College Towns Good For Real Estate Investing?

Interesting article from ABC money news that you can take a look at here.

States that university towns are not facing the "squeeze" the recession.

Here's their stats:

• Provo, Utah, where the university is located, has added jobs to its economy. Over the last year, there's been a 2.97 percent rise in jobs in Provo; the national unemployment rate has now hit 8.9 percent.
• There are also business booms in college towns like College Station, Texas (home to Texas A&M and up 2.06 percent); Baton Rouge, La. (up 2.16 percent), which Louisiana State calls home; and Durham, N.C. (up 2.49 percent), where Duke University have been major drivers of economic activity.

Why?

Research universities tend to be great environments for business, as they're flush with cheap, highly talented labor (recent grads), and the massive research and development budgets universities have. Plenty of the world's top companies, including Dell, Cisco Systems and Google, began in university settings.

So how does this effect the real estate market?

It appears buying in college towns is a good hedge against steep downturns during a recession. Going to Zillow (why can't we have this site in Canada) we can take a look:



The Zindex for Provo shows that prices have fallen 8.8% from last year and about 15% off the peak. In comparison, according the same ZINDEX, America has a whole has fallen 14.2% and 21.8% from the peak.

One of the key things we look at is our real estate is close to a university.

Low Dollar is a crutch to Canadians for too long

So here we are. The entire world is looking to Canada for lessons to keep the financial sector strong, whose strength essentially saved Canada from a prolonged real estate slump.

While politicians chest thump how great Canada is, and how crappy the US is, we still can't rest on our laurels. There is still a gap in the prosperity of Canada vs the US... and it's time to action to strengthen our cities further to power real estate across the country.

First off, why is there a prosperity gap?

Simply its because of our poor productivity performance. According to Martin Prosperity Institute at the University of Toronto, Canadians do not innovate enough or create comparable value add in our hours worked (take a look at their full report here). Our low dollar has allowed this to happen for too long.

Why is improving the productivity gap important to real estate investors?

First and foremost, increasing increasing our GDP/capita would increase our after-tax disposable income. Which means Canadians would be able to afford mortgages and more rents...increasing the value of real estate.



As can be seen from exhibit 4 from Martin Prosperity, if Canadians close the prosperity gap we would increase our disposable income by $11,500. This increase in disposable income would basically match the total Canadians spend on mortgages.


Finally, what should governments in Canada do to improve our economy?

According to Martin Prosperity, we should take on an attitude of offense and not defense:

• Develop a more competitive economy (hello cell phone providers and CRTC)
• Encourage business leaders to be ambitious, raise their sights, seek out and capitalize on new opportunities and focus relentlessly on improving how their business opportunities via a tax system that encourages investment and innovation in the long term.
• Regain our mindset to be the best...no more Mr Nice Canadian. Think bold and go all out baby

What do real estate investors do?? seek opportunities where cities and neighborhoods are fostering innovation. This will attract high income jobs, increase the population of skilled people from around the world and, in turn, cause real estate to boom.

Take a look at Richard Florida's theory on city prosperity here:

Don't Fall in Love with Economic Development offices

Every town has a great economic development office that talks up a town and sells itself as having a bright future. Examples of passionate people like the folks of Plano will excite you about the future and may cause you to rush off and buy real estate (I have no Idea if Plano is a good place to invest...watching their video inspired me to write).

The problem is: Every city has an economic development office and it's hard to tell if their actions will have an impact.

One key that David A Wolfe, professor of Economic Development at my Alma Mater University of Toronto, uses for measuring the effectiveness of a town's economic development office is the ability to mobilize local resources to tap into national and provincial/state funding.

Why? According to Professor Wolfe, it gives the city the "organizational institutional infrastructure for collaborative action." Examples of such type of infrastructure includes:

• a world class University (like University of Waterloo)
• research a technology "parks" (the MaRS discovery district in Toronto)
  
• a world class facility (like the Saskatoon Synchrotron)
• Transportation improvements (TTC transit City plan)
  

When you start seeing an economic development office with a proven track record..then and then only get excited about prospects for the town's real estate.

How do you spot the seeds of winner towns?

What are the factors we need to look in order to get a sense the real estate in a town will start kicking butt?

Analysis of real estate markets hard for two reasons:

1. is the fact you have many factors that drive real estate... they don't add up in a linear fashion (i.e. x+y=great real estate)
   
2. There is such a long time lag for the results of the local leaders actions before real estate could change.

Let's take a story of Ottawa and Kitchener-Cambridge-Waterloo area in 1990's. Ottawa hi-tech was on fire, companies like Nortel, JDS Uniphase, and Newbridge Networks were the darlings of the TSX. On the other hand KCW was a region in the middle of no where along the 401.

Flashfoward to now. RIM is on fire and KCW is home to many hot up and coming companies. Ottawa has some small promising startups...but nothing on the level that it once had.

Large companies have a huge impact on real estate, not only from driving up demand for office and industrial space...but in attracting employees for residential space. Understanding where a city will go real estate DOES involve studying the major employers in the area and to understand if they are on solid footing.

10 Minute Property Management course

Want to learn how become a good landlord in 10 Minutes or less? First thing, treat your real estate as a business. Simple as that. This is a lesson most gain through buy dealing with a lot of crap.

When I bought my first investment property I was so excited. I bought it under market value in high demand tenant area, had a professional landlord tenant lease, checked my potential tenant’s credit and rented it really quickly.

My first tenant was a sweet god fearing old lady, I thought I hit the jackpot because she gave me 6 post dated cheques and she loved the place. In a matter of months this situation changed. Without me knowing, my furnace conked out and I get a call from the city saying they wanted to speak to me because they thought I was a slum landlord. Very quickly, I was facing a tenant who broke her lease and took off, I was facing a court date with the city and I was carrying the mortgage on a property without a tenant. Going through this process I quickly learned the value of systematizing my investment property so I could limit myself from ever going through this again and could protect myself if I ever do.

Trading my war stories with April “The Terminator” Stewart, whose company, Landlord Legal, makes it their mission to eliminate problem tenants as quick and as pain free as possible, we’ve come up with the definitive way to set yourself up for success in managing your investment properties.

1. Be proactive:
• Buy legal properties. If you bought an illegal rooming house any landlord tenant contracts may not be enforceable and taking them to court could expose you to city bylaw officers.
• Pick the best tenants and do thorough background checks
• Know exactly what your competition is doing. When I first bought my first rental. I actually visited competition whenever I see a for rent sign. I was amazed not only by the difference in price, but with the differences in size, lighting, appliances etc. It really taught me how to sell the potential tenants and understand their issues.
• Have money in the bank to deal with any maintenance issues. They will come up and your tenants will let you know one way or the other.

2. Always keep in control, enter every landlord tenant situation as if you were going to take them to the board or take them to court. This means you have to create a file for each tenant documenting everything.

• Give your tenants rent receipts each time they pay you.
• Teach your tenants to send you every maintenance issue in writing with the proper forms in triplicate (one the tenant keeps, one goes in the tenant permanent file, one stays with you or the contractor have them sign it once complete). Showing that you are proactive landlord will go a long way at the landlord tenant board hearing.
• For any complaint advise tenants to document in writing the date, time and how it adversely affected their life. In cases when a neighbor is making excessive noise, this could be used to evict the offending tenant.
• Write your tenant dated reminder letters stating that if there are any maintenance issues please let you know. Keep these letters in your file. The burden of proof is on the tenant to prove that you were not proactive dealing with any issues
• Do quarterly inspections, have them sign any issues that you saw and fixed (i.e. replacing smoke detector batteries)

3. Keep the relationship purely business. Don’t run over to the property as a reaction every time they call. The only time the tenant should contact you is an emergency, every other communication must be in writing. This separates you from your own emotions, reading the issues allows you to be calm and collected.

Cambridge New Home overview. Should I buy a new home in Camrbidge for $350,000 put $40,000 in renovations and flip it later?

Real Estate Market Overview

Average price of resale properties listing on the mls has been doing great with a solid and steady appreciation rate.

Sales have declined 11% from last year, but when looking at a historical perspective, they are the second highest level on record. The resale market is doing well for a number of reasons:

1. Hugh price advantage buying old vs. new is about $109,000 (or about 40% higher)
2. Lots of selection
3. Great fundamentals (averages wages up 3%, continued population growth, diversification of economy as mentioned above).

New home market



Housing starts are trending down because of a huge decrease in multi-family sales. When considering your property, Cambridge single detached homes starts are driving the market right now in KCW.

Quick Highlights for Cambridge single detach home sales according to CMHC:

Year	Housing Starts	Completions	Q4 Price
2007	53	266	$446,230
2008	323	90	$380,774 (Decrease of 14.7 %!!!!)

What the above chart tells me is that there is a significant uptake on new homes that are in the construction phase in Cambridge, so we can expect a lot of new homes coming into the market next year. This has a significant impact in uncertain times, as evident in the above chart, in your area, according to CMHC, last year prices of new homes fell 14.7% comparing Q4 of 2008 to Q4 2007. Why this happened? People simply stopped buying in autumn, and builders slowed construction considerably (resulting in fewer completions in 2008) and were offering significant incentives (i.e. decreasing prices 14.7%) to offload the properties that they already started. Builders absolutely cannot have unsold inventory or they will go bankrupt.

It is hard to predict where the prices of new homes are going to be by the time you are ready to sell. Builders won’t react like the general real estate market, they are more open to the economic swings of the day, and that’s why you see such drastic changes. You would be purely speculating rather than buying.

Could prices decrease again? Builders are going to start building even more so people can get a new home before the new HST is going to be introduced (housing starts are at 323 now, up from 53 last year).

What could the impact be when you are buying a home during a time when builders are building the most? What impact will this competition have?

Will the increased supply be offset by more buyers coming in?

Do we really expect more buyers that are able to afford a home $350,000+ when for now KCW residents are their losing jobs, getting a mortgage is harder and most of the people moving in will rent first anyway?


Secondly, despite getting the house at a discount you are already paying for house at a price that is already in the top 10 highest price in the subdivision (of prices already sold last year). When you put the upgrades it will be in the top 5 of actually sold properties in the subdivision.

Now let’s get down to the nitty gritty numbers. Let’s say the following:

You buy the house for $352,000 put the $40,000 in upgrades. You get a mortgage for 281,600 at 4.5% with a 35 amortization on May 1st 2009. On May 1, 2012 your mortgage will be 270,557.49. So here are my calculations.

Sale Proceeds

Selling Price $410,000.00
Less Commissions $16,400.00 4%
Less Additional Costs of Sale $2,500.00
Less First Mortgage Payout $270,557.00
Less Down Payment and Upgrades $110,400.00
Before Tax - Net Sale Proceeds $10,143.00

It seems like a lot for work and lot of risk (Do we know if the house will be worth $410,000 in 2012, will it be worth $400,000? If so you make nothing).