Great post, Brett!
Each of your points are definately valid!
Just a couple points that I`d like to add to however, for someone looking for investment alternatives
1. While it is true that there are a lot of workers who come to see a job to completion, most of these types of workers are provided accomodations in a camp type setting where the actual work is taking place. While not always the case, this happens a LOT (I spent 5 years living in these camps while working the oilfield). Also, I would say the vast majority of these types of workers end up renting rooms in hotels/motels long term - typically the company they work for pays the bill.
We look for families that typically have trades or other high paid oilfield service work that is not so cyclical in nature. For example, if drilling slows down, all of the previous wells that have been drilled still need to be serviced, which in this area is a HUGE part of the industry. We tend to look for tenants that have more stable jobs that can weather a slowdown, and families that live here as opposed to people who and here only to complete a project. It`s all about screening and finding the right tenants. REIN`s Landlording program has worked wonders for us, and all of our tenants are great people that get along with us wonderfully. Sometimes in these areas it just takes a little more sifting to find great equity building tenants - but it can definately happen!
2. While it is definately true that smaller towns fluctuate more in pricing and you need to be aware of the economics of the area to time your exit strategy, the recent price volatility in Edmonton has also shown that large centres are not immune to these corrections either, even when the fundamentals are still strong. I do agree that smaller centres however require a little more sophistication when it comes to implementing the exit strategy. However, if you keep on top of the market and don`t aim for the `peak`, it is something that can usually be overcome.
3. I`m not sure what you mean about high prices for management, typical charges in major centres are between 7% and 10%, correct? For my commercial property, I am paying 7% and for my residential, I am paying $75 per door. This flat rate is great for my properties, as it`s about 5% gross rents due to the high rents we have ($1,650 per month on average for a duplex). I have heard the management pricing in Ft. Macmurray is extremely high, but I`m not sure how it compares to these figures. I would agree that you have to micro manage the property managers a little too much in this area (as there is ONLY 2 management companies), if you want impeccable management, but I have also heard horror stories about management companies in larger centres. I guess it`s important here to build a strong relationship with the companies in this area if you want to invest here and not spend much time with management hassles.
4. I have also heard about Calgary`s inititiave to allow secondary suites - Fort St. John is also under the process of getting similar legislation in place. However, this will still affect a LOT of suited homes as they still need to be brought up to various bylaws and building codes, which in many cases would simply cost too much. In this area, we are nearly 100% complaint driven with suited properties as well. But, who really wants to invest a bunch of money and have a new neighbour not like the amount of people parking at a property and start calling in?
Suited properties are a wonderful thing, but anyone who has them should definately keep in mind that they can be taken away in a moment`s notice. This happened to me in a duplex I was suiting with two basement suites - I got finished one renovation and was just starting the second when I got a knock at the door at 9 am - it was the Chief Building Inspector coming to shut down the suites as one of the next door neighbours somehow talked to a contractor I had, and filed a complaint. Also, one of the former tenants in the property heard what we were doing and filed another complaint - the suite we just finished was pulled out from under us in about 5 minutes!! All of this occured even though we spent a large amount of money to ensure the electrical system was upgraded to allow for a second kitchen (we added two new panel boxes and new wiring), the zoning was correct, but it didn`t meet the bylaws 100% and due to there only being one entrance per side (a set of stairs up and down with locking doors at either end) we couldn`t conform to the bylaw that requires a secondary suite to have more than one access point in case of emergency. We even had people supposed to move in the very next day there - it was a lesson learned the hard way. So, while suites being shut down may be complaint driven (which I feel is typically the case most everywhere), who is to say who will have a problem and eventually call a complaint? I personally would lose sleep over illegal or non conforming suites after what I`ve already been through with our first one!
5. I agree also with the added risk of investing in smaller centres!! However, the way to manage risk is to look at the issues and try to deal with potential problems before they arise. When we see things like a 45% jump in the record of rights to drill for natural gas coupled with several billion dollar announcements, it`s a pretty sure sign that things are going to be happening long term. That said, I would not get involved in property in this area that DOES NOT cash flow due to this exact reason. If you can purchase a cash flowing property and earn a 8-10% or more ROI on cash alone, then you can feel pretty safe that even in a downturn, you`ll still be alright. I feel for people who bought negative cash flow properties in Edmonton right before the market dropped around 10% (This is the number I keep hearing from investors in the area). While it`s true you only realize that loss if you sell, wouldn`t it be nice to have a couple properties that continue to put cash in your pocket regardless of what is happening with the appriciation end of things?
I only say this as my original intention in real estate was to add a bunch of monthly passive income, and to me appriciation was just a neat bonus. Even if it didn`t go up at all (which is FAR from what we`ve experienced), I would still be happy getting paid every month from these properties while equity is being built via a mortgage paydown. Different areas can offer different investments, and as long as you`re aware of all the potential issues with a given region before you get involved, you can do well if you manage these issues.
Wow - this turned into a long email, when I didn`t mean it to be!
I just wanted to throw my two cents into the small town discussion - this is a great thread, what are everyone else`s thoughts on this issue?
Best wishes!!
Mitch
