Background Image

Contraction Phase in Real Estate

Discussion in 'Economic Fundamental Research' started by Jason Ethier, Mar 20, 2016.

  1. Jason Ethier
    Offline

    Jason Ethier New Forum Member Registered

    Messages:
    1
    Likes Received:
    0
    Trophy Points:
    0
    Hello. I did my best to come to the conclusion we are in a contraction phase in Canadian Real estate. I currently have no investment properties but i do own a home. As far as I understand, i should not buy commercial residentials in this phase of the market and i should wait for the recession phase. Is this correct? If this is not true, why? Cap rates in Ottawa are around 4-6. None Cash Flow. Is this because we are in a contraction phase? A mentor would help me but this forum is sort of a mentor to me. Thanks. Should i keep networking to find a cashflowing deal? Or should i wait until the market finally goes into recession? Thanks in advance!
     
  2. Matt Crowley
    Offline

    Matt Crowley Senior Forum Member Registered

    Messages:
    758
    Likes Received:
    296
    Trophy Points:
    63
    Professional developers make money in all stages of the economy. Someone is always making a profit. Real estate investing is somewhere to put money once you have a whole stack of it. A lot of the quickie real estate investing books put the cart before the horse suggesting that the money was made by investing in real estate when really the money was made in the individual's profession or other businesses and then invested into real estate. I have seen many towers of Babylon built on the philosophy of high leverage and measuring success only by the number of doors held.

    You are exactly right that the yield on property right now is about 4-6%. You can leverage up, sure but you are totally constrained by the productive capacity of the product. So if you take on an 80% LTV you have a DCR of 1.2. If you see a 10% decrease in rents you have a DCR of 1.1. That means that you have only 10% of the gross rent to pay for all of your fixed and sunk operating expenses: property taxes, insurance, management fees, administrative, marketing, staff wages, utilities, grounds & maintenance, and repairs & maintenance. Commercial realtors for multi-family on new buildings will put around operating expenses at ~30% of gross revenue. This is before cyclical items which even new buildings will have once you get 5 and 10 years out. Clearly you are going to be underwater if you have a DCR of 1.1 when rents drop 10%. Banks are not stupid and it is a good thing they insist on 75% - 70% LTV with commercial property.

    Cash flow is nothing more than a result of how much debt you are comfortable with. It says nothing about the asset. Revenue and operating expense lines are far more important. 6% - 8% total return on a hold right now is the 3 year range of where you should hold expectations. Possibly large rental increase upside.

    If you want to make money above that 8% range, you need shorter term strategies. Investing is not a place for returns above that. You need to be creative and use the programs that are out there to your advantage:
    - affordable housing grants (many on favorable terms)
    - brown field redevelopment (grant $ available)
    - city grants for purchasing property on arterial & collector roadways where a streetway grant is available
    - partnerships with affordable housing groups
    - creative city / provincial partnerships (property tax holiday for affordable housing or CRL)
    - upzone, develop, and redevelop
     
    GaryW and Developer like this.

Share This Page