• Book no. 5 : The Wealthy Renter by Alex Avery

People assume that buying a principal residence makes good financial sense. Why throw money away on rent, right?  Not so fast, says Alex Avery. Investing is all about leverage, so the question should be: what else could you do with that money? Avery thinks you can find better ways to leverage your down-payment money, instead of plunking it into a single-family-home.

Some Numbers

Let’s take a simple example. Suppose you want to buy a condo or cottage for 300k. Let’s assume you put down 20% (60k). At 4% interest, these payments will run you 1250$ / month. Add 200$/month property taxes and the same in condo fees or, in the case of a home, 250$ in maintenance (no upgrades!!), and you’re running 1950$ in monthly payments. None of these expenses is tax deductible. You’re building equity at a rate of about 500$/month. Your ROI in terms of building equity is 6000$/60,000$ or 1%. Sound like a good investment? I’m thinking, Meh.

“What about market appreciation?” you say.

Okay. Let’s assume 3% appreciation per year. (We’re not accounting for the ups-and-downs of real estate cycles). You’re now making 4% on your money. Still sound like a good investment? Remember: your payments are made with after-tax dollars. None of the work or maintenance you do is tax deductible, neither is your mortgage interest. Sure, you won’t have the capital gains hit when you sell. But still, 4%?

Let’s consider what happens if you put the same money down on a rental property. Your cost structure is the same (1950$ / month), but now you’re making 1950$ in rent. Also, you expense all sorts of things to help create a loss in the early years of ownership, creating a tax advantage. You can also expense your mortgage interest.

What about my rent? you say. You need a place to live.

Sure! Let’s make your rent 1000$/month. In this case, your out of pocket is half the amount it would cost you to own.

Now, let’s say you’re still making 3% appreciation like in scenario 1, but you’re also saving 1000$ per month because your tenants are paying your mortgage and building expenses. Add 12k to the initial 6k being capitalized. You’re now making a 30% return, plus the 3% market appreciation. That’s 33% return versus 4% as a homeowner. See Avery’s point?

I Hate My Landlord’s Kitchen

But wait, you say. There are other blah things about renting. I can’t upgrade or really customize my place, right?

Says who?

I’ll tell you right now, if one of my tenants offers to redo a kitchen for me, I’d happily reduce the rent a bit. Consider what happens if you spend 5k redoing your landlord’s kitchen in scenario two.

Suppose you negotiate a 100$ rent reduction in exchange for 5k of renovations. You now save 13,200$ on your living expenses in comparison with scenario one. Subtract 5k for the kitchen renos from your savings, and you’re still ahead by 8,200$ over the person who bought their home. Now add the 6000$ of equity. That’s a 24% return! Still think becoming a landlord and redoing someone else’s kitchen is such a bad idea?

The key idea in Avery’s book is this: you need to understand the cost-structure and opportunity cost of plunking down-payment capital and after-tax dollars into a principal residence. His calculations are sometimes a bit hard to follow (maybe like mine where in this summary?), but the reflections these two financial scenarios is really important before making investment decisions.

That’s why I put his book in position number five on my list.

• Book no. 4 : Secrets of the Canadian Real Estate Cycle

It may sound a bit silly, but the main idea in Secrets is that there are real estate cycles in Canadian markets and that we, as investors, should be mindful of these cycles in our purchasing decisions. Amazing, right? In all our excitement about investing, we sometimes forget to assess where our particular market may be in it’s inevitable up-and-down price cycle.

Influencing Factors

The authors point out that real estate markets in Canadian cities are influenced by a very specific factors. Because real estate cycles are long (usually many years in depth), and because the media give us all sorts of conflicting information, we sometimes forget that there are a limited set of elements that come together to determine real estate prices and the availability of housing both for renters and owners.

Authors Don R. Campbell, Greg Head, and Kieran Trass do their best to name these influencing pressures in Secrets. For example, net incoming migration, economic patterns and industry concentrations, amount and quality of available rental housing, as well as possibility for geographic expansion are all factors that impact local markets. Rent control, for example, like in Montreal, or lack thereof (like in Calgary) can also greatly affect building profitability. Macro- factors such as interest rate trends and government regulations (especially in Canada’s regulated banking industry) also impact both local and national markets. (Think of the Bank of Canada’s lending laws or Vancouver’s foreign buyer tax as a few examples).  

Case Studies

The authors carry out case studies of each of Canada’s major markets (Toronto, Montreal, Vancouver, Ottawa, Calgary). They present some of the different forces that led to boom-and-bust cycles in each of these cities in the last decade. The cases studies are super valuable in terms of illustrating how different markets respond to different types of pressures. (For example Toronto has an incredible rate of growth due to immigration, whereas Montreal has limited on-island space. Calgary has a very resource-based economy, and so on.)

The one weak point I found in reading is that the authors spend a lot of time stating and re-stating that there are wise investors, and lemming-investors who tend to jump over a cliff because of frenzied information in the media. There’s obviously truth in this. That being said, at times I found this detracted a bit from space that could have been used to elaborate on more tangible and practical tips for understanding real estate cycles.

Still, this book is a must-read for any Canadian investor looking to make a buck and capitalize on the up-and-downs in his or her local market. That’s why I make this book my no.4 pick.

• Book no. 3 : More Than Cash-Flow by Julie Broad

Julie Broad is not a happy camper. Her book begins by voicing her (intense) disappointment with some of the (very expensive) real estate seminars she attended. Despite her level of anger, there are two really great things about this book. First, Broad really puts into perspective the realities of owning rental property.

Crackheads & Roaches

From crack-head tenants to the challenges of owning rental property in far-away places, she gives the would-be investor an up-close-and-personal set of impressions of what it means to be a landlord. This is valuable because so few authors and speakers who deal with investment property are really clear about the weird, wonderful and wicked realities that come with tenants and rental buildings. Broad pulls no punches here!

Bigger, Better, Bust

The second very important thing she does is question how the real estate coaching industry celebrates more deals, less money down, better numbers, a bigger portfolio. A lot of educational material on real estate investing celebrates high-risk leveraging practices. Workshop presenters often tell stories of investors doing fifty, eighty, one hundred deals in a year. What they don’t tell us, Broad suggests (and I agree), is about all the heart-attacks and bankruptcies that happen because newbie investors go to far too fast. Depending on your profile and ambitions, slow-and-steady may be a better idea than fast and furious.

#Landlordlife

Overall, what I like about Julie’s book is that she paints a very realistic picture of what it means to landlord, exploring what happens when real estate investment is a key part of your financial picture. This is rare in the industry, and it’s valuable. I appreciated her anger a little less. But, sit tight, read past this, and you stand to gain some valuable insight into what life as a landlord may be like.

• Book no. 4 : It’s Not About Money by Brent Kessel

  This book is not specifically about investing in real estate. So what’s it doing in a top-5 list of real estate books?

  Well, so far no one has written a real estate investing book that so cleanly addresses the practice of living a financially free and fulfilling life. Kessel’s book is ultimately about money management and financial planning. I highly highly recommend reading this as you’re looking at ways of making more money, because in trying to make ourselves financially richer, it’s very very very important not to lose sight of the true prize of wealth, which is – of course not a bigger bank account – but a better, more fulfilling life. Real estate investing is, at it’s base, a vehicle for building wealth, and so it fits neatly under the umbrella of what Kessel is talking about.

  Better Not Bigger

  Kessel’s book makes a great case against the our society’s drive for bigger, better, faster. His goal is to push the reader to reconsider his or her relationship to money, thereby increasing both financial stability and contentment. Kessel takes inspiration from Buddhist thinkers such as Thich Nhat Hanh, as he asks us to evaluate what he calls the “desires of the wanting mind.” He goes on to point out eight archetypal relationships people have to money and suggests ways of working within our archetype

  His book is persuasive and intelligently written. He takes us on a voyage of self-evaluation, encouraging us to pinpoint our financial acts of self-sabotage. Overall, his goal is paradoxically, to get us to realize that financial planning and investing is “not about the money”. Building wealth at it’s best should be a practice of cultivating a better life that suits our individual needs and desires, not some sort of competitive sport, or a place to let our neuroses run rampant.

Money and Mindfulness

The other thing that’s cool about Kessel’s book is that it’s a great counter-weight to Julie Broad’s anger in More Than Cashflow. While Broad is (justifiably) unhappy with the level of charletanry and exaggerated claims made in the real estate coaching industry, her anger is sometimes not terribly constructive for someone hoping to develop a mindful and healthy relationship with wealth. Until someone writes a real estate investing book on how to build an empire without trading in your peace of mind, read Brent Kessel.

• Book no. 1 : Rich Dad, Poor Dad by Robert Kyosaki

If you’re consider investing in real estate and you haven’t read this book: shame on you! Rich Dad, Poor Dad is the bible for real estate investors. While Kiyosaki’s book offers many insights and inspirational words for the new investor, the essential take-away is being able to recognize the mindset that separates the wealthy from everyone else.

Don’t Trade Your Time For Money

The middle class, on the other hand, usually own a family home and believes it to be an asset. While it is true that real estate tends to appreciate over time, once you factor in that mortgage-, maintenance- and upgrade payments are made with after-tax dollars, plus the fact that neither interest nor work on the property is tax-deductible, you’ve basically only contributing to a forced-savings plan (see Alex Avery in Wealthy Renter for a more detailed explanation of this).

So, working-class families tend to have no assets, only expenses. Middle class families tend to have liabilities (a single family home) that they consider an asset. But the true defining factor in creating wealthy has to do with cash flow and passive income.

The real trap, according to Kiyosaki, is to tie the number of hours you work to the ceiling on your salary. Anyone who’s main source of income is dependent on the numbers of hours they have to sell with forever bump against the fact that their number of “billable” hours are limited. If you get paid by the hour, your revenue depends on how much time you have to sell. Worse, the only real way to increase your income is to sell more hours. See where this little trap leads?

Wealth Mindset

“Passive income”, of which rental income is one source, is Kiyosaki’s answer to this problem. For him, cash flow is the defining marker of what separates the wealthy from everyone else. The wealthy set up systems – businesses or investments – that generate cash flow while they sleep, go on vacation, or work at their other jobs. In this analysis, real estate becomes an easy vehicle for creating a revenue stream that doesn’t require a specific amount of work-hours to produce fruit. In addition, there are all sorts of tax-breaks and deductions that come with real estate investment. Kiyosaki mentions this as a further advantage to owning property. The middle class, for him (and I am inclined to agree), is burdened with the largest tax burden vs. income structure, as the wealthy tend to have all sorts of strategies for paying less tax. Real estate is one such vehicle.

It’s Time

So, if you’re looking at investing in real estate and you haven’t yet read Rich Dad, Poor Dad, it’s time.

Can You Afford Not to Read These Books?

I’ll leave you with this closing thought: real estate gurus and coaches sell education packages that usually start with five-figures. These five books combined will run you fifty Canadian dollars if you buy the Kindle version or perhaps seventy-five bucks if you opt for paperback. The amount of time it’ll take you to read them is probably comparable to a three-day weekend seminar.

If you’re potentially becoming a landlord, can you afford not to spend this money and take this time to get similar value? On your path to building a cash-flow empire and a mindset that will slowly lift you from the ranks of the middle- or working-class, I’m hoping that the answer to this question will come easily.