Jan 112011
 

When I was growing up, my parents were slowly accumulating a portfolio of rental properties, a portfolio that ended up being somewhat impressive. In fact, all my Dad does for a living now is manage his rental properties. They keep him pretty busy too, it’s pretty close to a full time job between collecting rent and fixing stuff. He obviously loves real estate and he does a great job with his properties.

I also have investment properties. While my portfolio isn’t nearly the size of my Dad’s, I do have 3 properties that are completely paid for. If you add in the income I get from renting my basement, I have a very nice sideline income coming from rental properties.

I bought my last investment property 5 years ago and the house I live in 2 years ago. I don’t classify my house as an investment, as soon as I get a girl to move in with me (soon, bride from Russia, soon!) I’ll punt out the guy living in my basement so we have room to do the hanky panky all over the house put all of my girl’s crap.

Why am I not buying any more investment properties? There are all sorts of reasons.

Canadian Real Estate Is Overvalued

As a whole, Canadian real estate prices are sitting at record highs. Record low interest rates have helped keep prices up, as well as frenzied first time buyers who worry about future affordable housing. If you put these two things together (among other factors) and you have Canadian homeownership rates at 70% of the population, another number that is the highest ever. Interestingly, the U.S. real estate market peaked right around 70% in 2005.

I never really cared about price appreciation as a real estate investor. I knew that over the life of the house the value would go up, but I didn’t anticipate much more than inflation. For me, real estate was strictly a cash flow investment and any capital appreciation was just gravy.

Nobody Rents Anymore

Further to the first point, if the percentage of the population that owns a home is high, then the percentage of people who rent must be really low. Because of this, landlords are having to compete for good tenants, offering rents that are often cheaper than what the tenant could buy the place for. What a great place to be in for the tenant. Low interest rates are turning lots of good renters into first time buyers, often at a younger age than even 10 years ago.

Cap Rates Are Horrible

When I bought my houses back in the 2002-2005 range, real estate was an absolutely outstanding investment. I could borrow money at 5% and get 15-20% cap rates. Now, I live in a small town, maybe those return numbers just didn’t exist in the cities at that time. For me, I regret not buying more properties during that time. It just shows how an asset class can get very attractive when it’s unloved.

These days, cap rates are horrible. I can borrow money cheaper than before, but cap rates are only 5 or 6 percent. By the time I pay my property taxes and fix anything, I lose money. I am absolutely amazed anybody would borrow money to buy an investment they knowingly have to subsidize every month.

Leverage Makes It Risky

In general, real estate is one of the riskier asset classes. There’s always the small chance of something going horribly wrong, something that’ll cost thousands of dollars to remedy. I was okay with that- when I got a return 3-4 times what my carrying costs were. Returns aren’t anywhere near high enough these days to compensate me for the additional risk.

Leverage inherently makes an investment riskier. If you have a house worth $100k and you put $20k as a down payment on it, a 5% drop in the property’s value represents a 25% loss on your original down payment.

Be fearful when others are greedy. Be greedy when others are fearful.

Simply put, buying an asset at the top of the market generally turns out to be a bad idea. As Warren Buffett has famously said “be fearful when others are greedy and be greedy when others are fearful.”

I’m confident that real estate will look like a much better investment in Canada in 5 years. Cap rates will be up and investors will once again be compensated for the additional risk they’re forced to take on.

Maybe Look At U.S. Real Estate

There are areas of the U.S. where real estate is ridiculously cheap. Perhaps they aren’t at a bottom yet, but I think they’re close enough an investor shouldn’t care about the last 10% or so in price declines. I’m not buying any down there simply because I don’t want to be an absentee landlord. I think we’ll all look back on this decline as the fire sale of the century.

Are any Canadian readers actually buying investment real estate these days? What’s the thought process if you are?

Be Sociable, Share!

  37 Responses to “Why This Blogger Isn’t Buying Investment Real Estate Anytime Soon”

  1. Don't look at me. I'm too mobile for this.

  2. [...] This post was mentioned on Twitter by LandlordRescue. LandlordRescue said: RT @financialuproar: New Post Why This Blogger Isn’t Buying Investment Real Estate Anytime Soon http://bit.ly/gBAEp9 [...]

  3. At the residential side I agree with you the cap rate and cash flow is simply not there, because investors did not look at the fundamentals. The prices went up due to investors' emotions, it has become, in my opinion a compulsory purchase. However if you look at the commercial side, or mid-size apartment buildings, the cash flow is still there, because you have the economy of scale. Maybe you want to look at bigger units. I agree with you the number has to make sense first. We are in the process of closing on a 60+ unit apartment building. The cap rate is 6.5%.

    • I'd need at least double 6.5% to look at investing in real estate. For me, 1.5% above a risk free return isn't worth taking on the additional risk of owning real estate.

  4. Come on down to sunny Florida and invest. We have friends who manage 80-90 properties for British investors (they are British also). They collect weekly rents and take care of maintenance issues and visitor problems.

    • Robert, what's the property tax situation for foreign owners in Florida? I've heard they really stick it to foreigners, charging them double or triple what state residents pay.

  5. Being an out of country investor looks like it may not make sense, but I did want to offer a litle food for thought for some of your US based Viewers.

    1. Prices – Housing prices are at historic lows. I reccomend markets like – dallas, tx, Indianapolis, IN or any other market that didn't experience a huge housing bubble and have future job growth- not markets like CA, NV, AZ.

    2. Interest Rates – interest rates are at history lows, right now, you can lock in at ~5% interest rate. So if you wanted to buy a 100K home, you could put 20K down and cash flow 400-500 a month (depending on the market).

  6. here is the second part…

    3. hedge against inflation – I would say that a fix 5% interest rate for 30 years is an amazing advantage. With the way the US government is printing money, the bank loses most of the money from inflation. No to mention the dollars you pay back the loan with will be worth WAY less in the future.

    4. Population Growth – the US is poised to see that largest boom in population since the baby boomers. Gen Y will be entering their prime renting years and the current housing supply will not be able to keep up with the future demand.

    What are your thoughts?

    • All great thoughts on why to invest in American real estate. I did a bit of looking around back in 2008, but decided foreign ownership was too big of a pain for me.If I lived in an area where property had a cap rate of 15% or so (I've heard many areas do, but don't know for sure) I would definitely be buying, especially with rates so low.As more people lose their homes, they'll start to rent something. Buying near the bottom of the cycle seems like a good idea to me.

  7. Try.. Moncton? Duplex for $100K purchase can rent for $750-900 per unit, 4% vacancy rate, lots of schooling in the area. $1500 rent + utilities on a $80K mortgage (20% down) with a payment of $350 + taxes, hmm, not bad!

    • From my extensive research (read: 5 minutes on Realtor.ca) Jake is right, at least when it comes to buying the duplex. I found several on there, and the numbers do pass the initial sniff test.

      Saying that, areas like Moncton are the exception in Canada, not the norm.

  8. [...] Uproar tells us Why He isn’t Buying Any Rental Properties Anytime Soon plus he’s single! He’s also driving this nice vehicle while his car sits alone and [...]

  9. Canadian Real Estate Is Overvalued, so what if it is overvalued maybe because there is demand for it and ppl are willing to pay for it. There is a reason New York city prices are way higher than other cities in New York state.
    I think pessimist investors are scared because they have never seen values like this in Canadian real estate market. Canada has gone through lot of changes in the last twenty years. Rigidly built its market and population has gone up (creating demand) and immigration has helped this quite a bit. Canadian banks know this otherwise our conservative banks wouldn't be lending that precious Canadian dollar.

  10. investment market belongs to the high-growth emerging markets and to
    commodity-rich countries like Canada. Improving transparency and solid
    economic prospects will only add to this trend.”
     

  11. This is very nice price appreciation of real estate investor. The life of the home value to increase, but do not expect much more than inflation.

  12. In this existing post you have determined about profitable real estate investment. Real estate investment is largest investment, it is good that we invest in log term investment. There are many area from which we can get suggestions. 

  13. In this existing post you have determined about profitable real estate
    investment. Real estate investment is largest investment, it is good
    that we invest in log term investment. There are many area from which we
    can get suggestions. 

  14.  Also, remember, if you’re in the process of re-financing your lender will require an appraisal anyway. Wait for them to order it so you don’t pay twice, and remember to ask for a copy of the appraisal when it’s complete.

  15. Great post! I
    really learned a lot form this article about Why This Blogger Isn’t Buying
    Investment Real Estate Anytime Soon! keep up the good work!

  16. This blog are sharing such valuable information with us. Thank you.

  17. Most I recently seen of buyers are comparing condition and amenities of real estate to see if they are getting a bargain or getting ripped. I would say some people should be advised to not buy if this is the not right time for buying.

  18. Yeah i think some areas in the US are the place to go for investment to get more cheaper properties.

  19. It’s good to see this information in your post, I was looking the same but there was not any proper resource, thanx now I Thank to the post.I really loved reading your blog.It was very well authored and easy to understand.

  20. [...] last January, I wrote about why I’m not buying investment real estate. Go check it out for the commentary on Canadian real estate, stay for the sex jokes. Plus, [...]

  21. This is a great help for anyone who’s looking to invest in strategic places especially in the united states. 

  22. The housing market is at slow pace now a days. Most of the home owners are suffering because of that., Having said that, there are still areas where I think is a good place for an investment.

  23. Financing facilities available in the market provides you facilities to live with your dream. I find this post quite informative in the context of finance in rental system.

  24. Nice post i’ll come around here more usually thanks
    Colorado Springs Real
    Estate

  25. Robert, what’s the property tax situation for foreign owners in Florida? I’ve heard they really stick it to foreigners, charging them double or triple what state residents pay.

  26. Hi Nelson,

    Nice blog. I like your writing style.

    I do have to disagree with 2 points in your blog post. The points that I disagree with are “Canadian real estate is overvalued”, and “no one rents anymore”.

    What does ‘Canadian’ real estate mean? There are many markets in Canada. Some markets are overvalued yes, and some markets are undervalued. There are many markets, the Junction in Toronto for example one that is undervalued compared to other neighbourhood in Toronto with similar property types. This is an area that is undergoing revitalization, and is going to experience further appreciation in the years ahead…

    There are other markets, like Hamilton, KWC, Barrie that have experienced steady appreciation over the past several years, and I am only mentioning places in Ontario. Appreciating at or slightly above the cost of living in my opinion is not overvalued at all. This type of appreciation is a healthy indicator for a long term stable market.

    “No One Rents Anymore?”

    Yes, interest rates are low, but this does not mean that people don’t rent. Markets are different. In many markets there are multi generational renters. As you know there are lots of people who don’t want to buy, and simply want to rent. They have no desire to buy, for many reasons. One reason is that it could be too much of a hassle to buy. Seriously.

    One of the biggest challenges that people face when buying a rental property, is the management of the property. The management of the property discourages lots of people from actually moving forward and buying their first rental property. I educate lots of new real estate investors on how to buy their first rental property. Check out this article called The Secrets To Managing Rental Property and leave me a comment… http://www.firstrentalproperty.com/the-secret-to-managing-rental-properties/

    All the best,

    Neil.

  27. Great site (just found it) and GREAT post.This is exactly the kind of information we’re trying to provide for our users over at Rooof.com, our new landlord/tenant site (still in beta, but active). Thanks for the posts and if you have an opportunity, take look at Rooof. I would love to hear your professional opinion. – Andy

  28. [...] different motivations for someone who is just dabbling in the space compared to someone like me who actually makes money at it. Which is fine and good, but that still shouldn’t stop you from actually profiting from this [...]

  29. Thank you for sharing your experience with us. I have learn something important from your story.

  30. Is it really true? I don’t think so!!!

 Leave a Reply

(required)

(required)

Switch to our mobile site