CANADIAN REAL ESTATE INVESTING 101

By John W Carter, CEO

Parkhurst Asset Corp

March 2013

Content

� Background on John� Historical returns vs. other investment options � Why invest in real estate� Hurdles and challenges, and how to overcome� How to run the numbers on a property� Options for investment in real estate � Questions

Background on John W Carter

� John has over 10 years of experience managing his personal portfolio of single family properties & apartment buildings as well as a number of joint venture holdings. He has done so successfully through all market cycles.

� Since 2002 he has transacted business volume with clients and his personal portfolio of over $70,000,000 and over 100 property transactions.

Historical returns vs other options

Historical returns vs. other options

Why Invest in Real Estate

Why Invest in Real Estate

“Ninety percent of all millionaires become so through owning real estate.”

-Andrew Carnegie

� Leveraged appreciation� Equity repayment – tenants pay

down your mortgage for you� Tax advantages� Cash flow � Should achieve 12-20%+ ROI on

cash invested. � Depending on financing strategy, breaks down

as: 3-5% cash on cash return, 5-8% with equity paydown, and overall return includes appreciation over 5 years+.

Leveraged Appreciation

Equity Repayment & Appreciation

Income Grows too

Long Term Appreciation Formula

Research provided by Real Estate Investment Network & www.donrcampbell.com

Tax Advantages & Cash Flow

� Tax advantages:� Can write off interest on debt used to buy investment

property � Depreciation of asset value against other income� Growth of capital is tax deferred until sale � Tax on sale treated as capital gains, and thus only 50% of

gain is taxable� Cash Flow

� Should always invest into positive cash flow from day one � Debt should be positively leveraged (explained later in

numbers)� Invest in growth areas, and where high demand for tenants.

Ideal property types are 2 bed condos, 3 bed townhouses, or 3+2 bed suited houses

Hurdles and Challenges

Hurdles and Challenges Overcome

“You make your money real estate investing on the appreciation, but you need cash flow to wait for that”

- John Carter

� Not enough cash� Friends, family, business associates to JV with

you� Qualifying for mortgages

� Get co-signer � Finding viable properties

� Hire a Realtor that owns investments properties themselves

� Target growth markets where numbers make sense

� Fixing toilets, tenant horror stories, and 2am phone calls � Hire property managers, have cash flow to pay

for them by structuring investment properly up front, and do annual inspections yourself.

The Numbers

The Numbers

� Key terms:� What is NOI?� What is a cap rate? � What is positive and negative leverage?

� Proforma examples

The Numbers

� Net Operating Income (NOI) � Income after all expenses, but not including debt payments. Is an

equalizer to compare investment properties, and the primary value of an investment property

� Capitalization Rate � Simply put, it’s the NOI divided by the purchase price. Represents

the return on investment assuming purchasing the property with zero debt. Is the equalization for comparison of various properties.

� Positive and negative leverage� Positive leverage is where the interest rate for debt on a property is

lower than the cap rate. The result is the investor achieves an ROI on the banks money as the spread between cap rate and interest rate.

� Negative leverage is where interest rate is higher than the cap rate. This means cash flow is reduced to pay debt payments, and can result in the investor being short on cash to pay the mortgage and potentially losing the property to foreclosure in future.

Proforma Examples

Proforma Example

Options for investing in real estate

Options for real estate investment

� Equity options:� Buy rental property – 12-20%+� Invest cash as a joint venture partner with a

successful real estate investor – 10-20%+� Invest cash into a limited partnership or private REIT

– 7-15%+ (some are RRSP eligible) � Invest in public REITs – 7-18%+ (avg. 18% in 2012)

(RRSP eligible through self directed account) � Debt options:

� Invest in private first or second mortgages – 8-12%� MICs (mortgage investment corporation) – 8-12%� RRSP eligible

Options for real estate investment

� If have $40-50k, and ability to get debt, buy a rental property� If not, invest cash with

JV proven investor (amount varies)� If less than $10k, invest

in public REITs� If over $10-25k, invest

in private REITs, but do diligence

Best options for starting out

Real Estate Investment Success Plan

1) Own your own home2) Keep your first home as a rental, and move up3) Buy single family properties with secondary suites4) Real life monopoly… buy 4 houses, then move to

apartment buildings � Focus on tenant screening up front, effective

management, cash reserve� Slow, strategic moves. Buy and hold min. 5 years� Refinance when possible to bring debt costs down.

Use caution when refinancing equity. Must still be cash flow positive, and use equity for re-investment only � Increase rents with market, but keep tenants better

Additional Resources:

www.ptrust.ca – Download investment guide and review ‘Learn’ section. Signup for our email newsletter

www.reincanada.com REIN – take the ACRE system intro. course and signup for newsletter

Any Questions?