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Real Estate Forecast for late 2010 and 2011, would you buy a rental income property right now.

O

ottawaman

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Good day to all,

I would classify myself as a real estate newbie, so i apologise if my question is too general or was already asked again and again.

Any insights, comments, suggestions to my questions is very much appreciated.


I live in Ottawa and recently my parents told me they will give me 50K+ to buy myself a house. I wanted to buy a rental income property (duplex, or a townhome). However, Ive read a lot of articles stating that with the current economy, plus HST, plus high interest, plus houses are already overprice, plus this...plus that.... that the housing prices within Canada will fall by late 2010 and possibly even 2011.

Also,
Heres are some facts,
Rental vacancy in Ottawa is 2.4%, however it might be higher in Kanata..
Ottawa is a stable city unlike Toronto or Vancouver, one of rein`s prefered cities.
If I dont use my parent`s money I might lose it...
No, I cannot use that money to buy a car, boat etc etc (too bad eh... lol)
etc


So, if you were in my shoes would you take your parents money and buy yourself a rental property? or would you wait until maybe mid-2011 or start of 2012?


To all rein and non-rein members, thanks very much for helping me learn real estate investing faster.
ThomasBeyer, your articles are awesome, keep up the great work!
 
Do you have a house already?

Buy a principle residence first... Get one that you can live in and rent out a couple rooms or perhaps even a secondary suite so that you get used to being a landlord and running an income property business.

No one has a crystal ball and I`m sure if you look hard enough you will find an expert that will tell you what you want to hear. Seems opinions on the real estate outlook are all across the range these days. My personal thoughts are that the worst damage was done in late 2008/early 2009 and that you will see traditional slow climbs in prices in the 2% to 5% range. If you aren`t actively trading in real estate those increases can be hard to see in list prices so the layperson struggles to see obvious signs of confidence in the market... but those increases are there.

Thing you need to remember is that 2-5% is well within the negotiating margin on any given sale and you will have transaction fees like you mentioned... so you really need to be able to hold onto your property for a number of years to see the gain. No quick easy money in this business.
 
Hi Sorry, i forgot to mention, I already own a house (bought it 5 years ago, mortgage has been paid off Feb of this year)

I also bought another rental income property last year Sept. (is currently being rented)

thanks for the replies.
 
QUOTE (ottawaman @ Jun 23 2010, 01:30 PM) Hi Sorry, i forgot to mention, I already own a house (bought it 5 years ago, mortgage has been paid off Feb of this year)

I also bought another rental income property last year Sept. (is currently being rented)

thanks for the replies.


Sounds like you`re on your way already. No need to stop now. I would suggest reading Peter Kinch`s new book and come up with a 5 year plan to figure out what you want to do and why. If your mortgage is paid off, in five years no less, maybe you don`t need your parents money.

Nik
 
QUOTE (ottawaman @ Jun 23 2010, 01:30 PM) So, if you were in my shoes would you take your parents money and buy yourself a rental property? or would you wait until maybe mid-2011 or start of 2012?

I invest when the financial statements and price make sense.

I don`t look into forecasts any more than I have my palm read or listen to fortune tellers.
 
I would wait
I think the ten year bond at close to 3% represents fantastic value for the discerning investor!
 
QUOTE (housingrental @ Jun 24 2010, 09:33 AM) I would wait
I think the ten year bond at close to 3% represents fantastic value for the discerning investor!

In the current environment buying long term bonds is very risky. As soon as interest rates rise your bond`s resale value is likely to drop significantly. If you must invest in bonds go for a short term bond etf. Low commissions and less interest risk.
 
How said anything about selling prior to maturity?
There`s risk in anything... at least with this purchase you have two guarantees:
You`ll get 100% of you money back 10 years from now unless government defaults... you`ll likely have bigger problems if that were to ever happen
You`ll get a guaranteed interest payment regularly
 
QUOTE (housingrental @ Jun 25 2010, 07:55 AM) How said anything about selling prior to maturity?
There`s risk in anything... at least with this purchase you have two guarantees:
You`ll get 100% of you money back 10 years from now unless government defaults... you`ll likely have bigger problems if that were to ever happen
You`ll get a guaranteed interest payment regularly

Before I`ll say anything, I`ll note that if you believe interest rates are going up, long bonds don`t make sense. If you believe inflation is about to take off, long bonds don`t make sense. And if you believe you`ll be able to get better rates on shorter maturities, long bonds definitely don`t make sense, unless you actually expect interest rates to fall.

Why not get a five year GIC at 3.25%? It seems likely that rates will be at least as high as they are now in five years, so you could renew at the same or higher rate then, giving you a higher average rate. One example here:

You`ll get 100% of you money back 10 years from now unless government defaults...

Ignoring the risk of default as remote (since the gov`t can print money). However, the risk of getting much less than 100% of your VALUE back is very high due to inflation. (Since the gov`t can print money).

Regards,

Michael
 
To above: yes you`re correct.
Are you familiar with the recent history of Japan?
Most factors point to Canada being Japan light (extra light).
 
QUOTE (housingrental @ Jun 26 2010, 12:04 PM) To above: yes you`re correct.
Are you familiar with the recent history of Japan?
Most factors point to Canada being Japan light (extra light).

If you receive 3% interest, after tax you receive approximately 1.5% and after inflation your return is zero. Do you really want to tie up your money 10 years for that? Don predicted mortgage rates could be nearly 3% higher than today within two to 3 years. So if your bond rates were 3% higher in three years and paying you then 6% how would you feel then about your 3%. Basically your 10 year bond which already is returning you zero for the next ten years (assuming taxes don`t go up), will now have a trade-in value of 50% of the purchase price.

Same is true for GICs. Sorry, but if you want to park your money only do it for the short term in e.g. a bond ETF; you will break even as well and when ready to move on to better income alternatives you get most of your money if not all back.

For now, it is best to only invest short term for fixed income. There is too much uncertainty. Shoot, most of you guys are aiming fro 15 to 20% of ROI in real estate investments so why so tepid when investing in bonds and tying it up for 5 to 10 years for a guaranteed loss (in purchasing power or even worse).

You can buy variable rate prefered shares from companies such as Brookfield. 2.5% dividend wich will be adjusted along with the prime rate and which are taxed as dvidends. And you can sell them when you want. They also are not risk free but in my eyes a lot better than a 3% 10 year bond.

B,T.W. There are Yellow Pages preferreds that pay 6% or better (qualify as a dividend) and mature within 3 to 5 years. They sell now for around $20 and you`ll be paid $25 at maturity. So who wants that 3% 10 year bond?
 
Godfried
RRSP`s ?
Re other alternate investments - Yes you`re correct
Just saying - long bonds can be part of a portfolio
And I`d rather be there than investing in single family housing in Ontario right now
 
QUOTE (housingrental @ Jun 26 2010, 11:04 AM) To above: yes you`re correct.
Are you familiar with the recent history of Japan?
Most factors point to Canada being Japan light (extra light).
not quite as Japan, unlike Canada, has NO IMMIGRATION !!

Most cities of Canada will grow in size, due to this very important fact !

Thus, real estate will be a great investment in most urban markets as people who move here have to either rent, or buy !

Just make sure that you
a) don`t overpay,
b) use sensible leverage allowing cash-flow to hold 5+ years,
c) manage the property impeccably
d) buy in an area with at least average growth (or better in Top 10 REIN towns)

Then anytime is a great time to buy .. the best would have been 1920, then 2nd best 1954 and the 3rd best NOW !!
 
QUOTE (housingrental @ Jun 27 2010, 09:36 AM) ..
And I`d rather be there than investing in single family housing in Ontario right now
Why not ?

Ontario won`t disappear from the map any time soon .. and people are moving there .. and it has a decent economy .. and many markets allow cash-flow with 25% down .. yes it may grow slower than many W-Canada markets but it`ll grow in size and thus, real estate in value !
 
QUOTE (housingrental @ Jun 27 2010, 10:36 AM) Godfried
RRSP`s ?
Re other alternate investments - Yes you`re correct
Just saying - long bonds can be part of a portfolio
And I`d rather be there than investing in single family housing in Ontario right now


When you make your RRSP withdrawals they become fully taxable. That is the famous RRSP trap, in an TFSA you probably do somewhat better.

These are difficult times to invest. We are still climbing a wall of worry and if you believe guys like Bernanke, the economy is very fragile. Europe does not help - strangely though when I was in Holland last week, the Dutch were more concerned with world cup soccer than the economy.

But yes, there is lot of real estate for sale over there. With the population stagnant, it is amazing how much construction is on-going often to renovate or entirely replace residential, retail and office space. Real estate from what I could see is relatively cheap, but so are rents. Everything is protected and influenced by government. Europe is our economic laboratory right now, they are in the forefront of experiencing the greying of their population, the effect of new immigration on their culture and economy.

Once, world population growth stops, predicted around mid-centure, many countries will experience what Europe is experiencing right now. Although no fan of Harry S. Dent, I do feel that demographics are extremely important and that our expectations of continued growth will be determined more than ever by `creative destruction` and increased productivity. But no matter how efficient we may become, their will be a limit to how much we can consume especially when, with increasing age, our earnings power is likely to decline. If there was ever any truth to the statement `this time it is different` the time is now and areas with most influence will be in demographics, environment and energy.
 
Yes
Property values can still fall during times of inmigration
Some factors to add:
Barriers to entry on new supply
Future direction of building costs
Future direction of land values
Future dircetion of operating costs (utilities, interest rate on financing, availabiltiy of financing, property tax, etc.)
Changes in density of existing stock... (roomates, secondary units created or rented out, staying at parents house longer, etc..)

QUOTE (ThomasBeyer @ Jun 27 2010, 07:07 PM) not quite as Japan, unlike Canada, has NO IMMIGRATION !!

Most cities of Canada will grow in size, due to this very important fact !

Thus, real estate will be a great investment in most urban markets as people who move here have to either rent, or buy !

Just make sure that you
a) don`t overpay,
b) use sensible leverage allowing cash-flow to hold 5+ years,
c) manage the property impeccably
d) buy in an area with at least average growth (or better in Top 10 REIN towns)

Then anytime is a great time to buy .. the best would have been 1920, then 2nd best 1954 and the 3rd best NOW !!
 
I guess this will be market / operator specific
In many sizable towns with growth being cash flow postivie is predicated on :
High down payment or low cost of funds from down payment
Low mortgage rates
Full occupancy
Minimal repairs
Low or no property management fees.

In Waterloo as an example - If non student rental - rents around $1300-$1400 for a $250,000 house
(student rental $2400 for $230K possible in certain situations)

So generally cash flow negative if:
Management doesn`t go perfect (vacancy, delays between tenancy, unexpected repairs, etc..)
You hire quality outside property manager
Your HELOC rates increase a few percent (some likleyhood of this)
Your mortgage rates increase a few percent (some likelyhood of this soon
Rents fall in area

If things go well from operations you might pull out $200 a month.... And for the effort, risk, and cost of transactions not too appealing to me!!!

Your return expectations might vary


QUOTE (ThomasBeyer @ Jun 27 2010, 07:09 PM) Why not ?

Ontario won`t disappear from the map any time soon .. and people are moving there .. and it has a decent economy .. and many markets allow cash-flow with 25% down .. yes it may grow slower than many W-Canada markets but it`ll grow in size and thus, real estate in value !
 
QUOTE (housingrental @ Jun 28 2010, 03:41 PM) In Waterloo as an example - If non student rental - rents around $1300-$1400 for a $250,000 house
(student rental $2400 for $230K possible in certain situations)

1300/month for a 250,000 house is probably not a REIN system investment. The first filter is a 9% rental yield annually.

So 1300*12/0.09 = 173,333 approximate purchase price at that rental level. That is hard to do, but it can be done. (I`ve done a deal with almost those exact numbers in Calgary)

Sometimes the most important thing an investor can do is do nothing, and search and wait for the right deal. No called strike in real estate.

All that being said, just because a single family house in Waterloo isn`t a good deal right now, doesn`t mean a 10 year bond is either. Canada isn`t Japan.

Japan has been exporting inflation, literally for decades, by taking export earnings and converting them into foreign currency reserves. This has the effect of reducing the natural supply of Japanese currency. Instead of printing money, the government is taking money out of the supply, causing deflation. Our government has engaged in "quantitative easing" or increasing the money supply. We are much more likely to have long term inflation than deflation here.

Michael
 
QUOTE (bizaro86 @ Jun 29 2010, 09:33 AM) 1300/month for a 250,000 house is probably not a REIN system investment. The first filter is a 9% rental yield annually.

So 1300*12/0.09 = 173,333 approximate purchase price at that rental level. That is hard to do, but it can be done. (I`ve done a deal with almost those exact numbers in Calgary)

Sometimes the most important thing an investor can do is do nothing, and search and wait for the right deal. No called strike in real estate.

All that being said, just because a single family house in Waterloo isn`t a good deal right now, doesn`t mean a 10 year bond is either. Canada isn`t Japan.

Japan has been exporting inflation, literally for decades, by taking export earnings and converting them into foreign currency reserves. This has the effect of reducing the natural supply of Japanese currency. Instead of printing money, the government is taking money out of the supply, causing deflation. Our government has engaged in "quantitative easing" or increasing the money supply. We are much more likely to have long term inflation than deflation here.

Michael


Sounds like you bought a townhouse in NE Calgary. But you are right, we now are starting to see better pricing in the city that approach REIN criteria. With patience you may find the right deal. I am still waiting.
 
Hi Michael
The policy response has been to counter the existing deflationary pressures
Inflation in Canada is not a given for the next few years
If choosing not to invest in housing or not to invest in bonds your choosing bank account... which is fine... but cash as part of a portfolio!
Long term bonds have their place.. and from my perspective a good entry point given alternate investment choices currently available
 
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