Canadians Precariously Close To Financial Instability

Thomas Beyer

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REIN Member
QUOTE (safsad @ Sep 16 2010, 03:19 PM)
Should we wait for the inevitable downturn and buy later.I understand that if a good deal comes along we can act now.however the good deal may be available as a " great" deal in a few months.


didn't we just have a downturn for 1 1/2 years ?



you're waiting for another one ?



related post re "Warren Buffet see no double dip" http://myreinspace.com/public_forums/General_Discussion/61-18109-Warren_Buffet_No_double-dip_in_the_US.html



waiting and doing nothing is always the easy choice !!
 

RebeccaBryan

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QUOTE (ThomasBeyer @ Sep 16 2010, 05:21 PM) waiting and doing nothing is always the easy choice !!


My Dad always used to tell us when we were kids that people who say they don`t want to be rich are really saying, I don`t really want to do the work to be rich. Sadly, those are the same people that spend beyond their means and whine "poor me".
 

Thomas Beyer

Senior Forum Member
REIN Member
QUOTE (RebeccaBryan @ Sep 16 2010, 04:50 PM) My Dad always used to tell us when we were kids that people who say they don`t want to be rich are really saying, I don`t really want to do the work to be rich. Sadly, those are the same people that spend beyond their means and whine "poor me".
indeed Rebecca .. INDEED !

here`s another interesting article/video clip re `9 reasons this is NOT a depression"

http://www.businessinsider.com/james-altuc...pression-2010-9
 

JDaley

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QUOTE (ThomasBeyer @ Sep 16 2010, 05:21 PM)
didn't we just have a downturn for 1 1/2 years ?



you're waiting for another one ?



related post re "Warren Buffet see no double dip" http://myreinspace.com/public_forums/General_Discussion/61-18109-Warren_Buffet_No_double-dip_in_the_US.html



waiting and doing nothing is always the easy choice !!




Thomas, when did you buy last? I thought I read in another post of yours (you write so many I can't keep track) that you hadn't made a purchase in 2007-2009? That makes my original point to wait while the market settles, particularly since we know 1,000,000 foreclosures are expected in the US next year (a market we strongly depend on) and another 5,000,000 foreclosure are expected in the coming 5 years. The US is only half way through its foreclosures and this will impact the ability of lenders to finace growth. And let me say if you did buy during 2007 - 2009 you likely purchased a depreciating asset, so your net worth has been (considerably) reduced if not wiped out in certain cases. No matter which you look at it, now is not a good time to purchase, particularly if someone's (over) leveraged.
 

Thomas Beyer

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REIN Member
QUOTE (JDaley @ Sep 16 2010, 08:15 PM)
Thomas, when did you buy last? .. No matter which you look at it, now is not a good time to purchase, particularly if someone's (over) leveraged.




Yes, my (paper) networth dropped from 2007 to today .. but it is far higher than 2005, for example .. as the run up in values from 2005 to 2007/2008 was hockey stick like unrealistic !



We sold 8 buildings in Alberta in 2007 .. 2 prominently featured on the REIN invite to the multi-family event (and our website, of course) and haven't bought there since.



We did not buy in ALBERTA from fall 2007 to now .. but have just put under contract a 120 suiter in Calgary .. and are looking to buy 1 or 2 larger assets in Edmonton too !!



We bought in SK and in Abbotsford, BC in 2008 and 2009 .. nothing yet in 2010 except some (equity position) in foreclosed land in Cold Lake .. and in Abbotsford from a disstressed REIT (Transglobe) at sub 80/door .. and in Yorkton, SK in the 30's and low 40's/door .. all UP in value considerable today !!



Considering to buy in Texas .. as indeed prices have bottomed out there as well (like Alberta) . but unsure re US/Can $ exchange rate, taxation, risk and mortgage market in the US ! So looking cautiously !



Cash flow is king .. so usually 65-70% LTV only .. lower than in previous years !



You can make money in flat markets .. not as much as in rising markets of course .. but the combination of mortgage paydown (about 10% in 5 years on the 70% mortgage) and cash-flow (another 10% or so) adds up to significant returns too on the cash invested: 10% + 7% on 30% invested: 50%+ or so .. in a flat market in 5 years !! Plus I think in 5 years values will be higher than today .. not by much .. maybe another 5-15% easy .. so 7+10+8/(30% down + 10% reserve and soft costs to raise $s) = 25% / 40% = 60+% ROI in 5 years .. good enough for me !!
 

JDaley

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QUOTE (ThomasBeyer @ Sep 16 2010, 09:29 PM) Yes, my (paper) networth dropped from 2007 to today .. but it is far higher than 2005, for example .. as the run up in values from 2005 to 2007/2008 was hockey stick like unrealistic !

We sold 8 buildings in Alberta in 2007 .. 2 prominently featured on the REIN invite to the multi-family event (and our website, of course) and haven`t bought there since.

We did not buy in ALBERTA from fall 2007 to now .. but have just put under contract a 120 suiter in Calgary .. and are looking to buy 1 or 2 larger assets in Edmonton too !!

We bought in SK and in Abbotsford, BC in 2008 and 2009 .. nothing yet in 2010 except some (equity position) in foreclosed land in Cold Lake .. and in Abbotsford from a disstressed REIT (Transglobe) at sub 80/door .. and in Yorkton, SK in the 30`s and low 40`s/door .. all UP in value considerable today !!

Considering to buy in Texas .. as indeed prices have bottomed out there as well (like Alberta) . but unsure re US/Can $ exchange rate, taxation, risk and mortgage market in the US ! So looking cautiously !

Cash flow is king .. so usually 65-70% LTV only .. lower than in previous years !

You can make money in flat markets .. not as much as in rising markets of course .. but the combination of mortgage paydown (about 10% in 5 years) and cash-flow (another 10% or so) adds up to significant returns too on the cash invested: 20% on 30% invested: 66% or so .. in a flat market in 5 years !! Plus I think in 5 years values will be higher than today .. not by much .. maybe another 10-15% .. so 10+10+10/30% down = 100% ROI in 5 years .. good enough for me !!

Thomas, you forgot to add in expenses for the 5 year period and when you do that, a 10% mortgage pay down is either cancelled out or cash flow goes to zero unless you have a low LTV in which case your ROI won`t likely be 100% in 5 yrs. Most people can`t cash flow 10% in this price market. All this is predicated on low interest rates and the market staying flat at the very least, however if you`re over leveraged, and the market dips 15-20% or more, and you have say 100 properties and you have to refinance 10-15 of those properties in a year, you`ll soon be bankrupt if your heavily levered - some REIN members have already experienced this situation and that`s all I`m saying. Given what`s happening in the US, this is not an unrealistic scenario. I hope you`re right.
 

housingrental

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REIN really needs to get JDaley to present at a REIN meeting.

It still amazes me how someone can have 5 properties at 70+LTV, have a maxed out heloc, and think a $30,000 reserve fund is going to save them when things go wrong.

It`d be nice to see more voices like his advocating a prudent and conservative approach to portfolio management.

Rare events do not only happen to other people!
 

Thomas Beyer

Senior Forum Member
REIN Member
QUOTE (JDaley @ Sep 16 2010, 09:39 PM)
Thomas, you forgot to add in expenses for the 5 year period and when you do that, a 10% mortgage pay down is either cancelled out or cash flow goes to zero unless you have a low LTV in which case your ROI won't likely be 100% in 5 yrs. Most people can't cash flow 10% in this price market. All this is predicated on low interest rates and the market staying flat at the very least, however if you're over leveraged, and the market dips 15-20% or more, and you have say 100 properties and you have to refinance 10-15 of those properties in a year, you'll soon be bankrupt if your heavily levered - some REIN members have already experienced this situation and that's all I'm saying. Given what's happening in the US, this is not an unrealistic scenario. I hope you're right.


not quite .. 10% cash flow in 5 years is quite realistic (i.e. 2% per year). This is either kept .. or re-invested into upgrades for higher rent and thus: higher value !



If you have a CMHC mortgage then you can always refinance based on the (now) lower loan amount 5 years hence. All our 5 year mortgages are CMHC insured as the rate is about 0.8 to 0.95 % lower (currently: 3.1% vs. 4.0% conventional) !



Out of 30 properties we own (we did 30 transactions overall .. sold 13 thus far .. thus 17 remaining) .. 4 have dropped slightly in value (2 in the US and 2 in Powell River, BC) .. but still allow a hold due to cash-flow.



Yes, being less levered today is the way to go BUT but highly levered from 2000 to 2007 was the way to go .. and then sell to maximize cash-on-cash ROI .. we did that with many properties .. but not all !



The most expensive property ever was in the high 70's/door .. well over 50% below new construction cost !





You can make money in flat markets .. not as much as in rising markets of course .. but the combination of mortgage paydown (about 10% in 5 years on the 70% mortgage) and cash-flow (another 10% or so) adds up to significant returns too on the cash invested: 10% + 7% on 30% invested: 50%+ or so .. in a flat market in 5 years !! Plus I think in 5 years values will be higher than today .. not by much .. maybe another 5-15% easy .. so 7+10+8/(30% down + 10% reserve and soft costs to raise $s) = 25% / 40% = 62+% ROI in 5 years .. good enough for me .. and most of our investor partners with low risk of capital loss !!



Can you make more in land development or the stock market: maybe .. but the risk of significant loss exists there too which is low with a prudently levered affordable rent apartment building with cash reserves !!
 

JDaley

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QUOTE (ThomasBeyer @ Sep 17 2010, 10:32 AM) You can make money in flat markets .. not as much as in rising markets of course .. but the combination of mortgage paydown (about 10% in 5 years on the 70% mortgage) and cash-flow (another 10% or so) adds up to significant returns too on the cash invested: 10% + 7% on 30% invested: 50%+ or so .. in a flat market in 5 years !! Plus I think in 5 years values will be higher than today .. not by much .. maybe another 5-15% easy .. so 7+10+8/(30% down + 10% reserve and soft costs to raise $s) = 25% / 40% = 62+% ROI in 5 years .. good enough for me .. and most of our investor partners with low risk of capital loss !!

Thomas this is ok, but why carry around 70% leverage is my point. The sensible thing to do during these uncertain economic times is to drive down debt levels as quickly as possible, looking to get rid of it all. In 5 yrs or sooner we maybe facing very high inflation and as a result much higher interest rates - even a 8-10% interest rate in 5 yrs will seriously disrupt the market. And not because of Canadian Govt stimulus, but because of what`s happening south of the border. In this case, where the focus is to drive down debt your ROI is no longer 50%, 62% or 100%, it ends up being approximately 25% over five years or 5%/yr, ie., near your cap rate - this is a more realistic forecast. And you can pay down debt levels quickly if you know what you`re doing. Being 70% levered or higher, say 95%, is too hedged at this time if you have anything more than 10 properties (even 5 properties) because we might easily see large dips in asset values which can create serious problems during refinancing. If you don`t spend wisely, even one property can get you into trouble and I`ve seen it happen. I`ve never really liked securities much (stock, bonds, commercial paper, BAs etc) even though I`ve done very well at it, RE is just something I grew-up on surrounded by some very sensible people who have made money from RE generationally. However, every tom dick and harry is now playing this market (in Canada), its no longer recognizable and certainly not a business I would be in the US in the next 10 yrs. I hope what’s happening in the US doesn’t hit our shores.
 

JDaley

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QUOTE (housingrental @ Sep 17 2010, 09:05 AM) It still amazes me how someone can have 5 properties at 70+LTV, have a maxed out heloc, and think a $30,000 reserve fund is going to save them when things go wrong.

Yes! This is what I`m trying to say!
 

Thomas Beyer

Senior Forum Member
REIN Member
QUOTE (JDaley @ Sep 17 2010, 11:20 AM) Thomas this is ok, but why carry around 70% leverage is my point. The sensible thing to do during these uncertain economic times is to drive down debt levels as quickly as possible, looking to get rid of it all. In 5 yrs or sooner we maybe facing very high inflation and as a result much higher interest rates - even a 8-10% interest rate in 5 yrs will seriously disrupt the market. ..

Likely NOT .. inflation is driven by HIGH DEMAND .. and by lack of capital .. and I don`t see this .. there is AMPLE cash sitting around doing nothing .. TRILLIONS (!!!!) .. thus I expect interest rates to be tepid for quite some time .. yes higher than today`s .. maybe around 5% or 6% for 5 + year money !!

QUOTE (JDaley @ Sep 17 2010, 11:20 AM) Thomas this is ok, but why carry around 70% leverage is my point. ..
fair enough .. but if I can buy assets at a 6% CAP rate .. and money is 4% (or better) .. why not ?

I appreciate the fact that less or no leverage creates a more conservative scenario .. lower risk .. and lower returns !! banks do that .. or REITs .. or insurance companies .. they own an office tower with a 4.5% CAP rate in Vancouver or Toronto or London in cash .. so to compete with a REIT I need to do s.th. different. I do own some REITs in my "ultra conservative / waelth preservation" bucket .. but not in the "wealth creation" bucket !

QUOTE (JDaley @ Sep 17 2010, 11:20 AM) .. And you can pay down debt levels quickly if you know what you`re doing. Being 70% levered or higher, say 95%, is too hedged at this time if you have anything more than 10 properties (even 5 properties) because we might easily see large dips in asset values which can create serious problems during refinancing. If you don`t spend wisely, even one property can get you into trouble and I`ve seen it happen...

fair enough ..

but if I start at 70% LTV .. in a flat market in 5 years it is 63% LTV and in 10 years 55% .. and in a 2% growth market wich I ensvision AT LEAST in most robust markets in W-Canada like: Edmonton, calgary, Saskatoon, Yorktom, Regina, Winnipeg .. that LTV in 5 years is 55% and in 10 years mid 40% .. fairly conservative to me.

The trick is to strike a balance between ultra-low risk and adequate risk given prudent assumptions !

If I assumed (I don`t .. but if) interest rates at 8% and value declines of 20%+ in 5 years I would not be in real estate today.
 

JDaley

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Thomas, this is a good discussion but your model contains many built in assumptions. A wise investor will focus on taking down debt levels at this time. This kind of investor (conservative as you may call him) poses little to no risk to the system as a whole and as long-term investors, this what we want. We want to protect our system with sound and solid investment strategies and less risk, if anything at all, that`s what our southern brethren has taught us.
 

Rickson9

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QUOTE (housingrental @ Sep 17 2010, 11:05 AM)
It still amazes me how someone can have 5 properties at 70+LTV, have a maxed out heloc, and think a $30,000 reserve fund is going to save them when things go wrong.




Speaking for myself, I agree. I was uncomfortable at a 0.2 debt/equity. By the end of this year I'm crushing it down to 0.1 if not lower.



Of course each investment decision is a personal thing so my opinion is only applicable to myself.
 

Thomas Beyer

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REIN Member
QUOTE (JDaley @ Sep 17 2010, 12:07 PM)
Thomas, this is a good discussion but your model contains many built in assumptions. A wise investor will focus on taking down debt levels at this time. ..


I see .. equity gain through less assets ?



A DEflationary view of the world !!



What I am saying is that by having prudent debt level and paying it down through holding you have a built-in automatic cushion.



We did increase our cash reserves .. but to what level ? 6 months rent ? 12 ?



ANY model has assumptions.



One can't function in this world without assumptions !!



My assumptions is:

a) debt will cost slightly more in a few years BUT NOT A LOT MORE

b) there is plenty of cash

c) people move to desirable countries (not Iran, not Afganistan, not China, ..) such as W-Europe, USA, UK, Canada and Australia .. if they are allowed in

d) even people move to strong parts of this so called Western world, like cities in W-Canada where one can raise a family in peace, with jobs, democracy and decent laws free from persecution for little reason .. and where a house with a yard or a condo is safe and affordable with an average job (like MB, AB or SK)

e) it costs more to build new than buy old and upgrade .. thus: buy old and upgrade

f) plenty of money around at 50-70% LTV .. cheap .. why not use it as long as it is 2% or more cheaper than a CAP rate of an asset

g) plenty of investors around that wish a yield that exceeds 2% or 3% with low risk .. plenty !

h) plenty of folks who rather not buy stock or mutual funds but don't know what to buy and need help

i) energy will cost more

j) the sun will rise tomorrow .. and the day after .. and in 12 years .. and in 250 ..

k) there will ALWAYS be renters for reasonably priced, reasonably well maintained and reasonably located properties .. ALWAYS !!



... there area few more ..
 

JDaley

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QUOTE (ThomasBeyer @ Sep 17 2010, 01:46 PM) I see .. equity gain through less assets ?

A DEflationary view of the world !!

What I am saying is that by having prudent debt level and paying it down through holding you have a built-in automatic cushion.

We did increase our cash reserves .. but to what level ? 6 months rent ? 12 ?

ANY model has assumptions.

One can`t function in this world without assumptions !!

My assumptions is:
a) debt will cost slightly more in a few years BUT NOT A LOT MORE
b) there is plenty of cash
c) people move to desirable countries (not Iran, not Afganistan, not China, ..) such as W-Europe, USA, UK, Canada and Australia .. if they are allowed in
d) even people move to strong parts of this so called Western world, like cities in W-Canada where one can raise a family in peace, with jobs, democracy and decent laws free from persecution for little reason
e) it costs more to build new than buy old and upgrade .. thus: buy old and upgrade
f) plenty of money around at 50-70% LTV .. cheap .. why not use it as long as it is 2% or more cheaper than a CAP rate of an asset
g) plenty of investors around that wish a yield that exceeds 2% or 3% with low risk .. plenty !
h) plenty of folks who rather not buy stock or mutual funds but don`t know what to buy and need help
i) the sun will rise tomorrow .. and the day after .. and in 12 years .. and in 250 ..

... there area few more ..

Thomas I agree, assumptions are the premises upon which we forecast. In regard to a) above, as you mentioned in your earlier post, inflation is the result of demand - however demand doesn`t give the whole picture; inflation is also, and more importantly, the result of the increase in the money supply, competiting for the same number of goods produced, not just the demand for goods. Trillions of dollars of stimulus have been injected into the markets globally. Much of this money has made its way through the system and is now parked on the sidelines. In the US they’re talking QE2 – so there’s more stimulus to come. When this money finally hits the market, which it inevitably will, we’ll see spikes in prices and the question is how high. I`m not willing to bet a high-ratio mortgage on this and I would advise investors not do so either. I`m not disagreeing with you that a) is likely but I`m not sure I agree with a) either so I would suggest to investors to pay down debt as an alternative to leverage, and therefore not expose themselves to unnecessary risk on a low probability outcome and thus risking us all (widespread default as in the US). f) is tempting to an investor, however resist, a 2% margin on a cap rate isn`t much to work with, slim returns, but I believe the cap rate already factors in the cost to service this debt. But to the point, cap rates as you know, if you’ve been in this game long enough, are at historical lows which suggest there are just too many people playing the RE market (do you agree on this ?) - not a good sign - just like any bubble in gold, commodities, resources, oil and even bonds, when margins shrink beware.

But as I said I hope you`re right and that I`m wrong – I’d prefer it that way.
 

safsad

Inspired Forum Member
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Great posts.I think this topic is of crucial importance.If property prices go down and u have cash or money on the side to invest the upside potential will be much higher if u wait a bit.Also you wont risk going bankrupt if interest rates go up.
Market timing is however the challenge.What chance is there that interest rates will be higher in a year?Most argue that this is inevitable.What chance is there that property prices will be higher in a year?Not likely.



Do u know of property investors who have gone bankrupt in the last 1-2 years
 

Thomas Beyer

Senior Forum Member
REIN Member
QUOTE (safsad @ Sep 17 2010, 03:07 PM)
Great posts...What chance is there that interest rates will be higher in a year?Most argue that this is inevitable.What chance is there that property prices will be higher in a year?


I thought so too .. 6 1/2 years ago .. and locked in a 10 year mortgage at 5.5% .. and guess what: even since rates have been lower !



In 2007, again, we locked in a 10 year mortgage as "rates are going up" .. for 5.2% ..



loads of money around and possibly more coming to get folks to invest or buy stuff. Thus: price of money will stay LOW for quite some time !!



here is another assumption I forgot: there will ALWAYS be renters for reasonably priced, reasonably well maintained and reasonably well located properties .. ALWAYS !!
 

GarthChapman

Frequent Forum Member
REIN Member
Best thread in the last 6 months...hoping it keeps going.

JDaley, to help us understand your thinking - what is your background, training, education?
 

bizaro86

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QUOTE (JDaley @ Sep 17 2010, 02:21 PM)
In the US they're talking QE2 ` so there's more stimulus to come. When this money finally hits the market, which it inevitably will, we'll see spikes in prices and the question is how high.




Inflation is coming, and there will be a spike in prices. One of the things that will spike in price is real estate. And interest rates won't start going up in earnest until that inflation starts becoming visible, in things like higher real estate prices.



We won't get higher interest rates and a huge drop in prices. It'll either be one or the other. If the economy double dips, real estate prices will be lower, but so will interest rates. If inflation spikes, interest rates will go up, but so will prices and rents.



Michael
 

Thomas Beyer

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REIN Member
QUOTE (bizaro86 @ Sep 17 2010, 06:38 PM) We won`t get higher interest rates and a huge drop in prices. It`ll either be one or the other. If the economy double dips, real estate prices will be lower, but so will interest rates. If inflation spikes, interest rates will go up, but so will prices and rents.
indeed ... we (as real estate investors prudently levered with decent cash-flow and a 5+ year view on any asset) are hedged either way !!

And, as always, if folks and alarmists are on both sides of the fence: neither is right and it will be in the middle of the road .. more or less !!! no hyper-inflation .. but no "great depression" deflation either !!
 
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