To buy or not to buy, that is the question...

[Sherilynn]

I was posed this question today regarding our activity in the Edmonton market:
"You seem to be continuing to invest in strong cash-flowing properties in the area whereas (another seasoned investor) is actively advising investors to not purchase until 2019/2020....Why?"

Short answer: we're both right.

The properties I am currently closing on are custom built, legally-suited houses that I contracted to purchase prior to the oil crash. Because we purchased well, the properties still appraised fine and will cashflow. As long as a property cashflows and can carry you through the downturn and out the other side, and be poised for good growth in the next 'boom,' it really doesn't matter what happens to the price during the downturn. (It's a different story if you are forced to sell during the downturn...yet another reason one must always buy carefully.)

And I will continue to watch for other properties in the Edmonton area as single-family house prices fall and properties "go on sale." If they are quality properties in a good area, and cashflow looks good now and in the future, then it may be a good time to buy. (Better still if a legal suite can be added.)

I also agree with other investors that waiting is a good idea. This is especially true if one is buying in areas where the economy is less diversified than Edmonton. Why pay today's price when the price will likely drop? And why buy now when you could have lower rents and/or higher vacancy resulting in less cashflow? And if the economy is less diversified, when will it recover?

Other points to consider:

• my company has a fairly sizable portfolio with excellent cashflow, mitigating the risk
• I have 10 years experience in real estate investing, meaning I may be better suited to handle both the challenges and the stress of investing in an uncertain market
• I specialize in up/down duplexes (suited properties), so the expenses of the property are mostly (or completely) covered by one suite, meaning vacancy isn't as big of an issue

Bottom line: every investor must consider several factors when deciding a course of action. Obviously the fundamentals and economic outlook are key, but other factors include:

• risk tolerance
• experience and expertise
• stability and diversity of one's current portfolio
• the specific type and/or location of property (which may fall into a bit of a sub-market)

 

[Matt Crowley]

I was posed this question today regarding our activity in the Edmonton market:
"You seem to be continuing to invest in strong cash-flowing properties in the area whereas (another seasoned investor) is actively advising investors to not purchase until 2019/2020....Why?"

Interesting to see one's advice on what to do in today's market and one's actual investing behaviour ie. ongoing purchases in a market they say is totally defunct. It is almost as if large investors sometimes recommend the opposite action of the one they are taking.

 

[Sherilynn]

I certainly wouldn't call the Edmonton market "totally defunct." There is no doubt in my mind it will recover.

Yes, I will be very careful about what I buy, but I'm always watching for a good deal. It is virtually impossible to perfectly time a market, and what does it matter if the price dips a bit before it rises? (Answer: it only matters if you decide to sell after it dips.)

And who are "they" anyway?

 

[Matt Crowley]

I don't think the Alberta advantage is gone by a loooong shot either. We are so far from becoming an Ontario or have-not province. Edmonton and Calgary are both beautiful cities with great amenities and an amazing quality of life. 1 out of 5 jobs in Canada still come to Edmonton. There is reason for concern and surely things will get worse before better.

I was merely saying that I agree with your observation of some fear mongering on the forum... and that it is not really backed up by the investing behaviour I have observed. (Preaching the sky is falling and buying hundreds of units... alriiiight)

 

[Sherilynn]

That's what I thought you meant. Some people act like every downturn is another Enron or NorTel. Stocks and real estate aren't even close to the same thing.

And there are those who fall prey to the preachers of: "Yes, the sky is falling! Everyone sell me your properties (at a steep discount) before they are worth pennies on the dollar!"

The seasoned investor to whom I was referring is genuinely putting his buying efforts on hold for a while, but he has a substantial portfolio and it makes sense for him to clear out a few poorly performing properties and wait for a while before buying again. Every investor must formulate his (or her) own plan based on his unique circumstances.

 

[Courtney Hammond]

I'm glad this post has surfaced. Although I am new (2 years) and only have 7 doors, I have found within my area that there is still lots to consider. We've always purchased based on what I deem as base market rent and run numbers on our "worse case". We have yet to hit our "worse case". This last house (legal suited) it took more effort for me to get the right tenant... instead of just throwing a post out- and waiting for the replies, I responded to several of the "want" ads, and anyone I knew that was looking, or knew people that were looking. Not only are we fully rented, but for above my "top market" rent when we ran the numbers. There are still tenants out there looking for landlords that are responsible, that understand that it is a client based business, and that are proud of their homes. (Although I was worried about one new tenant, a face to face conversation sorted it all out and payment was fulfilled the next morning)

Anyway, it might be more work then before, but it's not gone.. at least not for us.

We are gearing up for some good buys--- when we started we always said "I wish we could have bought during the last down turn! " -- looking forward to taking advantage of some areas that I've waited to be able to afford.

I should note that we also only do legally suited homes which helps protect a bit with the cash flow crunch that can happen as our bottom line is a lot further away.

 

[Sherilynn]

We are gearing up for some good buys--- when we started we always said "I wish we could have bought during the last down turn! ".

That's exactly what we were saying then. We had exhausted all of our personal resources by September of 2007 and didn't have the reputation built up to attract JV partners to take further advantage of discounted prices.

And yes, legally suited houses can be a great strategy in any part of the cycle (providing they are well-managed because tenant selection is critical).

BTW, 7 doors in 2 years is a great accomplishment. Well done!

 

[Thomas Beyer]

Seriously ? You're buying in a falling market, not on the way up ?

 

[Sherilynn]

As mentioned, the properties I am currently buying were contracted before oil crashed, so we had no choice but to buy now. Because at that time we bought at a discounted price and because the properties are purpose-built, legally suited houses in a good area, they still appraised at the required value and will cashflow well. Since they cashflow and I don't plan to sell during the downturn, a short-term price decrease is somewhat irrelevant.

For any future purchases, I will be targeting properties with distressed sellers who are willing to offer huge discounts in order to exit the property quickly. If I can get a property at a huge discount (and possibly with low money down), and that property will cashflow well through the downturn and is poised to increase in value after the downturn, then why wouldn't I buy it?

I see the value in waiting until the market turns. However, I also see a lot of distressed sellers willing to offer excellent prices and terms. There is opportunity there, and I will buy if the right opportunity presents itself.

 

[Thomas Beyer]

Maybe I should invest more with you ?

 

[Sherilynn]

When I find more distressed sellers willing to offer low money down on cashflowing properties, then - yes, you should

A caution to others aiming for properties from distressed sellers: not every distressed seller has a property worth buying or terms worth accepting. I have been contacted by MANY distressed sellers over the past several weeks, yet I have not bought any of those properties. 'All ducks must be in a row' before a property is worth buying in a market such as this.

It must cashflow. It must be at a discount to compensate for the falling market. It must be with terms that provide decent ROI. (For example: a low-money-down AFS purchase or a vendor take-back mortgage reducing the down payment will increase ROI.) And it must be in an area that you anticipate will increase in value in the not-too-distant future.

 

[Sherilynn]

Come to think of it, I haven't bought a single investment property at the "bottom" or shortly after the bottom of a market. (However, I have been lucky enough to buy both of our personal residences at the bottom.)

In 2006, we returned to Canada and started investing in Edmonton when the market was skyrocketing. I bought several investment properties over the rest of the boom, with the last being a so-so condo purchased in June of 2007 - a couple of weeks before the big housing crash. (I wasn't yet a REIN member, if anyone is wondering.)

Because we bought well and were certain of high positive cashflow before we bought, every single property made a profit throughout the recession. The so-so condo was a challenge, but when it wasn't making money as it was, I changed it (super-suited) so it did make money.

Of course, the prices started falling in July of 2007, and they had soon fallen below what some of our purchase prices were. However, it didn't matter because we were still making money on the properties, so we had no need to sell. And it didn't take long (in real estate terms) for those prices to rise to levels higher than our purchase prices. (All except for the so-so condo, which we still would have lost money on if we sold at the top of the most recent 'boom,' but it makes an obscene amount of money as a super-suite, so we still have no need to sell.)

Bottom line: we bought first and foremost for positive cashflow, and that positive cashflow carried us unscathed through the "great recession."

This recession has already had a much greater impact on Alberta than the last one did; but quality, high cashflowing properties, in areas poised for future growth, can weather many a storm.

 

[LAndersen]

I don't think the Alberta advantage is gone by a loooong shot either. We are so far from becoming an Ontario or have-not province. Edmonton and Calgary are both beautiful cities with great amenities and an amazing quality of life. 1 out of 5 jobs in Canada still come to Edmonton. There is reason for concern and surely things will get worse before better.

Well said, I agree that the advantage isn't gone at all. We just have to look a little harder right now.

I was merely saying that I agree with your observation of some fear mongering on the forum... and that it is not really backed up by the investing behaviour I have observed. (Preaching the sky is falling and buying hundreds of units... alriiiight)

 

[LAndersen]

I'm glad this post has surfaced. Although I am new (2 years) and only have 7 doors, I have found within my area that there is still lots to consider. We've always purchased based on what I deem as base market rent and run numbers on our "worse case". We have yet to hit our "worse case". This last house (legal suited) it took more effort for me to get the right tenant... instead of just throwing a post out- and waiting for the replies, I responded to several of the "want" ads, and anyone I knew that was looking, or knew people that were looking. Not only are we fully rented, but for above my "top market" rent when we ran the numbers. There are still tenants out there looking for landlords that are responsible, that understand that it is a client based business, and that are proud of their homes. (Although I was worried about one new tenant, a face to face conversation sorted it all out and payment was fulfilled the next morning)

Anyway, it might be more work then before, but it's not gone.. at least not for us.

We are gearing up for some good buys--- when we started we always said "I wish we could have bought during the last down turn! " -- looking forward to taking advantage of some areas that I've waited to be able to afford.

I should note that we also only do legally suited homes which helps protect a bit with the cash flow crunch that can happen as our bottom line is a lot further away.

Well done! I'm glad your not allowing the fear of the media to dominate. Keep moving forward!

 

[Sherilynn]

Well done! I'm glad your not allowing the fear of the media to dominate. Keep moving forward!

Yes, with a cautious, ultra-conservative approach, and building in an extra cushion to soften economic blows.

 

[MonicaPaslawski]

Great post. We have lived through these before, and yes, this one is "different" - no doubt about it, (they all are) but the key is "not needing to sell". Keeping steady through these times, continuing to let someone else pay the mortgage, and looking for exceptional deals along the way - that's good business. It's pretty depressing out there politically and economically, but I am looking for opportunity.

 

[LAndersen]

Great post. We have lived through these before, and yes, this one is "different" - no doubt about it, (they all are) but the key is "not needing to sell". Keeping steady through these times, continuing to let someone else pay the mortgage, and looking for exceptional deals along the way - that's good business. It's pretty depressing out there politically and economically, but I am looking for opportunity.

Why is it depressing economically? We continue to see people innovate and create opportunity where there was none.

 

[Thomas Beyer]

I appreciate the optimism. It needs to be married with a reality check though.

Of course, where there is light there is shadow. AB needs a wake-up call re high labour cost and low taxation. This calibration to a new normal will take at least 2-3 more years.

PST, carbon taxes, higher energy prices, land transfer taxes, higher property taxes, and lower wages are all coming to AB !

Possibly rent control.

Of course safe public sector jobs with cushy benefits and pensions are exempt from this reality check ....

 

[Sherilynn]

Good points, Thomas.

I completely agree optimism must be based in reality, and must consider the worst case scenario. In every market correction, there are people who suffer unnecessarily simply because they took a "Poly-Anna" approach to investing.

One must hope for the best, but prepare for the worst.

 

[Thomas Beyer]

I think that is to simple as preparing for " the worst " is impossible. Are you prepared for 14% interest rates ? Are you prepared for nationalization of oil companies like in Venezuela ? Are you prepared for making oil use illegal ? A nuclear terrorist attack on Edmonton ? A meteor ? A major earthquake ?

Granted these are all extremely unlikely but "the worst".