Mass Foreclosures in Canada`s Future

[RedlineBrett]

QUOTE (TIMWEMBLEY @ Dec 17 2008, 11:51 PM) Very True

A little while back RedlineBrett posted a great document in "Calgary historical market analysis, 40 year info on the Calgary market + a little something special" (dont know how to link it )proving in a five year period Real Estate almost always is positive I have used in JV presentations. (great work Brett) It is calgary but Edmonton does mirror Calgary except on CUPS.. Go OIL!

Tim Blake

haha, thanks Tim.

Here is the link to the post you are talking about. It is in the `members only` section, so non members won`t be able to see it. When the 2008 numbers come out I will be updating this graph.

Linky

Go oilers!

 

[MikeJohansen]

QUOTE (realfortin @ Dec 11 2008, 12:57 PM) Lower demand in the resale market...=more renters
Lower demand in the resale market = declining house prices = easier for me to get properties

Lower house prices are good aren`t they? As long as it`s not a major crash. REIN pushes the "buy, cash flow and hold" principle.

It`s not quite as simple as that I`m afraid.
The easier it is to afford houses due to high inventory on the sales side means that the renters are turning into buyers right now. (=less renters not more)
"Easier for you to get properties" is true... However, make sure you research the rental inventory and average market rents constantly. Rents have come way down due to home sales falling off and desperate sellers are turning into reluctant landlords with no idea of cash flow. They are only trying to cover a mortgage or at least a portion of one. It`s pretty hard to compete with this type of landlord & nail your cash flow based on an 8.0 yield calculation which does not apply during this economic down turn.

I`m seeing some very surprised clients (investors or not) who can`t beleive their property won`t demand rents of a year ago. Not saying this is you. Just an opportunity to say something. Thanks for the opportunity people

 

[GSI]

QUOTE (MikeJohansen @ Jan 11 2009, 05:12 PM) Rents have come way down due to home sales falling off and desperate sellers are turning into reluctant landlords with no idea of cash flow. They are only trying to cover a mortgage or at least a portion of one. It`s pretty hard to compete with this type of landlord & nail your cash flow based on an 8.0 yield calculation which does not apply during this economic down turn.

I`m seeing some very surprised clients (investors or not) who can`t beleive their property won`t demand rents of a year ago. Not saying this is you. Just an opportunity to say something. Thanks for the opportunity people

Mike`s point is very good. I know that many REIN folk market competitively (myself included) to get market or slightly above market rents. It is indeed difficult to compete with a desperate would-be-seller/landlord who isn`t informed about the market and will rent a $2000 place for $1495 or whatever his mortgage is.

I`ve been seeing this happen more and more frequently and I`m very reluctantly looking at reducing rents on a few properties too. Is it better to hold a property vacant for 2 months to get your rent or lower it and get it rented in the first month? Both scenarios are a slightly losing proposition.

Perhaps another group brainstorm on ways to get our rents and get filled faster would be useful? Please add your ideas below.

Challenge is to vary these tactics enough so that they don`t become common place, ie "Move in today and get a free Wii" its a good incentive, but if 10 other ads are running the same offer it loses it`s punch.

I`ll go first:

1) Network with current tenants to attract new tenants.
2) Target out of town renters.
3) Build relationships with companies that are currently bringing in new workers- not all are now.

 

[ZanderRobertson]

actually it was carnegie who continually came out on top. through every financial crisis of his career, his consistent strategy was to take more business from his competitors. By the time he retired, his companies were producing over half the steel in America.

So what did this kind of strategy require from him? Well, he was well capitalized. During the good times he was constantly pressured by his partners to give a dividend. Nope, he refused, instead he re-invested in his businesses, and again, when the next panic arrived he waited it out, undersold competitors, took more business. He was relentless.

My point was not to be inspirational, it was to provide a counter-point to the idea that says we should hide under a rock. I wouldn`t characterize his success as inspirational, I`d say it`s an example of good management. It seems to me that good management sometimes requires a degree of aggressiveness, sometimes when others suggest against it.

I totally agree that success lies more in the actions of those concerned than in present market conditions. Prudent action now as ever is more likely to bring success than fear and inaction. Good point.

QUOTE (invst4profit @ Dec 19 2008, 08:24 AM) [Andrew Carnegie started his first steel company during the time of a massive financial panic, probably worse than the one we`re experiencing now. His strategy? Build up productive capacity at all cost. His competitors? Reduce capacity and wait for better times? Who do you think prospered when the good times came?]

This is inspirational although individuals must be very careful in not becoming overly optimistic

Carnegie may have been successful with this approach but how many thousands of other investors attempted the same approach at the same time and failed.
Because one person is successful with there approach at a given point in time does not mean that there approach will work for others. Success is very complicated.

As far as answering the question "Who do you think prospered when the good times came"? I would have to say some of both depending on the individual skills and abilities of there management groups.

Depending on a investors skills and abilities, good times or bad, success or failure is possible.

Reality is not always inspirational but not all investors (including REIN members) have the same abilities simply because they have the same training. In my opinion there will be some on here that will lose everything in the next few years (maybe many) the same as with those investors not involved with REIN.

 

[Thomas Beyer]

QUOTE (GSI @ Jan 11 2009, 04:52 PM) ... would-be-seller/landlord who isn`t informed about the market and will rent a $2000 place for $1495 or whatever his mortgage is.

...
Let`s not be so foolish and think that in an economic slowdown of unprecedented proportions the rental market will stay as high as 2007 / 2008 .. it will require some significant DOWNWARD reduction in rents (or move in incentives or tenant retention incentives or discounts, i.e. net achievable rent reductions) , or allow more people, say 3 couples into that 4BR house for $2000 !

So yes, that house that was $2000 will likely be rentable only @ $1495 while the recession lasts .. perhaps til later in 2009 .. perhaps or likely into 2010 ..

Any rental property with rents over $1200 or $1300 or so is at risk of a 20-25% reduction of rent to allow a hold during the recession !

We are budgeting FLAT rents for 2009 .. and I am now thinking we may be slightly too optimistic .. and most of our rents are on average $750 .. some $500 and some $1100 but most in the $700 to $850/month range !

BE PREPARED .. and VERY aware in 2009 and 2010 of realistic rent levels (tougher to do from Japan, btw, than being on the ground) !!!

 

[GSI]

QUOTE (thomasbeyer2000 @ Jan 11 2009, 07:06 PM) We are budgeting FLAT rents for 2009 .. and I am now thinking we may be slightly too optimistic .. and most of our rents are on average $750 .. some $500 and some $1100 but most in the $700 to $850/month range !

Yes, rents will drop during an economic downturn. So, the question is what are some additional tactics to insulate against massive drops? Your earlier advice and Garth`s advice on reducing expenses and hunkering down during the storm is good advice. What other ideas do folks have to reduce losses, while improving value and profitability?

(It is tougher to manage the manager from a distance, but no more than from BC, USA or Japan)

 

[mcgregok]

I think I had this conversation in 1981. Bought a house in Dalhousie in Calgary. there were 12 homes for sale on the same street. I think it took about 6-7 years to get back up to the orginal listing price. It was the end of the world for the owner I bought the home from. He just built a home and had to take possession, i bought it for around 30-35% of listing price. I doubt today is going to be any better.

 

[Thomas Beyer]

QUOTE (mcgregok @ Jan 11 2009, 09:21 PM) I think I had this conversation in 1981. Bought a house in Dalhousie in Calgary. there were 12 homes for sale on the same street. I think it took about 6-7 years to get back up to the orginal listing price. It was the end of the world for the owner I bought the home from. He just built a home and had to take possession, i bought it for around 30-35% of listing price. I doubt today is going to be any better.
Indeed .. I have post elsewhere that, yes, peak-to-peak is about 5-6 years .. peak being 2007 so 2012 will be the earliest we reach 2007`s prices again .. but if you buy today or 2010 you``ll likely be OK again !!

Of course, taken the long view, today`s value is FAR higher than 1981, isn`t it ?

Real estate values are like a wave along an upwardly sloped curve, called inflation.

With some techniques, like the ones taught at REIN or elsewhere, you can be faster, get in and out easier or better timed, or buy along a slightly different slope .. but the fundamentals are the same: hold long enough, with at least break-even or positive cash-flow .. and you will be OK !

 

[GarthChapman]

QUOTE (mcgregok @ Jan 11 2009, 09:21 PM) I think I had this conversation in 1981. Bought a house in Dalhousie in Calgary. there were 12 homes for sale on the same street. I think it took about 6-7 years to get back up to the orginal listing price. It was the end of the world for the owner I bought the home from. He just built a home and had to take possession, i bought it for around 30-35% of listing price. I doubt today is going to be any better.

We won`t see anything like what occurred in 1981. Then values dropped 20-25% or more. I don`t see this correction going beyond 15% and we`ve already seen most of that.

 

[Stephen1151]

QUOTE (GarthChapman @ Jan 12 2009, 12:40 AM) We won`t see anything like what occurred in 1981. Then values dropped 20-25% or more. I don`t see this correction going beyond 15% and we`ve already seen most of that.


What makes you say that? I know we had the huge interest rates in 1981 but now we have the big 3 on the brink of going bankrupt. I heard somewhere that not only the jobs of the big 3 but also the spinn off jobs from them (ie steel, paint, parts) account for over 70% of our economy. I really hope that they dont go under. If they go to electic vehicles how will this affect oil prices as well? I would like to hear your take on this or anyone elses.

Thanks...Stephen

 

[GarthChapman]

QUOTE (stephen @ Jan 12 2009, 08:20 PM) What makes you say that? I know we had the huge interest rates in 1981 but now we have the big 3 on the brink of going bankrupt. I heard somewhere that not only the jobs of the big 3 but also the spinn off jobs from them (ie steel, paint, parts) account for over 70% of our economy. I really hope that they dont go under. If they go to electic vehicles how will this affect oil prices as well? I would like to hear your take on this or anyone elses.

Thanks...Stephen

The big three aren`t so big any more, but nonetheless, whether they go under or not the cars, trucks & SUV`s (autos) that get sold will still be built. It doesn`t matter what name plate is on the grill, as the auto workers will make the autos for whoever is selling them (as long as roughly the same ratio of autos are made in North America vs. overseas as before).

Frankly I think it would be far cheaper if one or two auto mfgrs went into Chapter 11, like the airlines in the USA did after 9/11. It is an orderly way to do what needs to be done, and does not involve taxpayers money to prop them up.

Sales of autos were down something near 40% in 2008, so the jobs that would have made those autos are gone no matter what. No amount of Government bailouts will change that reality. Let the strongest survive and carry on to make good and affordable products that the consumer will buy. This is the elegant efficiency of our amazingly resilient economic system - and it works well if we leave it alone.

 

[Nir]

Hi Guys, keep in mind prices depend on supply and demand, supply and demand depend at least partially on human psychology.

Are you saying you can predict human psychology? I don`t know what I`ll eat tomorrow, not to mention think, and for sure not what other people will think about... a year from now.

That`s why I prefer cash flow properties from day 1 and not to sell before I die or 2020 whatever comes first, and see appreciation as a (very nice) bonus only. Cheers.

 

[GarthChapman]

QUOTE (investmart @ Jan 12 2009, 10:12 PM) That`s why I prefer cash flow properties from day 1 and not to sell before I die or 2020 whatever comes first, and see appreciation as a (very nice) bonus only. Cheers.

Well said!

One ought to buy and own revenue properties like one eats to survive:

1) Cashflow is the soup and salad - you can live on that alone while you are young. It`s not fancy but you can live alright day-to-day, but it won`t look after you by itself when you are old and getting wrinkled and skinny.

2) Mortgage paydown is the main course - with this you will become strong and develop healthy fat reserves for when there are lean times and you need to draw upon them - you know, kind of like equity take-out refinancing.

3) Appreciation is dessert - nice if you can get it, and tasty too; but not required for a healthy lifestyle. If there are no appetizers, soups and salads on the menu where you eat, you`d better be able to order some dessert, or there won`t be enough calories to survive on.

 

[EdRenkema]

QUOTE (GarthChapman @ Jan 12 2009, 10:53 PM) Well said! One ought to buy and own revenue properties like one eats to survive:

1) Cashflow is the soup and salad - you can live on that alone while you are young. It`s not fancy but you can live alright day-to-day, but it won`t look after you by itself when you are old and getting wrinkled and skinny.

2) Mortgage paydown is the main course - with this you will become strong and develop healthy fat reserves for when there are lean times and you need to draw upon them - you know, kind of like equity take-out refinancing.

3) Appreciation is dessert - nice if you can get it, and tasty too; but not required for a healthy lifestyle. If there are no appetizers, soups and salads on the menu where you eat, you`d better be able to order some dessert, or there won`t be enough calories to survive on.

If you`re eating to survive Buffets are the way to go!!
I generally get one plate each soup and salad, two plates main course, one plate desert (2 if I`m not hurting yet

).
So if I can find it I like cashflow, mortgage paydown, and appreciation.

Who says you can`t have it all? -just might have to go hungry between meals though.

 

[ChrisMewhort]

I haven`t posted on here in probably a year. I got scared by the market and have completely fallen off the REIN train. I`m making an effort to get back into it, though the market worries me as a young, un-invested, cat.

Just wanted to show thanks and appreciation for all the information in here. As lame as it is to read, Jack`s made some very good points, and others have made some great counter-points as well.

A few things stood out in particular, like

1) The notion that many will lose big time in this market, REIN and non-REIN alike. Be it through greed, ignorance, or something else... It`s a fact.
2) To date, from inception to present, real estate has been a rising market. Lots of swoops, but always bouncing back. This lends confidence to someone like me. If you can find properties which cashflow in a market like todays, you are very likely more safe than not.

On the topic of what`s happening in terms of buyers/renters/sellers/landlords... There seems to always be an equal, opposite argument. This means that both sides of the coin are correct to some degree. What`s the best way to create a plan that will target one specific side of the coin profitably?

 

[Thomas Beyer]

QUOTE (devc @ Jan 13 2009, 11:09 PM) What`s the best way to create a plan that will target one specific side of the coin profitably?
buy with a 5+ year hold in mind .. don`t overpay .. and ensure that you have realistic assumptions about rent levels, vacancies, expenses, mortgage rates ... be educated .. be ready when an opportunity arises .. stay focused on a target market/area . have financing in place .. and remember:

You can`t learn to swim while on the side of the pool and reading a book .. at some point you have to get wet ...

some add`l thoughts on 5 ways to make money http://myreinspace.com/public_forums/General_Discussion/61-3347-5_ways_to_make_money.html

How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html

 

[gwasser]

If you want to maintain positive cash flow during periods of falling rents, you will need a cash flow cushion. Thus your mortgage payments should be as low as possible. After optimizing your financing facilities (use of HELOCs, variable rate mortgages, etc.) you should also use excess cash (cash that is not immediately needed to survive) to pay down your mortgages or reduce your HELOCs. Check out your `lump sum payment` privileges. This may lower your payments further and thus you can afford to lower rent.

In fact, with today`s falling short term interest rates, your HELOC may be your life saver. If you are tied down with a 5-year mortgage and have room for a HELOC, consider refinancing – be careful before acting that your HELOC is still available and that the penalties of terminating your 5-year mortgage are not too high.

Although leverage maximizes profits, it should not be so high that you can`t get through bad times. If you have 20% down on a purchase at a market peak, you may get yourself in trouble when market values fall (say 20%). If you would buy during times of low real estate prices, 20% down may be perfectly fine since the chance of another 20% market price reduction is small. So, apply leverage carefully - it is better to be safe than sorry (where did I hear that before?).

Other ways to reduce your costs that allow you to lower rents to a more competitive level lie of course in your operations. Maybe you can do property management yourself - that costs time but helps with cash flow. Consider saving on energy by using better light bulbs, motion sensor light switches and timers. Consider lowering the phone bill by switching to VoIP. Also, check your city property value assessment in order to lower your property taxes. Etc.

 

[Thomas Beyer]

QUOTE (gwasser @ Jan 14 2009, 09:01 AM) If you want to maintain positive cash flow during periods of falling rents, you will need a cash flow cushion. Thus your mortgage payments should be as low as possible. After optimizing your financing facilities (use of HELOCs, variable rate mortgages, etc.) you should also use excess cash (cash that is not immediately needed to survive) to pay down your mortgages or reduce your HELOCs.
Cash is King - Cash-Flow is Queen

Thus: keep cash at hand RATHER than paying down the mortgage as this provides more liquidity. Different with a LOC as it is like cash .. being mindful of the fact though that some banks can and have cut back the LOC without notice. So rather have cash and invest it or eat the small difference between HELOC payment of 4% and interest of 2% on the cash.

 

[gwasser]

QUOTE (thomasbeyer2000 @ Jan 14 2009, 09:49 AM) Cash is King - Cash-Flow is Queen

Thus: keep cash at hand RATHER than paying down the mortgage as this provides more liquidity. Different with a LOC as it is like cash .. being mindful of the fact though that some banks can and have cut back the LOC without notice. So rather have cash and invest it or eat the small difference between HELOC payment of 4% and interest of 2% on the cash.


Thomas you misunderstand me. I said use `excess cashflow` - cash you don`t need to survive - to pay down your mortgages and HELOCS. That is the same cash you recommend to invest - well paying down your debt is investing. Also, if you pay down a line of credit and you need cash suddenly you just take it out again.

It is great to use excess cash in new investments but first take care of your immediate well being. Yes there are great values out in the stock market and less dramatic in the real estate market but only take advantage of those when you have lined up all your ducks in a row. Besides, this buying opportunity will not disappear overnight and things may become even more attractive.

I - I have cash in the bank enough to live off for the next year or two
II - Next I have invested for on-going cashflow
III - Excess cash has gone to lower mortgages and helocs to levels where I can afford lowering rents if I have to
IV - Cash that is left over, I will carefully invest over time for additional cashflow either in real estate or in the stock market.
V - I do not sell paper losses unless the business is poorly managed. Paper losses are not real until I sell - it is just a temporary reduction of net worth. Even Warren Buffett`s Berskshire-Hathaway is down 30% or so from its peak.

Hope this clarifies my ideas.

 

[Bill]

I`m a little confused by the subject of this discussion. I have read the article Jack linked to several times and it doesn`t mention Mass Foreclosures anywhere. It actually says
"the "most likely outcome" is for markets and credit conditions in Canada to gradually improve as extraordinary measures by central banks and governments take hold", which is slightly different than mass foreclosure.

It does mention a substantial increase in default rates on household debt if global economic conditions continue to deteriorate, but this comes across as a great example of looking behind the curtain and reading the whole article.

We can find or create negative news where ever we want, I think it`s really up to us as individuals and as investors to make sure we get the whole story and make our own decisions rather than continue to get dragged down with the negative aspect of the story.

I just wrote an article for my blog at the beginning of January talking about how much of the economic situation is being perpetuated by the media and the negative aspect of everything titled Could 2009 Be the Best Year Ever.

There are some huge positives to the slowdown right now ranging from actually being able to hire staff to costs of everything from renovations to hard goods coming down as competition increases. Simply put, there are always opportunities in any market, it`s just realizing them and either being like the masses and watching from the sidelines, or taking advantage of them and doing something with your knowledge.

Of course all this is just my opinion, the headlines seem to have a different opinion.