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Alberta - Where is the opportunity ?

ThomasBeyer said:
Buy when there is blood in the streets. 3Q and 4Q 2016 was pretty bloody in Alberta. Already less blood in the streets now.

Don't wait until the NDP clowns are booted from office in May 2019 !

Time to buy. We're picking up a mobile home park package in Central Alberta 20% below list price and 6% below appraised price with an 8% CAP rate. SWEET !!
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So I understand you changed your mind!? Last year you were recommending not buying in Alberta and even your advice was to wait until 2018 at the earliest if any and even longer.

It's a bit late now. last year was a buyer's market and it's over now.
 
Willyboy said:
So I understand you changed your mind!? Last year you were recommending not buying in Alberta and even your advice was to wait until 2018 at the earliest if any and even longer.

It's a bit late now. last year was a buyer's market and it's over now.
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Vacancies still VERY high in Alberta. Not a rookie market to buy single family houses or townhouses, or worse, condos, and hope for the best. Superb pricing, marketing strategies and realistic assumptions about rents & vacancies required to survive, then thrive. All doable, but not a slam dunk. The last two years were brutal, but at least values and rents now flatlined, and starting to climb, if ever so tepidly. We are buying a mobile home park package with 150+ pads in Central Alberta .. closing next month. Very low vacancies. 8% CAP rate.

I do not give advice. Advice costs money. I give opinions.

In my (humble?) opinion market will indeed not markedly improve until 2019 but values and also rents will go up slightly, ever so slightly ( maybe 1-2%/year?). Condo market is still way overbuilt putting pressure on rents, vacancies and condo prices as such avoid those unless you can hold five or more years.

But more and more #ABGreenShoots as China’s investments return to Alberta’s oil patch https://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/chinese-investment-alberta-oil-deals/article35061644/ and Alberta is bound for a rebound due to more and more drilling and consumer confidence https://www.arcenergyinstitute.com/bound-for-a-rebound/
 
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Willyboy said:
So I understand you changed your mind!? Last year you were recommending not buying in Alberta and even your advice was to wait until 2018 at the earliest if any and even longer.

It's a bit late now. last year was a buyer's market and it's over now.
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"Wow, that's a little harsh especially when someone such as Thomas is stating his well earned opinions. I'd like to say that no one can predict the market, the market will do what it wants and often without warning, history does lend a hand in possible predictions but one must find their own opinion on whether to invest in certain markets by doing their own research etc. Money can be made in any market whether it's a sellers or a buyers market if you do your research. Some of my best deals have been in a sellers market, a friend of mine once said "Once in a lifetime deals come along literally every month" its never over.

Lisa
 
alaas said:
"Wow, that's a little harsh especially when someone such as Thomas is stating his well earned opinions. I'd like to say that no one can predict the market, the market will do what it wants and often without warning, history does lend a hand in possible predictions but one must find their own opinion on whether to invest in certain markets by doing their own research etc. Money can be made in any market whether it's a sellers or a buyers market if you do your research. Some of my best deals have been in a sellers market, a friend of mine once said "Once in a lifetime deals come along literally every month" its never over.

Lisa
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You can make money in a sellers or buyers market but not in a flat market.
 
Willyboy said:
You can make money in a sellers or buyers market but not in a flat market.
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I completely disagree, if you know your market, there is always opportunity, you may not make as much money on appreciation but there is always properties to make money on the buy and mortgage pay down (this is huge with todays interest rates) and if you're lucky cashflow depending on the market. I myself have never depended on appreciation, for me it's a bonus. We don't consider ourselves risk takers, for us as long as the property is worth what we paid for it in 18-20 years we're happy because we'll have a property free and clear (that tenants paid for) and income for the rest of my life. There are many ways to make money in real estate, the key is not to expect to get rich quick, it's a slow game and if done correctly will definitely make you rich in the long run.
 
You make almost all of your return on the day you purchase. This can happen in sellers, buyers, flat, sideways markets, so be ready to pounce when those opportunities are presented to you. Alberta is a wonderful place to invest in almost any market if you find the right deal.
 
Willyboy said:
You can make money in a sellers or buyers market but not in a flat market.
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You make only 12% in a flat market.

Why ?

Let's say you buy a house, or townhouse or multi family asset for $1.2M say an 8 pled at 150,000/door with a 5% CAP rate. Let's assume the market and thus the rent is flat for 25 years.

You put down 25% or $300,000 and from the $60,000/year operating income ( 5% of $1.2M ) you pay your mortgage and some minor annual upgrades.

In 25 years your mortgage is zero. You made $900,000 in 25 years or $36,000 per year, on average. $36,000 / $300,000 is 12%.

If you consistently make 12% you'd beat 99% of all stock market investors.

So, Willyboy: what is a better investment than a 5% CAP rate price of real estate in a flat market ?
 
@ThomasBeyer I see your point but just for clarity and for others, cap rate does not equal total return on asset. Cap rate is not truly the yield on an asset because it ignores all large capital costs roof, exterior, surface, drainage, all of the huge cash hits. So if you bought that $1.2 million asset above at 5% cap rate you may actually only "yield" 3% on your cash after you account for the cyclical expenses.

Unfortunately, when the cowboys of real estate decided to value assets they used this fairly lazy concept of cap rate to reach a market valuation. It takes gross effective rent and subtracts operating expenses (property tax, insurance, utilities, salaries, grounds and maintenance - only painting and cleaning type maintenance no capital improvement dollars, amenities) and totally ignore all big capital expenditures to the property. Valuing a real estate asset at a cap rate where you treat the cap rate as a yield is essentially treating every capital expenditure for the property as a "sunk cost".

This is why you need to run IRR calculations for your property to see what the cash gains on the property actually are. So a 5% cap rate property in a flat market for an absolutely pristine asset might provide a return on asset of 4% but if it is a property requiring a few substantial cyclicals the return on asset is probably closer to 3%. Take 50% leverage return is roughly 6% in the lower case and in the better case 8%. So really not all that exciting to own real estate in a flat market, IMHO.
 
I would be interested in purchasing that asset that one has owned for 25 years without any capital expenditures. I bet the price is excellent! Just the way I like it.

What market are we in in Alberta at the moment? Buyers, Sellers or Flat.
 
The problem with today's market is that residential real estate is way overpriced or artificially inflated. What does this mean? It means for speculators they're making a killing but for normal rental property investors it's not good at all. Why? Because the house price to rent ratio is screwed. It's very high which under a healthy and normal market it should be lower. And that's why I keep saying there's no real positive cash flow in Canada anymore except in few situations where one can maybe add a suite and rent it out and still the cash flow won't be that great but better than nothing. In normal and healthy markets the cash flow positive should be easy to get with any kind of property and that kind of investment would be attractive and lucrative.

And based on my explanation above if the market is flat at today's inflated prices there won't be any real positive returns because if you factor in all the expenses that you would have to incur over the years you end up not losing but not gaining a lot either and it wouldn't be worthwhile.
 
Hmmm, if that would be true we better stop investing all together.
 
Willyboy said:
The problem with today's market is that residential real estate is way overpriced or artificially inflated.
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Artificially inflated why ? By whom ? Overpriced relative to what ?

I heard the very same thing when I moved to Burnaby in 1988. "Way overpriced. Rent to price ratio out of line A bubble. Imagine that, an average bungalow in Burnaby is $250,000. Who can afford it. ? Median income to price ratio .. bla bla bla" And that price of your average bungalow today is 5-6 fold of what it was in 1988 and likely will be over $2M in 2020.

What do you own, Willyboy ? Where do you make money ? Where did you make money ? Where do you buy, and why ? Or are you just here spouting unsubstantiated opinions ?
 
Willyboy said:
It means for speculators they're making a killing but for normal rental property investors it's not good at all.
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All investors are speculators!

If you don't have a macro bet or value-add you are going to make far less than an index fund. You must speculate. That is the nature of investment.

ThomasBeyer said:
Artificially inflated why ? By whom ? Overpriced relative to what ?
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Personally, I'm uncomfortable with Vancouver and Toronto valuations. Same with Seattle, NYC, San Francisco, Portland.

Let's use the simple relationship that cap rate = equity cost of capital - growth rate
As equity cost of capital, use the 1-year TSX ~10% (http://quote.morningstar.ca/QuickTa...rf.aspx?t=0P000072B9&region=CAN&culture=en-CA). This isn't 100% accurate because real estate is "so-called less risky" than the TSX.

Now, let's solve for growth rate using a little algebra. 3% = 10% - growth rate. So investing in Vancouver betting on a 7% growth rate. Sounds roughly accurate to mania going on there right now.

To provide some context, buying a 3% cap is really going to turn out to be closer to 2.5% after cyclicals and you drill down to earnings and paying interest expense which is a real cost, so what you are doing is buying at a P/E of 40 (see my comment above cap rates do not equal yield). So... comparitively, you are buying Twitter. Real estate less risky than the TSX?
 
Matt Crowley said:
..

Unfortunately, when the cowboys of real estate decided to value assets they used this fairly lazy concept of cap rate to reach a market valuation. It takes gross effective rent and subtracts operating expenses (property tax, insurance, utilities, salaries, grounds and maintenance - only painting and cleaning type maintenance no capital improvement dollars, amenities) and totally ignore all big capital expenditures to the property. Valuing a real estate asset at a cap rate where you treat the cap rate as a yield is essentially treating every capital expenditure for the property as a "sunk cost".

...
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Not quite as R&M of say $750-800/suite/year does include major items like a roof or boilers.

A roof on a 20-plex might be $60,000 and last 30 years so $2000/year or $100/suite/yr or $8/month.

Matt Crowley said:
.. really not all that exciting to own real estate in a flat market, IMHO.
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That is true. But still profitable.
 
Rickson9 said:
BC and Ontario kicking butt. Alberta, not so much.

Ratings agency Standard & Poor's downgraded the Canadian crude-producing province of Alberta two notches to single-A-plus from double-A on Friday, citing high budget deficits and growing levels of debt as the province struggles with depressed global oil prices.

https://beta.theglobeandmail.com/re...ttps://www.theglobeandmail.com&service=mobile
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Yup. Time to unload BC and ON overpriced stuff and invest in SK and AB !! "Overpriced" is highly context sensitive, but proces have shot up in some cities to the point of unsustainability.
 
Alberta insolvency rate jumps 34% as upward trend continues

The agency's report for 2016 showed that personal bankruptcies were up about 26.8 per cent, while consumer proposals — a legally binding process, administered by a trustee, where debtors make an offer to creditors to pay back a percentage of what is owed — increased by 40 per cent over 2015.

http://www.cbc.ca/beta/news/canada/...-calgary-edmonton-consumer-business-1.4049820

Hopefully Alberta can turn this around.
 
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