Monday, May 20, 2013

Canada's real estate market overheated! Are you kidding? There is no such market in the first place!


I haven’t written about real estate for a while. That is not because it is not profitable. To the contrary, investing in real estate is fine and once a rental operation is on track it is a bit boring. But then the best businesses are often boring.
In fact, most of the time, the longer you own your property the more profitable. Say you own a paid-off house that you bought 30 years ago for around $100,000 near the center of a large city. Chances are that over the years your property has quintupled in value, i.e. the place is worth $500,000 or more. Even better you can probably rent it out for close to $2300 per month if not more.
That means that per year your rental income is close to $27,600 After you paid, say $3,000, in property taxes and another $1500 for maintenance you hold close to $23,600 per year of cash in your hand… and with build-inflation protection!.  How does that compare to your Canada Pension Plan?  Hmmm.. and did you know that you can defer your taxes on that rental income using depreciation?
So if you wanted to retire with an annual income of a bit over $100,000 all you’d need is ownership of five(5) such properties!  Of course, you can make it fancy and play Reichman or Pocklinton using oodles of leverage and end up somewhat bruised (too say it nicely) or, if lucky, you’ll become the next ‘The Donald’.
Yes, if you’re greedy or don’t think long term things get a lot more complex. If you’d read the newspapers you’d think right now that Canada’s real estate is about to go into collapse or at least is going through a soft or hard landing depending on the day or brand of news paper you read. In reality this is far from the truth. Yes, things may be a bit top heavy in Toronto and in Vancouver’s condominium markets but that is not Canada’s entire real estate market!
Real estate is driven by local economic growth, population growth (natural growth and by immigration) and of course it is driven by how friendly the local governments are towards real estate. All these factors vary greatly across Canada’s provinces, territories, cities and rural areas. Canada is not one real estate market – it is highly fragmented and there are quite different rules, regulations and even tax regimes across our country.
Yes, Vancouver and Toronto are our largest markets, but conditions in Waterloo are quite different than in Toronto and conditions in the small towns and cities of the lower mainland away from Vancouver proper differ significantly as well.  In Calgary the market is different than in Edmonton while both cities have ‘balanced’ real estate markets without transfer taxes and provincial sales taxes; with reasonable landlord or tenancy regulations; no rent controls and low vacancy rates.  Compare that to Ontario!
So next time you read those hysterical headlines in our national newspapers, ask yourself, what market are those guys talking about?  Do these guys even know what they’re talking about or are they just trying to scare you into buying a newspaper or turn on the news channel?
Talk to realtors in your neighborhood or in the area you’re interested to invest. Don’t talk to one; talk to several. There are all kinds of realtors – some specialize in family homes (most do); some actually understand small investors; others specialize in commercial real estate; some know about the inner city; others know about condominiums; yet others sell you strip malls or recreational properties. Find the right realtor for you and then learn about your market of interest. Avoid bidding wars – they involve overpriced properties more often than not. Don’t buy from developers  - these guys are often very good at selling you own-sided (and I am not talking your side) deals that are mostly speculative in nature. Then, once you know your market make your move and buy that property that one day will be a cornerstone of your own private pension plan.

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