(img: vince wingate)
This is a strange post for us for a couple of reasons.
First, we own a real estate brokerage and make commissions when people buy property with us.
Second, in today's global economy we believe the value of the paper currencies is getting destroyed, so owning "hard assets" like good income property is a key way to protect yourself while simultaneously creating a stream of cash flow and long term equity.
However, we're seeing some very scary things in today's real estate market that should make us all nervous.
Properties are beginning to trade like stocks.
And that's never a good thing.
Here's what we mean...
We know of several examples in the suburbs of Toronto (Oakville, Ontario specifically) where someone purchased a property to then renovate and "flip" for profit.
Not a bad idea right?
Flipping is one of the riskier ways to deal with real estate but if you can handle the risk, there is sometimes a profitable reward for you.
However, once these individuals closed on the property, they realized that values had gone up so much in just a few short months that they just stuck the For Sale sign back in the lawn and sold the property "as is" with no improvements for a six figure gross profit.
Let us repeat this...
They made a big profit by doing nothing except reselling the property.
Earlier this week, a very active mortgage broker told us that he has a client who has decided not to sell their $800K family home after buying a new family home because they'll just keep it, rent it out for a bit, and then sell it when it goes up $200K in a few months.
We strongly believe you make money in real estate by NOT timing the market.
It's our opinion that you make money by getting into the market, expecting major ups and downs in the prices, and positioning yourself to survive it all.
By holding an $800,000 rental property that definitely will not cash flow "for a few months," you are putting yourself right in the cross hairs of disaster.
That's not smart investing.
That's "stock market like" speculation.
Should the market change on these people they may be left in a heap of trouble with a property they can't sell, can't cash flow and instead of going "up" a couple hundred thousand, goes "down" a couple hundred thousand.
And why do we know this?
Because this is exactly what happened to our family back in 1990. No one seems to remember this time. We do. It was nasty.
You make money in real estate with long periods of "time in" the market.
Never by "timing" the market.
Please re-read that.
And to survive long periods of "time in" the real estate market, you need properties that pay for themselves. Our preference is starter homes in good neighbourhoods where the rent pays for your expenses (mortgage, property taxes and insurance).
You slowly pay down the mortgage and perhaps pocket some cash flow in the process.
These types of properties are hard to find but they are out there. You have to fight multiple offers to get them but it is possible.
Canadian citizens are almost caught in an unfair situation.
Interest rates are so low that there's very little opportunity to create cash flow with interest rate based financial products.
When you account for inflation, if you don't find somewhere to put your money we're all likely losing purchasing power of our dollars.
Real estate provides a solution but you have to navigate the shark-infested waters of the market.
Profits are never guaranteed. They are carefully, slowly and cautiously earned.
So let us leave you with this...
Even in today's market, we believe there are good reasons to buy property.
But you have to buy the right ones with the right income potential and you have to have the financial resources to survive some markets ups and downs that can arrive at any moment.
If you don't have the emotional fortitude and financial ability to survive a major market downturn, this is NOT the time to get into the market.
If you do, then fight the "multiple offer" battle to buy the right properties for the right reasons.
This property run may have years left to run or it may end next Friday.
No one knows.
Study, create access to emergency funds, buy good properties that pay for themselves, and build up a network of good professionals.
We're very positive people but we're always preparing for unexpected market events and we believe you should too.
Until next time ... Your Life! Your Terms!