- Joined
- Sep 15, 2007
- Messages
- 62
Hey folks,
Below is an article I just wrote for our Investor Community newsletter. Thought you might be interested. Cheers!
Real Estate in 2009 – Crisis or Opportunity?
The question I’ve been asked most in the last month has been, “What impact do you think the financial crisis will have on real estate in Western Canada?” We have certainly seen a barrage of unprecedented events and turmoil in the market over the last year. What does this mean for us?
Financing Has Become More Expensive
One result of the financial crisis we are feeling North of the border is the increase in borrowing costs. Banks do not have the same access to capital they once did, and the cost of their capital and lending risk has gone up. Lending has not come to a grinding halt, as the media would have us believe, although it has become more challenging.
This October banks stopped offering 40 year amortized and 100% loan-to-value mortgages. We have also seen a significant increase in lending rates. To give you a concrete example of this, 6 months ago I refinanced a property and secured a prime minus 0.6% interest rate. If I applied for the same mortgage today, I would receive a prime plus 1% mortgage. However, prime has recently been reduced from 4.75% to 4%, offsetting this increase in spreads.
Because of this change, purchasers are required to have more income than in the past.
To illustrate, I’ll use an example of a $500,000 property. In the past I could have used an 80% mortgage, amortized over 40 years, at 3.4% interest (prime minus 0.6%). This results in a payment of $1,520.00, requiring income of $56,999 annually (banks typically only use 32% of your income to qualify you for a mortgage payment).
Take this same property and get a mortgage today, and I’d be getting an 80% mortgage, amortized over 35 years, at 5% (prime plus 1%). This results in a payment of $2,005.68, requiring income of $75,213 annually. That’s a 32% increase in the amount of income you need to qualify for a mortgage!
Does this mean we should run for the hills and stop buying real estate? No! In fact, in times like these it’s beneficial to be a landlord. Fewer people can afford to buy homes, which means there will be more renters and higher demand for rental housing. I don’t know about you, but I want to be the guy to supply it to them!
Cash-Flow Properties Are Essential
Because of the increase in borrowing costs, cash-flowing properties are essential now more than ever. Market appreciation is one of the main benefits of owning real estate over the long term, however, money now is much more important than money 5 years from now. Investors who are purchasing properties without cash-flow are hurting themselves in 2 ways: 1) They are speculating that the market is going to increase enough to provide the return they desire, 2) Negative cash-flow leeches away your monthly income and reduces your ability to borrow more money from the bank. Banks like to see cash-flow properties that cover their own debts plus a safety buffer of additional income. Their required safety buffer (read as cash-flow) has just increased substantially, making cash-flow more important than ever.
Research & Expertise Have Never Been More Important
Over the past 5 years, while the real estate market was superheated and booming, virtually anyone who owned real estate looked like a genius. Every second person on the street was a real estate expert. Well, a rising tide floats all boats and when the tide comes out you can see who’s been swimming naked. That’s one of my favourite sayings, and what I mean is that when there are bumps in the road it takes more than rolling the dice to make a successful investment.
Your secret weapon in times of market uncertainty is research. Investing based on the numbers and economic fundamentals and working with experienced professionals. Doing your “homework” so to speak. In the last 5 years, the market has covered up the mistakes of hundreds of would-be “expert” real estate investors that will lose their shirts if they continue to do the same things. Investing in real estate in today’s market conditions can still be extremely profitable, but you have to make sure you’re following a proven system, thoroughly researching your markets, and not being overzealous.
For more information on our comprehensive system of researching markets, download our recent Grande Prairie Opportunity Report from our website. It walks you through everything we look at before investing in a market.
Don’t Let Fear Lead to Inaction
In studies of past economic crises, history has always shown that fearful investors always let fear keep them out of the market for too long. People miss countless buying opportunities when the market is down or rebounding. Canadians right now are hoarding their money and putting it into precious metals, GICs, and cash or cash equivalents. Because of all the money being pumped into the market right now, combined with higher commodity prices, inflation is higher than it has been in the past. Inflation erodes the value of cash!
Good news for you, is that real estate is inflation proof. Land has always appreciated FASTER than inflation. Therefore, owning real estate in a high inflation environment is an excellent place to store your wealth. Real estate is also a much safer investment because it is tangible and able to generate cash-flow for you today. There are many excellent buying opportunities waiting for you right now, so don’t miss the boat!
Below is an article I just wrote for our Investor Community newsletter. Thought you might be interested. Cheers!
Real Estate in 2009 – Crisis or Opportunity?
The question I’ve been asked most in the last month has been, “What impact do you think the financial crisis will have on real estate in Western Canada?” We have certainly seen a barrage of unprecedented events and turmoil in the market over the last year. What does this mean for us?
Financing Has Become More Expensive
One result of the financial crisis we are feeling North of the border is the increase in borrowing costs. Banks do not have the same access to capital they once did, and the cost of their capital and lending risk has gone up. Lending has not come to a grinding halt, as the media would have us believe, although it has become more challenging.
This October banks stopped offering 40 year amortized and 100% loan-to-value mortgages. We have also seen a significant increase in lending rates. To give you a concrete example of this, 6 months ago I refinanced a property and secured a prime minus 0.6% interest rate. If I applied for the same mortgage today, I would receive a prime plus 1% mortgage. However, prime has recently been reduced from 4.75% to 4%, offsetting this increase in spreads.
Because of this change, purchasers are required to have more income than in the past.
To illustrate, I’ll use an example of a $500,000 property. In the past I could have used an 80% mortgage, amortized over 40 years, at 3.4% interest (prime minus 0.6%). This results in a payment of $1,520.00, requiring income of $56,999 annually (banks typically only use 32% of your income to qualify you for a mortgage payment).
Take this same property and get a mortgage today, and I’d be getting an 80% mortgage, amortized over 35 years, at 5% (prime plus 1%). This results in a payment of $2,005.68, requiring income of $75,213 annually. That’s a 32% increase in the amount of income you need to qualify for a mortgage!
Does this mean we should run for the hills and stop buying real estate? No! In fact, in times like these it’s beneficial to be a landlord. Fewer people can afford to buy homes, which means there will be more renters and higher demand for rental housing. I don’t know about you, but I want to be the guy to supply it to them!
Cash-Flow Properties Are Essential
Because of the increase in borrowing costs, cash-flowing properties are essential now more than ever. Market appreciation is one of the main benefits of owning real estate over the long term, however, money now is much more important than money 5 years from now. Investors who are purchasing properties without cash-flow are hurting themselves in 2 ways: 1) They are speculating that the market is going to increase enough to provide the return they desire, 2) Negative cash-flow leeches away your monthly income and reduces your ability to borrow more money from the bank. Banks like to see cash-flow properties that cover their own debts plus a safety buffer of additional income. Their required safety buffer (read as cash-flow) has just increased substantially, making cash-flow more important than ever.
Research & Expertise Have Never Been More Important
Over the past 5 years, while the real estate market was superheated and booming, virtually anyone who owned real estate looked like a genius. Every second person on the street was a real estate expert. Well, a rising tide floats all boats and when the tide comes out you can see who’s been swimming naked. That’s one of my favourite sayings, and what I mean is that when there are bumps in the road it takes more than rolling the dice to make a successful investment.
Your secret weapon in times of market uncertainty is research. Investing based on the numbers and economic fundamentals and working with experienced professionals. Doing your “homework” so to speak. In the last 5 years, the market has covered up the mistakes of hundreds of would-be “expert” real estate investors that will lose their shirts if they continue to do the same things. Investing in real estate in today’s market conditions can still be extremely profitable, but you have to make sure you’re following a proven system, thoroughly researching your markets, and not being overzealous.
For more information on our comprehensive system of researching markets, download our recent Grande Prairie Opportunity Report from our website. It walks you through everything we look at before investing in a market.
Don’t Let Fear Lead to Inaction
In studies of past economic crises, history has always shown that fearful investors always let fear keep them out of the market for too long. People miss countless buying opportunities when the market is down or rebounding. Canadians right now are hoarding their money and putting it into precious metals, GICs, and cash or cash equivalents. Because of all the money being pumped into the market right now, combined with higher commodity prices, inflation is higher than it has been in the past. Inflation erodes the value of cash!
Good news for you, is that real estate is inflation proof. Land has always appreciated FASTER than inflation. Therefore, owning real estate in a high inflation environment is an excellent place to store your wealth. Real estate is also a much safer investment because it is tangible and able to generate cash-flow for you today. There are many excellent buying opportunities waiting for you right now, so don’t miss the boat!