Is it smart to sell now?

[RogerPanchuk]

QUOTE (thomasbeyer2000 @ Dec 18 2008, 06:58 PM) indeed .. plus money is being printed at an UNPRECEDENTED rate .. so inflation protection is key going forward .. but yes, many markets will drop for a year or 2 .. then flat or start rising .. so if you must sell in the next 2 years now is better than a year from now .. but if you can find an asset where a 5+ year hold makes sense with realistic assumptions on vacancies, expenses, rents .. then you should buy .. and we envision 2009 will be a spectacular buying year as there will be carnage out there due to folks which are overlevered, have no reserves, poor management or high vacancies and have to sell !

Example: we just wrote 2 offers in Edmonton at realistic prices for 2 larger multi-family assets 10% below the mortgage amount .. and likely the bank will wait further until they realize that they did a bad loan in 2007 .. and this realization will take some time to sink in ! We wrote 10 offers in the last 4 weeks and none got even countered .. so it tells me the market is strong still or expectations are still too high (or both). CMHC money is still VERY cheap, we will have a re-finance in January 2009 with a sub 4% 5 year $7.5 M mortgage with awesome cash-flow .. so why sell if it cash-flows even with a 20% vacancy ?

So, IN SUMMARY to this question "should I sell": well located, cash-flowing, well priced, appropriately levered and well managed assets are still an excellent investment and you should not (or never) sell them .. however if it is losing money, is a headache to own, poorly located, hard to re-finance or has questionable upside due to poor demand you should sell it.

The big question I have and I think many others as well is How stable will rents be over the next 12 - 24 months. We have everthing cashflowing today, But if we see a drastic slide in rents, cashflow will disapeer quickly.

I feel its very hard to say where rents will be . If I was sure that rents will stay fairly consitant Why would I sell? But if rents are going to go down substantially and the property will no longer cashflows. Then I should sell.

Loan to value levels have been deteriorated by lower values, We had about 65% and know if you recallibrate the value we are closer to 85% loan to value

If we see much more of a drop in price`s we will be getting closer to 100% loan to value

Thomas you mentioned Ressecion proof appartment buildings Do you feel thet appartments are easier to rent or will rent for more money or hold there value, than detached house`s with suites or townhouse condo`s

 

[Thomas Beyer]

QUOTE (RogerPanchuk @ Dec 19 2008, 08:17 AM) Thomas you mentioned Ressecion proof appartment buildings Do you feel thet appartments are easier to rent or will rent for more money or hold there value, than detached house`s with suites or townhouse condo`s
yes, as the rent level is lower .. a rent of $1500/month is much harder to sustain than $750 or $600 / month !
Also more stable than office or retail as rent is not discretionary spending, whereas buying flowers or a car or a new shirt is, affecting commercial rents more ..

 

[Jack]

QUOTE yes, as the rent level is lower .. a rent of $1500/month is much harder to sustain than $750 or $600 / month !
Also more stable than office or retail as rent is not discretionary spending, whereas buying flowers or a car or a new shirt is, affecting commercial rents more ..

You`re also talking about (hypothetically) 12 units instead of 1 house. With 12 units, if one is vacant, it hurts, but it doesn`t kill. With 1 house, if it`s vacant, it really hurts. You`ve got a much more stable, diversified stream of revenues than you do with a single-family dwelling.

Also, multi-family buildings are valued by their income stream. So if you raise rents, or cut expenses, you`ve immediately increased the theoretical value of the building. Not this "nice countertop" crap that`s a faze which will fizzle out very soon; it`s a business, and as long as you make it a more profitable one, you`ll be rewarded. I like that.

These are some of the reasons why I don`t really have much interest investing in single-family homes!

 

[GarthChapman]

QUOTE (Jack @ Dec 18 2008, 10:14 PM)
On "1", when you're in acquisition mode, do you use any sort of sensitivity analyses? My problem with saying "well, it cashflows" is that most tenancy agreements are for 1-year, whereas most mortgages are for 35. So, while it may cashflow now, it might not necessarily do so next year. Rents aren't fixed forever, they (like all moving targets) can go down just as easily as they go up.







Or, you could just go fixed.

Good read. We should all commit this paragraph to memory, very well-said.




I can't figure out how to capture the quotes you are referring to Jack, so this may be tough to follow, but here goes...



1) I should have added that the cashflow should be high enough to cover a worst-case rent depreciation occurrance (this is market dependant)



Re your going 'fixed' comment - the interest rate sensitivity also goes beyond the period of the current term of the mortgage. ie How would you fare if rates went up from, say, 5% to 7%? How much can your interest costs increase before you go under water?

 

[egambling]

QUOTE (Jack @ Dec 19 2008, 10:32 AM) You`re also talking about (hypothetically) 12 units instead of 1 house. With 12 units, if one is vacant, it hurts, but it doesn`t kill. With 1 house, if it`s vacant, it really hurts. You`ve got a much more stable, diversified stream of revenues than you do with a single-family dwelling.

Also, multi-family buildings are valued by their income stream. So if you raise rents, or cut expenses, you`ve immediately increased the theoretical value of the building. Not this "nice countertop" crap that`s a faze which will fizzle out very soon; it`s a business, and as long as you make it a more profitable one, you`ll be rewarded. I like that.

These are some of the reasons why I don`t really have much interest investing in single-family homes!


Some interesting points, guys; it`s refreshing to finally see some discussion on the realities involved with RE investing when one doesn`t factor in all the pitfalls. I`d like to elaborate a little furthur....

I think that as more people lose their jobs, face wage decreases, accumulate more debt, etc., they`ll no longer be able to afford the luxury of renting single family homes. They will be forced to, either, move in with other family members or flee to lower rental housing (hi Thomas

). BTW, I heard that Don invests in apt. buildings also(?).

As I see it, investors holding single-family type properties will have to lower their rents in order to compete. Unfortunately, some investors are under the illusion that they control how much rent to charge, when in fact the current market dictates what a renter will pay for rent, just like the current market dictates what you will get when you buy or sell a property.

 

[Jack]

QUOTE As I see it, investors holding single-family type properties will have to lower their rents in order to compete. Unfortunately, some investors are under the illusion that they control how much rent to charge, when in fact the current market dictates what a renter will pay for rent, just like the current market dictates what you will get when you buy or sell a property. I reckon those speculative (oops, I meant sophisticated) investors who "took action" during the peak of the last few years (whatever happened to the buy low/sell high philosophy?) are going to be in dire straits in the coming years.

I agree with this.

It doesn`t make sense to rent a "nice" house. Why would you? You`d basically have an equal cash outflow with a mortgage payment. For some less intelligent folk who have tied themselves down with two kids, two dogs, and four cats at the age of 21, maybe a house works; but, for the most part, when people are renting, their logical mandate should be to keep costs down, so that they too can move into the ownership game as quickly as possible. And, as home values continue to be driven down by the once thought-of "recession-proof" Canadian economy, they`ll thus have a greater pool of potential buyers. The snowball continues, rents are driven down, vacancies rise, etc.

 

[Jack]

Why did some parts of Elaine`s post get deleted?

 

[REINteam]

Hi Jack,



While we respect everyone's opinion on this forum we expect the forum rules to be followed. Here is a link for any forum members that have missed the rules:



http://myreinspace.com/announcements/forums/123-Announcements.html





I have sent a personal message to Elaine to explain and if anyone has questions please feel free to contact me directly.





Regards,



Ray Reuter

Client Service Manager

Real Estate Investment Network

1-888-824-7346

 

[GarthChapman]

QUOTE (Jack @ Dec 19 2008, 02:37 PM) I agree with this.

It doesn`t make sense to rent a "nice" house. Why would you? You`d basically have an equal cash outflow with a mortgage payment. For some less intelligent folk who have tied themselves down with two kids, two dogs, and four cats at the age of 21, maybe a house works; but, for the most part, when people are renting, their logical mandate should be to keep costs down, so that they too can move into the ownership game as quickly as possible.

Logical concepts. But many Canadian adults do not govern their lives by thinking logically. If they did our industry would be much smaller.

Also, and maybe surprisingly to some, a lack of financial education is also a significant creator of renters who should or could be homeowners. Many renters were simply never taught about the financial benefits of home ownership, let alone given any financial education.

And then there are many who simply live from week-to-week, never looking down the road further than next Saturday night, or at best, to their next vacation.

 

[Thomas Beyer]

QUOTE (egambling @ Dec 19 2008, 01:17 PM) Some interesting points, guys; it`s refreshing to finally see some discussion on the realities involved with RE investing when one doesn`t factor in all the pitfalls. I`d like to elaborate a little furthur....

I think that as more people lose their jobs, face wage decreases, accumulate more debt, etc., they`ll no longer be able to afford the luxury of renting single family homes. They will be forced to, either, move in with other family members or flee to lower rental housing (hi Thomas

). BTW, I heard that Don invests in apt. buildings also(?).

As I see it, investors holding single-family type properties will have to lower their rents in order to compete. Unfortunately, some investors are under the illusion that they control how much rent to charge, when in fact the current market dictates what a renter will pay for rent, just like the current market dictates what you will get when you buy or sell a property.
indeed .. many a single-family home will go un-rented in 2009 or for substantially lower rents .. so be prepared and very aware .. jobs will be lost everywhere (China, US, AB, SK, BC, ON, NF, ...) .. people will move around more .. people will move back to their parents .. or shack up with another un-employed buddy .. or downsize from a 3BR to a 2BR .. empty basements all of a sudden will have an occupant ..

we are preparing for a bad 2009 of overall lower rents (of course newly reno`d apartments will go up in rent) and higher vacancies .. survive 2009 .. don`t become a motivated seller .. then thrive again .. we`re looking to buy in 2009 at the right price points from motivated sellers .. if you have a building for sale or know someone that has one for sale in BC, SK or AB .. call us ..

This does not change the overall fundamentals of sound investing in real estate in growth markets with cash-flow and prudent leverage .. it just makes it more "normal" as we are coming off a super-easy, get-rich-quick decade that we won`t see again for quite some time ..

 

[wealthyboomer]

QUOTE (thomasbeyer2000 @ Dec 20 2008, 02:33 PM) indeed .. many a single-family home will go un-rented in 2009 or for substantially lower rents .. so be prepared and very aware .. jobs will be lost everywhere (China, US, AB, SK, BC, ON, NF, ...) .. people will move around more .. people will move back to their parents .. or shack up with another un-employed buddy .. or downsize from a 3BR to a 2BR .. empty basements all of a sudden will have an occupant ..

we are preparing for a bad 2009 of overall lower rents (of course newly reno`d apartments will go up in rent) and higher vacancies .. survive 2009 .. don`t become a motivated seller .. then thrive again .. we`re looking to buy in 2009 at the right price points from motivated sellers .. if you have a building for sale or know someone that has one for sale in BC, SK or AB .. call us ..

This does not change the overall fundamentals of sound investing in real estate in growth markets with cash-flow and prudent leverage .. it just makes it more "normal" as we are coming off a super-easy, get-rich-quick decade that we won`t see again for quite some time ..

The `Survival` mode also creates `Opportunity`, or at least new thoughts within your investment strategies.
If people are `doubling` up to reduce their housing costs, then start renting out rooms instead of the whole house. This works great for college kids. It can also work well for the `almost` homeless. I know of a guy who works for the Salvation Army, and he buys houses and rents out the rooms by the week, to people he comes across within his job. It works out great for both him and the `renters`. I`ve even seen him drive down back alleys and grab old furniture that others have thrown out, so that he can furnish his houses. It isn`t something for everyone, but interesting to say the least. He brings about the term `recycling` to a new level.

Another nice thing about renting out the rooms, is that he can evict without dealing with the Residential Tenancy Act.

 

[nepoez]

I agree with the fact that there`s a lack of financial education. However addiction and weakness plays a much bigger role in the never ending supply of renters. There are much too many people who ARE financially educated but would not ever be able to own a home even if one could be had for only $80k. They would either spend all of each paycheque on entertainment, or at best save up for a brand new car, and the never ending list of "required" items. Then they would blame it on the economy, the system, the government, luck, etc.. And then there are some that would join the Zeitgeist Venus Project movement as they like the idea of not having to work to get anything.



QUOTE (GarthChapman @ Dec 20 2008, 10:21 AM) Logical concepts. But many Canadian adults do not govern their lives by thinking logically. If they did our industry would be much smaller.

Also, and maybe surprisingly to some, a lack of financial education is also a significant creator of renters who should or could be homeowners. Many renters were simply never taught about the financial benefits of home ownership, let alone given any financial education.

And then there are many who simply live from week-to-week, never looking down the road further than next Saturday night, or at best, to their next vacation.

 

[housingrental]

Wealthyboomer`s post last sentence about eviction isn`t correct
Though there are different rules for eviction if you live in the property and rent out a room