Real Estate Investing Goals

Why is it so important to know what your real estate investing goals are? In order to figure out what type of property you are looking for you will need to know what exactly you want to get from real estate investing. Are you looking for monthly positive cashflow, long term appreciation and equity building, or a combination? Are you interested in investing for the long term or the short term? How much time do you have and what is your risk tolerance?

Before you can determine your property type, it's necessary to assess your current financial state and understand what you are trying to achieve and what is possible.

Your Five Year Plan - Goal Setting

This is a technique we use over and over. Sit down right now and write down:

1. Where you want to be financially in five years (be specific, for example do you want to be earning $100,000/year in your job, own two properties that are giving you $500/month in positive income, and have $20,000 in RRSPs)?

2. What can you do in the next 12 months to achieve each of the above items (once again, be specific and try and make the items measurable)?

3. What can you do in the next six months to move towards your 12 month goals?

4. What must you achieve this month to move towards your 6 and 12 month goals?

5. Review these goals regularly. We used to do it monthly, but now we just do it quarterly. Find what works for you, and stick with it.

Think about the impact these goals will have on your real estate investing. How do you know what type of property to look for if you haven't established the goals you wish to achieve from real estate investing? Some initial considerations before you begin a property search:

* Will you live in one of the rental units or will you be an absentee landlord?

* Do you have any savings to use for the purchase (or can you use your RRSP's as part of the first time Home Buyer's Plan)?

* What size of mortgage can you qualify for?

* What is your risk tolerance?

* How much spare time do you have to devote to the property?

* Do you have any construction/renovation knowledge (or know somebody that does)?

* Will you manage the property yourself, or will you hire a property manager?

* Can you afford to supplement the property monthly if necessary?

Think carefully about your answers, as each one has an impact on your choice of property. For now, let's focus on the very first decision: Living in the building with your rental unit or being an absentee landlord.

Living in the building

Perhaps you just want to get your foot in the door in a nice neighbourhood and this is the best way to afford it, or the property you want to purchase needs some work and you want to live in it while you renovate it. Whatever the reason you want to live in your rental property, be prepared to take the good with the bad. The benefits that come to mind are (especially over a scenario where you are currently a renter):

* Cashflow from your home (tenant pays for some or all of your mortgage)

* Affording a better location with the rental income than you could otherwise qualify for and carry

* Appreciation on your home, and

* Tax benefits of repairs you do (be sure to speak to your accountant as not everything is eligible).

There are downsides to living in your rental property though:

* Potential for late night disturbances

* Feeling unsafe in your own home (but there are things you can do to carefully screen your tenants - we'll discuss in a later edition)

* Stress of having to deal with immediate problems (both large and small) because you are located there, and

* It's easier to "justify" spending more than you can afford on renovations because it is "your home" and you want to make it nice.

Absentee Landlord

If the down sides sound a little too much to handle then being an absentee landlord might be the answer. You may still benefit from:

* Cashflow

* Leverage other people's money (tenant pays down the property's mortgage)

* Tax benefits (although you will have to pay income tax on the rental income - again speak with your accountant)

* Appreciation, and

* If you choose to hire a (good) property manager, you barely have to think about your property.

Of course, if things go wrong you may not know about it because you aren't there. Problems that could have resolved themselves easily early on can multiply and create very dramatic issues. As well, if you choose to hire a property manager there are a whole host of other issues that can arise if your property manager turns out to be a dud (in a few months we will tell you about the property manager that stole from us, and tell you how you can take steps to protect yourself from the same thing).

Bottom line is there are positives and negatives to both situations. We lived in one of our properties (a tri-plex) for almost two years. We had two police visits, loads of stress over a tenant we tried to evict, and we spent more money on renovations than we would have if we were not living there. However, all of that was worth it because we lived in an area we couldn't afford to live in without the rental income, we were able to slowly renovate the house and it's now increased in value substantially, and we were able to write off many of the expenses of our home against the income we get from the two other units.

So, will you live in your rental property or will you buy a place that isn't going to be your home? How does that fit with your real estate investing goals? Now that you have some things to think about, it's time to start figuring out what types of property investments will meet your goals.