February 15th 2021
People acquire real estate for a number of different reasons. The end user, for example, which in the case of residential real estate would usually be the home owner, buys a property as a place to live. Whether it be a first time buyer, someone transferring in or out of the area, a move-up buyer wishing to accommodate a growing family, or an empty-nester looking for a home more suited to his current lifestyle. The motivation is the same. Acquiring a place to call home. The developer is
approaching the acquisition from a business perspective. He is looking for an opportunity where he can change the use in order to make a profit. It might be taking new land and creating a subdivision or converting an industrial building into residential condos, his goal is to elevate the property to its highest and best use and in so doing, turn a profit.
A second cousin to the developer is the renovator. He too is looking to enhance a property and in so doing reap a reward. He works on the principal that people will pay more for a renovated property than it will cost to buy a tired property and fix it up. Then of course, there is the speculator. He in all likelihood will not do anything at all to the property between acquisition and disposition. He is counting on the market itself appreciating and he is merely riding the wave. He acquires, often a condo. Perhaps rents it out for a period of time to cover carrying costs, but then when he sees the market has appreciated sufficiently, he sells the property for a profit.
And then there is the investor. Unlike the others, with the possible exception of the end user, he is in it for the long haul. His intent is not to generate a ‘lift’ between buying and selling. He is interested in long term sustained cash flow. He acquires a property. Puts a certain amount down and finances the rest. Then he finds a tenant or tenants to occupy the property and pay rent. This rent services the debt and the balance provides him with a return on his investment.
All seems straightforward enough, and we probably for the most part realized these distinctions. But we need to understand them and know precisely who we are in the overall scheme of things.
For you see, there is a significant difference in the way each person thinks about his ownership of property. The developer to a certain extent, and certainly the renovator and speculator approach property acquisition a lot like the day trader does to the stock market. They constantly watch the tempo of the marketplace. They read the papers. Listen to the news. When the market is hot, they flood in. But at the first sign of a slowdown they bail out. That’s why the real estate market can experience such severe and abrupt changes.
I heard the other day of an out of town buyer who was putting an offer in on a property in St. Catharines. His agent told the listing salesperson ‘If he gets this one, that’ll be 54 properties he now owns in St. Catharines’. I’m not faulting him, but understand he’s a spectator. He’s counting on rapid and substantial price increases. If and when the market ceases to overperform, he’ll generally liquidate. He’s a day trader.
Occasionally an investor will say to me “Do you think it’s a good time to buy?” “Will the market keep going up?” When I hear that I know the investor is starting to think like a speculator. For the investor there is never a bad time to buy. He’s in it for the long haul.
Let me give you a personal example. I purchased a good Northend backsplit back in the end of 1989 start of 1990. That market was hot in 1989. But then in the spring of 1990 it hit a wall. I paid $160,000 for the property. A year and a half later it had slid to about $142,000. If I was a speculator I would have had a problem. But I’m not. I’m an investor. Regardless of the market value, the mortgage was in place and fixed. The tenants were in place and covering the costs. For me, nothing had changed financially. And hey, here it is just over 30 years later and the property is worth around $600,000.
Always keep that in mind. You are an investor. You are in it for the long haul. If properties keep going up as they have been, and I believe they will, you will make a lot of money on paper. Your net worth will soar. And that’s a bonus. But your return on investment will remain steady regardless of what the market does. And that’s really what it’s all about for the investor. For him, there really is no bad time to buy.