Canadian Real Estate: Spiralling Downward

[Jack]

-Existing-home sales suffered their worst decline in 14 years and prices continued to dip-32,048 homes were sold last month on a seasonally adjusted basis, a 14% decline from a month earlier. The last time sales fell that sharply was June, 1994. "The market is dropping dramatically because there is so much nervousness now, especially in the big cities," said Benjamin Tal, senior economist at CIBC World Markets.

-The lack of demand in the market has helped pushed prices down on a year-over-year basis for five months running and the declines have risen on a percentage basis each month.

-The average sale price of a home in Canada last month was $281,133, a 9.9% decline from a year ago. CREA said activity was down in 75% of the Canadian markets it surveys, including the five most active -- Toronto, Montreal, Vancouver, Calgary and Edmonton.

(National Post 081115)

 

[Jack]

This would suggest that you shouldn`t settle for much less (if at all) than a 10% gross rent multiplier. There is fear, fear, fear everywhere, and deservedly so.

Anyone with the stones to buy now should be compensated handsomely for the risk they`re taking on.

 

[Thomas Beyer]

QUOTE (Jack @ Nov 17 2008, 12:40 PM) Anyone with the stones to buy now should be compensated handsomely for the risk they`re taking on.

what risk ?

 

[Jack]

QUOTE what risk ?

The risk that the asset declines in value.

If someone buys a house in Calgary today, and the market declines over the next 6 months by another 10%, it could be another 2 years (or more, or less) until the place is worth what you paid for it! That`s not a good investment, period.

 

[RedlineBrett]

QUOTE (Jack @ Nov 17 2008, 01:40 PM) Anyone with the stones to buy now should be compensated handsomely for the risk they`re taking on.

Well I can tell you that many REIN members are in full on acquisition mode. On the agency representation front I am the busiest I`ve been all year!

Still found time to do a deal for myself though, and got excellent price and terms.

Also, our phone lines are still ringing for inquiries on our rental properties priced around that $500-600/room level. Funny story - some landlord screwed up their contact info and put my GF`s cell phone number down as their call back number. She`s been getting 7 or 8 calls a day for a two bedroom apartment. So the renters are still there!

A year from now, when the lack of development of energy supplies turns around O&G prices we will see Calgary start to run again. Those that waited on the sidelines for a clear sign that the market had `bottomed` will have to deal with competing offers and quick financing/inspection timelines again, or watch as prices rise with nothing to their liking on the market!

 

[Thomas Beyer]

QUOTE (Jack @ Nov 17 2008, 02:54 PM) The risk that the asset declines in value.

If someone buys a house in Calgary today, and the market declines over the next 6 months by another 10%, it could be another 2 years (or more, or less) until the place is worth what you paid for it! That`s not a good investment, period.
maybe it is .. if you buy it below the price it would be in 6 - 12 months !!

You may not be able to buy this asset in a year or in 6 months or in 18 months or in 2 years for the price it is today if the market sentiment changes .. as you can see "the bottom" only in the rear view mirror 6 - 12 months after it has occurred !!!

The biggest risk is: you cannot cash-flow it !! Once you can cash-flow it .. the price de jour does not matter .. as it will be higher 5 or 8 or 15 years from now .. but you have to get there !

if you have only a 2 year view in real estate then it is the wrong asset class to invest in for you !

 

[Nir]

What - 10% gross rent multiplier? How about 20%? (Yeah!)

Jack, it`s a buyer`s market now BIG time, possibly the best time of our life to buy...in the right price and places.

By buying around 20% rent to price I generate nice income from the first month and really not worried about price going down "another 10%" within a year. I do not plan to sell anyway nor will any reduction affect cash flow. value drop does not affect our cash flow, selling does.

Cash flow is Queen.

Cheers,
Neil

 

[Jack]

QUOTE By buying around 20% rent to price I generate nice income from the first month and really not worried about price going down "another 10%" within a year.

20% rent to price? You`re saying that a 2-bedroom condo rented out for $1,000 per month can be found for $60,000? Care to offer a little proof?!?

And as for everyone talking about the fantastic buying opportunity right now - I seem to recall that being said about a year ago as well. Things have not improved, they`ve gotten quite a bit worse - and the economy-at-large has barely been hit at all! What happens when wages are driven lower, unemployment rises, inflation rises, etc.? Put me in the class of "let`s see how things shake out". I expect a further decline in home prices for the next 6 months and maybe beyond.

 

[Thomas Beyer]

QUOTE (investmart @ Nov 17 2008, 03:55 PM) What - 10% gross rent multiplier? How about 20%? (Yeah!)
...

By buying around 20% rent to price ...
20% rent-to-price ? Where, Investsmart, where ?

maybe in Windsor, ON ? Maybe in foreclosure hell in US ? certainly not in healthy markets like ON, AB, BC, SK, MB, NF ....

 

[Nir]

Hello Jack,

Yes, 20%!

no, not a 2-bedroom condo. a Plex.

Proof? my most recent purchase

Don`t be surprised you can find such amazing deals when people sharing your fears drive prices down. let`s not contradict ourselves
Are you afraid to buy now or are you surprised prices are so low? you can`t be both

Regards,
Neil

 

[ZanderRobertson]

what city is this in? I REALLY want to know.

congrats for finding such a deal.


QUOTE (investmart @ Nov 17 2008, 06:23 PM) Hello Jack,

Yes, 20%!

no, not a 2-bedroom condo. a Plex.

Proof? my most recent purchase

Don`t be surprised you can finds such amazing deals when people sharing your fears drive prices down. let`s not contradict ourselves
Are you afraid to buy now or are you surprised prices are so low? you can`t be both

Regards,
Neil

 

[DaveRhydderch]

QUOTE (Jack @ Nov 17 2008, 06:03 PM) 20% rent to price? You`re saying that a 2-bedroom condo rented out for $1,000 per month can be found for $60,000? Care to offer a little proof?!?

And as for everyone talking about the fantastic buying opportunity right now - I seem to recall that being said about a year ago as well. Things have not improved, they`ve gotten quite a bit worse - and the economy-at-large has barely been hit at all! What happens when wages are driven lower, unemployment rises, inflation rises, etc.? Put me in the class of "let`s see how things shake out". I expect a further decline in home prices for the next 6 months and maybe beyond.


Timing a market is a tough thing to do, one that not even Warren Buffet tries to do. He`s buying U.S stocks right now.

The thing about being a good buying opportunity is you have to be proactive. Say you buy something that cash flows $500 a month. Do you really care if it goes down?

I bought a property last Aug, closed it late October. It cash flows at over $700 a month and I have great tenants. The property has probably gone down 10%. But why would I care. I get $700 a month. It was a great buy (and ps, this was a 25 yr amort).

Now, by not buying, I would have missed out on $10,000. Thats significant. I`ve used that money to max out my rrsps and save for my next property.

There are tons of deals out there. You just need to find them, and you`ll see why people are in full buying mode.

 

[RebeccaBryan]

QUOTE (investmart @ Nov 17 2008, 06:23 PM) Hello Jack,

Yes, 20%!

no, not a 2-bedroom condo. a Plex.

Proof? my most recent purchase

Don`t be surprised you can finds such amazing deals when people sharing your fears drive prices down. let`s not contradict ourselves
Are you afraid to buy now or are you surprised prices are so low? you can`t be both

Regards,
Neil

Hey, if I found a property like that, I wouldn`t be keeping it a secret, but rather boasting about the exact details and how i found it.

 

[DaveRhydderch]

QUOTE (investmart @ Nov 17 2008, 06:23 PM) Hello Jack,

Yes, 20%!

no, not a 2-bedroom condo. a Plex.

Proof? my most recent purchase

Don`t be surprised you can finds such amazing deals when people sharing your fears drive prices down. let`s not contradict ourselves
Are you afraid to buy now or are you surprised prices are so low? you can`t be both

Regards,
Neil

Not sure if me and Neil have the same sources, but I did hear about a deal very similar to this. I merely offer this as some proof that this is possible.

 

[Jack]

QUOTE Say you buy something that cash flows $500 a month. Do you really care if it goes down?

Yes!

Cashflow isn`t fixed. Rents can go down too, just like property values. If you`re making $500/mo. on a single-family dwelling, chances are good that you`re in a market anomaly like 2006 in Calgary where there was an extreme shortage of rental supply. What happens 18 months later when things stabilize?

Besides, it`s ultimately capital appreciation that will make you rich, not a hundred dollars or so of passive income every month. So, yes, I care.

 

[Jack]

QUOTE Are you afraid to buy now or are you surprised prices are so low? you can`t be both
Well, it`s a little different. Prices in Calgary have come down about 2% YOY, meaning that you could get an average 2-bedroom, which would rent for about $1,000/month, for, what, $275K maybe? Not $60K, which would be a much, much, much more dramatic decline than the averages would suggest.

Are you sure it`s not a sale-and-leaseback agreement for 3 years with a condo developer in Flint, Michigan?

 

[ZanderRobertson]

I agree and disagree. Yes, one can get very rich based on capital appreciation. I know people who had the pure luck of being flippers in 2005-2006, and those transactions brought them a lot of money. But don't forget that cashflow has a way of snowballing. If you can only see the couple of hundred a month of cashflow as just that, it won't seem like a path to wealth. But when you think long term, basically, it's a way of using low cash investment to buy yourself a very expensive asset. you come up with the original money somehow, and having control of the asset allows you to operate the business that will eventually allow you to own it.



If I asked all of my non-RE friends what their plan is to have $5+ million by retirement, they wouldn't be able to answer. Whereas a RE investor might say "buy 15-20 properties in the next 3-5 years and let cash flow do it's thing"



The point is that there are definitely sexier ways to wealth, but I simply don't know how to operate those. Even RE is a stretch, but with strong education (REIN) and good role models (other members), I think I can figure it out over the next 5-30 years.






QUOTE (Jack @ Nov 17 2008, 06:39 PM)
Yes!



Cashflow isn't fixed. Rents can go down too, just like property values. If you're making $500/mo. on a single-family dwelling, chances are good that you're in a market anomaly like 2006 in Calgary where there was an extreme shortage of rental supply. What happens 18 months later when things stabilize?



Besides, it's ultimately capital appreciation that will make you rich, not a hundred dollars or so of passive income every month. So, yes, I care.

 

[DaveRhydderch]

QUOTE (ZanderRobertson @ Nov 17 2008, 07:01 PM) I agree and disagree. Yes, one can get very rich based on capital appreciation. I know people who had the pure luck of being flippers in 2005-2006, and those transactions brought them a lot of money. But don`t forget that cashflow has a way of snowballing. If you can only see the couple of hundred a month of cashflow as just that, it won`t seem like a path to wealth. But when you think long term, basically, it`s a way of using low cash investment to buy yourself a very expensive asset. you come up with the original money somehow, and having control of the asset allows you to operate the business that will eventually allow you to own it.

If I asked all of my non-RE friends what their plan is to have $5+ million by retirement, they wouldn`t be able to answer. Whereas a RE investor might say "buy 15-20 properties in the next 3-5 years and let cash flow do it`s thing"

The point is that there are definitely sexier ways to wealth, but I simply don`t know how to operate those. Even RE is a stretch, but with strong education (REIN) and good role models (other members), I think I can figure it out over the next 5-30 years.

I couldn`t have put this any better myself.

 

[RedlineBrett]

I guess the simplest question would be if now is not the right time to buy, when is?

What type of market condition are real estate investors waiting for?

The answer is it is different for every investor. Some investors are more aggressive than others. Call it the "sleep at night" factor. Some investors need clear signs of a growth market and are willing to give up on a great buying opportunity to be able to invest when all the news is positive. Others recognize that the investors that typically do the best are buying when everyone else is selling.

FEAR is the worst four letter word. It`s paralyzing. Overcoming it is something every investor must deal with and the success of one`s business is directly related to how they go about it.



QUOTE (DaveRhydderch @ Nov 18 2008, 10:33 AM) I couldn`t have put this any better myself.

 

[gwasser]

There are currently two discussions going on covering basically the same issue. This one and the `Why Sell` topic. It is on the latter that I have posted a discussion on how to value an investment. Once you can value an investment and when you have the means to execute, you should be ready to take your executive decision(s).

Hope this helps.