Is it smart to sell now?

[Stephen1151]

Im just curious about selling. I know its trying to time the market but it seems that we are at the start of a down trend. Would it be wise if I were to sell my house then buy back in if real estate prices drop more? What do others think of this?

 

[brad]

We are well into an economic mess, it started many, many months ago. Your question can only be answer by yourself. Trying to time rarely works as well as riding out the storm. What does your business plan tell you to do?

Brad

 

[nepoez]

Are you talking about Abbottsford BC? What are you selling exactly?




QUOTE (stephen @ Dec 12 2008, 11:58 PM)
Im just curious about selling. I know its trying to time the market but it seems that we are at the start of a down trend. Would it be wise if I were to sell my house then buy back in if real estate prices drop more? What do others think of this?

 

[zimnicki]

QUOTE (stephen @ Dec 13 2008, 01:58 AM) Im just curious about selling. I know its trying to time the market but it seems that we are at the start of a down trend. Would it be wise if I were to sell my house then buy back in if real estate prices drop more? What do others think of this?


Right, personally i would say no! it`s not a good time to sell, if you can, just hold on to your home, for a while till the market starts to move. Right now it`s a buyers market and for example homes in winnipeg are staying on the market for an average of 40-50 days before getting sold. So everyone is just going to low ball you for an offer for your home! Best time right now is to buy buy buy property, pick something up for lower then asking price and hold for 3-5 years. and then sell! But remmeber this is just my opinion!

Michael

 

[MikeMcCrae]

Real estate investing is a long term game. Real estate speculation is a very different game. Trying to hit the highs and lows to me is speculation. Not a bad business if that is what you want to do. Just understand what business you are in. REIN`s model as I see it teaches the investment side. But selling in a buyers market just doesn`t make sense to me. Sometimes it is necessary but I wouldn`t do it by choice.

 

[Nir]

what? in general it is the worse time to sell ever? Don`t sell unless you must. the best time to buy is in a buyers market and the best time to sell is in a seller`s market? do you think now is a buyer`s market or seller? hint: open the TV for 5 minutes. Good luck.

 

[invst4profit]

I would only sell if I was forced to for personal economic reasons. However if your plan was to sell in the next couple of years I believe things will be getting much worse then they are now.
Based on what I have seen recently, especially the next upcoming wave of foreclosures in the states expected by 2011, I believe Canada has only seen the tip of the iceberg. The Canadian economy will be dragged down due to the world economic situation. I expect to see a devastating plunge in the next 1-3 years causing drops in real estate values that could well take over 10 years to recover.
For those presently in real estate investment this is definitely a long haul game now regardless of what your plans may have been going in.

In my opinion if you were already planning on selling in the next 1-3 years sooner is probably better than later.

 

[mikestr]

With that said. It is this bad time to start in real estate investing?! If the values are going to drop within the next couple of years, then it is best to wait till they hit that low? Any thoughts?

I`ve read a book from George Soros lately called New Paradigm of Financial Markets and he predicts based on this theory (yes, I know a threory) that the market prices need to drop 20% by the end of 2009 for the economy to stabilize and match the populations average income.

 

[Nir]

Mikestr, Why speculate? have a vision and a personal quantitative target based on your needs that you can use for each and every purchase by answering the question: does it bring me closer to my goal? if the answer is yes you put an offer. for example "owning 20 units with an average of $200 positive cash flow per door AFTER Financing." See with a target like that suddenly you no longer need to watch TV news everyday. you just saved $30/month on cable TV. true, life can be more complicated than that, there are other factors to consider and certain level of real state knowledge required. the bottom line is if you can sleep well at night with your goal, make a move, if you can’t then no one can stop you because you already stopped yourself. Good luck.

 

[invst4profit]

The two key factors involved in buying now are positive cash flow and a long term investing plan. Assuming you can even get financing.

Way to many new landlords do not understand the costs involved in holding rental properties and by doing so far underestimate monthly expenses. They often do not have a large enough emergency fund and they have no idea how important it is to properly screen tenants.
The pitfalls for new investors let alone new landlords are numerous.

Throw on top of that the fact that the economy is in a death spiral and buying now could see having to hold 10 years to break even and I would say novice investors should tread lightly and be extremely well educated on the topic.

Those that invest now based on cash flow rather than future appreciation can do fine but if you make a mistake there will be plenty of experienced vultures waiting on the side lines in a couple of years to pick your bones.

PS: if you do not have a good paying full time job that you are guaranteed to keep throughout this recession or you are self employed do not even think of starting to invest now.

 

[egambling]

QUOTE (stephen @ Dec 13 2008, 01:58 AM) Im just curious about selling. I know its trying to time the market but it seems that we are at the start of a down trend. Would it be wise if I were to sell my house then buy back in if real estate prices drop more? What do others think of this?


GET OUT NOW!

The window of opportunity to get out of real estate is closing, act now before we really start "turning Japanese"!!!

 

[NorthernAlex]

QUOTE (mikestr @ Dec 18 2008, 09:45 AM) ....With that said. It is this bad time to start in real estate investing?! If the values are going to drop within the next couple of years, then it is best to wait till they hit that low? Any thoughts?......

True. I am a newbie, too and discovered REIN for me. The same question is bugging me, too. Should I keep my cash and wait or start investing now.... There is a nice 5plex here in town right now and the price was reduced today.

BR,
Alex.

 

[ZanderRobertson]

Japan`s population shrinks every year. After all the people have shifted from rural to urban, what market would there be for Real Estate to grow? Korea is in a slightly earlier stage of this now.

Canada and the U.S. are growing and plan on continuing to grow in population. in the U.S it`s quite dramatic. Doesn`t demand drive value? More people=more demand.

Not sure Japan is the best comparison.

QUOTE (egambling @ Dec 18 2008, 04:08 PM) GET OUT NOW!

The window of opportunity to get out of real estate is closing, act now before we really start "turning Japanese"!!!

 

[Thomas Beyer]

QUOTE (ZanderRobertson @ Dec 18 2008, 06:34 PM)
Japan's population shrinks every year. After all the people have shifted from rural to urban, what market would there be for Real Estate to grow? Korea is in a slightly earlier stage of this now.



Canada and the U.S. are growing and plan on continuing to grow in population. in the U.S it's quite dramatic. Doesn't demand drive value? More people=more demand.



Not sure Japan is the best comparison.


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.

 

[Jack]

QUOTE 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

So what would you consider to be an appropriate level of leverage?

In REIN, we`re sort of taught that it`s prudent to put 20% down on all properties. Even with this being said, some are even more highly levered.

So essentially, they`re suggesting an 80:20 debt:equity ratio. I don`t know of many businesses that would attract much investment capital with a structure comprised of 80% debt; they`d be considered very high-risk.

This being said, what`s an appropriate level of leverage?

 

[Thomas Beyer]

QUOTE (Jack @ Dec 18 2008, 08:27 PM)
So what would you consider to be an appropriate level of leverage?



In REIN, we're sort of taught that it's prudent to put 20% down on all properties. Even with this being said, some are even more highly levered.



So essentially, they're suggesting an 80:20 debt:equity ratio. I don't know of many businesses that would attract much investment capital with a structure comprised of 80% debt; they'd be considered very high-risk.



This being said, what's an appropriate level of leverage?


It is a function of ability to service the debt, thus a function of

a) interest rate

b) interest rate outlook,

c) loan-to-value,

d) current income,

e) income sustainability i.e. income growth (or lack thereof)



100% debt is OK if the income is 20-30% higher than the debt payments and income is growing. This is impossible in most markets but there were a few the last 3-6 years.



What attracted me to this business 10 years ago, and that is why I invest into it to this day is the ability to get up to 85% CMHC insured low interest rate debt. Most other business need more cash down with higher interest rates, thus lower cash-on-cash ROIs. If I honestly thought buying oil wells or gold mines or software start-ups or restaurants I would do that instead (but I do not).



Indeed in most business anything over 50% is considered high leverage, but 85% or even 90% is OK if item a) to e) are carefully and realistically evaluated.



However, what we have seen over the last few months, i.e. an increase in interest rates, overleverage, decline in asset values in many asset classes, decline in revenue and a lack of lender's appetite tells me that today 75-80% is on the high, yet still appropriate side for the right asset (such as an apartment building). That's why it is very hard today to get even 60% for a commercial strip mall or an industrial building as its rent outlook is much murkier than that of an apartment building. 80%+ is OK for the folks with high risk tolerance and deep enough cash pockets to survive vacancies and rent decline, hence a higher (CMHC) risk premium. Anything over 80% is higher risk, but again the context is relevant.



Complex problems have simple, easy to understand, wrong answers !

 

[GarthChapman]

QUOTE (Jack @ Dec 18 2008, 08:27 PM) So what would you consider to be an appropriate level of leverage?

In REIN, we`re sort of taught that it`s prudent to put 20% down on all properties. Even with this being said, some are even more highly levered.

So essentially, they`re suggesting an 80:20 debt:equity ratio. I don`t know of many businesses that would attract much investment capital with a structure comprised of 80% debt; they`d be considered very high-risk.

This being said, what`s an appropriate level of leverage?

In my view an appropriate level of leverage is one that is enough to cover these criteria:
1) That the property will generate sufficient cashflow (the investor says how much is enough)
2) That the cash-on-cash return justifies the cash investment (the investor says how much is enough)
3) Enough to cover a worst-case value depreciation occurrance (this is market dependant)

Interest rate sensitivity is also an issue to be concerned with, particularly when rates are historically low.

Investing in Real Estate is a business with relatively low barriers to entry, especially for a business model with such high potential for gain. It is a leverage play, in that the appreciation is leveraged by the ratio of investment size to asset value - in a 20% cash investment scenario the owner`s equity gain is five-times the asset`s appreciation. So if the property appreciates by 5% then your equity gain is 25% on your cash invested. Equally powerful on the way down, hence the prudent investor protects against this possibility creating serious damage to them.

 

[Jack]

QUOTE It is a function of ability to service the debt, thus a function ofa) interest rate
b) interest rate outlook,
c) loan-to-value,
d) current income,
e) income sustainability i.e. income growth (or lack thereof)

I think "E" is of particular importance, and maybe I`d change its verbage to earnings quality. How persistent are the earnings that the building generates?

As for the interest rates, I`m kinda more of a fixed rate guy, therefore "A" and "B" don`t really matter. If you can get a fixed rate around 5%, why go variable? You may save a few dollars for a few months, or even years, but it could just as easily go the other way. I don`t see the point in exposing yourself to that potentiality.

Thanks for the response, well-said.

 

[Jack]

QUOTE In my view an appropriate level of leverage is one that is enough to cover these criteria:
1) That the property will generate sufficient cashflow (the investor says how much is enough)
2) That the cash-on-cash return justifies the cash investment (the investor says how much is enough)
3) Enough to cover a worst-case value depreciation occurrance (this is market dependant)

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.

QUOTE Interest rate sensitivity is also an issue to be concerned with, particularly when rates are historically low.

Or, you could just go fixed.

QUOTE Investing in Real Estate is a business with relatively low barriers to entry, especially for a business model with such high potential for gain. It is a leverage play, in that the appreciation is leveraged by the ratio of investment size to asset value - in a 20% cash investment scenario the owner`s equity gain is five-times the asset`s appreciation. So if the property appreciates by 5% then your equity gain is 25% on your cash invested. Equally powerful on the way down, hence the prudent investor protects against this possibility creating serious damage to them.

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

 

[calgarypoolshark]

QUOTE (Jack @ Dec 18 2008, 08:27 PM) So what would you consider to be an appropriate level of leverage?

In REIN, we`re sort of taught that it`s prudent to put 20% down on all properties. Even with this being said, some are even more highly levered.

So essentially, they`re suggesting an 80:20 debt:equity ratio. I don`t know of many businesses that would attract much investment capital with a structure comprised of 80% debt; they`d be considered very high-risk.

This being said, what`s an appropriate level of leverage?

That`s why Real Estate is one of the best businesses in History, because when most other businesses can`t attract much investment capital with 80% debt, people ( including banks and their boards) essentially line up to give us money to buy real estate with 20% equity. Things might be changing in the credit market but this is an example I use with potential investors to highlight the safety/security of real estate.

That being said, my portfolio is sitting around a 50/50 debt equity ratio right now b/c I am gearing up for the long haul. I want to avoid negative cash flow at all costs in the coming 12-24 months and then re evaluate.