use of real estate is a “Fat Bear” strategy. Some features of the Fat Bear strategy of real estate investing are multiple sources of income, a hedge against inflation, and leverage. These elements, all within one financial instrument, are what makes real estate such a powerful creator and store of wealth.
Today I will share the elements of a “Fat Bear’s meal” by talking about multiple sources of income(Fat Bear strategy #1), and tomorrow I will address the other Fat Bear strategies.
Multiple Sources of Income are a Real Estate Meal
In keeping with the theme of hunting for food, and thanks to the wisdom of a man I greatly admire, Mr. Thomas Beyer, it is helpful to think of the profit centers of real estate as a meal.
1. Monthly Cashflow
Think of Cashflow as the appetizer of your Real Estate Meal. I only purchase properties that will Cashflow. That means rents cover ALL expenses (mortgage, taxes, utilities, maintenance, insurance, vacancy risks, renovations, management, etc…) PLUS a bit extra to build your “sleep at night fund.” Without Monthly Cashflow, you introduce risk into your real estate. A zero, or worse, negative Cashflowing property is not an investment, it is speculation. Speculation leaves one to hope values go up, so one can recapture down payment and holding costs.
2. Mortgage Principal Paydown
This is the main course of your Real Estate Meal, and the biggest profit centre. Like the main course at dinner, it can be a bit boring(especially if I was the one cooking), but this is where you get most of your sustainable calories. Because you will be holding your property for 5 years or more, having someone else pay off your mortgage adds up to significant numbers.
This is like dessert of your Real Estate Meal. Appreciation, or increase in value of real estate, receives the most attention because it is exciting, it is fun to talk about, and it makes great news stories. The reality is that although important, you can still have a satisfying meal without dessert, and you can still make money in Real Estate without appreciation.
That being said, I like dessert, and I will go out of my way to get it, so the topic of appreciation deserves more attention. There are three main ways to increase a property’s value:
- do renovations that increase the property value more than the cost of the improvements
- do renovations to increase rent, but only if the increase lasts longer than the useful economic life of the improvement during your holding period
- look into your Crystal Ball to know exactly where prices will increase, and only buy there (more on this later)
Until next time,