Carrion

Runners fall in the path of an Alcurrucen fighting bull (L) and steers at the entrance to the bull ring during the first running of the bulls of the San Fermin festival in Pamplona July 7, 2013. Several runners suffered light injuries in a run that lasted four minutes and six seconds, according to local media. REUTERS/Susana Vera (SPAIN - Tags: SOCIETY ANIMALS) - RTX11FDV

Sometimes bloggers get sued, especially those dumb enough to post under their own names. With their pictures on the top. Who try to speak the truth.

Rachelle Berube is one of them, for months on the case of the League group of companies – the private empire of BC residents Adam Gant and Emanuel Arruda. Their mass of 105 corporations includes everything from REITs to mortgage lenders to developers. Until recently, they seemed to have a slick deal going – raising money from small investors (many of them retired, looking for income) and using it to finance projects.

This all led to one big mama of a thing, the $1 billion Capital City Centre, outside of Victoria. Here’s how the local daily described it, breathlessly, three months ago:

“The first phase of the project includes a four-storey residential building on top of a 35,000-square-foot London Drugs, three retail buildings and a six-storey office tower. The full project will include 12 residential high-rise towers; four office towers; four-storey, wood-framed residential buildings with commercial components; two-storey townhomes; multi-storey office buildings; and a public plaza with various amenities.”

But blogger Rachelle wouldn’t let go of her bone. She believed the whole project was in jeopardy, that the League empire was a wobbly wreck, and thousands of poor, misguided and ill-informed investors were about to lose their savings.

League CEO Adam Gant sued Berube, and then used the media to get his spin out: “We like honest feedback, analysis of results and criticism of strategy and approach. What we don’t like are people irrationally or in an unsupported way making accusations that have no basis in reality,” he said, noting that kind of rhetoric tends to have an effect on people who don’t have time to dig for the truth themselves. “We are not going to stand by any unbiased accusations.”

Meanwhile the BC Securities Commission fined Gant and Arruda $250,000 for failing to properly inform investors of the risks involved in raising more than $209 million. The BCSC has issued a notice of hearing to probe allegations League broke more securities rules when promoting its REIT, failing to make proper disclosures. But that was just the prelude to the storm.

Last week the whole company rolled over.

League has applied for credit protection under CCAA, often the first step in a process leading to oblivion. Ninety days after CEO Gant tried to shut down a blog, and told investors (through the media) its giant project would soon be bustling with workers, the same guy had this to say in court documents about ‘Cause of difficulties and need to restructure’:

“The first factor… was the credit crisis which began in 2008… the League Group is left with a large amount of legacy debt from that period. Further, the credit crisis changed how a number of lenders conducted their underwriting requirements for making loans, and this resulted in the League Group having a smaller number of lenders to look to, generally at a higher cost. The spiral of higher credit costs has put a substantial pressure on cash flow. The second factor…an increase in the demand for redemptions by investors… further straining cash flow.”

In other words, Adam Gant suggests League has been coughing up blood for the past five years – during which time it was madly selling units in a private REIT to investors. In addition, its related real estate limited partnership syndication arm, League Investment Services Inc., dangled potential annual returns from 9.14% to 20.15%.

But at the heart of the credit collapse of one of BC’s largest developers seems to be a stampede of lenders away from real estate development deals, including Capital City Centre. A big drop in demand for commercial property, tougher lending standards and more regulatory scrutiny are all stakes through the heart of a consortium which some bloggers allege has now stripped ma-and-pa of up to $120 million.

On Friday came the words no investor ever wants to hear: “Our assets remain strong, but unfortunately we have insufficient cash flow to meet our ongoing operational needs.” Usually the next utterance is ‘liquidation,’ wherein the schmuck who invested $25,000 hoping for a 10% return ends up with diddly.

Of course, League continues to troll for more money. Its widely-circulated sales tool, ‘Blue Book of Real Estate Syndication’, is still being pushed on the company web site. The stilted and abandoned Victoria Project continues to be pumped in a limited partnership: “The Colwood City Centre LP enables investors to participate in the planning, design and construction of Capital City Centre, a $1 billion mixed-use project development located in Colwood, southwest of Victoria.” The bloggers continue to circle high over the corporate carrion.

There are lessons here. Private REITs don’t operate under the same bright light of scrutiny as publicly-traded ones. In times of trouble there can be no liquidity whatsoever. Limited partnerships in real estate projects are high-risk assets best suited for sophisticated investors who can absorb loss – not for seniors looking for grocery money. Any financial asset backed by an unbuilt project with no cash flow should be considered speculative, if not toxic.

And when you see large outfits like League swallowing dirt, best ask yourself what kind of harbinger this is.

In a day or three I will look at Fortress Real Developments. Hmm.

125 comments ↓

#1 TurnerNation on 10.20.13 at 8:44 pm

The smell of fresh weblog in the evening.

#2 TurnerNation on 10.20.13 at 8:47 pm

Two carrion items allowed onboard. Say wasn’t Bigarider nodding over 10pct mortgage funds the other month? Never met a fee he didn’t like.

#3 Howiee on 10.20.13 at 8:53 pm

After 5+ years of saying the same thing you were bound to be right eventually, although businesses go bk all the time…in good times and bad

#4 Seven Stars and Orion on 10.20.13 at 8:54 pm

Sh*t’s about to get real.

#5 Mike on 10.20.13 at 8:57 pm

I don’t know if anyone can answer this question, but when buying a property as an investment, what should one expect in positive cash flow (as % of property value) after the mortgage, maintenance and taxes?

#6 Thoughts on 10.20.13 at 8:59 pm

Can’t wait for the Fortress post! There are so many unethical unregulated things happening in real estate it’s really amazing!

#7 Canadian Watchdog on 10.20.13 at 9:00 pm

It doesn't get any more clearer as to who's been looting and profiting off taxpayer's money and running the show over at CMHC then this.

August, 1976 PDF

HUDAC – Housing And Urban Development Association of Canada (now CHBA)

[Page 11] The following achievements began as Association recommendations to Government:

– Removal of NHA ceiling.
– Amortization period extended from from 35 to 40 years.
– Mortgage insurance fees reduced by 50%
– Loan ratios increases resulting in lower down payments.
– Loan on existing house broadened to include, in addition to purchase, improvement and alterations.
– Five year roll-over mortgage
– Increase maximum loans amount.
– Considering 50% of wife's salaried income when computing gross debt service ratio, subsequently amended further to include 100% of wife's income.
– Increasing maximum loans on apartment housing units.
– Agreeing to issue undertakings to insure or to make loans on houses where work has progresses from the first floor or joist stage.
– Reduction in sale tax on building materials
– %500 grant as rebate or portion of sales tax.
– Improvement in terms and qualifications related to the grant.
– Removal of restriction on high ratio loans insured by private mortgage insurers.
– Reduction of capital cost allowances from other income for new multiple rental units.
– Extension of AHOP to include private lenders in program.
– Extension of limited dividend type programs.

Ok?

#8 dosouth on 10.20.13 at 9:03 pm

And these poor Gen Y’ers are having a tough time too….

Poor Gen Y’ers having to live in….

#9 Bill Gable on 10.20.13 at 9:12 pm

Canada doesn’t come too well when it comes to world rankings, in financial scams.

This was just draw dropping. Incredible. Do your due diligence, being the message.

#10 Fortress of Clowns on 10.20.13 at 9:18 pm

Just look at this lineup of scammers. The best part is their education and work history, especially the CEO. York University? Lol! Guy was probably a bookie part time….

http://fortressrealdevelopments.com/the-team/

#11 Chris L. on 10.20.13 at 9:19 pm

Anyone want to comment about Skyline REIT?

#12 dosouth on 10.20.13 at 9:20 pm

Try this link instead….

Poor Gen Y’ers having to live in….

#13 HogtownIndebted on 10.20.13 at 9:20 pm

Development gears seem to be grinding to a slowdown all over, in line with the general economy.
Here’s an interesting developer two-step in condo crazy and supposedly desirable midtown hogtown.

http://www.mytowncrier.ca/so-long-hungarian-house.html

This story from over a year ago tells of Urbancorp, about to demolish and build on the site of the former Hungarian House on St. Clair east of Dufferin. Developers have also bought the properties on adjacent corners, for the same purposes. I’ve been told.

Today, the razed site remains vacant, a full year after demolition. Well, not quite. No condos are shops are happening, that’s all stalled. Instead, a small sales centre is being built to flog the firm’s upcoming townhomes in a much less attractive area about 2 kilometers west.

http://blog.newinhomes.com/news/homes-st-clair-west-urbancorp/

The sign on the vacant lot says these towns “start” at $799,000. Thin townhouses with what looks like condo glass, ready to explode. Ridiculously overpriced, and in the wrong stretch of the street to demand such prices.

Interesting that a developer would stall a project on prime property, and use the space to flog something with even lower chances of ever going ahead, way down the street.

Meanwhile, the number of business vacancies along even this coveted stretch of the street is a daily eye-opener. Empty stores abound, with the cash/gold stores seemingly the busiest many days.

On another note, I am also noticing businesses like fast food places around the city cutting staff, making lunch hours filled with longer waits for those wanting to buy burgers. Home Depot is closing its Harvey’s outlets around the GTA. good thing I pack a lunch most days. Loblaws just laid off 275 at its head office while trying to scam customers into buying overpriced items based on its new “points” scheme instead of price comparison.

http://www.thestar.com/business/2013/10/16/loblaw_companies_ltd_to_lay_off_275_employees.html

The Toronto real, and real estate, economies appear to have caught a case of the flu. Time will tell how bad this is going to be.

#14 Ripped on 10.20.13 at 9:21 pm

Judge: “What your doing is WRONG!”

Bernie: “…But I was only doing what the banks have been doing for YEARS…”

Judge: “You’re not supposed to know that.”

How the Government Borrows Money

The U.S. treasury, the department of the U.S. government that manages all of the Federal finances, borrows money by issuing a bond.

A bond is simply a piece of paper – a promissory note – that says if you give me money now, I will pay you back in X amount years, with interest.

These pieces of paper are then sold through a bond auction where the world’s largest banks participate in buying part of this national debt.

The banks then sell these bonds to other investors, such as investment funds and countries like China and Japan.

(China owns more than $1.28 trillion in U.S. Treasuries, according to the July 2013 figures released by the U.S. Treasury. This is equal to nearly a quarter of the U.S. debt held overseas and nearly 8% of the United States’ total debt load of more than $17 trillion.

Since America is the world’s largest economy, among other things, the demand for their promissory notes has never been an issue.

But over the past years, record amounts of these bonds have been issued; so much that the banks had to turn to someone else to buy them.

But who?

Who is the Largest Single Buyer of America’s Federal Debt (aside from the government itself*)?

(*The U.S. Social Security Trust Fund is the largest single holder of America’s national debt, but they’re part of the government. Yes, the government can sell debt to itself but it will have to pay it back by issuing more bonds borrowing more money.)

Welcome the Fed, America’s central bank – a private bank controlled by bankers, and not the U.S. government.

The Banks – who purchase these bonds from the Treasury – sell Treasury-issued bonds to the Fed, who in turn gives these banks yet another piece of paper in exchange.

This piece of paper is essentially another IOU from the Fed to the Banks, just like the IOU from the Treasury to the banks.

Its like when you or I write a check, we’re giving someone an IOU that they can redeem at a bank.

The only difference between our IOU and the Fed’s IOU to the banks, is that we have to have that amount available in our bank account for someone to cash that IOU – otherwise, that check bounces.

When the Fed writes an IOU to the banks, it doesn’t have to have anything:

“When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.” – Federal Reserve Bank of Boston, Putting It Simply (1984)

If there are no deposits at the Fed, how does the Fed give cash to the banks?

Easy. It writes another IOU to the banks. And since the Fed is neither audited, nor are there are any real bank deposits taking place, it’s literally creating free money.

Now here’s where it gets fun.

When the government spends money building roads, providing social aid, or funding wars, they are essentially funding more workers and soldiers who then take their hard-earned money and deposit it back at the banks.

But when you deposit your money at the bank, the money doesn’t just sit there for safekeeping.

In fact, once your money is there, the bank can use it to make more money by lending it back out to you, or make big bets on the stock market by using YOUR money as collateral.

Furthermore, it can do this with insane leverage because a bank is only required to have a certain percentage of your money available at any given time. The remainder of your money is used to fund investments or loans that the bank makes to other customers, including you.

This is called fractional reserve lending.

Currently, banks in the U.S. are required to have a certain amount of money in their system, known as reserves. These required reserves are normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with the Fed.

In the U.S., the average fractional reserve-lending ratio is 3%* – meaning that if you deposited $100 at the bank, the bank can take $97 of it to make loans or gamble on the stock market.

(*This number can be as low as 0% – depending on the amount and on different classifications.

Not only are banks able to use most of your money to make big bets, they now have a record amount of money in deposits from selling bonds to the Fed.

With so much money sitting in the banks, the banks are practically forced to invest and make even bigger bets on the stock market.

How Big Can the Stock Market Bubble Get?

The Fed purchased an astounding 61% of the total net Treasury issuance in 2011.

According to Bloomberg, the Fed bought 90% of new bonds in 2012.

While the ultimate stock market bubble is being created, there is so much more room to grow in terms of paper asset appreciation. The amount of leverage now in the system is beyond anything you could imagine.

Now you kow why stock market is moving higher – and why it will continue to move higher – despite all economic worries.

#15 John W Foster on 10.20.13 at 9:26 pm

Anyone else see a problem with where the airplane is headed in the banner? Ironic….

#16 Ralph Cramdown on 10.20.13 at 9:26 pm

#5 Mike — “[W]hen buying a property as an investment, what should one expect in positive cash flow (as % of property value) after the mortgage, maintenance and taxes?”

Less or negative for a mostly land value bungalow that you’re renting while getting plans and permits to redevelop. More for a student residence. Much more for a rooming house.

If you can’t answer this question (and you obviously can’t, because while positive cash flow is a very good idea, your profit comes from paying down the mortgage, and everything depends on leverage and amortization), you should do a bunch more reading and studying before signing on the line that is dotted.

At the end of the day, it’s your money, risk and credit. Are you going to believe the numbers of the bullshit artist trying to sell this to you, or are you going to be able to estimate/calculate them all yourself, and then decide whether you’re satisfied with the probable return on your capital based on the risk and work involved, and on comparisons with available after-tax returns on other investments and asset classes?

#17 Samrtalox on 10.20.13 at 9:28 pm

Wasn’t the Fortress Group the developer that folded on the Vancouver Olympics athletes’ village, and stuck the city of Vancouver with the ($700 million) bill?

Or am I thinking of somebody else?

#18 Bigrider on 10.20.13 at 9:30 pm

Hey Turnernation

Your obsession with me is creepy.

You are incorrect of course. Look back through my posts.

I have asked Garth to deal with these syndication deals for at least a year , specifically Fortress and hopefully Empire at some point as well.

He waited to long IMO. The amount of money funneled into these investments including mortgage funds from mom and pops nears the same for condo unit investments.

They are a time bomb waiting to go off.

#19 Big Bear on 10.20.13 at 9:33 pm

My oh My what a mess my precious former home of Victoria is in… First Bare Mountain goes teets up now this.

What were they thinking here anyways? Last time I looked about 18 months ago, there’s an overpass by the entrance to Goldstream park that appears to go nowhere because the funds dried up.

There were huge holes in the ground on Bare Mountain and nearby on Wale road (about an 8 iron from this fiasco) that were dug for high rise condos back in the good ol pre 08 days. It was supposed to be so different there, until it wasn’t.

I fear my fair maiden Victoria is in her swan song, black swan that is, as the toxins from the out of control meltdown across the pond continue to encroach…

#20 Samrtalox on 10.20.13 at 9:34 pm

Disregard my post # 17, it turns out that it’s a different “Fortress” that stiffed the City of Vancouver on the athletes’ village.

#21 HAWK on 10.20.13 at 9:35 pm

This story illustrates as one among endless examples why many people are disillusioned with Financial Assets and Finance Professionals as opposed to Real Assets.

The problem with financial assets is not the concept, which is fine but the counter-party criminality risk.

The blog is forever condemning Realtors, but one thing about residential Real Estate is that ultimately people do get to see, touch and feel what they buy, no matter how much slick Real Estate Sales people pitch RE.

In a day and age when we barely punish criminals for the endless misery they inflict on unwary population, is it any wonder that people are scared shit about owning paper assets when they have no clue as to how those assets are appropriated and used?

Of-course not all in the financial community are bad apples but the fact is that until all these people are jailed and dealt with severely these shenanigans will continue and people will sadly continue to have their faith eroded in bankers and corporations.

#22 Serge on 10.20.13 at 9:40 pm

GTA Weekly Drop – October 20, 2013
http://gtapricedrop.blogspot.ca/2013/10/gta-weekly-drop-october-20-2013.html

#23 ed on 10.20.13 at 9:40 pm

Look at this article and the comments section, where likely some realtors and journalists (same thing, right?) are trying to diss one of the bloggers:

http://www.timescolonist.com/group-behind-1-billion-colwood-project-files-for-creditor-protection-1.664541

#24 Sir Finance on 10.20.13 at 9:42 pm

Garth,
Whats your general opinion of investing in exempt market securities? Thanks!

#25 Fortress = scammers on 10.20.13 at 9:43 pm

I’ve been watching Fortress for some time. All outlined here:

http://forums.redflagdeals.com/fortress-real-capital-condo-development-syndicate-mortgages-1073974/2/#post17521002

#26 Harbinger on 10.20.13 at 9:51 pm

Fear the reaper when the kids with BAs and good jobs start sleeping in vans to make ends meet.

#27 T.O. Bubble Boy on 10.20.13 at 9:51 pm

Lesson Learned: don’t buy a REIT that you found by clicking on an ad that popped up on top of a Justin Beiber YouTube video.

#28 Exurban on 10.20.13 at 9:52 pm

Millenium Properties was the developer that bailed on the Olympic Village and stuck Vancouver City Hall with the $740 million dollar bill. Fortress is a different bag of tricks … BC RE everywhere outside the offshore and immigrant interest zones in the Lower Mainland is crashing and burning right now.

LOL at this one … “…the Group is left with alot of legacy debt..” Legacy debt? As an old supervisor of mine used to say every time he heard the phrase “human error”, what other kind is there?

One more BC thing — in order to actually get censured or sanctioned by a BC regulatory body, you generally have to do something way way out of line.

#29 Ralph Cramdown on 10.20.13 at 10:01 pm

#21 HAWK, you’re right.

Private REITs sell exactly this idea. They’re real estate, so they’re safe, and they aren’t volatile because they’re not listed on that big bad stock market. Add that to some moderately high pressure sales techniques, and how could you not put a big fraction of your net worth with them. After all, you’re an accredited investor, right? That means you’re rich and sophisticated… right? Well act fast, because this fund is closing to new money next week… It’s ironic that private REITs are sold to unsophisticated investors, while public REITs are bought by sophisticated ones.

And it’s hard to talk too long to a real estate agent without them disparaging the stock market.

For purely selfish reasons, I like that people are scared of financial markets. It keeps prices down and yields up.

#30 HDJ on 10.20.13 at 10:02 pm

No wonder so many Canadians don’t trust the financial/investment world.

They also buy Kias. — Garth

#31 Ripped on 10.20.13 at 10:10 pm

I don’t think you want to be short this chart.

http://www.housepriceindex.ca/Default.aspx

Follow the trend is a pretty simple investing strategy

#32 Victor V on 10.20.13 at 10:16 pm

For those of you who tweet, considering sending the team at Fortress a heads up tweet that they’ll be blogged about here. Will give them something to chew on.

https://twitter.com/FortressRDI

#33 Ralph Cramdown on 10.20.13 at 10:17 pm

#24 Sir Finance — “Whats your general opinion of investing in exempt market securities?”

These two posts reflect my views, in a witty but occasionally profane manner. They’re US oriented, but it’s the same stuff.

http://www.thereformedbroker.com/2012/02/10/stockbrokers-a-guide-to-private-placement-due-diligence/

http://www.thereformedbroker.com/2013/10/18/whats-your-return-on-running-back/

#34 Inglorious Investor on 10.20.13 at 10:18 pm

#5 Mike on 10.20.13 at 8:57 pm
“[…] when buying a property as an investment, what should one expect in positive cash flow (as % of property value) after the mortgage, maintenance and taxes?”

Short answer: Zero.

#35 Larry Laffer on 10.20.13 at 10:19 pm

@27 T.O.Bubble Boy

I’d rather say: don’t watch any Justin Bieber video. Problem solved.

#36 Herb on 10.20.13 at 10:20 pm

#5 Mike,

don’t know what the “usual and customary” returns are, but when the Ottawa Sports and Entertainment Group struck a deal with the City of Ottawa for the redevelopment of Lansdowne Park, they wrote an 8% anual return on their capital investment into the contract. I’d aim for that.

#37 Mike on 10.20.13 at 10:20 pm

#16 Ralph Cramdown on 10.20.13 at 9:26 pm
#5 Mike — “[W]hen buying a property as an investment, what should one expect in positive cash flow (as % of property value) after the mortgage, maintenance and taxes?”

Less or negative for a mostly land value bungalow that you’re renting while getting plans and permits to redevelop. More for a student residence. Much more for a rooming house.

If you can’t answer this question (and you obviously can’t, because while positive cash flow is a very good idea, your profit comes from paying down the mortgage, and everything depends on leverage and amortization), you should do a bunch more reading and studying before signing on the line that is dotted.

At the end of the day, it’s your money, risk and credit. Are you going to believe the numbers of the bullshit artist trying to sell this to you, or are you going to be able to estimate/calculate them all yourself, and then decide whether you’re satisfied with the probable return on your capital based on the risk and work involved, and on comparisons with available after-tax returns on other investments and asset classes?
——————————————————–
I’m not talking about the current environment, as I’m well aware there are little to no positive cash flow properties. I’m asking what is normal cash flow to expect under reasonable housing costs. New properties are the worst culprits of immediate negative cash flow, and paying down $500 of principle while being $400 in negative cash flow is no investment. I really want to know what the positive cash flow should be to make housing as an investment attractive.

#38 Cici on 10.20.13 at 10:22 pm

Thanks for this update Garth.
I remember you warning someone months back about not investing in this very speculative outfit. Hope they listened to your advice!

#39 Shawn on 10.20.13 at 10:24 pm

INVEST ON THE MARKET NOT WITH PRIVATE DOOR KNOCKERS

In 25 years of investing I have never touched anything sold by offering memorandum. I stick with the big boards, the TSX or New York Stock Exchange. There can be scams on the big boards but it is rare. There are certainty companies ran by idiots on the big boards but they are easier to spot.

Two years ago (July 2011) an investor asked my advice about private REITs and he mentioned League. I said I had never heard of private REITs and that much caution and due diligence would be needed. He never invested, thank goodness.

#40 CantRememberMyName on 10.20.13 at 10:27 pm

:)

#41 dosouth on 10.20.13 at 10:28 pm

#19 Big Bear on 10.20.13 at 9:33 pm

My oh My what a mess my precious former home of Victoria is in… First Bare Mountain goes teets up now this.

What were they thinking here anyways? Last time I looked about 18 months ago, there’s an overpass by the entrance to Goldstream park that appears to go nowhere because the funds dried up.

———————————-

The overpass you speak of stood as a reminder of failure for over two years to “teach those residents in Bear Mountain” a lesson on investing. If you want another exit to your development, you will have to pay for it.

Of course this summer and no surprise to any, it was completed at B.C. taxpayer expense – go figure. (and it still goes no where)

‘Bridge to Nowhere’

#42 HAWK on 10.20.13 at 10:29 pm

29 Ralph Cramdown on 10.20.13 at 10:01 pm

=================

Agree with your analysis the sophisticated investor figures out that its’ dangerous to deal in investments that aren’t publicly trade-able and become illiquid fast.

That said, I am not sure if we should be happy that most people don’t invest in financial markets either as there is now too much vested in bricks and mortar in Canada and when the shit hits the fan everyone will pay a price, not just the highly leveraged. —–(The Government will pander to a large voting block and make everyone pay somehow one way or the other).

#43 James M on 10.20.13 at 10:40 pm

Mike #5. If you’re not cash flow positive, it’s not an investment. Buy rental properties for cash flow, not on the presumption of equity growth. You need to be cash flow positive to pay for vacancy, repairs, and your yearly trip to Vegas.

#44 Inglorious Investor on 10.20.13 at 10:41 pm

#37 Mike on 10.20.13 at 10:20 pm

“I’m not talking about the current environment, as I’m well aware there are little to no positive cash flow properties. I’m asking what is normal cash flow to expect under reasonable housing costs. […] I really want to know what the positive cash flow should be to make housing as an investment attractive.”

Longer answer:

Historically, your NOI (net operating income) after debt service is zero. I’m talking smaller properties here, say SFHs to multiplex apartment blocks. Until a significant portion of the mortgage is paid, you should expect anywhere from negative to maybe slightly positive if there are no major repairs or upgrades that year. But you should go in with the expectation of zero net cash at year’s end, and be prepared to dish out. I’m talking about properties that are fairly valued. If you want positive cash flow you need find very undervalued properties. Or you need to reduce your LTV (loan to value). For example, if you pay all cash for a property, then you have no debt service, so your net cash flow will be positive. But you forgo the power of leverage (see below).

The reasons you eventually come out ahead are:
• over time your mortgage will take less of your NOI. And once the mortgage is retired, you are only deducting operating costs.
• capital gains
• leverage (the mortgage) which allows you to magnify the gains your can realize from your invested capital

#45 Herb on 10.20.13 at 10:44 pm

#37 Mike,

positive or negative cash flow didn’t matter in the past as long as you could carry an investment property and the Revenooers weren’t on your tail about showing a profit. You more than recouped any rental losses in capital gains when you sold.

Now ask yourself if capital appreciation is going to be likely over the next decade or so.

#46 Hugh on 10.20.13 at 10:45 pm

Can’t wait to hear your bit about Fortress. Their president got his start at Primerica, that Multi-Level-Marketing/Amway-style insurance/investment company – selling expensive term life insurance, back-end loaded mutual funds and expensive debt consolidation loans. He used to give “investment seminars” that were elaborate recruiting vehicles for the MLM. Quite a motley crew of people. Consummate salesman, always loved to make a buck, but not a prestigious pedigree – to say nothing of his history with the MFDA and OSC. A number of his colleagues also have a history in MLM. Draw your own conclusions.

#47 Inglorious Investor on 10.20.13 at 10:46 pm

… Oh, I forgot to mention taxes. When you have a mortgage on an investment, you can deduct the mortgage interest. Then there is also depreciation where the value of the structure declines, but (wink, wink) the value of the land (usually) rises.

There’s much to know. Go read some books and talks to some good land lords. And maybe a good financial advisor with real estate investment experience.

#48 James M on 10.20.13 at 10:50 pm

#44 Inglorious Investor. That’s terrible advice. Why would you pay 25% down payment on a rental property in order to NOT make money? You can’t expect equity growth for many years, so unless the property can add to your bank account, walk away.

#49 Ralph Cramdown on 10.20.13 at 10:51 pm

#37 Mike — “I’m not talking about the current environment, as I’m well aware there are little to no positive cash flow properties. I’m asking what is normal cash flow to expect under reasonable housing costs.”

There’s no one answer, Mike. Is inflation at 1%, or 4%? Can you buy a government bond paying 6%? Does a basket of conservative dividend payers pay 5%? The answer is different for every investor and property type, every neighbourhood and city. Even now, investors are buying or building income properties in many places in Canada, and they’re not all idiots. Keep reading more books on investing and real estate. Find them at the library or online. Figure out the answer that’s right for you. Every income property that changes hands is a trade between someone who would rather have the money than the property at that cap rate, and somebody who’d rather have the property than the money.

#50 Tre on 10.20.13 at 10:52 pm

Gath its been a while, glad to be back for a post. Can’t wait for the expose on the fortress real developments. They’re pumping on an unnamed Ottawa radio station every Saturday. A lot of people are going to get hurt. They just don’t learn.

#51 Inglorious Investor on 10.20.13 at 11:01 pm

#46 James M on 10.20.13 at 10:50 pm

I’m not giving any advice. I’m just stating the reality (within the constraints of a blog’s comment section) based on the numbers, research, and personal family history.

#52 45north on 10.20.13 at 11:05 pm

But at the heart of the collapse of one of BC’s largest developers seems to be a stampede of lenders away from real estate development deals, including Capital City Centre. A big drop in demand for commercial property, tougher lending standards and more regulatory scrutiny are all stakes through the heart of a consortium which some bloggers allege has now cost stripped ma-and-pa of up to $120 million.

the housing bubble in the US caught the banks and regulators by surprise – see Janet Yellen’s appointment as Chairman of the Fed
http://www.greaterfool.ca/2013/10/17/the-85-club/#comment-266843

Canadian banks and regulators are not going to caught by surprise.

HogtownIndebted: Interesting that a developer would stall a project on prime property, and use the space to flog something with even lower chances of ever going ahead, way down the street.

why not? Here’s an article by David Fleming which explains condo financing:
http://www.torontorealtyblog.com/archives/condominium-financing/9775

#53 KommyKim on 10.20.13 at 11:07 pm

I don’t know Garth, judging by the picture at the top of this page, the private REIT market looks positively bullish!

A few years ago a friend recommended investing in League. But after looking at a promo video by Adam Gant I couldn’t help but notice that he looked and acted like a used car salesman. I didn’t invest.

#54 Andrew Woburn on 10.20.13 at 11:21 pm

#19 Big Bear

There are other possible signs of trouble on Vancouver Island. A major plumbing contractor has gone into receivership and a leading BC furniture company is pulling out of the Victoria market. Best Buy closed out of the Island a few months ago although affiliated Future Shop remains.

I hope you are wrong about Victoria but I saw it happen there in the 1980’s. Things stagger along longer than you think possible until they fall straight down like a drunk in a stairwell.

#55 Ralph Cramdown on 10.20.13 at 11:21 pm

#48 James M — “Why would you pay 25% down payment on a rental property in order to NOT make money?”

Because if your rents cover your mortgage and expenses for 25 years with 25% down, you’ve quadrupled your money in real terms, which works out to a 5.7% compound after-inflation yield. And if you’re even in year one, you’ll either be cash flow positive down the line or be paid off in under 25, or able to extract equity to buy another one.

#56 Sir Finance on 10.20.13 at 11:22 pm

Thanks Ralph Cramdown

#57 45north on 10.20.13 at 11:30 pm

Hawk: The Government will pander to a large voting block and make everyone pay somehow one way or the other

you know it’s not that the Government is going to make everyone pay that much. Here’s the Home Affordable Modification Program (HAMP)
http://en.wikipedia.org/wiki/Home_Affordable_Modification_Program

it’s not a secret program

very few people are actually helped, it’s the promise that does the damage.

#58 Inglorious Investor on 10.20.13 at 11:36 pm

#49 Ralph Cramdown on 10.20.13 at 10:51 pm

You’re right, but you’re making it more complicated than necessary. Mike’s only asking about cash flow on rental properties. Sorry, if some people don’t like the answer, but, oh well… Dreams of buying a rental property and living off the ‘income’ perhaps? Just off-hand, I’d say you’d need at least 20 average units that are mortgage free to get what most people would consider a fairly decent income.

It’s like those guys who flog solar panels under the absolutely insane MicroFIT program. They claim you can get ROIs of 10% or 15% or more. Not so fast. I ran the numbers. The REAL numbers. The actual return (at the old rate of 83 cents per kilowatt-hour) was actually only 1.4% adjusted for a pithy inflation rate of 2%. And it does not take into account equipment repairs and replacements, possibly a new roof, etc. And I heard that the gov is now paying much less than 83 cents/KWH; but after running the original numbers a couple of year’s back I fuggottaboutit.

#59 Inglorious Investor on 10.20.13 at 11:41 pm

#55 Ralph Cramdown on 10.20.13 at 11:21 pm

Righto. Along those lines, see my posts at 44 and 47.

#60 Obvious Truth on 10.20.13 at 11:55 pm

21, 42 Hawk.

You’re right about the average person out there. Financial markets are totally foreign to them. They are actually afraid of them. That includes smart educated people.

The fund controlled industry is mostly to blame because of all the ridiculous and overly complex products they peddle. The lingo itself is perplexing to most.

I always encourage reading of many books. And interviewing many advisors. Without it they really can’t ask the right questions. And then more reading to figure out what was said. Then short listing and doing it again.

The industry has them confused for their own benefit. I too want them in and learning. It can be very empowering. Makes people look forward to the future. Young savers are great for growth and a future tax base. Guys like Ralph and others here can navigate either way. Garth will trim and rotate regardless.

Maybe the govt can make banks run public service announcements outlining the benefits of low cost investments in return for the damage they have done as an industry. They’re doing it to carriers. Kind of like participation for finances.

Was it great seeing Hal and Joanne on amazing race.

There has to be a way to demystify it.

I’d mention you for the part Garth but I think our PM has a Constitutional veto for these things. Or at least it would be clear cause for a prorogued parliament.

I right this watching Peyton manning go to work and I just saw a “life’s better under the sun commercial.” Geez.

Touchdown. He’s in a league of his own. 6 back. Looks like acl for Wayne. Sucks.

#61 Ronaldo on 10.21.13 at 12:34 am

Anyone remember these dudes? If it sounds too good to be true, it usually is.

http://www.cbc.ca/news/business/eron-mortgage-vp-pleads-guilty-to-fraud-theft-charges-1.527870

#62 Lookie Loo on 10.21.13 at 12:53 am

Rachelle wasn’t sued because she blogged about her concerns about a private REIT, she was sued because she posted, without offering any proof, that League was operating an illegal Ponzi scheme, that League founders and managers, their lawyers and their auditors were committing fraud, and that League executives were illegally money laundering REIT proceeds to offshore bank accounts.

I am all in favour of the media investigation bad investments and warning the public, but when a blogger states that they can say anything they want without fear of recourse because they are broke and aren’t worth suing then a line is crossed and I don’t fault Gant for trying to protect his company and reputation.

#63 bob on 10.21.13 at 1:22 am

Hey, Garth, what’s your beef with yoga pants, Kia’s, and Vespa’s anyways?

#64 Obvious Truth on 10.21.13 at 1:29 am

The IFIC actually has an easy to read website that starts with ” you don’t need a PhDs to visit Rome ” and continues with the investing analogy. They are also upfront about fees and changes. They also mention a variety of investing tools and question to ask.

Could ETFs be included here? I think we can do more to help Canadians invest more safely and avoid the disaster garth outlined today. It’s heartbreaking as this money was hard earned.

A first stop well advertised site that could be referred to by respected professionals could make a huge difference. Maybe use some action plan advertising money.

#65 Brian Ripley on 10.21.13 at 1:31 am

To #5 Mike’s query “when buying a property as an investment, what should one expect in positive cash flow”

I did a cash flow analysis on a low end Vancouver condo as an exercise to discover what might be a minimum acceptable return on investment; and I suggest one would have to get at least an equivalent of a 10 year T-Bond yield before even bothering to physically look at the property and after that, it is a matter of determining if there is any upside after the minimum return.

Personally because there is so much price risk (falling price risk, both on real estate AND bonds) I would want a multiple of a current 10yr bond yield.

Also, the financing variables are important to consider.

4 Scenario Analysis Here: http://www.chpc.biz/2/post/2013/05/vancouver-condo-yield-case-study.html

#66 Mike on 10.21.13 at 1:37 am

#55 Ralph Cramdown on 10.20.13 at 11:21 pm
#48 James M — “Why would you pay 25% down payment on a rental property in order to NOT make money?”

Because if your rents cover your mortgage and expenses for 25 years with 25% down, you’ve quadrupled your money in real terms, which works out to a 5.7% compound after-inflation yield. And if you’re even in year one, you’ll either be cash flow positive down the line or be paid off in under 25, or able to extract equity to buy another one.
—————————————————
Thanks for the responses. I understand you can put a larger down payment to get positive cash flow, but that only discounts the value of money, which results in positive cash flow (seemingly, while disregarding the opportunity cost). Part of the problem with no cash flow is it results in more risk than typical investments because if a unit stays vacant a few months, you must find money to carry it, possibly being forced to lose, or even foreclose (and also affecting the nice returns you mentioned). Real estate without cash flow is much more risky than even the stock market since it may require continuous and unexpected additional investment from the investor, whereas, in the stockmarket, the only risk is the value of the shares and the cash flows the investor expects to receive. There is a big difference. Add the fact that you have to deal with other issues, including collecting payment, repairs, financing etc., I would expect some cash flow after sinking a 25% dp.

More to the point, Garth mentions how bad real estate investing is based on lack of positive cash flow. That being the case, what should an investor expect in positive cash flow? Just to be clear, most properties are currently in severely negative cash flow territory, making investment prospects bleak.

#67 Pt Bob on 10.21.13 at 1:44 am

Pay ranges as low as $12 per hour for temporary workers at plants in the U.S. Southeast, compared with about $35 an hour for skilled union veterans at U.S.-owned plants. Union workers in Canada on average are paid even more; a year ago, GM Chief Executive Dan Akerson described Canada as “the most expensive place to build a car in the world.”

http://www.reuters.com/article/2013/10/20/us-autos-mexico-investment-insight-idUSBRE99J04Y20131020

#68 Tony on 10.21.13 at 1:47 am

Who would quote invest in a Canadian REIT in Victoria? Commercial real estate there can only fall in value meaning little or no payouts. Those people deserved to lose their money.

#69 Tony on 10.21.13 at 1:58 am

Re: #55 Ralph Cramdown on 10.20.13 at 11:21 pm

If you bought rental properties in Victoria today you’d most assuredly lose your shirt after 25 years.

#70 Buy? Curious? on 10.21.13 at 4:42 am

Hey Garth! Those investors, like the dudes in your picture, are willing participants. Am I suppose to feel sorry for someone who gets trampled by a bull, or an investor that that gets burned because he thought he could get a few extra points on his investment? No. They had to expect it, didn’t they? By the way, I did that run. It was one of the best moments of my Life. A few people died that weekend. Not from the bulls but there was this tall monument, that at night, people would climb up, jump off and expect the crowd to catch them. The first couple of guys did it. We all cheered but then it was getting boring and I wanted to pick up chicks. 30 mins later the crowds were getting thinner and one guy jumped but there wasn’t enough people to catch him and he hit the cobble stone street hard. Another guy got in a fight in an ATM and got stab. Meanwhile, I slept under the stars, with a chubby girl and a smile on my face.

Sure, I’m comfortable in owning house that is appreciating at 5% annually, but I’m not a greedy bugger. Why would I trust someone else with my money?

Point the story? People are going to get burned all the time, just make sure it isn’t you.

Oh, and I like all women. Friday, The Keg. “Are you hear by yourself?”

http://www.youtube.com/watch?v=8N0TJyd3OgU

#71 Buy? Curious? on 10.21.13 at 4:44 am

Damn Spellcheck! Why do I put my trust in it? I feel like Smoking Man, but sexier.

#72 MiniMe on 10.21.13 at 6:45 am

No kidding.
So what can we say when RE companies hire marketing companies to run fear campaigns like the one with chinese buyers in yellow helicopters hoovering over Vancouver or the near by areas? How many lines have been crossed there and the guys are still in business?

I guess our only consolation is that they keep their capital in a business that is going down as we speak.
#62 Lookie Loo on 10.21.13 at 12:53 am
Rachelle wasn’t sued because she blogged about her concerns about a private REIT, she was sued because she posted, without offering any proof, that League was operating an illegal Ponzi scheme, that League founders and managers, their lawyers and their auditors were committing fraud, and that League executives were illegally money laundering REIT proceeds to offshore bank accounts.

I am all in favour of the media investigation bad investments and warning the public, but when a blogger states that they can say anything they want without fear of recourse because they are broke and aren’t worth suing then a line is crossed and I don’t fault Gant for trying to protect his company and reputation.

#73 Ralph Cramdown on 10.21.13 at 8:06 am

#62 Lookie Loo

Are you faulting Rachelle-type accusations that turn out to be false or unprovable, or are you still faulting her even after League’s collapse?

EVERYTHING in the League manure heap collapsed and filed for protection. You could, I suppose, make a case that this was a result of spectacularly poor organizational structure and ill-advised cross-collateralization agreements which left investors in good projects exposed to risks in bad projects. But usually in these cases, new investor money is used willy-nilly to plug cash-flow holes and/or redemptions in whatever entity is in the most trouble, rather than going to a firewalled place in the entity being sold to the investor. That’s a ponzi and a fraud.

And if they were still taking new investor money when they knew they weren’t going to be able to meet their obligations as they came due, or that some obligations were already in default, threatening the incoming money entity’s viability and that wasn’t disclosed, that’s fraud.

I haven’t read the pleadings against Rachelle, and I don’t even know if they’re posted online, but my understanding is that they hinged on a specific and narrow definition of the word ponzi. This is why ponzi schemers get into the worthless stuff business — like breeding alpacas, or breeding pigeons for squab, and then claim that it wasn’t a money scam, just a spectacularly bad business plan with exponential growth characteristics. The League principals’ claim, if I may paraphrase, was “M’Lud, while this may have been a steaming pile of crap with elements of fraud and misrepresentation for which we are already being reprimanded by the BCSC, the word ‘ponzi’ is a BIT much.”

Three cheers for Rochelle!!! (and her co-conspirators)

#74 TurnerNation on 10.21.13 at 8:33 am

Like a rabid dog. The word’s out. League’s swimming with the fishes. Watch out for Concrete equities (shoes).

What happens on this blog stays on this blog?

Ben Rabidoux ‏@BenRabidoux 11h
“…I’ll look at Fortress Real Developments” -Garth Turner. This should b interesting. Lots to say here. @FortressRDI http://www.greaterfool.ca/2013/10/20/carrion

#75 Ralph Cramdown on 10.21.13 at 8:49 am

…and then I spell her name wrong. Sorry, Rachelle.

#76 LuckyRenter on 10.21.13 at 9:17 am

Fed’s Fisher warns of potential U.S. housing bubble!!

A top Federal Reserve official said on Thursday he is seeing fresh signs of a U.S. “housing bubble” and warned about the central bank’s ongoing purchases of mortgage-based bonds.

http://www.bnn.ca/News/2013/10/17/Feds-Fisher-warns-of-potential-US-housing-bubble-MBS-buys.aspx

Here we go again!

#77 :):( Ying Yang on 10.21.13 at 9:42 am

Smoking Man I was begrudgingly dragged to Seneca by my girlfriend on Saturday night. She played with my money last time and won large. This time it was my turn. The look on her face was a classic moment. How did you do that? I want to borrow some of your winnings (I will never see that money again). After she and her friends disappeared and blew my cash. I bought drinks for all of my friends at the bar. Then I had a Smoking Man moment and declared that I was broke and that this was the last of my winnings. She said what happened to all of the money you won. I said sorry I rolled it big on some large bets and lost it all. This time I came home with some large tucked away in my pocket, not enough that I had to declare but enough to make up for my girlfriends gambling and spending habit. Sometimes your twisted logic makes perfect sense.

#78 thoughts on 10.21.13 at 9:55 am

Dont forget FDS Broker services, part of Fortress and the team there http://www.fdsbroker.com/team.htm
This would never be allowed within the the regular financial world.

#79 Infused with Opiates on 10.21.13 at 9:57 am

61 Ronaldo – yes I do…..

#80 Daisy May on 10.21.13 at 10:21 am

“Loblaws just laid off 275 at its head office while trying to scam customers into buying overpriced items based on its new “points” scheme instead of price comparison…..”

*********************

Save-On has been doing that for years….

#81 bigtown on 10.21.13 at 10:26 am

Ontario has to do better in auto manufacturing if we want to keep that industry alive. Mexico is beating us at our game due to their low cost labour and low cost shipping.

We are a first world economy and we are capable enough but being invested is more crucial than ability. If our community colleges had dedicated departments to fit only the auto and manufacturing sector and had very low or no tuition…we would eat Mexico’s lunch. Of course, the fuel cost analysis would need to be addressed to meet the Mexican’s competitive advantage.

#82 Bobby on 10.21.13 at 10:55 am

Yes, it’s a mess here in Victoria. Out looking at townhouses and condo open houses yesterday. In each of them, I was the only one there. Rather sad.
Realtor at one spoke of a real buyers market out there. One unit, purchased new at $650k a couple of years ago, sold for $425k recently.
It’s getting really ugly out there!!

#83 Obvious Truth on 10.21.13 at 11:05 am

Just realized Garth that you are affiliated with Raymond James. Seems like a great fit for both of you. An organization employing my favourite Monday morning read. Jeff Saut. Is there a better student, teacher person in the financial world?

It easy to beat up the fund industry but can’t paint everyone with the same brush. There are guys like Jeff that would only lend their name to the best.

#84 Inglorious Investor on 10.21.13 at 11:13 am

#65 Brian Ripley on 10.21.13 at 1:31 am

Hey, Brian.

You know the name of the game in rental properties is to have the rents cover the operating costs and debt service while the property appreciates in nominal value.

Positive cash flow is rare in the early years, based on conservative assumptions viz. maintenance costs, vacancy rates, repairs, upgrades, etc.

Currently, the last time I checked, cap rates on apartment blocks in Toronto were under 5% and falling. Price inflation in these types of properties has been extreme over the last five years. Prices are climbing much higher than rents. The expense-to-income ratio for such properties has historically hovered around the 45% to 50% mark. So, in other words, the operating costs eat up about half of your revenues. Debt service eats up the other half.

I’ve run the numbers on many, many properties in Toronto; I typically get a slightly negative ROI, which only gets worse when adjusted for inflation. To be an investor in rental properties you must be prepared to pay for some things out of pocket in the early years.

Of course, since you are in partnership with the banks when you invest in properties, you get breaks, like tax deductions for things like mortgage interest, expenses and depreciation. The game is to transfer some of the government’s take (in taxes) to the banks (in interest charges). During the right times (high inflation, relatively low mortgage rates) the ‘game’ can work very well. Like it has over the past several years.

I’m still amazed at how much prices have soared. There is lots of money out there chasing hard assets. Still. But I certainly agree that with prices at historic highs, now may not be the best time to invest in RE. And condos? I wouldn’t touch ’em with a ten foot pole and a hazmat suit.

#85 yinyang on 10.21.13 at 11:30 am

Re: #5 – Mike’s question;
Investments are investments. The “income property” idea as a “sure-win” investment got distorted over the last 50 years or so, for the same reason that real estate (i.e., home ownership) as an “investment” did. The perfect storm that drove house prices up endlessly for decades is obviously coming to an end, if not over already. So, the notion that “as long as your mortgage and expenses are covered it, it doesn’t matter what the return is because you will have huge capital appreciation along the way” no longer holds true. It would be the same as borrowing to buy an income investment (bond, preferred share) that paid zero, with the hopes that it will be worth more in the years to come.
That is not to say that all income property investments are bad. You have to be astute enough or lucky enough to find the right deal. It all comes down to the numbers.
For example (and this is a real-life one on a tiny SFH):

House Price (2007, after all closing costs): $300K
Down Payment (“Invested dollars”): $100K

Rental income: $1925/mo

Mortgage Payment: $775/mo
Prop. Tax: $300/mo
Ins.: $60/mo
Heat: $100/mo
Hydro: $150/mo
Water/Sewage: $100/mo
Maintenance: $50/mo

TOTAL COSTS: $1535/mo

NET POSITIVE CASHFLOW: $390/mo

YEARLY NET INCOME: $4,680.00

INVESTED DOLLARS: $100K

ROI: 4.68%

Sure, You can also take some solace in the fact that the principal is gradually being paid down as part of your mortgage payment, but don’t get too excited and factor it back in to your actual realized cash return. You also get to write-off the interest portion of the mortgage payment, but big deal – the net rental income is still taxed at full pop. Don’t forget, you are assuming a lot of risk in holding a fat mortgage to be able to make the investment in the first place, and the value of the asset COULD STILL GO DOWN!!! Also, the renters could default, while continuing to squat, which will cause months of forgone income plus the cost to evict them, and then repair the property damages. And don’t kid yourself, eventually this WILL happen!

Bottom line: It’s about a 4.5% return, with the very long term possibility of having the $200K principal eventually paid off for you. If you have a lot of patience, and a lot of luck along the way (no major interest rate hikes, no defaults, no squatting, no massive repairs and maintenance bills, no long term vacancies, no problems getting mortgage renewals along the way), you MIGHT do alright in the long run.

But if you already have $100K to invest, why not just invest it in a liquid, balanced, diversified portfolio of financial investments and get an average return of 6% – 7%?? Nothing beats flexibility! (Have you heard that one before?)

Or, you can learn the hard way. (At least you’ll have something to talk about at cocktail parties.)

#86 Mike on 10.21.13 at 12:16 pm

#84 yinyang on 10.21.13 at 11:30 am
Re: #5 – Mike’s question;
Investments are investments. The “income property” idea as a “sure-win” investment got distorted over the last 50 years or so, for the same reason that real estate (i.e., home ownership) as an “investment” did. The perfect storm that drove house prices up endlessly for decades is obviously coming to an end, if not over already. So, the notion that “as long as your mortgage and expenses are covered it, it doesn’t matter what the return is because you will have huge capital appreciation along the way” no longer holds true. It would be the same as borrowing to buy an income investment (bond, preferred share) that paid zero, with the hopes that it will be worth more in the years to come.
That is not to say that all income property investments are bad. You have to be astute enough or lucky enough to find the right deal. It all comes down to the numbers.
For example (and this is a real-life one on a tiny SFH):

House Price (2007, after all closing costs): $300K
Down Payment (“Invested dollars”): $100K

Rental income: $1925/mo

Mortgage Payment: $775/mo
Prop. Tax: $300/mo
Ins.: $60/mo
Heat: $100/mo
Hydro: $150/mo
Water/Sewage: $100/mo
Maintenance: $50/mo

TOTAL COSTS: $1535/mo

NET POSITIVE CASHFLOW: $390/mo

YEARLY NET INCOME: $4,680.00

INVESTED DOLLARS: $100K

ROI: 4.68%

Sure, You can also take some solace in the fact that the principal is gradually being paid down as part of your mortgage payment, but don’t get too excited and factor it back in to your actual realized cash return. You also get to write-off the interest portion of the mortgage payment, but big deal – the net rental income is still taxed at full pop. Don’t forget, you are assuming a lot of risk in holding a fat mortgage to be able to make the investment in the first place, and the value of the asset COULD STILL GO DOWN!!! Also, the renters could default, while continuing to squat, which will cause months of forgone income plus the cost to evict them, and then repair the property damages. And don’t kid yourself, eventually this WILL happen!

Bottom line: It’s about a 4.5% return, with the very long term possibility of having the $200K principal eventually paid off for you. If you have a lot of patience, and a lot of luck along the way (no major interest rate hikes, no defaults, no squatting, no massive repairs and maintenance bills, no long term vacancies, no problems getting mortgage renewals along the way), you MIGHT do alright in the long run.

But if you already have $100K to invest, why not just invest it in a liquid, balanced, diversified portfolio of financial investments and get an average return of 6% – 7%?? Nothing beats flexibility! (Have you heard that one before?)

Or, you can learn the hard way. (At least you’ll have something to talk about at cocktail parties.)
——————————————————-
Thanks, lots of good information. First off, I don’t care what anyone says, but real estate as an investment is riskier than stocks. There is risk of vacancy, random and significant additional capital requirements, possibility of lack of financing and lack of liquidity. The risk of financing is especially high right now, in which case, you could lose your entire investment. You did provide good information in what proportion of cost the financing and maintenance should be.

I don’t know if anyone has noticed this, or if this is normal, but new condo developments have many rentals available compared to older buildings. I’m not sure what this means, I just find it interesting.

#87 Mister Obvious on 10.21.13 at 12:31 pm

#52 45north

I read the blog link you posted about condo financing. In the comment section there is a scathing (and somewhat ad hominem) criticism of Garth.

It centers on the figure of 19K unsold condos in Toronto. The commenter agrees that many condos remain unsold but only about half of those physically exist at present. He claims the remainder are only phantoms and as such, pose no threat to the market.

I don’t know if that statement is true or not. But let’s suppose that it is. Do ‘non-existent’ unsold condos (that presumably exist within a tower of sold but also non-existent condos) somehow present less of a problem?

Just wondering.

#88 Canadian Watchdog on 10.21.13 at 12:38 pm

Philippines was Canada’s greatest source of immigrants in 2012

"[T]he new push in the last couple of years has been temporary workers. Many of them going to Canada to work for companies such as TIm Hortons and Boston Pizza. According to immigration Canada and the Government of Canada, the Filipinos make fantastic immigrants."

No racial profiling or discriminatory HR practices going on here! Nope. There just happens to be a shortage of skilled coffee makers and waitresses! Alas, chances are if you're a Canadian and/or a student looking for a job, your resume goes to the bottom of pile, but if you live on the other side of world and are willing to work for peanuts, never ask for a pay raise and borrow from a bank, you go to the top of pile!

This is an absolute disgrace. Big corporations and banks are running the worlds biggest debt slavery ring right under everyone's noses.

#89 heineken on 10.21.13 at 12:44 pm

imo, garth you are such a real estate “collapsitarian”.

food,clothing, SHELTER.
no financial assets included in the basic needs of humans.

i hope your blog remains strong for a long time — i find it so entertaining!

#90 angela on 10.21.13 at 12:49 pm

Following last week’s last two day panic buying driven not by data (since in the US it has been delayed until late October and November, and elsewhere in the world it is just getting worse) but by the catalyst that the US isn’t going to default (yes, that’s all that is needed to push the S&P to all time highs) and just hopes that the tapering – that horrifying prospect of the Fed reducing its monthly monetization by $15 billion from $85 to $70 billion in line with the decline in the US deficit – will be delayed until March or June 2014 because, you see, the Fed isn’t sure how the economy is doing, it makes no sense to even comment on the market. Squeezes, momentum ignitions, rumors about what Messers Bernanke and Yellen had for breakfast, Goldman’s 2015 S&P forecast of 2100: that’s the lunacy that passes for market moving factors. News, and reality, have long since been put in the dust. Just keep an eye on flashing read headlines, and try to buy (remember: anyone caught selling by the NSA is guaranteed a lifetime of annual IRS audits)

#91 Zeeman1 on 10.21.13 at 1:00 pm

Garth, your post yesterday had me laughing unintentionally.

You’re freaking out about a 2 week 23 billion loss to the US economy due to the shutdown but you actively approve and promote the never ending 85 billion/month of QE by said government?

Today’s post was great, by the way. I like the increasingly investigational nature of your work here.

Where did I freak out? The shutdown dropped US mortgage apps by 7%, BTW. — Garth

#92 Son of Ponzi on 10.21.13 at 1:08 pm

G&M.
“Bank of Canada economists write poorly, need help, audit finds.”
Maybe they should hire Smoking Man.

#93 TnT on 10.21.13 at 1:12 pm

#88 Canadian Watchdog

There is something different happening in GTA and I am sure the same goes for other major CDN Cities.

A supply teacher who works York Region will see new Canadians make up 75% of each class south of Aurora in York Region.

This has to have an effect on Real Estate (low rates + horny Canadians + HGTV + blah blah blah)…..

The landscape has changed….

Must adapt to survive….

Good Luck Peoples….

#94 jess on 10.21.13 at 1:16 pm

Magnetar

SEC Announces Fraud Charges Against Collateral Manager Of CDO
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539908794#.UmGcoxBnBSw

http://www.propublica.org/article/sec-files-charges-in-magnetar-deal

#95 ozy - Success Story Edition on 10.21.13 at 1:18 pm

Are you still gathering material for the Property Purchase Success Story Edition Garth?

I think you’ll do an even better service telling the flock housing needs to be bought, just not the 95% of it…

A successful story edition is sure to raise interest. Without compromising your overall bearish stance. Hey some flowers in the dark forest! Be a man and do it.

Hope that helps folks

#96 To 88 Canadian Watchdog on 10.21.13 at 1:33 pm

thank you for the info

I see tons of them popping up on the dating sites breaking the I’M COOLER THAN YOU downtown TO urbangirlie culture.

the local girls, I say, suffered heavy casualties, many become more flexible in their conditions and expectations and start chasing. wow, time is running out for many. The trend has finally reversed. God bless America (they started the crisis)

Well Done Canada! A success story harpooning such stuff here, MAY I THOUGH SUGGEST A SUPLEMENT OF Nordic babes for the IKEA&more?

#97 Sideline Sitter on 10.21.13 at 1:36 pm

#83 – Inglorious… what I’ve found is that Commercial Properties have not increased in values as quickly as homes have because you need 25% down (as well as higher mortgage rates, environmental assessments, etc).

My wife and I bought a commercial property (store-front with apartments) for WAY less than smaller houses in the same Toronto neighborhood.

If you have $$$, there’s more opportunity in commercial spaces, but obviously these are also harder to rent.

#98 Truth C Kerr on 10.21.13 at 1:37 pm

Fortress has some interesting blog posts up, I found them interesting

Low Rise, Low Risk http://fortressrealdevelopments.com/news/ben-myers-low-rise-is-low-risk/

Surge in Anecdotal
http://fortressrealdevelopments.com/news/the-other-side-of-the-story-vi-we-are-seeing-a-surge-of-articles-with-anecdotal-evidence/

Canada condo bubble
http://fortressrealdevelopments.com/news/the-other-side-of-the-story-v-is-canada-experiencing-one-of-the-biggest-housing-bubbles-in-the-world/

Have you read Garth?

#99 Mike on 10.21.13 at 2:39 pm

#90 angela on 10.21.13 at 12:49 pm
Following last week’s last two day panic buying driven not by data (since in the US it has been delayed until late October and November, and elsewhere in the world it is just getting worse) but by the catalyst that the US isn’t going to default (yes, that’s all that is needed to push the S&P to all time highs) and just hopes that the tapering – that horrifying prospect of the Fed reducing its monthly monetization by $15 billion from $85 to $70 billion in line with the decline in the US deficit – will be delayed until March or June 2014 because, you see, the Fed isn’t sure how the economy is doing, it makes no sense to even comment on the market. Squeezes, momentum ignitions, rumors about what Messers Bernanke and Yellen had for breakfast, Goldman’s 2015 S&P forecast of 2100: that’s the lunacy that passes for market moving factors. News, and reality, have long since been put in the dust. Just keep an eye on flashing read headlines, and try to buy (remember: anyone caught selling by the NSA is guaranteed a lifetime of annual IRS audits)
————————————————
The US was not on the verge of default for its inability to pay, but because of a technicality. It’s like having a piggy bank full of money, with no proper tool to open it (assuming you can’t just smash it on the ground). The market may be overvalued, but don’t anticipate a large collapse.

#100 Old Man on 10.21.13 at 2:54 pm

#97 Sideline Sitter – There is great opportunity for a combo with commercial and apartments on top for any married couple. I saw this done in Port Credit with the commercial space leased out and 6 modern apartments on the second level rented out with a large paved parking space out back for all.

The best I have ever seen in my life was in central Toronto with a married couple. The bottom level was a successful mirror business, and their home was on the upper level with parking in back. They needed a new mortgage for 40% against appraised value with private money, as they kept two sets of books, and wanted nothing from any bank. :( Taxman alert?

I have never seen anything like this in my life, as before me was almost 4,000 sq.ft. that was fully renovated with the best of furnishings, and it looked like a showroom as they were living well, and their business was making good money. So committed the mortgage immediately for a quick closing, as there was no risk.

#101 Mike in Surrey on 10.21.13 at 2:55 pm

#5 Mike… Here’s my take on a good real estate investment. Back in 2003 city of Surrey, house can be brought for 15 years rent $1333x12x15= $240000. At 4.5% fixed 3 years mortgage rate was a good investment as the house has doubled the price, even the house stays the same price is a good investment as it commands $1800 rent today with upgrades and maintenance. But rent is 22.2 years of rent for the current price of the house, a bad investment today even with 3.5% fixed 3 year mortgage rate.

#102 ToRealtyBlog helps us to understand how TREB counted 582 cond units sold in To in the first half of October on 10.21.13 at 2:56 pm

Here he goes:
http://youtu.be/m26fR3d8BvE
He is very excited about a new development. He is even childish about the whole story (3 years old), going like “this is Real Life monopoly’ when he talks about what the developer did there. I wonder whose life is he talking about when he says Real Life monopoly.

Anyway just above his post here http://urbantoronto.ca/forum/showthread.php/19952-Best-of-Real-Estate-Video?p=772344#post772344
I was asking him if he could help us to elucidate the mystery of the 582 condos declared as sold by TREB this past half of October. He ignored that and posted the video above.
The video shows where they plan to build this: http://theberwick.com/

Now if you use MLS to see what is for sale in that area (60 Berwick) you learn that although the condo building is not there they are selling the units via MLS and they will count them as sold in one of the coming months! I know, this was indicated previously by CanadianWatchdog

here are the units:
Condos
http://www.realtor.ca/propertyDetails.aspx?propertyId=13656547
http://www.realtor.ca/propertyDetails.aspx?propertyId=13764015
Cond Townhouses
http://www.realtor.ca/propertyDetails.aspx?propertyId=13756678
http://www.realtor.ca/propertyDetails.aspx?propertyId=13756637

On Kijiji you can see that this ad promising 1% cash back collected WOW!! 52 hits since Sept 07 2013
http://toronto.kijiji.ca/c-real-estate-condos-for-sale-1-Cash-Back-The-Berwick-W0QQAdIdZ521259212

That is a heck of a lot of interest in this cool looking building.

Anyway since I asked the admins of the site urbantoronto to block my account there I want to thank RoRealtyBlog for his metaphorical response to my question

#103 Shawn on 10.21.13 at 3:05 pm

OWNING A HOUSE IS A BASIC NECESSITY, RIGHT?

Heiniken at 89 says:

imo, garth you are such a real estate “collapsitarian”.

food,clothing, SHELTER.
no financial assets included in the basic needs of humans.

*******************************************
It appears that the comment is suggesting that one should buy a house because a house is a basic necessity of life.

By this logic we should also own the means to grow our own food and make our own cloths. Welcome to the dark ages everyone. Let us throw off the shackles of modern life. Okay, you first Hienekin.

I’d ask you to let us know how it goes, but there is no internet where you are headed.

#104 Victor V on 10.21.13 at 3:15 pm

#88 Canadian Watchdog

I’d be curious to see how many Canadians want the jobs that temp workers are getting or believe the jobs are ‘beneath’ them.

#105 jess on 10.21.13 at 3:20 pm

britons / swiss currency loans

“Because Cyprus is part of the EU, they can apply to the British courts for possession orders against the property of Britons to meet debts in Cyprus. … away, as they could conceivably lose their home in the UK as a result”…
http://www.independent.co.uk/money/spend-save/the-cyprus-dream-becomes-a-nightmare-8891733.html

#106 jess on 10.21.13 at 3:22 pm

apprentice robots
PRACE – The Productive Robot Apprentice
– concept basically relies on robot learning by demonstration
http://www.control.lth.se/Research/Robotics/prace-project.html

For example, Abbeel taught one robot how to fold laundry by giving it some general rules about how fabric behaves, and then showed it around 100 images of clothing so it could analyze how that particular clothing was likely to move as it was handled. After that, the robot could fold towels and sweaters without further instruction. ­—Kristina Grifantini
http://www.technologyreview.com/video/425195/robots-that-learn-from-people/
http://www.technologyreview.com/news/520456/why-this-might-be-the-model-t-of-workplace-robots/

#107 coastal on 10.21.13 at 3:33 pm

That Colwood Corners deal stunk from the get go. How could anyone raise massive money when only a mile or two away Bear Mountain is being gutted for 10 cents on the dollar from peak asking price ? I like to use the local home owners blog as a barometer with their resident condo king who continually pumps the latest soon-to-fail building in process and his phony market prowess. The more they pump, the more they dump. Victoria condos have been getting smoked the last few years and the SFH’s will be next. The young and naive are about to learn a very hard lesson.

#108 Old Man on 10.21.13 at 3:51 pm

#104 Victor V – I need a part-time job to make ends meet and have placed my application for employment with Walmart to become a greeter, as minimum wage is looking good now, and will dress up nice and smile, and guess what? My phone is silent, so no interview for me, so need to look at McDonalds now, as can flip and cook a good burger.

#109 sciencemonkey on 10.21.13 at 4:27 pm

Oooooh, shitty townhouses costing $700,000 to 1 million, where do I sign up?

@104 Victor V
Isn’t that stereotype a little tired? I’m sure Canadians would be interested in those jobs if they paid anything other than trash salaries. Temp foreign workers and high immigration are useful tools for depressing wages and propping up ponzi industries.

#110 Mike T. on 10.21.13 at 4:37 pm

‘This is an absolute disgrace. Big corporations and banks are running the worlds biggest debt slavery ring right under everyone’s noses.’

true indeed

but we have iPad, iPhones and naked Mylie Cyrus to cheer us up!!

Mr Watchdog, if you have not, investigate spirituality.

Our souls asked for this experience – if you figured out the trap on Earth then your experience can be different that those that have not. Don’t worry about others, they are fine, on their path, learning at their rate.

I just hope there is some joy and happiness left inside and not all hopelessness.

#111 Canadian Watchdog on 10.21.13 at 4:47 pm

#104 Victor V

No data for that. I wish. However, by looking indirectly at the City of Toronto's job application demand, I'd say the job market is oversubscribed by a lot. 

#93 TnT

Oh there's something different about Toronto alright. We've got North America's largest condo inventory and not enough coffee makers to sell them to.

Just crossing the newswires.. Bloomberg reports

Toronto Home Sales Lowest in Decade as Developers Retrench

Sales of new houses and condominiums in Toronto plunged 26 percent this year to the lowest since 2003 as developers pulled back on projects.

Sales of new low-rise units dropped to 8,878 from January to September from 11,604 in the same period last year and high-rise sales fell to 10,449 compared with 14,399, according to data released today by RealNet Canada Inc., a Toronto-based real estate research firm.

Developers planned to build 20,722 new homes and condos during the first nine months of the year, a 31 percent drop from the same period last year, according to RealNet’s report.

The cost difference between houses and their high-rise counterparts reached a record C$226,016 ($219,454) in the city, with houses forecast to continue losing affordability for many residents.

“They continue to move in opposite directions,” George Carras, president of RealNet, said in a quarterly conference call today.

#112 45north on 10.21.13 at 4:57 pm

Mister Obvious: Do ‘non-existent’ unsold condos somehow present less of a problem?

well I would say they do present less of a problem. A lot less. Going back to David Fleming’s point – it’s the bank that pulls the trigger. If the bank says no then the development company has to pay the cost of the presentation centre – small beer.

ozy: are you the ozy that pointed out the paper “three cities within Toronto”? I think you’ll do an even better service telling the flock housing needs to be bought, just not 95% of it

you know for a while I thought that Garth was doing just that but somehow he figured that picking, finding the 5% was just too much. I mean better than average chances still means losing money. Even if you buy into the top 10% means breaking even. Look the competition on the way down is going to be fierce! There are skilled experienced tradesmen with the tools and equipment who need to make a living.

I’ve heard of two deals I would rate in the top 10%. Pass.

#113 HDJ on 10.21.13 at 5:15 pm

“No wonder so many Canadians don’t trust the financial/investment world.”

“They also buy Kias.” — Garth

Garth, You’re damaging Kia’s reputation. Isn’t that libelous? One of these days Mr. Kia’s going to sue you.

#114 jim on 10.21.13 at 5:43 pm

“Where did I freak out? The shutdown dropped US mortgage apps by 7%, BTW. — Garth”

Good. There are concerns that the real estate markets in many states are experiencing another surge in irrational exhuberance. Incomes are not rising in most locales, yet house prices are going up. I agree that they are still undervalued in many places, but not all. Officials at the fed are even raising concerns.

#115 Smoking Man on 10.21.13 at 5:54 pm

#77 :):( Ying Yang on 10.21.13 at 9:42 am

Like it dude, your learning…

On a sad note, Jim Mckenny, famous leaf and broadcasters city TV, lost his daughter in a car crash. On Saturday.

Very sad. He’s a really nice guy and helped a lot of people in distress over the last few years.

#116 Rachelle Berube on 10.21.13 at 6:08 pm

Hi Garth,

Thank you for the support, I feel like I may have arrived.

As for the peanut gallery, when I was sued I had written very little about League. Comments in this article here http://wp.me/pYiYd-9b and http://canadianmoneyforum.com/showthread.php/12289-League-REIT-suspends-distributions-in-June?highlight=league+reit Not worth a lawsuit.

#117 Canadian Watchdog on 10.21.13 at 6:12 pm

#102

Now you get it. New low rise and high rise sales are trickling into resales, making TREB numbers look great.

All explained at DELETED

#118 jess on 10.21.13 at 6:30 pm

http://www.smh.com.au/business/planners-go-rogue

SPECIAL: How the nest eggs of hundreds of retirees were placed, without permission, in high-risk products that generated big fees for the People’s Bank.

http://www.smh.com.au/business/banking-and-finance/targets-bonuses-trips–inside-the-cba-boiler-room-20130621-2oo9w.html

#119 :):( Ying Yang on 10.21.13 at 6:49 pm

#115 Smoking Man on 10.21.13 at 5:54 pm

Yes heard the bad news yesterday about his daughter, he is a class act. My deepest sympathies to his family.

#120 Ripped on 10.21.13 at 7:08 pm

Summer last year NFLX bottomed out about $40 a share. Today in AH’s you can buy it at $400 a share

#121 Scalgary on 10.21.13 at 7:54 pm

Have anyone heard anything about ‘New Horizon Mall ‘ in Calgary? Too much hype going on here.

#122 recharts on 10.21.13 at 8:08 pm

CanadianWatchdog DELETED ate your link.
Please send it here: [email protected]

#116 Canadian Watchdog on 10.21.13 at 6:12 pm
#102

Now you get it. New low rise and high rise sales are trickling into resales, making TREB numbers look great.

All explained at DELETED

Trust me. There was a reason. — Garth

#123 recharts on 10.21.13 at 8:24 pm

Trust me. There was a reason. — Garth
I do not argue with that.
There is also a reason for what TREB is doing and I want to know if I am wasting my time with the stats that I compile, as Ms. ItSoldYouaRemoving is insinuating.

#124 Lookie Loo on 10.21.13 at 8:34 pm

#73 Ralph

I don’t follow the end justified the means argument. You seem to be saying that it is ok to defame someone to get a point across. Not only did she suggest League was a Ponzi, she defamed KPMG, the BCSC, a lawyer and a CFA. Are all those ok as well? Those people and organizations should just suck it up and allow their reputations to be smeared?

I think that Garth does an excellent job of calling people and businesses out without resorting to this level.

#125 World Traveller on 10.22.13 at 11:26 am

#12 dosouth on 10.20.13 at 9:20 pm

Poor Gen Y’ers having to live in….Vans!

Great, Canada is turning into a nation of Matt Foley’s

http://www.youtube.com/watch?v=3nhgfjrKi0o