MARKET CAP COMPRESSION SQUEEZES INVESTORS

Really great tips by another Real Estate Investing Pro:

MARKET CAP COMPRESSION SQUEEZES INVESTORS

No doubt, some of you read the title of this article and thought ... huh?  "Market cap compression" is just a fancy term which merely states that prices for commercial real estate continue to rise.  The market cap has an inverse relationship to the price/value of a commercial property.  In essence, as the price/value of the property goes up, the market cap goes down or becomes "compressed".   In the past few years we've seen significant market cap compression in the commercial sector which is primarily a function of low interest rates coupled with no real alternatives to park investment dollars.  The question is, what does this mean for the average investor either looking to buy their first property or their fifth?

1. Look outside of major urban centres

I've always been a major advocate of investing outside of the major urban areas such as Toronto, Calgary and Vancouver.  As much as I would love to buy properties in those cities, the cap rates for multi-unit residential properties have reached historic lows and thus don't make economic sense for investors looking for cash flow.  Five percent market caps have now become the norm in Toronto.   I've even started to see caps as low as 3.5%.  With caps that low, your investment property is unlikely to cash flow.   Further, when the mortgage resets after the initial term, investors are opening themselves up to signficant risk if and when interest rates rise.

Why look to the smaller urban centres?  Because cap rates in the smaller urban areas tend to be a percentage point or two higher than their more densely packed counterparts.  That's not to say that all smaller areas are created equally.  Investors need to focus on the key metrics to find the right place to invest which includes GDP Growth, low unemployment, low vacancy rates, population growth, etc...  Smaller cities that investors should be looking in include, but is not limited to, Kitcher/Waterloo, Guelph, Cambridge, Hamilton, Durham region (Pickering, Ajax, Whitby, Oshawa) and Kingston.

2. Watch the bond markets

The bond markets are a critical metric and commercial investors  need to keep an eye on them as they are used to establish the ultimate cost of funds (mortgage rate).  Over the past 30 days, the Canadian bond markets have seen a significant increase in bond yields which will ultimately place upward pressure on commercial mortgage rates.  In the longer term, if the movement in bond yields proves to be a trend and not just a blip, market cap compression will begin to reverse as cap rates have a close correlation to the cost of funds.  Investors need to be weary in the short term that they aren't buying commercial properties today based on the recent trend of extremely low cap rates and getting financed at the new higher mortgage rates.

3. Lock into longer terms

With mortgage rates at historic lows, even with the recent run in the bond market, locking into longer term rates such as 5 and 10 year terms will make economic sense for most long term investors.  This type of certainty allows for predictable cash flow and signficant mortgage paydown during your mortgage term.  More importantly, it significantly mitigates the risk of rising interest rates.  

4. Ensure you have a healthy spread

The key to profitable investing is to ensure that you have a healthy spread (the spread is the difference between the market cap and your cost of funds).  Market cap compression in the larger cities such as Toronto have all but squeezed the spread in most cases to zero.  To illustrate this point, the average 12-plex in Toronto has a cap rate of approx. 5%.  The cost of funds for this type of property are typically between 4-5%.  In essence, there is almost no spread, which means that the investment property is unlikely to cash flow.  Even worse, the investor could be in a negative cash flow situation having to pull money out of their pocket every month.  I personally like to work with spreads of 2.5% to 3% to ensure healthy cash flow and to provide a buffer should interest rates rise upon rate reset. 

5. Be weary of too much leverage

Real estate investing and leverage go hand in hand.  In fact, without leverage, most real estate investors wouldn't exist as they wouldn't be able to pay for their property entirely in cash.  As much as I love leverage and have used it extensively to make significant gains, it must be approached with extreme caution.  Basically its the old adage ... too much of a good thing.  While taking on large amounts of leverage/debt may seem like a great idea now that interest rates are at historic lows, one must keep in mind that in all likelihood, when the mortgage resets in 3, 4 or 5 years from now, on a balance of probabilities, mortgage rates will be significantly higher than they are today.  If you are overleveraged this can pose a significant problem with your cash flow and your ability to service your debt.  As a rule of thumb 65% to 75% LTV, in a longer term (5 or 10 year) are usually a pretty safe bet.

Authored by:: Paul Kondakos, BA, LL.B, MBA - Professiona Real Estate Investor

 PAUL KONDAKOS | POSTED ON  MONDAY, JUNE 24, 2013 Realtyhub

Five more tricks to finding a bargain

Here are the last five of ten ways investor Gord Lemon urges you to beat the bushes for a deal. Ahem, a deal at a discount, no less. Note: They're in no order of preference or effectiveness, although all require initiative and, perhaps, a little luck.

The truth is, says Lemon, When it comes to finding more deals, it is not the lack of resources, but rather the lack of resourcefulness that truly prevents real estate investors from reaching their investment goals.

Go to your local landlord/tenant board
There are cases which are held on a regular basis at landlord/tenant boards across the country. These happen both in the courtroom and outside of the courtroom by a mediator. Attending these hearings from time to time gives you the opportunity to meet landlords or property managers who have just come from an experience they probably wish they had not had to go through. They may be very willing to talk to you about selling their property.

Go to foreclosure court
Going to foreclosure court can be a very interesting experience. You can witness foreclosure hearings which will be at various stages in their processes. Sometimes the owners are in attendance and sometimes not. The reason for attending, other than for your edification, is to potentially meet owners and be able to provide them some help. This may be financial help, advice to save their property or a deal to buy the property. Sincerely providing options to owners who are unfamiliar with the process can be invaluable to them. I encourage you to understand the foreclosure process in your province.

Placing ads
Utilize local papers and online ads like Kijiji and Craigslist to get your message out. Simple messages like: “I can buy your house fast!” “Need to sell your house today?” It can be as simple as “I Buy Houses.” These ads work well under the “Money to Lend” sections and attract people who are looking for cash to keep their houses. They may read your ad and realize if they just sold their house, it may relieve their financial pressures.

Fax Realtors
Create a simple message.
“I am looking for distressed houses in [your area of choice] that I can get for a minimum of 10% (or whatever your number is) under market value. I can buy cash and close quickly.” When you fax this to all the local real estate brokerages, you should get calls. This can be the initiation to creating some great relationships with Realtors who may be able to find you some great deals.

Word of mouth
There is no better advertising for you than word of mouth.

Just like in any type of sale, when a trusted friend, neighbour or business associate passes along your name to someone they feel can benefit from what you do, it comes as a great recommendation to the person receiving it. This can dramatically help in your sales process as your service and credibility have perhaps already been addressed. All you have to do now is fill the need and make the sale.

This was originally posted by Gord Lemon and source Canadian Real Estate Wealth Magazine, a monthly publication focused on building value through property investment, covering topics such as values and trends, mortgages, investment strategies, surveys of regional markets and general tips for buyers and sellers.

Shannon's note: establish a good relationship with REALTORS who will carry "pocket" listings and create "VIP Lists" so you'll be in the know. Ask and interview!

Additional NOTE: Check out Top Investor Award 2013 Winners from the Canadian Real Estate Wealth Magazine - Top Investor Awards naming Shannon P. Murree, Sales Representative with RE/MAX Chay Realty Inc Brokerage the 2013 Winner as Top Real Estate INVESTOR Agent -Eastern Division 

Investing: Rentals: What's your tenant profile?

Great tips from Paul!

Everyone has heard at least one horror story of "the tenant from hell," so much, in fact, that dealing with renters is the biggest fear potential investors face, writes industry expert Paul Kondakos. But that threat can be easily mitigated.

Owning an investment property is tantamount to owning a small business. To succeed in business, you have to ensure that you have a good client base that respects your business and pays bills on time.

The same holds true for succeeding in real estate investing, you have to ensure that you have a tenant profile that respects the property and pays its rent on time.

For most novice investors, the tenant profile is likely something that hasn't even crossed your mind, but it is actually one of the most important factors to determining your success. Some of it is tangible and some of it is intangible. As you become more experienced, you'll get a better feel of what makes a good tenant profile.

There are two occasions when you have to pay particular attention to the tenant profile. The first is when you are purchasing a new investment property. Assessing the tenant profile has to be a consideration because a bad tenant profile can cost the novice investor time, stress and money.

On a side note, for the more experienced investor a bad tenant profile isn't necessarily a bad thing as; (1) the experienced investor knows what they are getting into; (2) the property is usually priced accordingly, and (3) turning around the tenant profile can be a lucrative proposition.

Assuming Tenants - Talk to Every Tenant

When purchasing an investment property, the buyer has to assume the existing tenancies so you need to ensure that you are comfortable with what you are getting as you have no control over who is currently living in the property. The best way to learn about your prospective new tenants is to talk to them.

Be present at every inspection and try to schedule inspections for the weekend or evenings as most tenants tend to be around at that time. Depending on the reports required (eg. appraisal, building condition assessment, phase 1 environmental), you will likely have at least 2 occasions to meet and talk to them.

Always take personal notes so you can review and assess afterwards. Engage the tenant in small talk. This will not only reveal potential issues with the building, it will give you a good idea of the tenant's personality. Things to looks for:

    - Cleanliness of unit
    - Items that shouldn't be in unit (eg. washer/dryer, moped - I found one in my latest building inspection)
    - Pets (loud, neglected)
    - Does the tenant seem personable and cooperative?
    - Does the tenant like to complain alot?
    - Does the tenant work, do they have anyone that stays over, do they like living there, do they get along with their neighbours?

After a quick inspection and short conversation you can usually tell what type of tenant this is going to be. Once you have inspected all the units and hopefully met all the tenants and have taken good notes, you can review and decide on whether this is the type of tenant profile that you would be comfortable assuming.

Renting to New Tenants - How an $11.30 investment can save you thousands!

Here you have a lot more control of your tenant profile as you decide who gets to live in the property. This is where you need to be diligent and selective about who you let in as it will make all the difference between owning a profitable and headache-free investment or owning a money-losing and headache-filled one.

All too often, landlords are more concerned about filling vacancies than the quality of their tenant profile. In the short term they may fill a vacancy, but in the long term, it always, always costs them more. This I know from experience.

The ability to come up with first and last month's deposit should only be one of the criteria, and certainly not the only one. You need to learn as much about your prospective tenant as possible. My checklist includes the following:

    - Letter of employment or pay stub
    - Call employer to verify employment and get reference
    - Call previous landlord for reference
    - Tenant traits - Appearance, punctuality, demeanor
    - Do an online search (eg. work, hobbies, activities, asssociates, etc...)
    - Credit Check (Price: $10.00 + HST) - The single most important and effective way to forecast if you will get your rent on time every month. People earn good credit scores by being responsible and diligent with their financial obligations. I typically look for a score of 680 or higher.

While it may be tempting to fill a vacancy with a suspect tenant, you are ALWAYS better off to absorb the cost of the 1 month vacancy and hold out for a good tenant to occupy the unit.

What's the Big Deal About the Tenant Profile Anyway?

As mentioned earlier, having one bad tenant can significantly affect your investment and your stress levels. When I first started off, I was a lot more lax about who I let into my properties. The application, first and last, and a call to the previous landlord was about the extent of my due diligence. This lack of scrutiny ended up costing me tens of thousands of dollars and lots of stress.

Below is a sample calculation of how much one bad tenant can cost you:

______________________

Lost Rent (assume $800/month): $2,400+

Tribunal Filing Fee: $170

Tribunal Representation (if you don't go yourself): $200+

Sheriff: $330

Repairs and Renovations (almost every tenant I have evicted has left the unit in need of repair): $3,000

Intangible Costs: Stress, Your time, Tenant Profile

Total: $6,100 + Intangible Costs

______________________

I own and manage close to 100 doors right now and I find it easier to manage now, ever since I became more prudent with my due diligence and started checking credit scores, than I did when I owned substantially less doors but did not run credit checks.

With a good tenant profile, tenancies tend to last longer and when tenants give notice to vacate, transitions are almost seamless. A good tenant will give proper notice, which then gives the landlord enough time to advertise and rent the unit (usually left in good condition) out to a new tenant without incurring the costs of a vacancy. This not only maximizes your revenues, but also minimizes your stress and headaches as a landlord.

In closing, pay close attention to your tenant profile as it is one of the most important elements to running a successful and profitable investment property.

Source: Paul Kondakos is a professional real estate investor and operates industry site RealtyHub.ca

Investors helping 'drive' the market, says report

Investors helping 'drive' the market, says report

Written by  Jemima Codrington - Canadian Real Estate Magazine

Are investors the driving force behind Canada’s housing market?

A new survey from RE/MAX, “RE/MAX Canadian Homebuying Trends Survey 2013-2014”, reveals that multi-time buyers are accounting for 41% of all home purchases in Canada. Combined with second-time buyers, the number of buyers purchasing property for the second time or more will account for 70% of home purchases.

Gurinder Sandhu, Executive VP Regional Director REMAX Ontario and Atlantic Canada, says investors fall under this umbrella.

“There are a fair number of investors in that multi-buyer category,” he said. “The challenge is we don’t know how many.
“We know based on discussions with our realtors that there is an increasing number, because over the past 17 years, real estate has been a sound investment.”

Sandhu was also quick to point out that immigration in urban areas is helping to prop up the condo market, despite fears that it’s in bubble territory.

“We still see demand for that product because it represents a product that is more affordable than others,” he said.
RE/MAX surveyed 1,109 purchasers who intended to buy over the next two years, and found that 39 per cent of those surveyed were multi-time buyers, 31per cent were second-time buyers and 30 per cent were first-time. The demographic is a shift from previous years as investors took the helm early last year and dove into the market.

"Between 2009 and 2011, first-time buyers were the engine driving housing activity, taking advantage of favourable conditions and a recovering economy," says Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada. "That changed in 2012, and even earlier in B.C., as prices reached a breaking point.”

But when quizzed about prices, the response was remarkably positive considering the current climate. 48 per cent of respondents believed housing values will rise, while 35 per cent believe they’ll remain the same. And according to the report, low vacancy rates and higher rents have driven some survey participants away from the rental market and into homeownership. When considering a property type, the majority of buyers were interested in larger properties, and lifestyle and investment were noted as “principle drivers” in the decision to purchase.

The survey also revealed a higher number of women active in home-buying. "Our Realtors   have definitely seen an upswing in the number of female homebuyers active in the market in recent years—and the survey confirms those anecdotal accounts," said Ash.

However the numbers stack up, the report generally indicates that mature, seasoned buyers are taking the helm and profiting from the current market. "Today's real estate consumer is more experienced and financially prudent than in the past," added Ash, “it seems the lessons of excess are being heeded."

Fewer investors, homeowners looking to sell: report

Fewer investors, homeowners looking to sell: report

Written by  Vernon Clement Jones - Canadian Real Estate Magazine

National home sales slipping 17 per cent in December from a year ago, according to new report from the Canadian Real Estate Association, suggesting investors are no more anxious to sell than homeowners.

"Sales activity continues to hold fairly steady at lower levels since mortgage rules were changed earlier in 2012, said CREA President Wayne Moen Tuesday, “but there are still some real differences in trends between and within local housing markets."
More generally, national home sales edged 0.5 per cent lower in December 2012 compared to November, and actual activity was down 17.4 per cent year-over-year.
A large part of the equation is the falling number of listings, said one analyst. They dropped 1.3 per cent from November to December, something that may encourage buyers now in the marketplace to act sooner rather than later. But the decline also points to the growing number of investors now opting to hold onto their current portfolios rather than sell up to access equity.

"While some will focus on the deep dive in sales from a year ago, it looks as though prices are providing a better read on the health of the sector, as homeowners are in no rush sell," write economists at BMO, referring to the new data. "Prices are easing gently, consistent with a soft landing through much of the country."

Fewer listings mean those investors looking to add to their holdings will likely be challenged, especially in terms of small multi-family properties.

Still, the challenge of new mortgage rules introduced in July remain, with many analysts writing off the possibility of a repeat of last winter’s brisk activity as buyers sought to get an jump on the spring competition.

That activity was spurred, in part, by unseasonably warm weather.

In 2012, a total of 453,372 homes traded hands over the Canadian MLS system, which represents a decline of 1.1 per cent from 2011 and 1.4 per cent below the 10-year average.
The downward trend is actually in line with projections for this year, with Jim Flaherty’s new mortgage rules bearing the brunt of any blame.
Still, investors anticipating an even greater shift to the current landlord's market may be disappointed.

The government isn't expected to further tighten rules this year. The Finance minister has suggested the government is satisfied that its move to lower the amortization on insured mortgages, along with other key changes – in addition to OSFI’s new lending guidelines – have already begun to de-accelerate consumer debt.