Is an income property right for you?

If you’re considering buying an income property during your retirement, think carefully before you do so. As long-time property investor Rui Torrao says, “Investment in real estate isn’t for everyone.”

You have to appreciate that—unlike investing in stocks and bonds—this kind of investment isn’t passive. You’ll need to do your homework, stay on top of the real estate market, and master all the details of managing your property to get a good return, even if you hire someone else to do much of the day-to-day work.

“It’s not hands-off,” says Don Campbell, author and senior research analyst at the Real Estate Investment Network, an educational and research company. “You’re in essence buying a small business.”

You also want to consider that you probably already have a big stake in the real estate market through the equity in your house. That may not matter much if you consider your home primarily a place to live and you don’t intend to sell it to realize your retirement objectives. But it can be a factor if you consider your home an investment you may need to cash out of at some point.

In that case, if you buy a rental property—particularly in the same city—that means a lot of your wealth will be riding on real estate’s good fortune.

If holding real estate directly isn’t your thing, you do have a more passive alternative: buying units in real estate investment trusts (REITs). These have some clear advantages, says Michael Missaghie, portfolio manager with the Sentry REIT Fund, Canada’s largest REIT mutual fund.

He points out that REITs are easy to buy and sell with low transaction costs (they trade like stocks). As well, you’re assured of professional management, and REITs provide a well-diversified real estate portfolio that you just don’t get if you buy one or two properties on your own. REITs may hold commercial or industrial properties, office buildings, apartments, shopping centres, hotels and the like.

On the other hand, Campbell says direct investing gives you more control, you save on fees if you have the skills to manage your assets yourself, and you can invest in residential market segments like six-plexes that are too small for REITs to touch.

Which gives you the best return? It depends what you compare. Interestingly, analysts Michael Smith and Matt Koskinen at Macquarie Capital Markets Canada did a head-to-head comparison last October of investing in apartment REITs versus condos. They first compared returns from investing in a Calgary condo to Alberta-focused Boardwalk REIT. Then they compared returns from investing in a Toronto condo to eastern Canada–focused CAP REIT. In both cases, they found the REIT investment came out ahead consistently in recent years.

Campbell reiterates the best direct real estate investments are in niche markets like small multiplex buildings rather than condos, and he avoids Toronto altogether. He contends you can generally make more money through direct investments “if you do it right.”

**originally posted CTV

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

Bank of Canada Rate Announcement - May 29th, 2013

As expected, there was no change in the Bank of Canada press release. Bank prime remains at 3%.  

This means no changes in variable rate mortgages or line of credit rates.

Five year money ranging from 2.79%-3.04% and 10 year money in the 3.69%-3.79% range.   

Below are the highlights of the Bank of Canada Announcement: 

• "The Bank expects global economic activity to grow modestly in 2013 before strengthening over the following two years"
• Canada's growth was stronger than initially projected in the first quarter
• Growth in household credit is slowing.    
• "Monetary policy stimulus currently in place will likely remain appropriate for a period of time"

The next Bank of Canada Announcement is scheduled for July 17th, 2013. 

Bank prime is 3.0%

 Click Here to Read the Full Announcement

If looking to invest in Barrie, Innisfil, Angus or Orillia Real Estate - call the experts who are investors and work with investors - Shannon Murree with RE/MAX Chay Realty Inc Brokerage was voted the Top Investor Agent by the Canadian Real Estate Wealth Magazine

InvestingInBarrie.com

Do You Have What It Takes to be a Landlord?

The following article is from Canadian Real Estate Wealth Magazine.

Despite the long list of potential hazards, the possible rewards of being a landlord often outweigh the downsides. Here are the top 10 reasons why you should become a landlord.

1.) You use tenants’ money to pay your mortgage and build your equity. You can raise the rent each year (with restrictions) and adjust for current market rent rates when a property becomes vacant. Long-term investors buy real estate that generates positive cash flow, and either hold it until the tenants have paid off the mortgage or until there’s a compelling reason to dispose of the income stream in return for a lump sum; for example, to buy something bigger/better or to create a retirement annuity income stream.

2.) Real estate assets can be leveraged to bargain for additional real estate investments. Unlike stocks, mutual funds, term deposits, etc., you do not have to pay for the whole real estate investment yourself. Lenders will give you the extra money you need (mortgage) in exchange for receiving interest and the property as collateral if you default on the scheduled payments. When the property’s value has increased enough, some lenders will let you borrow against that value (your equity), which you can use as downpayment to buy another property.

3.) Real estate is tangible and more easily collateralized than most other types of investments. Ask ex-shareholders of Northern Telecom, Enron, Bre-X, and other “blue chip” failures. Lenders generally offer a higher ratio of loan amount versus the value of a real estate property than they would offer on a portfolio of stocks, for example. The building and/or land will still exist if the worst should happen. Mainstream lenders also love the low-risk appeal of rental housing properties insured by the Canada Mortgage and Housing Corporation, and offer very attractive interest rates.

4.) A modest increase in rental income and/or decrease in operational costs can have a significant positive impact on property value. For example, increasing net operating income (by reducing costs and/or increasing rent) by $1,000 per year and applying a 6 per cent capitalization rate (better-than-average in today’s southern Ontario market) can add about $16,650 to the value of a property, using the Income Approach. This does not include appreciation for other reasons such as high demand for, and low supply of, rental space, improvement in the neighbourhood, etc.

5.) Several current tax policies (RCCA, capital gain, etc.) discourage longterm owners from selling their rental housing properties because the proceeds of a sale may only equal the cash flow they would receive from keeping the property for a few years. Combine this with the discouraging rent control policies which make investors/ developers unwilling to tie up their money in building a rental property. They may have to wait a decade or more for a return on their investment, when they can build a condominium and get their money back– often with a huge profit–in just a few years. So what’s good about that? Rental housing inventory is shrinking, resulting in high investor demand and high sale prices for existing inventory (seller’s market), and increases in average rent rates (low vacancy).

6.) A well-maintained and fully occupied rental property rarely depreciates. Unless they have been damaged by stigmatism or an eroding neighbourhood (eg. increase in crime), values have traditionally increased over the long term.

7.) If the very worst should happen, you still have a low (or no)-cost place to live.

8.) Legitimate and reasonable expenses reduce your taxable income. Tax deductions include mortgage and credit card interest, depreciation, a reasonable salary with employment deductions, a percentage of your local travel expenses, relevant long-distance travel (eg. trade show), portion of home office and workshop costs, etc.

9.) Despite the perceived stereotype, many landlords enjoy the satisfaction of helping to provide good-quality housing to self-sufficient people in need.

10.) Multi-residential investments are arguably the most stable, depression/recession-resistant, and relatively secure type of real estate investment you can make. Everyone needs a place to live; not everyone needs a place to work. Buying a place to live is not possible for many young people and remains elusive for many adults too. Some adults choose the apartment living lifestyle for its freedom from housing related issues.

Treat your investment like a business, and your tenants like valued customers; know your rights and those of your tenants; maintain tight control on your cash flow; act promptly in everything you do; surround yourself with high-quality industry professionals, and you’ll experience the success you’ve dreamed was possible, especially if you can expand your holdings.

From 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.

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 

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

Should you use your RRSP to buy a first house? Buying a first home can be tough. Under the Home Buyers’ Plan you can use your RRSP to help. Should you?

Buying a  first home can be a tough journey. Especially trying to come up with a 20 per cent down payment in order to avoid having to purchase mortgage loan insurance. 

Under the Home Buyers’ Plan (HBP), first time homeowners can borrow up to $25,000 tax free from their RRSPs to buy or build a home. If you are purchasing a home with a spouse, you can each withdraw $25,000 if you qualify. 

Here are a few things to consider: 

The Pros 
• If you can use your RRSPs under the plan to make that 20 per cent down payment, you might not only avoid paying the mortgage loan insurance, but you could also qualify for a lower interest rate. 
• With a larger down payment, your monthly mortgage payments will be smaller 
• This is one of the only ways to make a tax-free withdrawal from your RRSPs 
• Your RRSP can help you buy your first home if you don't have much in terms of savings. This is a great option for young adults. 
• There is no penalty for repaying more each year than what your scheduled payment amount is. 
• It is a tax-free and interest-free loan over a 15-year span. 

The Cons • You will lose years of compound growth, depending on how fast you reinvest your money. 
• The HBP means that you are taking on debt. Except, instead of owing to credit card companies or the bank, you owe it to yourself. 
• If you don’t make your repayment each year, the unpaid amount is fully taxed as income for that year. 
• If you declare bankruptcy, you will still need to make payments back into your RRSP each year. 

My Plan 
When it comes time to buy my first time, I will definitely be utilizing the HBP. The Vancouver real estate market is expensive. So for the past four years, I have been saving for part of my down payment by contributing to my RRSP. This allowed me to receive a tax refund each year, which I reinvested back into my RRSP. 

The reason why I am confident in using my RRSPs to help pay for my down payment is because I am an aggressive saver. I invest between $8,000 and $10,000 a year in my RRSP, so I know I will be able to contribute towards my future and have my retirement account back at its previous amount within just a few years. This means I will minimize my loss in compound growth, and fully benefit from avoiding the mortgage loan insurance by having a 20 per cent down payment. 

Plan eligibility • You have to be a first-time home buyer (or buying for somebody who is disabled) and a resident of Canada. 
• You must intend on living in the house purchased under the HBP within one year of purchase or completion. However, there is no minimum amount of time that you have to stay there. 
• You must have entered into a written agreement to buy or build a home. 
• You cannot own the home for more than 30 days before the withdrawal. 

Plan rules • Starting the second year following the year in which you made the withdrawal, you will need to start repaying the money back into your RRSP. 
• You have up to 15 years to repay the full amount, where each year 1/15th of the total amount is due. For example, if you withdrew the entire $25,000, you would have to make payments of $1,666 each year for the next 15 years. 
• RRSP contributions made less than 90 days before your withdrawal date cannot be used towards the HBP. This means you wouldn’t be able to make a last-minute contribution into your RRSP in order to take it out again for the HBP. 

For more information on eligibility and rules, please visit the CRA website. 

Repaying the HBP 
You don’t actually have to make your first payment until the second year following the year in which you made your withdrawal. For example, if you withdrew your money in 2010, you wouldn’t need to make your first payment until the tax year of 2012. 

The annual repayment amount is determined by the total amount you have borrowed from your RRSP, divided by 15. If you pay more than the minimum each year, future payments will be the remaining amount owing divided by the number of payment years you have left to go. 

Your notice of assessment will have all of your Home Buyers’ Plan information on it, including payments due, so you won’t have to calculate the payments yourself. 

Would you consider using the Home Buyers’ Plan? 
Krystal Yee is a marketing and graphic design professional living in Vancouver. She also blogs at Give Me Back My Five Bucks.