The Burrard Street Blog

“It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate.”
-Donald Trump

There is no doubt that some of the wealthiest people on earth made their money through real estate. Building wealth through real estate can give you financial freedom and more time to enjoy living! This is part one of a series of articles I will be writing on real estate investing for Canadians, expect at least one new article on the topic every two weeks. If you’re tired of hearing about other people making money in our amazing real estate market now is your chance to step up and get into the game.At the most basic level there are only 2 ways to make money through real estate: Rental income and capital gains. Understanding these basic concepts is fundamental in becoming a successful real estate investor.Here are some quick definitions:
Rental Revenue: This is the money you receive from tenants living in your properties. This is taxed by the government the same as any other income.

Capital Gains: This is the money you make from increases in your properties value when you sell. Income through capital gains is taxed less than rental or employment income and is only paid when the property is sold. You do not pay capital gains tax on your primary residence.

An investor usually earns income (or attempts to) from both sources. A property bought to earn a monthly income (often referred to as a revenue property) will often increase in value (resulting in capital gains when they eventually sell). Properties bought to be resold because they are expected to increase in value are also usually rented out to help with mortgage payments.

Some other terms you should know:
Cash Flow: This refers to actually money coming in and out. If your property generates more cash per month than it costs you it is said to have positive cash flow.

Equity: Equity refers to your ownership in a property. If you put $30,000 down on a $300,000 property you have 10%, or $30,000 equity. If that property goes up to $425,000 you now have 36% or $155,000 in equity. You can see how one is able to turn a small investment ($30,000) into a large profit($125,000).

Look forward to future articles covering everything from increasing your leverage to using options to make money with minimal risk.

 This site is a great place to post opinions, ask questions or recommend learning materials.For more reading on real estate investing I recommend:“Real Estate Investing in Canada: Creating Wealth with the ACRE System” by Don Campbell. It starts with the basics and is written for Canadians by Canadians. This book covers a lot of the little details. For the big ideas behind many successful real estate investors I recommend anything by Trump or Robert Kiyosaki. 

Like most people I never realized how important my credit score was until I started in this business. A credit score of 700+ (considered good to excellent in the lender’s eyes) will help you secure the lowest interest rate possible. A lower score will not prevent you from buying a house, but you may end up with a higher interest rate or additional fees. This also applies to car loans and leases (those advertised 0% financing are only for buyers with excellent credit).

Your credit score or “beacon” is used by lenders to predict the likelihood of you missing a payment over the next 2 years, whether or not you owe money or have balances on your credit cards have little influence on this score.

Your credit score is broken down into various components:
35% Payment History - This means paying your bills on time. You don’t have to pay off your credit cards every month, just always make the minimum payments. Most companies will allow you to send in a void cheque and set up an automatic minimum payment, or you can schedule it online with your bank.

30% Amounts Owed - Anytime you are using more than 50% of a credit account it lowers your score. Having balances below this on your credit cards does not lower your score. In the final months leading to a home purchase you may be better saving cash for a down payment and leaving balances on your cards. This decision should be discussed with a professional.

15% Length of Credit - Try and stick to the same credit accounts. It looks much better to have a visa you have used and paid since you turned 19 than constantly opening and closing accounts.

10% New Credit - If you are applying for every credit card you can or shopping around for mortgage rates this shows up on your report and lowers your score, you may be considered a “credit hunter.” Financial institutions will wonder why you were rejected by the other companies who checked your score, or why you are signing up for so many different credit products.

10% Type of Credit - The kind of credit affect how it is viewed. Bank loans are best, than major credit cards and lastly consumer cards (ie future shop, home depot cards). A bank loan paid on time every monthly looks great.

Things you can start doing now:
Everyone should pull their credit score (www.equifax.ca), it will cost you $23.95 and will give you your score and advice as to how to improve your score so you can have excellent credit. If you’re looking to purchase a home in the near future I can check and review your credit with you during the mortgage application process.

If you have high balances on your credit accounts try and pay them down or at the least spread them out (so no account is at 50%+ of its limit). If avoidable, do not apply for any new credit. Make sure not to miss any minimum payments, and if it is unavoidable call the creditor beforehand and ask for an extension!

If you are a student or looking to purchase in more than 2 years: If you don’t already have a credit card get two, building a credit history of 2 years or more is very important and having 2 different accounts is best. If you already have a lot of credit, don’t worry about outstanding balances, just make sure you do not miss payments. Try and stick to 2 or 3 credit cards and avoid closing accounts or switching banks too often.

This covers a basic introduction to credit. In addition to credit, lenders are also concerned with your income and the property involved, I’ll cover these 2 subjects later this month. I will also be writing an article on how to read your credit report in the future.

If you have any questions send me a message or better yet post it so everyone can see because you’re probably not alone.

Dan.

In some circumstances it is now possible to purchase a property with no down payment (infact in some circumstances you can get cash back, effectively borrowing over 100% of the properties value). Although this is heavily advertised by many banks and mortgage professionals it is not always advisable and may be a poor financial decision. While there are circumstances when you’re best decision is to buy a property with zero down, if the market shifts you can find yourself with negative equity. Here I’ll review the pros and cons of the Zero Down mortgage.

Benefits
-If you have a good income but have not saved any money it allows you to purchase a property without waiting. This is very appealing in a rising market, especially for recent graduates.
-You can keep your savings for new furniture, rennovations or other moving costs.

Downside
-You will pay significant insurance premiums (this covers the bank in the event you can’t make your payments) for the privilege of having a Zero Down mortgage.
-If your property doesn’t increase in value over the term of your mortgage you may have trouble refinancing when your mortgage comes due.
-These products are marketed hard because there is money to be made lending money, the more lent the more made. This is part of a scary societal trend of over borrowing. Before taking on any debt you must really consider your ability to make payments and what other areas of your lifestyle may suffer if you stretch your income too much.

Even in some advertising they show the client as broke! When used responsibly the no money down mortgage is a great tool, unfortunately irresponsible lenders tend to market it towards those who should not be using the product.

In conclusion the Zero Down mortgage is an excellent option to have available when used properly. Under the right circumstances this mortgage allows you to buy property immediately without waiting years to save a down payment. In a fast rising market this could be a major benefit. Imagine having waited 2 years from 2004 to 2006 to save a down payment to avoid insurance premiums only to have the property you want increase in value 40%?

If you’re considering this option send me an email and we can discuss your circumstances and decide what is your best solution.