“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” – Bill Gates
If you had a stressful 2023 financially, you’re not alone. We had an incredible bull run from 2009 to 2021 and, quite frankly, it seduced a lot of people into thinking that was normal. For many of you, a twelve-year run is all you’ve ever known, so why would you think it could be any different? And if things didn’t get challenging, why would you think it wouldn’t be temporary? After all, leading economists in early 2022 were telling us that inflation was transitory. Even the Bank of Canada (BoC) was telling us that high interest rates would be temporary.
You’re smart. But when nearly all your experience is within that bull run, and nearly every expert around you is telling you that you should have faith in the process, why would you question your success?
Now you are doubting yourself when in fact you just need perspective. You weren’t wrong in your approach; you just lacked the perspective and tools to protect yourself.
You are smart. Smart people assess the situation, regroup, and activate their next steps.
So why did I do well in 2023? It really isn’t because I am an oracle with special powers; I am not. I did have concerns coming into 2022, but I chalk that up to considerable experience and an intuition derived from my passion in the real estate investment sector.
I am older than most of you, so I have the benefit of having experienced things that you may have not. I didn’t personally experience the intense inflation in the 1970s. I’m not that old! But I did witness the stress my parents had with the resulting high interest rates. I even remember my mother mentioning how lucky one of our neighbours was for having locked in a long-term rate of 6%. I don’t know why that conversation stuck, but it did.
Through most of the 1990s when I was buying my personal houses, interest rates were relatively high. We were all used to it. It was normal. In 2005, I bought my first investment property. In my first podcast with Erwin Szeto in 2019, Erwin asked me what interest rates were like then. They were around 5% for a 5-year fixed and perhaps 4% for a variable rate. In 2019, that would have sounded ridiculous. Today, that sounds about right; maybe even favourable!
Buying that first investment property (a purpose built 4-plex), was a scary thing. It was necessary as I had no pension and I needed to find ways to prepare for eventual retirement. It was scary because we were a single income family where, quite frankly, we were spending as fast as the money came in and maybe more than that. I had no experience as a landlord, and I understood nothing about real estate investing. However, I was good at math and I had fear on my side.
Why was fear good? Because it made me think about “what if” scenarios. I knew I had to invest to secure my future, so saying no to a purchase didn’t feel like an option really. Instead, I channeled my fear into considering my risks and my contingency plans. When I understood my contingency plans, I had the confidence to move forward.
There are of course lots of risks of which some you cannot manage. But one I could manage was my mortgage interest rates. I opted for a fixed rate even though it was more expensive. Why? Because I could put a plan in place to deleverage and increase my cash flow when the five-year term was up for renewal. By doing so, it was literally one less thing I had to worry about, and it significantly limited my overall risk. It turned out to be a good decision. Interest rates climbed in the next three years, but then fell in years 4 and 5. I learned from this.
Risk management is a cornerstone of my investment business. It is not a tool to say why you should not do something (though it can), but it is a tool to help you manage the exceptions to your plan.
Here are the four crucial plans I create in my business:
The purpose of an operating plan is to outline the financial details of the real estate business for the upcoming year. Ask yourself – what is our revenue, expense, and debt profile? Consider structuring this as a series of proformas for each building you own all summed together. You can also add components for non-real estate business activity.
Your cash flow plan is crucial to help you identify the sources of cash inflow and outflow, ensuring the business remains financially stable.
The purpose of a capital plan is to define how the business will secure funds for property acquisition, renovation, or construction. Where are you getting money to buy, renovate, or build your next asset? Consider having more than enough capital (money) on hand to complete your plans.
A risk management plan aims to identify and mitigate potential risks that could impact the real estate business. What needs to be put in place to protect your business?
Use your risk management plan to plan actions to be taken before mortgage renewals to avoid equity top-ups or to take advantage of favorable rates. Ask yourself – what do I need to do before a mortgage renewal to ensure I do not have the lender ask me to top up equity or, if rates are favourable, allow me to do an equity take-out.
It’s critical to implement a proper plan to support your success this year and into the future.
Do this for your business; do this for your family. I refresh my plans annually and monitor them monthly.
Now as we head into 2024, consider the following:
Start by implementing the five essential plans – operating, cash flow, capital, risk management, and deleveraging. These plans serve as the backbone of your real estate investment strategy, providing a structured framework to guide your decisions and actions. Work on these plans now and refresh as necessary when you know more.
I have been buying properties on my own terms. Take advantage of a buyer’s market by assessing potential purchases on your terms. Fear in the market can limit competition, offering you opportunities to negotiate favorable terms. Be strategic in your acquisitions, considering long-term value and the potential for future growth.
Evaluate the value of properties based on current market conditions and interest rates. Steer clear of valuations rooted in the past, focusing on today’s parameters. This approach will ensure that your investment decisions are aligned with the current realities of the real estate market.
Regularly review the performance of assets in your portfolio. If any property is lagging in Return on Equity (RoE) or adversely impacting your operating and cash flow plans, develop a strategic plan for it. This may involve optimizing its performance, renovating, or considering a sale to reallocate resources effectively.
Explore opportunities to restructure debt to enhance cash flow and mitigate risks. This proactive approach allows you to align your financial obligations with your plans, taking advantage of favorable interest rates and optimizing the overall financial health of your real estate portfolio.
Seek ways to increase working capital, ensuring you have cash reserves for contingencies and seizing buying opportunities. Maintaining liquidity provides flexibility and agility in navigating market fluctuations and unexpected challenges.
Prioritize ongoing education to stay informed about market trends, regulations, and emerging opportunities. Continuous learning is crucial for establishing effective discipline in your real estate investment strategy. It equips you with the knowledge needed to adapt to changing conditions and make informed decisions, ultimately contributing to the long-term success of your investments.
Many people are asking about interest rates. I have my theories, and not surprisingly, they are not in line with most pundits. In a future article, I will explain my theory. But let me be clear, I view my predictions to be only slightly better than random chance. The economy is incredibly complicated and subject to things beyond our control. As such, establish your risk management plan for your debt! Whatever you choose to do, what if you guessed wrong? What if the pundits are wrong? What is your contingency plan? If things are better than you hoped, then that is upside!
Remember, you are smart! You can do this. Opportunity presents itself when others are cowering. Just focus on your discipline!
As a savvy real estate investor, safeguarding your investments is more important than ever. Our free risk management tool helps you identify, assess and mitigate risks, so that you can make strategic decisions with peace of mind. Download our free risk management tool today!
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