Investment grade

PUPPY modified

Days ago CMHC gave us the results of a condo survey. This is a big deal. With 105,000 under construction in Toronto alone (in contrast, there are just 4,500 being built in Miami, where they worry about a glut) some people think too many units could precipitate a property plop.

Nobody really knew how many of those new buildings are being bought by flippers, speckers or amateur landlords or, for that matter, non-residents – something people in Vancouver are obsessed with. But this fed poll of cliff dwellers was trashed about five minutes after it was announced.

Critics rightly pointed out CMHC did not count investors who own condos in Toronto or Van and yet live elsewhere. It did not count foreign owners. Worse, it didn’t include the owners of condos built in the last five years, or sold pre-construction and yet to rise. As you might imagine, since mortgage rates collapsed in 2009, this has been the most explosive part of the Canadian real estate scene.

Anyway, despite the warts, here was the result: 17% of these older units are owned by investors, and the rest occupied by owners. Given what everyone in the industry tells me, this would support the common view that at least 40% of all recent sales in a city like Toronto were to investors. If prices rise in the short-term (good luck with that), they might flip. More likely, the units will be rented and held as investments – usually by people who have no idea what they’re doing.

Mega-developers, marketers, media hounds and all-round scary people like Brad Lamb in Toronto or Bob Rennie in Vancouver tell the masses daily that buying a unit or five in a hot new building on the Skytrain route or in Liberty Village is a no-lose thing. You’ve seen the ads. Make 161% ROI, guaranteed!

Well, since this is Misery Week on this pathetic® blog, it’s time to burst another bubble.

I actually agree with the Motley Fool guy who days ago reminded me of a traditional and cardinal rule in ICI real estate (that’s commercial property). It’s simple: if you’re purchasing an income-producing piece of real estate, you should pay no more than eight times the annual gross rental income the property generates. It’s called the GRM, or Gross Rent Multiple.

By adhering to this tenet, professional real estate investors know they can actually make a return on their invested capital, once normal operating and ownership costs are deducted. They don’t gamble on capital appreciation, because there are simply too many risks involved – market risk, economic risk and interest rate risk, to name a few.

Hmm. But do amateur real estate investors know this? What if they don’t? With 105,000 condos now being built in Toronto, and if 40% are going to investors, is this dangerous if prices stall?

Let’s look at a couple of current and fairly typical listings, one in Toronto’s popular Liberty Village, and the other in Vancouver’s hipster kingdom, Yaletown.

LV modified  The tower rising at 100 Western Battery Road in trendy Liberty Village always has a slew of listings in it, despite being new, like this one. The one-bedroom, one-bathroom unit has two small balconies and nice views and is being marketed as “perfect for young professionals and investors”.

What’s it worth? Well, the same unit rents in this building for about $1,800 a month, which equals $21,600 a year. If you apply the GRM to that (a factor of eight), the condo would be worth $172,800 to an investor expecting a reasonable return. But the asking price is $406,000 – suggesting that as an investment, it’s overvalued by 135%. By the way, condo fees and property taxes equal $6,700 a year.

YALE modified  Vancouver, of course, is worse. A nice little (517 square feet) one-bed, one-bath unit in a low-rise warehouse conversion at 1072 Hamilton rents when available for about $1,600. Based on the GRM, that would mean it should sell for $153,600. But, this condo is on the market at $409,000, with strata fees of $285 a month. Overvaluation: 165%.

Now some hipster might gladly finance four hundred grand to live in either of these digs, because it would be cool, there’s Vespa storage, four Starbucks are within three blocks, and you gotta live somewhere. And paying too much based on hormones, vibe and misleading marketing is the very essence of real estate today. I get that.

But when you buy property as an investment, it’s all about cash flow – unless you can count on capital appreciation.

These days Lamb, Rennie and their developer/marketer buddies tell investors to expect 3-5% annual price gains, as well as positive cash flow. But it’s a pipe dream. New condo buildings get old fast with boatloads of 5%-down owners bailing as soon as the paint dries, while new towers get slammed up next door. Go and ask people who bought units in downtown Calgary or Toronto six years ago if they’ve made 21% after buy and sell costs. And I think the next six will be far worse.

So, a big chunk of all these thousands of units are being purchased by people paying a huge premium over investment value, who are subsidizing tenants, and will lose money. That sounds stable.

When it becomes clear you could have had sexier performance from a GIC, what then?

U got it. Misery.

193 comments ↓

#1 Crowdedelevatorfartz on 08.13.14 at 5:53 pm

Take it away…….. DA………….. explain to us blogdogs how foolish we are for renting.

#2 Big Ed on 08.13.14 at 5:53 pm

pathetic® blog

Garth you own that pathetic trademark. Awesome

Big Ed

#3 Yogi Bear on 08.13.14 at 5:56 pm

I’m rather enjoying living in a pimping, brand new condo at some dumb landlord’s expense.

#4 ILoveCharts on 08.13.14 at 5:57 pm

Will next week be happy week?

Any bets on the new job numbers? I’ll bet 5300.

#5 CPG on 08.13.14 at 5:57 pm

“Bank of Canada Governor Stephen Poloz is breaking with an almost decade-long practice by taking a speech to an annual meeting of financial economists behind closed doors.

His Aug. 25 remarks in Kingston, Ontario to the Canadian Association for Business Economics — whose members include representatives of the country’s major banks — are closed to media according to the group’s description of the event, and the audience will be told not to share the contents. The Ottawa-based central bank doesn’t mention this year’s event in its schedule.”

http://www.bloomberg.com/news/2014-08-13/closed-door-poloz-speech-breaks-bank-of-canada-s-custom.html

#6 Big Ed on 08.13.14 at 6:01 pm

gotta wonder who you are targeting with today’s post? As you know most who come here are not buying the condo as an investment thing. Oh well, misery week continues.

-Big Ed

Connect the dots. The condo danger is contagion for the entire market. — Garth

#7 sugarray on 08.13.14 at 6:01 pm

#1
Finally a talk on the condo “investment”

#8 Mark on 08.13.14 at 6:03 pm

Excess investor “enthusiasm” for RE means that there are asset classes that are likely severely mis-priced to the downside.

Personally I like the gold mining sector. Picking up shares of solid mining companies, in many cases, for less than 1/4 of the replacement cost of the assets.

As for Brad Lamb et al, eventually he will be a mere footprint. Much as the tech stock salesmen of the late 1990s aren’t even remembered these days. But it will take a long time before the losses are.

#9 SWL1976 on 08.13.14 at 6:04 pm

Misery loves company, everything thing is fine

#10 uber doomer gloomer on 08.13.14 at 6:06 pm

That’s insane, if you get burned for investing in condos you deserve it hasn’t been a viable investment in 10 years !

#11 Mean Gene on 08.13.14 at 6:07 pm

In some cultures the number “8” is lucky.

#12 Mark on 08.13.14 at 6:09 pm

“I’m rather enjoying living in a pimping, brand new condo at some dumb landlord’s expense.”

Maybe Garth will do a blog entry on what we should expect when we vultch those units for $100k a piece (or similar in real terms) when they undergo severe mean reversion.

I mean, what should we be looking for in terms of not just the price, but the entire organization? After all, if everyone in the building is on the verge of bankruptcy, is that the ‘crowd’ that someone really wants to be living next door to? Random unit fires (severely leveraged RE in a downturn tends to spontaneously combust at a higher rate than normal). Poorly maintained cars. Absenteeism. Etc.

#13 LH on 08.13.14 at 6:13 pm

Condos in Toronto are for the 99 percent.
SFHs in the downtown core will increasingly be accessible only for the 1 percent.

Simple supply and demand.

LH

#14 Big Ed on 08.13.14 at 6:19 pm

#4 ILoveCharts on 08.13.14 at 5:57 pm
Will next week be happy week?

Any bets on the new job numbers? I’ll bet 5300.
===============================

I’ll go 16,700. Is this like price is right where you can’t go over, or closest to?

#15 Lh on 08.13.14 at 6:27 pm

The funny thing is, recently built condos have always been MORE expensive per sq ft than most old but solid SFHs in c01 and c02. Considering the huge imbalance of supply (zero new houses vs 100k condos) the pricing didn’t make any sense and thus all of my buying has been in SFHs. I would put on this spread trade if there were a way to short condos.

I disagree with the gross rent multiple for residential real estate. Residential rents are more stable than ICI and typical multiples were 10x. Recently thanks to Bernanke, Yellen and Poloz, this multiple has gone up and cap rates lowere to as little as 5% for prime assets.

One more thing, in a Poloz world of low interest rates forever, those condo fees (increasing by inflation) should be capitalized at real interest rates approaching zero. Let’s be generous and use 2% (higher than long maturity linker bonds). Then a typical strata fee of 5000 per year explodes to 250k. This is a signal problem for the condo floggers everywhere. On my SFHs all I have to worry about is property taxes which are pretty low percentage of mkt value by North American standards (but not as ridiculously cheap as council taxes in London!)

LH

#16 Sheane Wallace on 08.13.14 at 6:27 pm

People like Brad Lamb, Bob Rennie are insult to people’s intelligence.

Unfortunately there are bigger idiots in power that make the smaller idiots shine.

When this thing really hits the fan it is going to be horrendous and epic at the same time, we better plan to move somewhere else as calling it severe depression would be putting it mildly.

#17 Happy Renting on 08.13.14 at 6:30 pm

#12 Mark on 08.13.14 at 6:09 pm

Maybe high availability of attractive Millennial dinner companions who will show up at parties just for the free food and drink. Always nice to have some young, hip friends. Just hide the silverware.

#18 Sheane Wallace on 08.13.14 at 6:30 pm

13 LH

Is that the case in Detroit? No. How about Miami? No.
Is this the case for LA? No? How about Chicago? No.

It is the case ONLY for some areas of San Francisco and Manhattan in New York in North America.

So what makes you think we are special /other then obviously beating everyone in stupidity/?

#19 Mark on 08.13.14 at 6:30 pm

“Not related to this post, but given that many markets are in correction mode already. Does this going to affect the Canadian banks and especially employment in the finance/mortgage sector?”

Absolutely. Most of the big banks have purged mortgage origination staff significantly. CIBC even shut down their “Firstline” division, a perfectly viable franchise, and discharged most of the staff in response to the diminishing volumes.

However, I hear there’s been some hiring on the collections side of the business. Banks are gearing up for a continued deterioration of credit conditions, that’s for sure.

#20 Big Ed on 08.13.14 at 6:31 pm

Connect the dots. The condo danger is contagion for the entire market. — Garth
=================================
really another black swan?
I guess you don’t believe the lyrics of this song.
https://www.youtube.com/watch?v=WlBiLNN1NhQ

#21 Italians love real estate on 08.13.14 at 6:32 pm

Even as an Italian Cdn and a lover if all things real estate, even I have to admit that buying a condo to rent out as an investment at these prices are insane and a guaranteed money loser.

Not single family homes on good solid ground or multi residential buildings like triplexes though. Commercial even better !!

#22 T.O. Bubble Boy on 08.13.14 at 6:40 pm

Hahahaha – Brad J Lamb on BNN saying the number is 50%:
http://www.bnn.ca/News/2014/08/13/50-of-condos-are-owned-by-investors-developer.aspx

So – we can trust Brad Lamb more than Harper’s goons at CMHC… sad but true.

#23 Oh Garth! I'm almost ready to VULTCH!!! on 08.13.14 at 6:46 pm

Mark said-
Maybe Garth will do a blog entry on what we should expect when we vultch those units for $100k a piece


Mark, use your spread sheets to line your ‘Vulture’ cage.
Are you related to “Stonleigh”? She made the same predictions five years ago. Typing nonsense is easy.
Garth’s “I can’t wait to Vultch” meme really caught on here at the planet of the apes.

Mark, go to the mirror and repeat “I’m a big scary Vulture”

http://upload.wikimedia.org/wikipedia/commons/thumb/3/39/Sentinel_parrots.jpg/800px-Sentinel_parrots.jpg

BTW, if you keep aping Garth maybe he’ll elevate you with a quip.

#24 Freedom First on 08.13.14 at 6:47 pm

Wow! Renting right now is a really really good deal!

Thanks for the post Garth, and the pics.

#25 Sail on 08.13.14 at 6:51 pm

This blog post sounds very similar to “Thinking About Buying Toronto Real Estate? Read This First” by Robert Baillieul..hmmmmmm

Of course. I referenced it. — Garth

#26 Son of Ponzi on 08.13.14 at 6:56 pm

There are plenty of job openings in the field of “Empty Condos Management”.
Turning lights off/on, flushing toilets etc.
I understand that this category has not been captured by Stats Canada’s July job data.
Hence the need to redo the numbers.

#27 Andrew on 08.13.14 at 6:56 pm

@ #4 ILoveCharts

I’ll say 2,000 jobs created in July instead of the 200 reported last Friday. I figure one of the Stats Can eggheads misplaced a zero.

#28 Smoking Man's Old Man on 08.13.14 at 7:03 pm

We’re all greater fools as long as we buy into the notion that acquisitions of any kind will lead to lasting contentment.

#29 Son of Ponzi on 08.13.14 at 7:04 pm

Italians love RE.
——————
My house loving East Vancouver Italian friends all think that they are Trillionaires, because they convert their home equity into LIRA.

#30 Son of Ponzi on 08.13.14 at 7:05 pm

Aka,
Take a break from posting.
You’re crowding out MARK.

#31 Landlord on 08.13.14 at 7:07 pm

I love how you scare everybody to keep renting! I recommend ALL my tenants read your blog everyday! Keep those rent cheques rolling in and building my wealth!

#32 Catalyst on 08.13.14 at 7:08 pm

I’m not saying renting isn’t a better deal, however there is no magical number for GRM and 8 is certainly far too low. Commercial properties are more commonly using cap rates for valuation.

In your ‘Toronto’ example you have a cap rate of 3.6% ((21,600-6,700)/405,000) which is below average but not to the extent you imply.

Similarly, if you put down 20% (investor minimum) you have cash on cash return of 18.4% ((21,600-6,700)/(405,000*.20))

#33 Tremblant110 on 08.13.14 at 7:10 pm

Friend of mine’s kids sold their home in North Vancouver. On the market for 4 months and sold for $150,000 below list. Only one offer !!!!

#34 rainclouds on 08.13.14 at 7:12 pm

Just did a valuation for Yale town digs I happily rent. 8X annual rent =
209k

There are 6-2 bed/ 2 bath for sale ranging from 585k to 640k (plus avg 400 per mo condo fees)

Portfolio up about 90K in the past year…..

NOTE : in anticipation of Satan’s mouthpiece and the Pasta guy nattering (neither of which provide any reliable or credible data) …….shut up!

#35 asp on 08.13.14 at 7:15 pm

1072 Hamilton? That was the textile warehouse I worked in back in the early to mid 90’s, just as Yaletown was getting hip. A designer jean place opened on the ground floor while us sweaty and shirtless receivers unloaded bales of table clothes from India. The fashionistas couldn’t keep their eyes off our glistening abs!

#36 crowdedelevatorfartz on 08.13.14 at 7:15 pm

@#21 Italian
“Even as an Italian Cdn and a lover if all things real estate……”

Miracles DO happen! You admit you’re a canuck!
Time to bust out the maple syrup and sing ‘the good old hockey game by Stompin’ Tom !

#37 Catalyst on 08.13.14 at 7:17 pm

Note: adding in monthly payments for P + I of $1,537 on 25AM, 5T, 4% you get Cash on Cash of -4%. So generating positive cash flow is not feasible at the stated rents.

In order to generate cash on cash return of 8% at stated rental value, the property would need to be priced at ~$310,000 (~30% currently overvalued)

#38 OttawaMike on 08.13.14 at 7:18 pm

Rental Glut

A big side effect of all the condos being built is downward pressure on rental prices throughout the market including SFH’s.

Here in Ottawa, landlords are waiting 60-90 days to find suitable tenants. I have never seen so many good rentals available in my 22 years of living in this city.

As the investment condos hit the rental market along with unsold homes, rent adjustments occur.

Who said this condo craze is all bad?

#39 crowdedelevatorfartz on 08.13.14 at 7:18 pm

And for all you govt employee pensioners out there in Denile ( located somewhere in Egypt).
A little cartoon to explain the looming pension/taxpayer/boomer financial crisis about to hit us all…….

http://whispersfromtheedgeoftherainforest.blogspot.ca/2014/08/simple-cartoon-demonstrating-looming.html

#40 Adrian on 08.13.14 at 7:18 pm

Number of realtors according to the CREA is up every year since 2001 and now totals 109,000.
http://issuu.com/canadianinvestors.ca/docs/canadianinvestors_-_august_14th__20/0

#41 Mike T. on 08.13.14 at 7:22 pm

pathetic® blog

Nice touch!

#42 DM in C on 08.13.14 at 7:23 pm

Just in case he’s so busy selling he misses it — response to DA’s nyah nyah nyah nyah I can’t hear you post at #135 yesterday

(when’s he gonna break out with the ‘my wife is better looking than yours’ stories — bets? Anyone?) Snowboid, I think you’re right — heading to another banning

++

Oh DA HAHAHAHA

“6. I don’t need or want your business, not trolling at all.”

AHAHAHAH that’s not what they (nor I meant yesterday) mean by TROLL. You are either obtuse (history proves that point well) or willfully dense.

troll
One who posts a deliberately provocative message to a newsgroup or message board with the intention of causing maximum disruption and argument

By that definition, sir, you are the penultimate TROLL. And everyone reading this knows thus.

#43 Shawn on 08.13.14 at 7:25 pm

Torture and Confessions

Condo prices are too high… or not.

If you torture the numbers long enough, they will confess to what ever you want them to confess to.

#44 Shawn on 08.13.14 at 7:28 pm

Brad Lamb…

Saw him on BNN today. Seemed like an decent fellow.

He mentioned that condos will at some point suffer a big price drop and so buyers need to be able to live through that and not be over leveraged.

From the vitriol against the guy on this site I was expecting a monster but saw a pussy cat.

The hate toward contrary views seems to have ramped up lately on this site. People seem angry the world has not unfolded as they thought it would.

I know Mr. Lamb well. No pussy. — Garth

#45 Smoking Man on 08.13.14 at 7:34 pm

#4 ILoveCharts on 08.13.14 at 5:57 pm

I’m going with +14900 jobs Friday..
And I bet 20 contracts selling USDCAD

#46 TEMPORARY® Foreign Prime Minister on 08.13.14 at 7:37 pm

…pathetic®… ??

C’mon, be like a REALTURD® and give it some fake Viagra.

…PATHETIC®… !!

much better.

#47 FormerSaskie on 08.13.14 at 7:39 pm

Good information Garth. Much appreciated. Investor guy who bought my condo did not crunch his numbers very well… to my benefit. I’m glad the sale didn’t go to some kid just starting out.

#48 Paul on 08.13.14 at 7:41 pm

You nailed it today Garth- as always. I’m in my late 20’s and every single person I know is a fresh 5% downer who simply doesn’t understand the real estate math or investor math. If people are after the cash flow why aren’t they looking at only commercial properties ? These RE agents are pathetic. I have a friend who owns 5 condos and thanks her dad for teaching her how to invest in RE markets and build wealth. 5% down- they are spread incredibly thin. Uneducated folks with a bit of knowledge is dangerous

#49 TurnerNation on 08.13.14 at 7:43 pm

(B-but what of the Hypothecation/Reverse Hypothecation, the trillion dollar derivatives Ponzi scheme; or a return to Gold Standard?? Yo Fiat currency, what’s up.)

-The Financial Post reports in its Wednesday edition the second-quarter earnings season looks impressive with better-than-expected results across the board after nearly 70 per cent of S&P/TSX composite index companies having reported. The Post’s Jonathan Ratner, writing in Trading Desk, says eight of the Toronto Stock Exchange’s 10 sectors have beat analysts’ forecasts, coming in higher by an average of 5.2 per cent. Scotiabank strategist Hugo Ste-Marie noted earnings per share, at $239, made Q2 the strongest quarter since the financial crisis. Trailing 12-month EPS has also increased in recent quarters. Mr. Ste-Marie thinks TSX earnings could finish the year around $950. He also pointed out that year-over-year Q2 revenues are up 22 per cent and 12-month trailing revenues have climbed 14 per cent. The health-care, technology and energy sectors have posted the most impressive annual EPS growth at 65 per cent, 44 per cent and 41 per cent, respectively. Also strong are industrials, consumer discretionary and financials.

© 2014 Canjex Publishing Ltd.

#50 DM in C on 08.13.14 at 7:44 pm

(penultimate because we all know Smoking Man will be the last troll standing)

#51 Realties.ca » Investment grade on 08.13.14 at 7:53 pm

[…] Source: http://www.greaterfool.ca/2014/08/13/investment-grade/ […]

#52 TEMPORARY® Foreign Prime Minister on 08.13.14 at 7:54 pm

#43 Shawn on 08.13.14 at 7:28 pm
“…..People seem angry the world has not unfolded as they thought it would………”
=========================
Yeah, I hear you.

We all voted for openness, transparency, integrity, and democracy and look what we got.

Unaffordable housing, temporary foreign workers, lobotomized manufacturing, one-trick economy, opaque secrecy, sociopathic narcissism, arrogant dictatorship, two-faced hypocrisy, narrow-minded ideology, contempt of parliament, disdain for the Supreme Court, manipulative paranoia, and now,….wait for it….massaged Statscan numbers.

We should all be thankful. The nerve of some people.

#53 VICTORIA TEA PARTY on 08.13.14 at 7:56 pm

MR. POLOZ TO LOWER THE BOOM ON REAL ESTATE HORNINESS?

Canada’s still relatively “new” central banker will be talking in privately to Canada’s business class represenatives on August 25 in Ontario: “Stagnation or Growth: Can we have policies to promote balanced growth in Canada?” is the topic according to a report from Bloomberg news.

Given the latest CMHC ramblings, and the insane real estate markets in various parts of our fair land, I have to believe that something maybe in the wind: higher interest rates.

I know, I know, that our (or any)central banker should not presage new monetary policy to a group of private sector suits. I get it.

But such is the situation, amongst too many Canadians who’ve been borrowing beyond their means for well nigh the last seven years, that SOMEONE IN AUTHORITY HAS TO DO SOMETHING to cool this nutsoid real estate ardour once and for all.

For average Canadians to STILL load up on endless debt, thanks to interest rates that make loans virtually free of any financial penalties, CAN’T GO ON FOREVER.

So what will our trusty central banker mumble about this time?

I guess that he’ll issue soothing something’s-gotta-be-done-now comments about Mr. and Ms. Canadian overindebted consumers before our financial roof falls in.

What would cause it to crash?

How about impending European-wide conflict starting in Eastern Ukraine; active currency wars in which the US dollar is getting whacked by various countries whose leader don’t much like the Yanks any more (just about everybody); US Special Forces now parachuting into northern Iraq to fight ISIS and rescue those Christians (mission creep a la Vietnam); the ongoing violent shambles in Gaza; high oil prices; the beat goes on.

Canadians horking down on cheap debt now are not immune to ANYTHING financial/political/military in this world any more, AT ALL.

Mr. Poloz will set tongues awagging and, at the next central bank meeting in early September, an announcement will trigger the addled minds of those horny condo buyers into something resembling absolute panic. And no escape. Mr. Lender is at the door and needs to be satisifed NOW.

But, of course, Mr. Poloz will not be speechifying about impending changes to monetary policy. Of course not.

He’ll simply “meander” about for 20 minutes or so then point, those those assembled financial wizards, the way to the lifeboats. They’ll be over on the right.

#54 TheRealTruth on 08.13.14 at 8:02 pm

This would crash the condo market :

$400,000 condo paid with cash.

4% savings account.

Equals $16,000 per year.

Compare that with monthly rental income (if that rent is taxed)….

Now will rates rise by 2%??

Rent ($1,800 a month) is $21,600, less condo fees and taxes = $14,900. ROI is 3.7%, fully taxed. The same amount ($400,000) in a balanced portfolio (60/40) over the last four years would have earned 10.1%, taxed far less. — Garth

#55 Nuke on 08.13.14 at 8:02 pm

8 times rent! That means my TH value is just $128k or less than 10% what my neighbour just bought. I have a better view and backyard. How can I stop renting now that I know the high premium of owning?

#56 Hong Kong money on 08.13.14 at 8:07 pm

I love your blog, I get it –real estate is not the place to be investing now.
In 2000 you could get properties in Ottawa providing 12% return annually, now the same property is barely giving back 5%.
It is now impossible for investors to brake even on cash flow basis with only 20% down.

It would be interesting if you can give ideas on where we should be investing
Keen to know where we should be putting all our hard earned cash!

#57 TEMPORARY® Foreign Prime Minister on 08.13.14 at 8:12 pm

DELETED

#58 Paul on 08.13.14 at 8:13 pm

#55

It’s not about being scared into renting for the rest of your life . It’s about diversification and not over extending your RE for living purposes . The smartest and richest folks I know live in very modest homes. They have a modest home in toronto, mid 6 figure portfolio of stocks, a condo down south, and a pension or 2.

#59 TS on 08.13.14 at 8:22 pm

My guessing is that Big ED is a real estate agent who’s packing a two milimetre peter.

#60 Cici on 08.13.14 at 8:26 pm

#12 Mark

I’m thinking us Blog Dawgs might not want to EVER vultch on a condo. Even at $100,000 it’ll probably be a money trap (rising taxes, maintenance and condo fees + market saturation leading to low rents). Not only that, most of the buildings are made out of paper mâché and will need extensive renovations in 15 to 20 years (if the they don’t implode and kill a bunch of people in the process).

I’d rather buy an acre of rising ocean.

#61 Tom on 08.13.14 at 8:28 pm

I have a relative who is moving to Montreal for a new job this month. She found a condo to rent in the downtown area for $1350 a month. I looked up on mls.ca, and similar condos on the same floor in the same building are listed in the mid $400,000. Add condo fees and property taxes to the mix, and i calculated the monthly carrying costs to be around $2500. The condo to which i’m referring is located on 1414 rue chomedey. Another example of a landlord heavily subsidizing the renter.

#62 TO Renter on 08.13.14 at 8:30 pm

RE #150 };-) aka Devil’s Advocate
Give me some addresses. You can’t can you.
#140 TO Renter
Same goes for you.
Put up or shut up boys.
———–
Ooo ooo ooo!! I got called out by the angel who fell from the top! I feel honoured!

Come on over and sell some condo units that have been unsold since 2010: http://www.jamesclub.ca/main/

Show us what you get for them hot stuff, and I’ll compare it against the original prices in the stack of glossies from the ‘opening special’ and a few comparables over the last few years. Let’s see who wins. Fair?

Game on. Suddenly I love misery week!

};-)

Note to self – stop writing like a man. At least I don’t look like one.

#63 Bob Rice on 08.13.14 at 8:34 pm

“Even as an Italian Cdn and a lover if all things real estate, even I have to admit that buying a condo to rent out as an investment at these prices are insane and a guaranteed money loser.

Not single family homes on good solid ground or multi residential buildings like triplexes though. Commercial even better !!”

Really? I hope you collecting $5000++/ month

You’re a bacala

#64 Ben on 08.13.14 at 8:34 pm

Where in N.A can you still find investment properties that fits under the GREM criteria?

#65 TEMPORARY® Foreign Prime Minister on 08.13.14 at 8:36 pm

“…..By the way, condo fees and property taxes equal $6,700 a year………”
=========================

$558/month? Seriously? On a 2-bedroom, vertically stacked, windowless bird-cage?

That makes a $1,178 GTA rental apartment even more appealing:

$1,178 rent
– 558/mo taxes and condo fees
– 120/mo included parking (2 spaces)
– 100/mo included water, heat, & AC
Net rent: $400/mo

Leftover disposable income: PRICELESS®

#66 Cici on 08.13.14 at 8:37 pm

#28

Old Man is that really you? Great to have you back! I’ve missed your nostalgic rambling prose…please stick around for the ride down ;-)

#67 Vinnie7 on 08.13.14 at 8:39 pm

I’ve understood that any investment property should pay itself over 16 years or so. AM I using an incorrect calculation or assumption?

#68 Vancouverite on 08.13.14 at 8:45 pm

#33 Tremblant110 on 08.13.14 at 7:10 pm
Friend of mine’s kids sold their home in North Vancouver. On the market for 4 months and sold for $150,000 below list. Only one offer !!!!
——————————————————–

Then your friend found out and accepted that the list price was too high by $150,000 – the actual market price.

In my mind, your friend got lucky with the one offer and took the deal.

Many sellers (even in crazy Vancouver) with over priced listings will eventually
(a) lower their price to market or
(b) pull their listings

#69 Cici on 08.13.14 at 8:46 pm

#37 Catalyst

Just don’t forget to factor in rising interest rates most likely starting sometime in the next two years.

And when that happens, don’t even consider selling…hang in there for the next 15 to 20 years, LOL.

#70 Ronaldo on 08.13.14 at 8:46 pm

#43 Shawn on 08.13.14 at 7:25 pm

”If you torture the numbers long enough, they will confess to what ever you want them to confess to.”

or

Numbers are like people, torture them enough and they will tell you anything your want to.

Mark Twain

#71 Chickenlittle on 08.13.14 at 8:48 pm

So according to Garth’s calculations, my 4 bedroom, brand new house (rented, of course!) should be worth $174,000…..instead of over $600k that my LL paid….wow. (1800/mo)

………….

#33 rainclouds:

“Satan’s mouthpiece”

LOL!!!

#72 devore on 08.13.14 at 8:50 pm

#27 Andrew

I’ll say 2,000 jobs created in July instead of the 200 reported last Friday. I figure one of the Stats Can eggheads misplaced a zero.

Stats Can doesn’t release disaster numbers like these without a dozen eggheads quadruple-checking all the data and numbers. Jobs numbers report is not a job for a fumbling coop student.

The model will be fudged to hit on the low side of expectations.

#73 Mr. Frugal on 08.13.14 at 8:51 pm

Connect the dots. The condo danger is contagion for the entire market. — Garth

This is what really concerns me. It seems pretty obvious that a condo bubble could bring down the entire Canadian housing market. That in turn could have a big impact on the entire economy. My concern is how this will impact the Canadian equity market. The big banks make up a significant portion of the TSX.

#74 Italians love real estate on 08.13.14 at 8:53 pm

#63 bob rice

The only “bacala” have been those waiting for this so called RE correction that continues to be denied to these cod fish looking for it . Looks like you are king ” bacatoon”

#36 criwdedelevatorfartz. Never meant to imply otherwise , you did.

#36

#75 JSS on 08.13.14 at 8:58 pm

“if you are purchasing an income-producing piece of real estate, then you should pay no more than eight times the annual gross rental income the property generates. It’s called the GRM, or Gross Rent Multiple.”

At what interest rate will an investor be able to achieve a Gross Rent Multiple of 8, on an income property?

#76 TEMPORARY® Foreign Prime Minister on 08.13.14 at 9:00 pm

#57 TEMPORARY® Foreign Prime Minister on 08.13.14 at 8:12 pm
DELETED
=========================

Saw that one coming, but couldn’t resist.

No worries, you’re still good in my books. Appreciate all the informative work that you do.

#77 No Debt on 08.13.14 at 9:01 pm

#55 Nuke asked “How can I stop renting now that I know the high premium of owning?”

Long answer, which isn’t an answer at all – How can you not sell, knowing what you know?

Short answer – Sell.

#78 Grantmi on 08.13.14 at 9:03 pm

Kevin O’Leary…. wouldn’t touch Canadian real estate right now with a 10 foot pole.

http://bit.ly/1sWYkWM

#79 Mark on 08.13.14 at 9:04 pm

In 2000 you could get properties in Ottawa providing 12% return annually, now the same property is barely giving back 5%.

Exactly!!! All the investor enthusiasm was with Nortel, PMC-Sierra, JDS Uniphase, Mitel, and a few other companies. Nobody wanted assets that needed maintenance, weren’t sexy, and only provided 12% cash return annually.

Today, housing has taken the place of Nortel. P/E ratios are stretched beyond recognition.

Where in N.A can you still find investment properties that fits under the GREM criteria?

Generally, you can’t. But you sure as heck can find some extremely viable businesses, that are publicly traded, that trade for far less than that, with significant future upside. Shop around, its not hard to find great examples of solid businesses trading at 4-5X cashflow to place your investment dollars.

#80 Smudgekin on 08.13.14 at 9:08 pm

Liberty Village: At least the waft of the pig abattoir is gone. Rebooted rabbit warren with encountering’s of screaming schizophrenics and cat abandoner’s down from local Queen W. The Indy & Ex traffic are engaging fun as is area parking daily. Directions are tricky in the bouche, know to pronounce Strachan “strom” & Tecumseth “teacomsy.”
And yes damnit you have ‘Liberty’ & ‘Liberty East.’
Do you know where the divide is? Cause taxi gandu & pizza don’t.

#81 Bob Rice on 08.13.14 at 9:08 pm

“Where in N.A can you still find investment properties that fits under the GREM criteria?”

Lots of places. You can buy a 3000 sqft home with 5 beds and 4 bath, new build, in the suburbs of Atlanta.. GREAT neighbourhoods… for less than $250K. Rents? Close to $2000

But the X8 is a little too conservative… no doubt about that…

#82 devore on 08.13.14 at 9:09 pm

#38 OttawaMike

A big side effect of all the condos being built is downward pressure on rental prices throughout the market including SFH’s.

Same on the wet coast. Lots of units available for rent, rents going nowhere, eager landlords still offering $1-200 off the advertised Craigslist price to any promising tenants walking through for 1 year lease.

#83 bigrider on 08.13.14 at 9:09 pm

As irritating as ‘Italians love real estate’ (you are incredibly so ) is, unfortunately , I do think that he is quite representative of the average thinking in the Italian community.

Much has been said and made of the Asian obsession with RE on this blog, but it is religion in the Italian Canadian community.

I am sure I will catch some flak for this, so be it ,but it does not change the truth.

#84 No Debt on 08.13.14 at 9:10 pm

Working for an electrical wholesaler, I get to see many condo projects currently under construction being built. Personally, considering that you own little more than a particle board box on a concrete floor built on land that someone else owns, I wouldn’t invest one dime more than what I’d spend on a mobile home in a trailer park.

You’d have more living space in the mobile home, no elevator to wait for and parking right outside your door.

#85 Realist on 08.13.14 at 9:23 pm

8x gross rental income? Give your head a shake. That translates to a 12.5% cap rate or roughly a 12.5% yield. Please show me a major market anywhere in North America where that exists for for-rent residential. And that’s an unlevered return. On a levered basis assuming conservative leverage that return can easily by north of 25%. High quality residential rental apartment units are trading at 20-25x. If a 8x market existed on the single family home sector, do you not think that would be arb-ed away by pension funds ? Commercial real estate may not be as efficient as the stock market, but that type of margin simply doesn’t exist. Not even during the GFC.

#86 I'll take the Job #'s are crap for $100 Garth on 08.13.14 at 9:26 pm

anyone who believes Guberment stats is The Greater Fool

#87 Mike S on 08.13.14 at 9:27 pm

“Absolutely. Most of the big banks have purged mortgage origination staff significantly. CIBC even shut down their “Firstline” division, a perfectly viable franchise, and discharged most of the staff in response to the diminishing volumes.”

Lots of layout seen in mass media lately, nothing about the banks though, how so?

#88 Inglorious Investor on 08.13.14 at 9:43 pm

If you want to live in a condo as a lifestyle choice (no lawn to mow; no snow to blow; no roof to fix; no spallling bricks, etc., etc.) then by all means, go sequester yourself in one of those “concrete boxes in the sky.” (Hey, I’m pretty sure I coined that term right here on this very blog. Go back and check if you’re interested.)

However, I would NEVER buy one as an investment.

First of all: No land. Land is what gives RE its rising value. Anything you build on the land depreciates. Condos have no land to call their own. They are the ultimate ‘detached’ homes.

Second: Condo fees. You are trapped, paying whatever they demand with little to no control over cost increases. How’s that been working out lately?

Third: Since your property is essentially just the contents of the aforementioned concrete box, you are particularly susceptible to changes in fashion as your building can become dated quickly. Therefore, you are more vulnerable to depreciation. You can always update the exterior of a house to match the latest architectural fashion (e.g. stone facade, wrought iron, stucco walls, etc.) but you can’t do that to a condo. You can update the interior of your unit, but the rest of the building is beyond your control.

Fourth: Construction quality today is typically shoddy (or another word that sounds similar).

Fifth: The numbers don’t work, as Garth points out. Single family homes are typically cash-flow negative when applying standard financing, but in today’s market condos are particularly bad. Like Garth said, you’re only hope is price appreciation, and it’s never wise to bet on that alone. It’s called ‘speculation.’

Sixth: This is a bit of my own speculation, but I can see many of these latest condo towers becoming multi-level slums in the years ahead as the money to maintain and upgrade them fades.

That said. Today, all rental properties in the GTA are overvalued. It’s called a mania. GRM of 8 or lower? Good luck with that.

#89 CREIT on 08.13.14 at 9:47 pm

If every investor, including REIT’S, used a factor of 8 when calculating GRM, then all most every piece of RE in Canada is over valued.

#90 Fartweezel on 08.13.14 at 9:48 pm

Another great read!

Four Starbucks in three blocks? I see you have been here before……

#91 JimH on 08.13.14 at 9:49 pm

Great post as usual, Garth! Thanks!

In the late 1960’s, I was a rookie chokerman/logger marshaling out of Mac&Bloe’s Franklin River Division on misty Van. Isle; complete with a blushing bride with a bun in the oven (no shotgun-voluntary). I had the better part of two years at SFU under my belt, but I really had no choice but to man up and pay the piper. I needed the bucks.

We had a term for a tree that appeared to be somewhat valuable, but due to a combination of time and circumstance had been devalued due to rot, or just a bad lean, or lots of boulders at the base, which made for a crappy escape route. These SOB’s were called “widowmakers”. They acquired the label due to an excess of inexperienced, testosterone-driven young fallers were intent on proving that they, despite the advice of those who had been through these moments and survived, were sure they could easily do what others feared to attempt and thereby achieve a huge boost in reputation and self-esteem if not in finances.

The mossy graveyards of forested regions from the Queen Charlotte’s to the California Redwoods are sprinkled with these victims of the syndrome.

The years flew by, and one of the first (of many) mistakes I made as a rookie trader in the late ’90’s actually has a name. It’s commonly referred to as the “Widowmaker Trade”, and is basically composed of the same elements. It really just consists of initiating a position in an equity, future or derivative (or anything in any market) that due to time and circumstance has been mercilessly crushed by mother market. You are utterly and completely and totally convinced that the inherent value of this item is so, so far above its market price that you must be a genius for seeing this while thousands of other “old farts” in the trading business have mysteriously ignored.

So, you jump in; and amazingly, you get burned: but right after a modest spike to the upside makes you think that corner office is yours for the taking.

But the price spike falters, pauses, and then starts another leg to the downside. This is perplexing, but only temporarily. The obvious solution is to increase your position through additional buying; this is fondly referred to as “averaging down”, and is roughly the equivalent of dicing carrots while your most precious of private parts are resting on the counter.

Yet, testosterone and the relentless acclaim universally given to the virtue of bargain-hunting makes it easier and easier to buy more as the price slides. Every dip is trumpeted as another “buying opportunity”. All too soon you’re in deep doo-doo.

The “Widowmaker Trade”, unlike the “widowmakers” in the forests, doesn’t actually always result in widows.

But you can sure feel like one when your losses run to six figures and your wife starts commenting on that neighbor who is such a “genius at business” and whose wife “has a new XYZ convertible”…

Moral? By careful about on what and when you vultch. Even the stupidest of Arizona Buzzards circle for awhile to make sure the next meal is completely dead before it swoops in to land.

More on the “Widowmaker Trade” here: it triggered a ton of memories…

http://pragcap.com/a-world-of-widowmakers

#92 Inglorious Investor on 08.13.14 at 9:53 pm

#75 JSS on 08.13.14 at 8:58 pm

“At what interest rate will an investor be able to achieve a Gross Rent Multiple of 8, on an income property?”

Interest rates are not a factor. GRM= Market Value ÷ Gross Rent

#93 Sheane Wallace on 08.13.14 at 9:54 pm

#81 Bob Rice

The rule is actually price = 100 monthly rents. It was always the case in Europe as I have heard.

#94 sideline sitter on 08.13.14 at 10:06 pm

That ‘Rule of 8’ is rather generous… I own commercial, and by that rule my building would be doing 31% return on the cash down, after paying the mortgage.

Where’d this rule come from?

#95 X on 08.13.14 at 10:08 pm

I am not one for more gov’t intervention in economies, however there are alot of financially stupid people out there. The gov’t really does need to make changes to help people from ruining their financial futures.

#96 Son of Ponzi on 08.13.14 at 10:08 pm

Zolop is calling for a secret meeting.
WTF does he think he is?

#97 JimH on 08.13.14 at 10:08 pm

#85 Realist
“8x gross rental income? Give your head a shake. That translates to a 12.5% cap rate or roughly a 12.5% yield. Please show me a major market anywhere in North America where that exists for for-rent residential.”
===================================
Sure, rookie!
You need help in research. I’ll hold your hand.

Lets go to Houston, TX; one of the fastest growing metros in North America.

Do you believe in Zillow? I do!

Even in The Woodlands and in Spring, TX, both very cool subdivisions… (in one of the fastest growing metros in North America). Amble over to Tomball, TX and have a gander.

You issued a challenge. My daughter rents a house in The Woodlands for $1,500. The Zillow Zestimate for this 3bdr 2br property in a desirable subdivision? $134,000.

Fill your boots.

#98 Mark on 08.13.14 at 10:11 pm

“8x gross rental income? Give your head a shake. That translates to a 12.5% cap rate or roughly a 12.5% yield. Please show me a major market anywhere in North America where that exists for for-rent residential.”

Sure. If you reconcile that back to after-tax equivalent corporate earnings, that comes out to an after-tax earnings yield of around 7%, which is consistent with a P/E of around 16. Which is consistent with where the stock market trades today.

Since RE grows its earnings at a rate significantly less than the business world, even an 8X cash multiple may very well be quite an aggressive valuation.

Of course, such RE doesn’t exist in Canada/USA today, but as the argument goes, the reason for this is the property bubble. But if you take the time to compare RE against other sorts of investments, it becomes clear that RE is dramatically and utterly overvalued relative to active business investment.

#99 Mark on 08.13.14 at 10:13 pm

“The rule is actually price = 100 monthly rents. It was always the case in Europe as I have heard.”

100/(12 months/year) ~= 8, thus effectively we’re talking about the same ‘rule’.

#100 Mark on 08.13.14 at 10:16 pm

““At what interest rate will an investor be able to achieve a Gross Rent Multiple of 8, on an income property?””

Over the long term, leverage doesn’t help property investors. As the banks will always, over the long term, charge more for the leverage, than the actual asset returns.

In other words, buying stuff on credit today (including rental properties) carries the price of lost future consumption. And as rates go up and prices fall in lock-step, we’ll see the practical realization of such.

#101 Ben on 08.13.14 at 10:17 pm

Yield calculations are for wimps. Asset appreciation is where it’s at Garth. The more you leverage the more you win!

#102 centarian on 08.13.14 at 10:19 pm

just multiply the monthly rental by 100…much simpler rule of thumb that has been around longer….after all can’t expect sophisticated investors to be able to multiply something by 12 and then multiply it again by 8.

#103 Inglorious Investor on 08.13.14 at 10:21 pm

# 95 X on 08.13.14 at 10:08 pm

“The gov’t really does need to make changes to help people from ruining their financial futures.”

Government “changes” have already gone a long way toward ruining peoples finances. Don’t count on them to fix anything––unless by ‘fixing’ you mean making the situation even worse.

#104 John on 08.13.14 at 10:21 pm

It is very interesting to browse through demographics data provided on MLS. The are where your sample Toronto 100 Western Batter is located, 54% of people are renters…

#105 NostyVlad the Snugglebombed on 08.13.14 at 10:34 pm

#53 VICTORIA TEA PARTY on 08.13.14 at 7:56 pm — “How about impending European-wide conflict starting in Eastern Ukraine; active currency wars in which the US dollar is getting whacked by various countries whose leader don’t much like the Yanks any more (just about everybody); US Special Forces now parachuting into northern Iraq to fight ISIS and rescue those Christians (mission creep a la Vietnam); the ongoing violent shambles in Gaza; high oil prices; the beat goes on.”

No scenario can be counted out, no matter how far out of the ballpark it is. For example — Ebola, Remote hijackings (MH370), Rise / Fall of the EU, ISIS / ISIL / al q’CIAdeeuhhh, (CIA psyops), Sovereign debt for territory, Turkey – Russia (new biz. partners, bypassing the petro-dollar?), Africa (if the US wants to do biz. in Africa, why is it sending its military in?), Capital flight from China with Bitcoin, BRICS and Mammoth FTA no one has ever heard of, along with plenty of unforeseen shocks, which Garth alluded to recently.

However, the Barclay’s Premier League Soccer season starts afresh Saturday, which beats all of the preceding hands down! Good post.

#106 Inglorious Investor on 08.13.14 at 10:38 pm

#100 Mark on 08.13.14 at 10:16 pm

“Over the long term, leverage doesn’t help property investors. […] In other words, buying stuff on credit today (including rental properties) carries the price of lost future consumption. And as rates go up and prices fall in lock-step, we’ll see the practical realization of such.”

Leverage is how you make real money in investing.

When you leverage an income property with a bank mortgage you are taking advantage a tacit agreement between govs and banks, whereby govs forgo tax revenue so that you can hand that money over to the banks in the form of interest payments. So, this gives you a tax advantage. Not to mention the tax deductions you get for keeping your property in good shape.

When you borrow to invest you magnify your actual returns vs paying all cash. You can also magnify your losses, but no risk, no reward.

Inflation reduces the real value of mortgage debt over time, while the real value of your property is maintained. It also helps drive up rents. And costs. But generally inflation works in your favour as a property owner. Deflation is really only a big risk if you are forced to sell at the wrong time.

With leverage you can invest in more properties than you could with cash only. This can help you diversify and, again, magnify the returns on actual cash invested.

#107 Rainmaker on 08.13.14 at 10:45 pm

#88 – Inglorious Investor

Excellent list of reasons not to purchase a condo – and I will add a 7th.

Ted Kesik Professor of Building Science at the U of T has written an excellent paper on potential problems 15-20 years down the road with Condo window wall systems. Here is an excerpt from the paper.

“Industry experts forecast that many of these window wall systems will require extensive retrofit or replacement within 15 to 20 years after they have been constructed in order to remediate these performance problems. Owners of these buildings, and purchasers of buildings that are now under construction, are often not aware of the potential liabilities associated with their real estate investments.”

Here is a link to the paper.

http://www.cbc.ca/toronto/features/condos/pdf/condo_conundrum.pdf

This is a must read for anyone considering purchasing a condo with window wall systems.

#108 JimH on 08.13.14 at 10:48 pm

Crap! I stupidly failed to include a reference to my own residence in 85650.

Granted; I live on the right side of the tracks. The community is gated, beautifully maintained, 55+ only (I love kids, but at a distance), 2 rec centers and 2 pools and with a HOA fee of $76/month.

There are several properties for rent in my extended neighborhood with rents in the $1000-$1300 range; one was for $1400, but you’re too late.

Zestimates of similar properties in the neighborhood range from $140,000 to $200,000.

Are we living on the same planet????

#109 JimH on 08.13.14 at 10:50 pm

#106 Inglorious Investor
“Leverage is how you make real money in investing.”
=====================================
How many times in 2007 did I hear that one!

When did you start shaving?

#110 Mark on 08.13.14 at 11:04 pm

“Leverage is how you make real money in investing. “

Not in an asset class that, at best, tracks inflation, and has a negligible return over and above inflation in the form of rents historically.

The interest that one pays, over the long term, more than consumes any excess return.

Key is long-term. In the short term, the property may provide a total return greater than the short-term financing cost. ie: in an abnormally low interest rate environment like we see today. But this eventually gives way to an environment with a higher long-term financing cost, and lower returns.

The calculus is somewhat different for active business investment since you’re talking about an asset class that generally provides a much higher total return.

Don’t worry, the past 30 years of declining long-term interest rates and rising real property values can be a bit deceiving over the long term.

Leverage might work for the bank that lends you the money, but they’re using it to get their shareholders rich, and they’re doing it in a calculated way. Not just spraying it onto an asset class, RE, that is hard pressed to provide a return greater than inflation over the long term.

#111 Scully on 08.13.14 at 11:18 pm

@59 TS,
Ha,ha,ha. He could be a reelturd. Lots of them on here. BTW, Big Ed is what I call my husband’s “rental” unit. I haven’t seen it lately, it’s being used for declining “investments.” ;)

#112 kg on 08.13.14 at 11:36 pm

That has always been my benchmark.

#113 Canuck Down Under on 08.14.14 at 12:00 am

The difference between renting and buying in Australia is even more extreme. I live in Melbourne and rent a 3 bedroom house with a decent backyard for $21k annually. Similar houses in the neighbourhood are selling for $650k, so buying the house I’m already living in as a renter would cost at least $45k/year in mortgage payments. Insanity!

#114 Saskatoon on 08.14.14 at 12:31 am

I live in Saskatoon and am considering buying a house in some small town to rent out. Thanks for the formula for positive cash flow Garth. Plenty of house in the $30,000-$80,000 range, should do all right. Would only make a couple thousand a year but can buy the house with cash so no interest from a bank loan.

#115 Spectacle on 08.14.14 at 12:42 am

Excellent summary today Garth.

Also wanted to send out a thanks to all the blog dogs as well.

We got married last week, and big thanks to Garth and all the good commentaries on here, I gained significant ammunition to skillfully convince my wife that we shouldn’t actually consider real estate as another purchase ….at this time! Yay!

We have discussed the sound of tiny feet pitter-pattering around the house, so we got CoCo, the puppy .

So…sacks of wedding cash for real estate deposit (riiiight !) or whatever we want to invest in, is ours.

My beautiful wife still refuses to read “my blog…” ( I understand others are fighting the hormones as well) but thanks to the Turner blog, here is another happy couple who is:
1) debt free,
2) cash safely on hand, ( man, that’s a de-stressor )
3) we opened joint banking accounts,
4) investment accounts ,
5) matching TFSA ‘s ,
6) zero on our credit cards
….and so much more to come.

Appreciate your input into Garth’s ongoing attempt to keep the people financially aware!!

Another young family saved by the Team! WOOF !

Sincere Regards all.

#116 Rabbit One on 08.14.14 at 1:17 am

As in Asia, same rules in urban area investent properties.
You should get 1% gross monthly income from your investment property value to make it worthwhile to own as business.

= 100 times monthly gross income = 8 times annual gross

#117 Tom from Mississauga on 08.14.14 at 1:20 am

Why am I enjoying Misery Week? Garth, please, really pore on The Misery to round out the week. Thanks!

#118 juno on 08.14.14 at 6:19 am

Interesting the job numbers only need to be advised when they are unfavorable.

When favorable, the corrections are announced in stealth mode.

Mabey Stats Can is creating frankennumbers to make things look rosie

#119 Turtle on 08.14.14 at 8:04 am

#115 Spectacle

Congratulations!
I would like to add one more point to your list – mobility. As a young couple you need a mobility to chase better opportunities, you need to be able to move from place to place. It is much (much!) easier when you have no mortgage.

#120 Dupcheck on 08.14.14 at 8:47 am

Excellent article today.

#121 jess on 08.14.14 at 8:50 am

parellel universes

ghosts venues
score private 1 public zero

Athens’ Olympic Games venues lie abandoned and left to …
http://www.dailymail.co.uk/…/Athens-Olympic-Games-venues-lie-abandoned-left...
Aug 6, 2014 – Empty: The diving venue, where Leon Taylor and Peter Waterfield won silver for Team GB, is now in a sorry state in the Greek capital. Deserted …

#122 Daisy Mae on 08.14.14 at 8:51 am

“Misery Week on this pathetic® blog…”

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

Registered? LOL

#123 Louis on 08.14.14 at 8:55 am

@Mark

Leverage might work for the bank that lends you the money, but they’re using it to get their shareholders rich, and they’re doing it in a calculated way. Not just spraying it onto an asset class, RE, that is hard pressed to provide a return greater than inflation over the long term.

You forgot the cashflow part for rental.

Yeah prices will match inflation more or less, but the monthly cashflow from the rental add a lot to that.

Leverage in rental real estate allow your tenant to build your equity without having to a cent of your own.

I put 120k$ into a 600k$ building, I have a small positive cashflow for 25 year and at the end I have a paid for building valued at 600k$ + 25 year of inflation.

That being said at 8* time yearly revenu is a nearly sure win. You can make decent money at anything up to 12* the revenu. I would NEVER pay more than 15* and current valuation are just ridiculous.

#124 Inglorious Investor on 08.14.14 at 9:00 am

# 109 JimH on 08.13.14 at 10:50 pm

2007?

Don’t conflate the insanity of systemic fraud, corruption, massive debts, and lack of proper risk management which lead to the financial crisis that started in 2007 with the basic concept of leverage.

As an investor, you must always prudently manage your risks, leverage or no leverage. Obviously, using leverage increases your risk, but a smart investor knows how to use leverage intelligently. And the smart investor knows that leverage is the key to making real money when investing in assets. Investors have been doing it for centuries, particularly in real estate.

Did you start shaving in 2007?

#125 Big Ed on 08.14.14 at 9:10 am

#59 TS on 08.13.14 at 8:22 pm
My guessing is that Big ED is a real estate agent who’s packing a two milimetre peter.
++++++++++++++++++++++++++++++++

Real Estate Agent. Boy have you got that wrong. I don’t even work…………………hmmmm, maybe I’m more like a Real Estate Agent than I thought????

Big Ed

#126 2CntsCdn on 08.14.14 at 9:10 am

Exponentially increasing dept on depreciating investments by people who can’t afford it in an already wavering economy. The ducks are lining up for a very tough next 5 – 10 years for Canada. I’ve said it before …. but there is still time to fix your problems … and for over 55’ers there’s still time to build your retirement plan. Once RE “corrects” and the economy takes its RE supported bullet to the head … most people will be in survival mode at best … for many years.

#127 crowdedelevatorfartz on 08.14.14 at 9:13 am

@#74 Italians love real estate.

Your very name denies your true heritage.

Whereas my name leave no doubt as to where i come from …………..an elevator….. ;)-

#128 drydock on 08.14.14 at 9:27 am

#52 TEMPORARY® Foreign Prime Minister on 08.13.14 at 7:54 pm

Here here.

#129 Big Ed on 08.14.14 at 9:30 am

#107 Rainmaker on 08.13.14 at 10:45 pm
“Industry experts forecast that many of these window wall systems will require extensive retrofit or replacement within 15 to 20 years after they have been constructed in order to remediate these performance problems
+++++++++++++++++++++++++++++++
Now think like Smoking Man = Investment opportunity

Big Ed

#130 Big Ed on 08.14.14 at 9:34 am

#111 Scully on 08.13.14 at 11:18 pm
@59 TS,
Ha,ha,ha. He could be a reelturd. Lots of them on here. BTW, Big Ed is what I call my husband’s “rental” unit.
++++++++++++++++++++++++++++++
Your husband uses a strap on???
TMI

This conversation is over. — Garth

#131 Nicko on 08.14.14 at 9:37 am

I’m just curious if this is the same kind of investment mentality that they have a china and the Italian shoreline.
Millions of investment condos all empty because the locals can’t afford them. All the investors agree that the price will keep going up even though no ones buying.

It’s not a typical investment that pays cash but it’s a place to stick money in such a volitial world.
I watch land sales in BC and alberta, and as soon as something decent pops up for cheap it’s gone within days, (Im convinced that most deals don’t make it to the listing service at all) while other land stays on the market for years.
Perhaps a similar multimillion dollar investor club that is only there to keep prices up and the serfs down?

#132 Inglorious Investor on 08.14.14 at 9:39 am

# 123 Louis on 08.14.14 at 8:55 am

“You forgot the cashflow part for rental […]”

Allow me to add that as the mortgage principle declines, your cash flow increases. Finally, after the mortgage is retired you get all the income. A typical small apartment building has an NOI of somewhere around 50%. In the early years the income is all but eaten up with mortgage payments, but once the mortgage is paid off, that gross 50% goes into your pocket.

As for out of pocket expenses, certainly a property owner may incur very hefty out-of-pocket expenses at times, especially in the early years when the debt service eats up your NOI. However, forecasting those expenses (via a good inspection) and trying to minimize them is all part of the investment and management process. As always, caveat emptor. And, as always, you get tax deductions for the expenses.

#133 Hot Albertan Money on 08.14.14 at 9:46 am

Don’t forget Marnie Bennet, Ottawa’s “Condo Queen” who’s promising a secured annual rate of return of 8%!!!

http://www.bennettpros.com/gold_customform3.asp

#134 };-) on 08.14.14 at 9:59 am

Doesn’t really matter what mathematical equation you apply to determine an investment property’s value, ultimately no savvy investor is not going to invest in it if it’s a losing proposition. Those who do will eventually fail and that property will be subsequently be absorbed by a more savvy investor for a more appropriate price. Ultimately though rents and lease rates will rise, they have to or no one will be attracted to the investment and rental inventories will deplete which in turn will tighten supply in the face of demand and cause those rents to increase.

Bottom line… rents ARE going up.

Many here are renting while they wait for property values to fall but they are missing the other side of the equation…. rising rents. You can bury your head in the sand and say it ain’t so, but simple economics dictate that it must be, just wait and see.

SHIFT happens, get used to it.

Your resident Narcissistic, O.C.D., A.D.D., Obsessive Compulsive, Troll… D.A. };-)

#135 };-) on 08.14.14 at 10:21 am

Doesn’t really matter what formula (GRM, Cap Rate, 100x …) you throw at that the seller of the condo you expect to buy for half what he/she is asking the result will be that the most polite of them will tell you to “Go pound sand!!!

It isthe market that sets the price not you. Clearly there is a market for condos priced at double what you think they are worth as they are being bought and sold at those asking prices. So, really, who is it that has their head in the clouds?

Yes the market will correct, eventually. Cap rates are not nearly where they need to be. But I expect prices to continue up before they come down and when they do come down it won’t be nearly as much as many of the readers here expect they should.

There is another side to the equation and that is that rents are going up. Rents will continue to go up long before prices come down.

Again, yes prices will correct but equilibrium will be achieved not by falling property values alone but by a meeting of rising rents and falling values. My bet is that it will be rising rents that pick up most of the slack. You may bet otherwise. It’s your dime.

};-)

#136 Overseas Canuck on 08.14.14 at 10:48 am

Correction Paul #48, :) you have a friend who “owns” only 1/4 of one condo (and soon likely not even that), but who has, undoubtedly, well north of a million dollars of soon-to-be-increasingly expensive debt. That’s a bankruptcy waiting to happen, sadly. Hopefully, she can reduce her leverage before the whole thing blows up in her face, but I bet she doesn’t see it that way and so there’s likely no telling her.

#137 Happy Renting on 08.14.14 at 11:15 am

#115 Spectacle on 08.14.14 at 12:42 am

Congrats on the marriage and for finding a spouse who will listen to financial reason. For those that don’t, the misery can last much longer than a week.

#138 Scott on 08.14.14 at 11:19 am

That listing is an excellent use of an ultra-wide angle lens. You can almost see the wall the photographer is backed up against, I wonder if he had to crop it out.

#139 Randis on 08.14.14 at 11:21 am

Tara Perkins from G&M reports low mortgage rate turning housing market around, like its legit news, except that low mortgage rate is in place for a couple of yrs already

http://www.theglobeandmail.com/report-on-business/economy/housing/low-mortgage-rates-showing-signs-of-turning-around-housing-market/article20052195/

With news media collectively making an effort to mask the truth and average Joe on street relying on such info to their decision making, I just don’t see how this madness will end …

Quite hopeless indeed.

#140 TheRealTruth on 08.14.14 at 11:21 am

DA:

Absolutely correct. That’s why people here in surrey buy homes with 2 suites. Within 15 Yeats, the $1400 rent becomes $2800 while the mortgage debt stays the same.

#141 Rational Optimist on 08.14.14 at 11:25 am

It’s not complicated. Prices are determined by rents. Rents are determined by incomes. If you believe that incomes are going to go up, factor that in to your price accordingly.

It is accurate to say that wage gains have been vanishingly low the last few years. So rents have not gone up much. This is not up for debate, either: CMHC says that rents (on a two bedroom apartment) went up on 2.4% annually between 2003 and 2013.

That’s nationally. In Toronto, it was 1.7%. If prices in Toronto have gone up more than that in the same period, it’s because people are behaving irrationally. The smart thing to do is not to participate. If prices are out of line with rents, it’s not prudent to believe that they will return to historical ratios. They will likely overshoot until renting is comparatively expensive.

#142 Tony on 08.14.14 at 11:27 am

#4 ILoveCharts on 08.13.14 at 5:57 pm

I’ll venture a guess, a loss of 12 thousand jobs for July in Canada.

#143 Retired Boomer - WI on 08.14.14 at 11:29 am

Garth, this was a good article.
I did a little research into rentals in this area. Many 2 br apt a rent for from $400 to $600 per mo.
Three bedroom homes go from a low of $400 to as much at $1350 depending on age amenities, on water etc.
Interesting, that the 100 times rent = market value was pretty dam accurate! Not absolutely perfect as there were those somewhat above, and below, but close!
Yeah that $400 a month farmhouse needs help, and would be a bear to heat! Worth maybe 40 grand on a good day!

Helpful article to those “thinking” of buying. Your rental $$$ seem to go much farther as the market will correct!

#144 SWL1976 on 08.14.14 at 11:53 am

Great post Garth, thanks for keeping on keeping on and thanks to all the blog dogs for providing interesting and thought provoking posts in the comments section

DA, I think you are missing the big picture and are a little too obsessed with ‘SHIFT’

#145 };-) on 08.14.14 at 11:57 am

#141 Rational Optimist on 08.14.14 at 11:25 am
It’s not complicated. Prices are determined by rents. Rents are determined by incomes. If you believe that incomes are going to go up, factor that in to your price accordingly.

Doesn’t make sense. If then please explain why so many are prepared to pay such a portion of their disposable income on owning a home? I don’t think the evaluation is so much different for a renter than it is an owner.

Price is determined by supply and demand not income. Demand varies regionally.

The bottom line is maintaining a roof over your head of all types, rented or owned, is going up just like all other necessities.

The things you want are coming down in price the things you need are going up in price… it comes down to value. You may want that big screen TV but in a vacuum with no air it becomes a little important luxury. You may want that new car but living in a cardboard box shifts that priority pretty quick. Value.

In the last 100 years the world population has grown from 1 billion to 7 billion. You think there is plenty of land available… not so much really. This planet is becoming increasingly crowded and difficult to find a place to call home will only get relativel more difficult and expensive – rented or owned.

#146 Tony on 08.14.14 at 12:02 pm

Re: #45 Smoking Man on 08.13.14 at 7:34 pm

Forgot the fictitious figures pulled out of a hat in America. Now closer to reality Canada “lost” 12,000 jobs for the month of July.

#147 TurnerNation on 08.14.14 at 12:04 pm

Dollarama stock going into hockeystick/Timmy’s mode. Never doubt the thrift of Canadians. Maybe it will kiss a hundo.

#148 JimH on 08.14.14 at 12:05 pm

#124 Inglorious Investor
“Leverage is how you make real money in investing.”
===================================
The above phrase was the object of my objection.

Leverage is most certainly NOT “how you make real money in investing”!

As one who advocates the prudent (and timely) management of risk you know better than that!

The poor performance of most of the heavily leveraged hedge funds (managed by guys with more experience and brains than either you or I) should tell you this. It is also the reason that all those 3X ‘ultra’ etf’s are destined to require split after split just to keep from dropping to zero.

The trap of leverage in investing is very simple; a highly leveraged position, even one you can be convinced is ‘prudent’ due to risk/reward leaning heavily in your favor, can very easily drop by 50% due to time/circumstance/etc… You now need a 100% gain just to get back to where you started.

You surely also agree that in fact it was very high levels of leverage in 2007 that contributed mightily to the 2008 debacle!

2007 was not totally unique in this regard; I also saw the same very substantial piling on of leverage in 1997 before the crash in the spring of 1998: the great party of 1999; 2007; the spring of 2011; and most recently, June-early July of this year.

Don’t get me wrong; leverage (in the form of certain option strategies, for example) can be a perfectly great tool for actively managing risk!

But to say that “leverage is how you make real money in investing” is so dangerous because it is so false.

#149 Spectacle on 08.14.14 at 12:11 pm

See how appreciated you are Mr Turner !

Re:
#119 Turtle on 08.14.14 at 8:04 am
#115 Spectacle

Congratulations!
I would like to add one more point to your list – mobility. As a young couple you need a mobility to chase better opportunities, you need to be able to move from place to place. It is much (much!) easier when you have no mortgage.
My reply: Big Thanks Turtle, 100% true! we have moved 3 times already, once for her work. Had a beautiful place by the ocean . We are also planning an escape for a vacation/honeymoon/2nd wedding , where we have very cool real estate (remains private sorry). Your all invited! : )

Re:
#137 Happy Renting
#115 Spectacle on 08.14.14 at 12:42 am

Congrats on the marriage and for finding a spouse who will listen to financial reason. For those that don’t, the misery can last much longer than a week.
My reply: And Thank You, Happy Renting !
So strange how life works out. Actually I don’t know what she sees in me….. : ) dreams do come true, and worth working very hard for. She brings much more to the relationship than I do!

Funny note, I wonder how many people blogging on here also have the wisdom of Garth pop into their head as they see a 6 story timber condo ( WTHeck) going up in richmond etc etc, and after a while it becomes a critical analytic habit to use the sensibility as you call it “Happy Renting”.

It can’t be just me?!

Regards for the thoughts.

#150 Rexx Rock on 08.14.14 at 12:19 pm

I also say a soft landing for housing because interest rates will stay the same for many years to come.What I’m hearing through the grapevine is Canada is adopting the same policy as Japan but are not wanting to make it public.So buy on the pull back on stocks because there is now where to make yield on your money.
Its funny,some people in their 50’s and 60’s will never see interest rates rise again.So give thanks to our banks and government if you like to borrow money at very low rates.

What you hear is wrong. The BoC will follow the Fed. — Garth

#151 Mark on 08.14.14 at 12:41 pm

“I put 120k$ into a 600k$ building, I have a small positive cashflow for 25 year and at the end I have a paid for building valued at 600k$ + 25 year of inflation.”

Yes, that worked well over the past 25 years, in a declining long-term rate environment, rising RE environment. But it isn’t likely to work for the next 25 years, which is a rising long-term rate, falling RE environment.

Leveraged landlords for the next 30 years should not expect a windfall like they’ve seen in the past 30 years due to interest rate fluctuations. And if you remove the impact of interest rates, housing bought on credit has provided negligible returns.

What you hear is wrong. The BoC will follow the Fed.

With a huge lag, perhaps as long as 5-7 years, as the Canadian RE bubble still has yet to really begin unwinding in earnest. Inflationary pressure forcing the BoC to move isn’t going to magically appear in Canada simply because the US Fed takes a policy action.

#152 };-) on 08.14.14 at 12:52 pm

#144 SWL1976 on 08.14.14 at 11:53 am

DA, I think you are missing the big picture and are a little too obsessed with ‘SHIFT’

SHIFT IS the big picture.

He’s obsessed with a how-to book for US realtors. — Garth

#153 Big Brother on 08.14.14 at 12:55 pm

#147 TurnerNation on 08.14.14 at 12:04 pm
Dollarama stock going into hockeystick/Timmy’s mode. Never doubt the thrift of Canadians. Maybe it will kiss a hundo.
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
MKULTRA says Smoking Man = Turner Nation. We programmed him to not spell or use the English Language just to confuse all of you.
He was spotted at his Casino Niagara Seneca last night. He is the one with the trench coat, dark greasy hair and sunglasses. Please don’t bother him this is where we program him.

#154 Financial Freedom at 40 on 08.14.14 at 1:00 pm

#145 };-) on 08.14.14 at 11:57 am
… please explain why so many are prepared to pay such a portion of their disposable income on owning a home? I don’t think the evaluation is so much different for a renter than it is an owner.

Price is determined by supply and demand not income. Demand varies regionally.

The bottom line is maintaining a roof over your head of all types, rented or owned, is going up just like all other necessities.
________________

[Scratches head]

When I pay my rent cheques (almost-all-in-one-price) I factor in small YoY increases (formula based on CPI) and rent protection laws (90 days notice, 1 year minmum between increases etc). The only thing that gets my direct attention is the Hydro bill.

When I “buy” and own houses I bring the mortgage broker and the bank with me. I have to think about renewals, prime rates, the bond market, aging assets, real estate trends, the economy, regular and unforseen expenses, mobility, liquidity… damn, I could probably make a multi-page list.

I do both. I can compare them. The evaluation is quite different.

I wish all necessities went up in price. Jobs for life for everyone! Commoditization hits many industries. Price volatility hits many. Why is real estate special? You’re not new to this planet…

If you can manipulate supply and demand and monopolize a market, tap into an emotional sale, you can keep prices high. DeBeers can teach you.

[Back to appreciating why my real estate agent is good at working phones over giving me financial advice]

#155 Humpty Dumpty on 08.14.14 at 1:04 pm

This is just the beginning of west coast misery…

” Pacific Ocean Now Dead From Fukushima Radiation ”

The entire 200 kilometers we checked of Canadian Pacific Coast Line was devoid of all life , recovery is highly unlikely

Enjoy those socs, oysters, mussels, shrimps and kelp….

https://www.youtube.com/watch?v=-1FrscZBjhc

#156 Rational Optimist on 08.14.14 at 1:10 pm

#145 says “Doesn’t make sense. If then please explain why so many are prepared to pay such a portion of their disposable income on owning a home? I don’t think the evaluation is so much different for a renter than it is an owner.”

I personally don’t think that many homeowners are prepared to pay more of their income than renters; that wouldn’t be logical. I think a lot of them are not fully aware of what they spend on their homes. And you might be aware that many of them incorrectly view their homes as an investment, which would account for their willingness to spend more as a proportion of their income.

“The bottom line is maintaining a roof over your head of all types, rented or owned, is going up just like all other necessities. “

This isn’t based in fact. Which necessities are going up in price relative to incomes? I bet you think that food is, but that is not the trend at all: food has spent a long time getting cheaper.

“In the last 100 years the world population has grown from 1 billion to 7 billion. You think there is plenty of land available… not so much really. This planet is becoming increasingly crowded and difficult to find a place to call home will only get relativel more difficult and expensive – rented or owned.”

You have a bleak and inaccurate view of the world. The blog post was talking about investing in condominium units- a lot of which are in towers fifty stories or more- there would have been two or three of those in the entire world a hundred years ago, and they would have cost fortunes. Now, they can be put up in a couple of years, and then shills like you (apologies if you are not a shill, but you sound like one) convince people that the units therein should be worth more and more because “God ain’t makin’ no more land” and “the cost of necessities are going up.”

#157 Holy Crap Wheres The Tylenol on 08.14.14 at 1:15 pm

#107 Rainmaker on 08.13.14 at 10:45 pm
#88 – Inglorious Investor
Excellent list of reasons not to purchase a condo – and I will add a 7th.
Ted Kesik Professor of Building Science at the U of T has written an excellent paper on potential problems 15-20 years down the road with Condo window wall systems. Here is an excerpt from the paper.
“Industry experts forecast that many of these window wall systems will require extensive retrofit or replacement within 15 to 20 years after they have been constructed in order to remediate these performance problems. Owners of these buildings, and purchasers of buildings that are now under construction, are often not aware of the potential liabilities associated with their real estate investments.”
Here is a link to the paper.
http://www.cbc.ca/toronto/features/condos/pdf/condo_conundrum.pdf
This is a must read for anyone considering purchasing a condo with window wall systems.

____________________________________________

Agree 100% my wife and I have friends who dropped the home on the market after 40 years and purchased a new condo downtown. I wont say what building but you can all guess. Well only two months after moving in to this floor to ceiling glass menagerie several windows popped out and hit the ground (not their unit). Then they lost the seals on four windows. The whole build has the same issue and its brand new. The homeowners group is already dipping into the freshly fed reserve fund to get this remedied. Last I heard they could be looking at well into the hundreds of thousands to retrofit the windows.
I told him before by brick and mortar with small windows set on brick! His wife likes the view, I felt like saying hows the view of your bank account as it gets drained from these greenhouse rat farms.
Anyway for those of you who enjoy the view from up there, enjoy it cause in few years you will be looking through brand new windows that you paid for!

#158 Snowboid on 08.14.14 at 1:21 pm

#91 JimH on 08.13.14 at 9:49 pm…

Great post!

We’ve had our share of AZ buzzards circling above us as we relax in the pool – they like scaring old farts!

Learning from this has taught us to keep circling until we find the right ‘dead’ condo in the Okanagan, as ever we are patient.

We will happily rent until then, or until rents increase by about 50% – not likely to happen in our lifetime.

#108 JimH on 08.13.14 at 10:48 pm…

Our place in the northwest valley of Phoenix is similar, HOA is about $ 55 a month – a community of about 5000 homes.

2-18 hole golf courses, 2 rec centres, 2 pools, gym, club rooms, etc.

Renting by the year offers about $ 1400 a month, or $ 2500 a month Nov-May.

Average prices are about $ 200K now, but closer to $ 100K when we bought in 2010.

The closest homes we found in Kelowna are in the Mission area and a few sold over the last couple of years in the $ 475-550K range.

When comparing the two areas it is indeed like living on different planets!

#159 Inglorious Investor on 08.14.14 at 1:32 pm

#148 JimH on 08.14.14 at 12:05 pm

Hey, Jim. I think we’re each looking at this from two slightly different perspectives.

I personally would never enter into a leveraged position on an exchange-traded security such as a stock or ETF. This is where the prudence part comes in. Basically, there is very little room for any prudence with a stock because the management of the underlying business is beyond your control; what’s happening day-to-day is unknown to you; and the information available to you (e.g. quarterly reports) are lagging indicators; and they often cook the books to boot. So your due diligence is reduced to what they report and whatever market info you can glean on your own.

Also, you’re absolutely right that the high volatility of exchange-traded securities makes them very risky as leveraged plays. However, if you are willing to take that risk than the gains can be tremendous. Of course most people should never play this dangerous game.

However, without leverage, you simply won’t make the big bucks. You will have to be satisfied with a pretty low average ROR after fees, taxes and inflation. And you can still easily lose years of gains in short order. What good is a 3% dividend if your stock drops 20%?

I know a lot of people who have make fortunes (big and small) in real estate. They do it using tremendous leverage. That’s really the only way to turn a relatively small cash investment into a substantial sum over time. Without the leverage, there’s very little reason to even bother. However, we tend not to think of high leverage in real estate as risky because of the low market volatility.

As for the hedge fund guys. I’m sure they are far more savvy traders than I, but I think perhaps you give them too much credit. Sure, there are some very smart or lucky ones who have made fortunes on lucky bets, but I think most simply make their money by skimming from their clients. The real sure money for them is in the ‘golden crumbs’, not in a lucky trade.

#160 Derek R on 08.14.14 at 1:34 pm

#145 };-) on 08.14.14 at 11:57 am wrote:
please explain why so many are prepared to pay such a portion of their disposable income on owning a home? I don’t think the evaluation is so much different for a renter than it is an owner.

It is. Owners expect to get status, security, financial gains and a roof over their head from their purchase. Renters just expect to get a roof over their head. Consequently owners place a higher value on the house and are prepared to pay more for it.

Price is determined by supply and demand not income. Demand varies regionally.

It’s not either-or. Price is determined by supply and demand. Demand is determined by migration, interest rates and income. Migration and income varies regionally. Therefore demand varies regionally.

The bottom line is maintaining a roof over your head of all types, rented or owned, is going up just like all other necessities.

It’s not so cut and dried. Prices and rents will likely fall in depopulating parts of Canada or parts with rising unemployment and go up elsewhere.

#161 Bottoms_Up on 08.14.14 at 1:36 pm

#39 crowdedelevatorfartz on 08.13.14 at 7:18 pm
—————————————————

Please enlighten us and tell us how this pension fund shows a looming pension crisis :

http://www.investpsp.ca/en/public-service-pen-plan-ff.html

Or how that they’re beating needed actuarial returns of 4.1% by 2% every year in the past decade (ps. I’m pretty sure 6% is higher than 4.1%, the return required, as set by professionals, for a pension fund to be stable)?

#162 Bottoms_Up on 08.14.14 at 1:40 pm

#115 Spectacle on 08.14.14 at 12:42 am
——————————————
Congratulations, but please keep in mind that Garth’s advice is essentially ‘buyer beware’, and he also recommends against certain kinds of real estate (condos).

You really need to analyze your own life factors (city you live in, stability of jobs, likelihood of staying a long time, ability to afford increases in mortgage rate etc.).

For example, real estate markets have been flat for a long, long time in smaller towns — if you have stable jobs, live in a smaller city, and see yourselves there permanently, it may make way more sense to buy.

Just something to keep in mind.

#163 Uh Oh Canada on 08.14.14 at 1:43 pm

Meanwhile, this pathetic renter just made 20% return on my Chiquita Banana stock. Reinvesting in etfs as per Garth’s recommendation, as individual stocks are too stressful. No misery here.

#164 Macrath on 08.14.14 at 1:51 pm

#148 JimH
———————–
Have you any knowledge on what Steven Keen refers to as a genuine hedge ? He does not follow through and explain what he is referring to.

PM? land? RE? diversification?

#165 Inglorious Investor on 08.14.14 at 1:53 pm

#151 Mark on 08.14.14 at 12:41 pm

“Yes, that worked well over the past 25 years, in a declining long-term rate environment, rising RE environment. But it isn’t likely to work for the next 25 years, which is a rising long-term rate, falling RE environment.”

That may very well be, but it’s worked well up till now––under very different interest rate conditions and even under different monetary systems. We’ve had our ups and downs in RE. But it’s not that complicated: properties tends to hold their real value over time, and you get an income.

Now, I myself have commented on this blog that perhaps the long term outlook for RE is not bright. Given a number of macro factors (population trends, demographic trends, our increasingly virtual world, the increased need for mobility, too much debt, climate uncertainty, political and social instability, wars, etc.) we could be on the cusp of a long-term global decline. Properties in certain markets could even go to zero under extreme circumstances. I don’t know why peopled deny this possibility when it’s happened before. When that inflection occurs is anyone’s guess. Or has it already occurred? Or do we have one last big maniacal blow-off in the years ahead before the secular fall? I don’t know. At the end of the day each of has to decide for ourselves based on our own circumstances, needs and goals.

#166 Snowboid on 08.14.14 at 1:56 pm

Let’s use an actual example to see how rents are going up in Kelowna.

Using the actual allowable rent increases in BC from 2008-2014:

2008 rent: $1500 a month
2008 purchase price: $500,000

2014 rent: $1884 a month (could be)
2014 listed price: $410,000 (estimated based on exact unit one floor below)

So while rents could have gone up 23.2% the actual rent is only up 1.6%. This is because the rents did go down from 2008-2011 and the first increase since 2011 was this year.

If we say the property value should increase at the same rate as allowable rent increases, this would put the condo at $ 644,794.

Instead the property value has decreased by 36% based on this formula.

OMREBs’ own stats indicate a decrease in average condo values of 21.6%.

So while the lake troll is correct in stating rents are up, we are certainly happy to see that 1.6% rental increase, instead of a minimum 21.6% decrease if we were owners.

As a disclaimer we did own rental properties from 1997-2008, and did quite well on both rents and net after capital gains.

And the assertion that good tenants were hard to find is true, I will give the GG of RE that. One of the reasons we sold.

But looking at condo rents vs. purchase price currently (and for the foreseeable future) it’s only a GG real estate agent that would claim ownership is a better investment.

#167 devore on 08.14.14 at 2:00 pm

#88 Inglorious Investor

3a. Special assessments and forced maintenance, which you have no individual control over. A SFH owner can defer repairs, DIY, or use cheaper or more expensive or greener options. There are also mechanicals (such as elevators) and parkades, which SFH owners never need to worry about.

#168 Hicksville Alberta on 08.14.14 at 2:04 pm

#155 Humpty Dumpty

Thanks for posting this very timely and telling article. I’ve been trying to move away from Alberta as i am getting way too old for Alberta winters so have been looking at both East and West coasts.
I’m originally from B.C. and already have a house on the coast but i think there is no way i’ll go back there.
Spent some time looking at East coast property and for the most part there seems to be a lot of moderately priced property out there, especially in smaller communities which is my preference so perhaps that is where to go.
There is another great timely posting on Fukishima fallout today by “George Washington” on Zerohedge titled “We’ve Opened the Gates of Hell” and that too is very well worth the read.
By the way, some of the stuff in that youtube video is very much like the ocean scenes in the original Planet of the Apes.

#169 A Yank in BC on 08.14.14 at 2:05 pm

Garth,
I hope it hasn’t escaped your attention that the Pope was picked-up at the Seoul airport yesterday in a Kia.. supposedly his choice.

#170 TurnerNation on 08.14.14 at 2:11 pm

@Big brother, no but likely dropping by Shangri tonite I suspect an equal number of gold diggers and erm paid entertainment exist here. It’s on the usual Thurs circuit.

#171 devore on 08.14.14 at 2:12 pm

#93 Sheane Wallace

The rule is actually price = 100 monthly rents. It was always the case in Europe as I have heard.

There are various “rules”, depending on who you talk to and what their objectives are. 8-10 years rent multiple is a common one. It is said REITs aim for 8% cap rate. Amateur investors might be happy with 4-5%, many operate at a loss or a marginal profit, but not enough to account for long term maintenance or vacancy periods.

Any “sane” metric really, is much too strict to actually find any viable properties in Canada (but quite possible in many US markets, even after the last 3 years price increases). I’ve looked at a brochure of rental apartment buildings for sale in Vancouver region a couple of years ago, and they were all advertising cap rates 1-2%, before “lifting” rents and filling vacancies. Good luck with that; if the current owners could do it, they wouldn’t be selling.

#172 Shawn on 08.14.14 at 2:20 pm

Berkshire Hathaway hits $200,000 today

Just five of these is worth the same as a one million $U.S. house.

None of the stories about Berkshire hitting $200,000 has mentioned that when Buffett took control of Berkshire in 1965, these very same shares were about $15.00. So that is a 13,333 fold gain. That is a gain of 1.333 million percent. Amazingly it is “only” 21.4% per year compounded for 49 years.

Before buying control of Berkshire, Buffett had already made about 10 times on his early investors money from 1956 and 1957.

In total Buffett is easily up 10 million percent compounded on his earliest investments.

He is easily the world’s best and most successful investor in History. And yet most people have never bothered to learn from him.

Also he is one of the smartest people on the planet though that is less well recognized.

#173 JL on 08.14.14 at 2:25 pm

“It’s simple: if you’re purchasing an income-producing piece of real estate, you should pay no more than eight times the annual gross rental income the property generates. It’s called the GRM, or Gross Rent Multiple”

I don’t think so Garth, virtually no commercial properties are selling at only 8 GRM.

The B class office space we are in generates about $5000 per month in rent and is appraised at $700,000. A GRM of 8 puts the building value at $480,000?! In your dreams, your commercial guy is out of date or delusional.

I’m a tenant paying $5000 per month in basic rent (plus CAM and additional rent) and you’re suggesting I could buy the building I’m in for $480,000?? 30% down payment is needed for commercial so that would leave me a $336,000 mortgage which is only a $2000 mortgage payment with a 20 year amortization at 3.6%.

Sure Garth, find me that deal and I’ll pay a double commission.

#174 devore on 08.14.14 at 2:26 pm

#100 Mark

Over the long term, leverage doesn’t help property investors. As the banks will always, over the long term, charge more for the leverage, than the actual asset returns.

Financing does not usually figure in the buy/not buy decision for the professional RE investor. That is because interest cost vs opportunity cost is close enough to a wash in the long run. Thus, investment properties are typically financed.

Amateur RE investors, which includes pretty much everyone owning individual units, will often consider rents covering their costs (interest, taxes, condo fees) and paying down principle out of pocket to be a good enough “investment”; the renter pays the expenses, while they slowly gain equity in an appreciating asset. Thus, negative cashflow is not a problem whatsoever. This is very insidious mentality in Australia, where money-losing landlords are given income tax breaks (negative gearing).

#175 };-) on 08.14.14 at 2:41 pm

He’s obsessed with a how-to book for US realtors. — Garth

Not “obsessed” and not a book for just U.S. based REALTORS® but for everyone north and south of the 49th. I’ve given a copy to many of my clients over the years. It’s an AWESOME educational tool that helps them understand what they need to know. It’s a good read with a message your readers should be aware of. Have you read it… if not, maybe you should.

Shift: How Top Real Estate Agents Tackle Tough Times
by Gary Keller, Dave Jenks, Jay Papasan

Everyone else:

I will let the future speak for itself.

He who laughs last laughs best as I have for the last 6 years that you all have been projecting the end of real estate as we know it. Will it pan out as you predict in the future? Possibly, but based on each of the past decades when we thought it couldn’t continue as it had to then, it did, time and time again. I’m inclined it will continue that trend for a long, long time to come.

Your dime, place your bets as you may.

};-)

#176 Bottoms_Up on 08.14.14 at 2:47 pm

#93 Sheane Wallace on 08.13.14 at 9:54 pm
———————————————–
Isn’t it the case in Europe that price = 1000 rents???

#177 Macrath on 08.14.14 at 2:58 pm

#148 JimH
———————-
I found some more info, He explains a genuine hedge as:

“It`s a nice sunny day but I`m going to bring an umbrella in case it rains.”

So my interpretation would be the markets have been going strait up for years so I`m harvesting my profits before they disappear.

What is your hedging strategy ?

#178 rosie "moving forward" in the knowledge that, "this won't end well" on 08.14.14 at 3:10 pm

Wonder if what’s happening in Vegas, stays in Vegas.

http://vegashousingreport.com/tidal-wave-home-sellers-wanting-sell-buyers-elvis-left-building/

#179 bill on 08.14.14 at 3:31 pm

snowboid wrote :
‘And the assertion that good tenants were hard to find is true, I will give the GG of RE that. One of the reasons we sold.’
we are having a time getting quality tenants as well.
we are definitely seeing the effect of all the condo sales.
and fully expect it to get worse as they condo owners slowly sink under their debt load.it will be hard to match their lower rents.
however if your fridge dies we usually have a replacement in a few days with, of course ,a loaner to tide them through till the new fridge arrives. [naturally heat,hot water and garbage disposal included!]
not to mention in house maintenance crews etc etc.
three vacancies this month .to be fair one was an family emergency that was very serious indeed.
hated to lose good tenants like that !

#180 bill on 08.14.14 at 3:49 pm

#91 JimH on 08.13.14 at 9:49 pm
once many years ago I was wandering through some second and third growth forest and cam upon a first growth ‘widow maker’.
what a big old fir! it went straight up for quite some distance and then split into two spires.
my rough calculations seemed to indicate that the no 1 head rig [9 ft with the guide raised] would have been unable to process it…
the size and amount of fallen limb ‘litter’ surrounding it was most thought provoking.
with one of those dead limbs you could have made a nice size tool shed with a chicken coop adjoining…

#181 TurnerNation on 08.14.14 at 3:58 pm

Takeover candidate?

If you haven’t heard a rumor by noon, start one.

#182 Knock Knock on 08.14.14 at 4:21 pm

People, don’t disagree with Mark. He’s the blogger equivalent of a Jehovah Witness.

(If you let them know your name and that you’ve read the Bible, it’s already too late- you might as well move.)

#183 dontcallmeshirley on 08.14.14 at 4:27 pm

I’ll join the chorus saying 8 GRM is nonsense.

Please refer to Riocan news releases about property acquisitions — none of these were anywhere near as low as 8 — more like 15 to 20.

Now why would you compare a major, multi-billion-dollar REIT buying major projects as part of a long-term portfolio to a condo acquisition by an amateur landlord? — Garth

#184 Singaporean Investor on 08.14.14 at 4:51 pm

Condo prices are undervalued when compared to SFH

Explain how, when a condo owner actually owns no real estate, just the right to occupy space. — Garth

#185 Shawn on 08.14.14 at 4:57 pm

Now why would you compare a major, multi-billion-dollar REIT buying major projects as part of a long-term portfolio to a condo acquisition by an amateur landlord? — Garth

Yes, so just why did you compare “a traditional and cardinal rule in ICI real estate (that’s commercial property)” to a condo acquisition by an amateur landlord?

Because that’s exactly what a rental condo is – investment property. It’s all about cash flow and ROI. — Garth

#186 Crowdedelevatorfartz on 08.14.14 at 5:36 pm

@#161 Bottoms Up
“Please enlighten us and tell us how this pension fund shows a looming pension crisis”…….
++++++++++++++++++++++++++++++++++++

Apparently, you are incapable of differentiating between a one, two or even three year “return on investment” with “long term insolvency”.
Imagine, if you will, a pension worth an impressive $97 Billion dollars and eventual pension liabilities worth an even more impressive $200 Billion dollars.

No where in the report full of bar, pie and chart graphs that you linked does it mention the amount of money that will be required to pay out all these govt pensioners if they live to their full life expectancy. It merely states the value of the pension to date.
Hence while $97 Billion looks impressive…….it’s no where near enough for the kitty.
Not to work, unpensioned taxpayers to the rescue to top up yer sadly lacking trough of cash.
But not for much longer.

Welcome to the financial “Twilight zone”

#187 Crowdedelevatorfartz on 08.14.14 at 5:37 pm

@#161 Bottums Up

My turn to link.

http://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CD0QFjAC&url=http%3A%2F%2Fnews.nationalpost.com%2F2014%2F05%2F06%2Fcanadas-152b-public-pensions-arent-prepared-for-work-force-changes-ag-warns%2F&ei=oSntU7SQLOTUigL8iYHoCQ&usg=AFQjCNEwRhhWn41bwCy3YuXrLghi6B9ZKg

#188 };-) on 08.14.14 at 5:51 pm

#88 Inglorious Investor on 08.13.14 at 9:43 pm

If you want to live in a condo as a lifestyle choice (no lawn to mow; no snow to blow; no roof to fix; no spallling bricks, etc., etc.) then by all means, go sequester yourself in one of those “concrete boxes in the sky.” (Hey, I’m pretty sure I coined that term right here on this very blog. Go back and check if you’re interested.)

However, I would NEVER buy one as an investment.

First of all: No land. Land is what gives RE its rising value. Anything you build on the land depreciates. Condos have no land to call their own. They are the ultimate ‘detached’ homes.

I agree, especially with the “Land is what gives RE its rising value. Anything you build on the land depreciates.” .

I prefer the term “Compartment” in the sky.

And I agree with Brad Lamb… no one is building rental buildings (apartments). It’s all sale (condos). For there to be an adequate supply of condo’s to rent there has to be landlords willing to supply them. For landlords to be willing to ad more rental inventory there has to be something in it for them.

Rents are going up… WAY UP

#189 DreamingInTechnicolour on 08.14.14 at 5:51 pm

This outlines how harder it is in the USA to get a mortgage than before in pre-bubble times.

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/08/13/a-top-mortgage-industry-executive-explains-why-banks-dont-want-to-take-a-chance-on-some-borrowers/

#190 };-) on 08.14.14 at 6:01 pm

Oh and the way around rent controls…

Don’t do a perpetual month to month rental agreement. Instead Lease your property to the renter for six months term only. Doing so will accomplish a couple key things:

At the end of the contract they are outta there.

At the end of the term if you like them you can sign them up under a new lease contract with a new lease rate.

You’ll have had six months to evaluate them and if you don’t like them as a tenant they’re outta there!

Worked for me };-)

I’m guessing many on here (renters) will consider that to have been a Troll post.

#191 NostyVlad the Snugglebombed on 08.14.14 at 6:18 pm

#181 TurnerNation on 08.14.14 at 3:58 pm — “If you haven’t heard a rumor by noon, start one.”

This one? It’s as good as any right now.

“BRILLIANT! Putin out-thinks the US again! By charging Roubles for Russia’s oil, Putin will force European countries to have to trade Euros for Roubles, leaving the US dollar high and dry.

“The US cannot complain about Russia selling its oil for the Rouble without telegraphing to the world that all these wars of conquest have been about keeping the global oil trade in US dollars only.” wrh.com.

#192 };-) on 08.14.14 at 6:22 pm

Check out item 2. Length of Tenancy (b.ii) on the standard form British Columbia Residential Tenancy Branch RTO Residential Tenancy Agreement.

#193 };-) on 08.14.14 at 6:39 pm

Explain how, when a condo owner actually owns no real estate, just the right to occupy space. — Garth

For what it is worth, condo owners enjoy a unit entitlement to the insurance proceeds upon destruction of the improvements upon the land and the same to the remaining land itself.