New home prices edge lower - Western cities post largest drops, Statscan says

My Response to the comments on the latest globeandmail article

Why is western Canada taking a bigger housing hit when Ontario has lost more jobs.


Taking a look at prices at a historical level we have seen the market appreciate at incredible levels since 2005. It’s hard to put in context that the Tiger Wood’s like years we have been having is not the norm. The home prices shot up too quickly because of the frenzy of buying since 2006. We are seeing a normal correction in a long term up cycle.







We need to get back to late 70's house prices for it to match peoples ACTUAL paychecks these days. Till then oh well, the price crash has just started.


Affordability of a home is a key measure of the health of the market. According to the RBC affordability index, which measures the average pre-tax income that goes towards housing, Edmonton is currently under 40%. This is at the historical norm. It should be taken into account that the affordability now is even better than it was over the past 20 years with the introduction of the 35 amortization mortgages.

Ways To Fund Your Real Estate Investments

Today, I would like to briefly touch on a important subject matter when it comes to real estate investments – funding your down payment/closing costs. Many people think that real estate is a high stakes game that requires huge sums of money and is an investment vehicle that only rich people can participate in.

Many look at their chequing or savings account and come to the conclusion that they do not have the cash required to even make a down payment on an investment property. Well today, I would like to present you with a well known source of capital that real estate investors understand, use and most people have access to. This source of capital is called a Personal Line of credit or a Line of Credit (LOC).

A Personal Line of Credit is basically a revolving loan that you can secure from the bank. There are two type of Personal Line of Credits available. One is a Secured Line of Credit which means that any loan that is advanced to you is secured against an asset such as your principal residence. The other is a Non-Secured Line of Credit. The Non-Secured Line of Credit as the name suggests is not secured against any asset, you just have to qualify for the loan, but carries a higher interest rate.

Both Secured and Unsecured Line of Credits come with benefits and may allow you to fund real estate investment costs such as down payments, closing costs, inspection costs, appraisals, renovations and so on.

Benefits:

1. Relatively low interest rates compared to other source of credit such as credit cards. Interest rates are calculated by taking the current prime lending rate of that specific lending institution and adding their premium to that rate. Over the past 5 years, the interest rate on LOC loans have been between 7%-10% - much lower than credit cards. The rate that you ultimately get depends on your financial standing, credit score, current prime rate and the lending environment.

2. Interest Only Payments. Some banks/financial institutions will allow interest only payments which ultimately means that less money is required to service the debt.

For example, some banks only require that you pay 3% of the principal amount each month. So if you establish a $10,000 line of credit and you use it all for a major purchase, your monthly interest cost can be low as $30.

3. No Application Costs. There are no up-front fees or costs with applying for a Personal Line of Credit.

4. Revolving Credit Facility. LOC are revolving credit facilities which means that you can establish a line of credit and you will only be charged interest if you borrow from it.

• Once you open your Line of Credit, you have access to the full credit limit and you don't have to reapply
• As you pay off any credit that you have used, it becomes available again
• For example, if you have a credit limit of $10,000, you might use $2,000 for closing costs or renovation and have $8,000 for other purposes. As you pay off the $2,000, that credit becomes available again.

5. Tax Write Off Benefits. This is one of my favourite benefits. If you use your line of credit dollars towards an investment such as an investment property, you can write off all the expenses related to the loan. This means that you can now write off the interest as a investment/business expense!

Have Equity in Your Home? Get a Home Equity Line of Credit (HELOC).

Equity simply means that the fair market value of your home is higher than your current mortgage balance. The difference between the market value of your property and your mortgage balance is your equity amount. Now depending your finances and credit rating, banks may allow you to draw on that equity amount through something called a Home Line of Credit (HELOC).

What is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit is simply a revolving Line of Credit that allows you to use the equity in your home to borrow money. With the Home Equity Line of Credit, you can have access to up to 80% of the appraised value or purchase price of your home (whichever is lower), less any prior outstanding mortgage charges. As your mortgage balance decreases, your available credit increases.

The terms on a HELOC vary from bank to bank and of course your personal financial situation. I recommend that you consult with your mortgage broker or personal mortgage professional/banker on how a HELOC affects your finances and if it really meets your goals.

In closing, there are different ways to raise the money required to fund your real estate investments and Personal Line of Credit and HELOC are just a couple of ways.

Ajayan Sritharan
Real Experts Inc
www.realexpertsinc.com

Cash Is King – The Power of Positive Cash Flow

Today, I would like to illustrate the importance of positive cash flow in real estate investing. As I mentioned in previous articles, positive cash flow is a key element in real estate. Positive cash flow is important because it can allow you to make money in any real estate market – even during times when real estate prices are going down. However, please note that positive cash flow is not the only criteria when considering real estate opportunities, however, it is one of the tools used to identify good investment properties.

At Real Experts Inc, we generally purchase positive cash flow properties. At a minimum, we would consider buying properties that breaks even now, but have the potential to generate positive cash flow in the future. Let me illustrate the power of having positive cash flow properties in your investment portfolio and impact it can have on your investment returns.

About one year ago, I purchased a property in a small town in Ontario for $88,900 (a triplex). The price might shock you because it seems very low, but trust me; this is a real deal that I have completed. My total out of pocket cash investment was $11,800 – this includes the 10% down payment and closing costs. The monthly positive cash flow on this property is $400. ($4800/year). Therefore, my total return on my investment is 40.6%/year! If you think that is a great return on anyone’s money, you would be right. Now keep in mind, my return figure does not include any price appreciation or the fact that I was able to purchase this property below market value. But at the end of the day, with great cash flow like this, who’s counting on the real estate market to go up? Now, deals like this are not easy to find and it takes a lot of time and research to spot the right areas, and negotiate a favourable price.

Following a strategy of only buying cash flow positive properties, below current market values, has allowed us to make money even in today’s soft real estate market. In closing, positive cash flow is a very important element in real estate investing and can deliver key benefits such as:

a) Stable returns month after month (if the property is managed right and has no vacancies)

b) Allow you to generate profits even in down markets, thereby allowing you to ride out any short-term downturns such as the one we face now.

c) Reduce risk and generate the cash you need to purchase more real estate in the future.

REAL ESTATE IS A PROFIT MACHINE! - 7 Ways To Profit from Real Estate

As a sophisticated investor, I review every aspect of an investment before jumping in. The top 3 things I study are how the investment will be profitable, the risks involved and possible exit strategies.

Today, I like to focus on how investment in real estate can generate profits. Now most of us already know the 2 main ways real estate generates a profit – increase in property value (appreciation) and positive cash flow. However, did you know that there are 5 additional ways real estate can put money in your pocket? If your answer is “No”, please keep reading and you will be amazed to learn that there are actually 7 ways to make a profit in real estate.

Folks, only after learning that real estate can be profitable this many ways, I was able to come to the decision that real estate was an investment that I should be involved in.

1. The first one is Equity. Equity is basically the current market value of a property minus the mortgage amount owed to the bank. So how do you increase equity and therefore your profit on your real estate? When buying, you can negotiate and secure a lower purchase price (below fair market value) and when selling, you may be able to get top dollar for your property. If you do both things correctly, you can make thousands of dollars in profit. I will discuss ways to accomplish both in another article.

At Real Experts Inc, buying below current fair market value is a cornerstone of our strategy and so we always try to find deals at a discount. All of our properties have been purchased at least 10% below market. In today’s market, if you do your homework, you can find deals like that in many places – just make sure those areas are growing and have good long-term prospects.


2. Leverage is the power of using the bank’s money to fund your real estate purchases. By using the bank’s money to fund the majority of the property’s purchase price, you can now buy more property. Let me give you an example. Let’s say you have a $100,000 in cash to invest and there is a property that you would like to buy, also worth $100,000. Now you have two options:

a) Use all of your money to fund this purchase or

b) Use the bank’s money to fund the majority of this purchase and very little of your own money.

So now let’s look at the impact of both of these strategies:

a) If you use all of your money to buy this $100,000 property, you’ve bought 1 property with no debt but now you have run out of money to invest in other properties!

b) If you go and get a mortgage with the bank, say for 80% of the purchase price ($80,000) and pay the rest yourself 20% ($20,000), you have only spent $20,000 of your cash. This leaves you with another $80,000 to invest in other properties!
One word of caution, if you are borrowing from the bank, make sure that your property generates enough monthly rent/income to cover the mortgage payment as well as all the other costs (property taxes, utilities, insurance, property management fees etc).

3. Appreciation simply refers to the increase in market price of your property. Based on conservative estimates, real estate has appreciated an average of 3-5%/year over the past 25 years. So does that mean you’ve only made 3-5% on your investment? Absolutely not!

Let me illustrate an example. Say you purchased a property worth a $100,000 and made a down payment of $10,000 and financed the rest with a mortgage from the bank. Your actual out of pocket investment is only $10,000. Let’s also assume that the property went up in value by 5%. What’s your return on investment? Well it 50%!
How is this possible? Well, if you take the increase in property value which is $5000 (5 % x 100,000) and divide it by your out of pocket investment $10,000 this equals 50%. This is the power of appreciation and leverage in real estate!

4. Principal Reduction. This is one of the sure fire ways to make money in real estate. Every month you are going to be collecting rent from your tenants. You will use that rent to pay your monthly mortgage bill. As we all know, part of your mortgage payment goes towards the interest on your loan, but the other part goes towards the principal amount that you owe. So this means you have now got someone else paying down your loan and in time your mortgage balance will be zero!

5. Positive Cash Flow. Positive cash flow simply means that your total income on a property is greater than all the expenses related to that property. Positive cash flow is a key fundamental in real estate investing. You only want to purchase property that is positive cash flow. At a minimum, you want to make sure that the property breaks even and that you don’t have negative cash flow.
All of our properties generate positive cash flow and have allowed us to live a better lifestyle and not rely on a company pay cheque all the time. In most cases, positive cash flow coupled with principal reduction of your mortgage is your ticket to generating predictable returns in any real estate market (especially when the market is correcting).

6. Tax Benefits. When you are in real estate you have to treat this as an investment and a business. Therefore, you can now write off all of your expenses associated with owning that investment or operating that business. So for example, you can write off things such as your mortgage interest on your investment property, utilities costs, property management costs and so on. However, on the flip side, you have to declare your rents as rental income. Please make sure that you speak to a professional accountant about what is considered rental income and business expense.

7. Refinance/Equity Re-investment. To illustrate this point, let’s go back to the original example. Consider the following scenario. So let’s say the property that you bought for $100,000 went up 5 % every year. Now 4 years later, the house would be worth about $121,000. Now during that time let’s say your mortgage balance went down to $80,000.

You can borrow against the new value of your property (refinance) usually it can go up to 80% of the property value. So how much cash can you pull out of your current investment and how is that calculated?
You take $121.000 (property value) x 80% and subtract $80,000 (your mortgage balance) this equals about $17,000. This means that a few amazing things have happened:

1. You have cashed in on the increase of your property without having to sell it!
2. You didn’t have to pay a hefty commission to the real estate agent (often 5% of selling price) – you saved $6,050 on commission alone.
3. You get to keep the property where your mortgage is still being paid down by the tenant’s rental payments.
4. If you have a positive cash flow property, you can still profit from that and benefit from any future increase in property price (appreciation)
5. Now you have $17,000 in cash that you can use to buy a similar property and repeat the process. This is how you build your real estate portfolio and multiply your income.

Big News: New rodent problems for Chinatown, Kensington Market

Now a high density of rodents in Chinatown shouldn't be surprising...it also has the highest density of restaurants and grocery stores in the city.

When I see Chinatown-Kensington market area I see great opportunity for some residential development. The area is a classic case of how economic fundamentals, when uncontrolled, can kill a neighborhood.
Being a neighborhood that is very accessible and close to the core, Chinatown-Kensington, has always been a highly concentrated area with business and retail. As a result, many different businesses move into the area and area becomes popular with people looking for a diverse shopping area.
Overtime, because of the super competitive nature of a neighborhood, the winners of economic fundamental dance are only a very narrow segment of particular uses, crowding out other businesses that supplied the diversity in the first place.

This is what happened in Chinatown. In its first incarnation, Chinatown started with one successful laundry business started by Sam Ching in the 1870’s.

Sam Ching, started a trend of thousands of Chinese immigrants starting laundry shops in the area, as more and more migrant Chinese started to move in they saw opportunity to open different kinds of businesses, and they opened restaurants and grocery stores. These businesses started to become really popular and profitable; as a result, more and more would be restaurant and grocery store owners starting to prospect the area and they were willing to pay higher rents to landlords than the other businesses (like the laundry shops).

The other businesses in the area started to get crowded out because they couldn’t afford the rents in the area as the rents were going up.

Fast forward to today, the area becomes super saturated with restaurants and grocery shops, driving away other businesses (i.e. to Markham). What’s ironic it’s the diversity of businesses that would create extra traffic to the area which caused the restaurants and grocery shops to be popular in the first place. Chinatown-Kensington market is now a rat infested fad neighborhood.

Toronto should increase the diversity of the area by making it economic viable for developers to increase the number of residential and office buildings available along Spadina (YES CONDO’s). The AGO and Ontario College of Art and Design are doing a great job creating a different type of anchor to attract people, however, it doesn’t make economic sense for a developer to build a condo or office building on Spadina over Markham…that’s why Markham is getting more jobs and Toronto is getting more rats.

Can Gordon Ramsay make real estate more attractive?

So if Starbucks can make your real estate double (see the Venti Indicator) can Gordan Ramsay do the same for some lucky Toronto neighborhood. The thought of that sweet smelling fresh and local ingredients bringing all those DINKS (Dual Income No Kids) into a transitioning neighborhood like Dundas East (ONE COLE anyone?) may have developers salivating for something else.

Rochester Real Estate: Stagnating towns or neighborhoods

During my hunt to find profitable real estate investments I went to Rochester. I heard it was a goldmine for cash flow and had potential for future growth because real estate was so cheap. I went in with an open mind, saw property and then dug in the fundamentals for the city and particular neighborhoods. Alas, after doing the research, I don't feel Rochester is a good place to invest, especially for Canadians (significant currency risks will erode any cashflow, and you will see continued deprecation with no real exit strategy).

This trip lead me to write this blog about why some towns and some neighborhoods are stuck in perpetual loops of decay (i'll call the ghetto loop). Rochester has some really rough neighborhoods where an out of town investor can find properties under $20,000...basically these properties are worth less than the materials used to build them...simply because they are in poor locations.

The ghetto loop occurs when residents of a neighborhood cannot help themselves to prosper and have to move away. Essentially, every time a population makes any socio-economic gains, people move en mass. When this occurs the new residents that replace them are in the same socio-economic situation of the people that just left...essentially creating a black hole for millions of public dollars in policing and social assistance. Being a real estate investor, I see two things I CAN'T STAND:

1) Wasted Investment dollars (i.e. public money) that could go to making my real estate grow

and

2) wasted potential for a good investment if i want to make one.


For my opinion, part of the reason why the potential for real estate gains is wasted is because there is nothing there to hold the population in place to make a change.

I wish I can find the stats to support this, I haven't seen lenders publish the ratio of successful/unsuccessful applications for a particular neighborhood in Rochester and why they were unsuccessful. As a result, I can only come from is personal experiences of of bankers and residents in certain neighborhoods that are transitioning.


Now Imagine if you were a new immigrant, who loved your neighborhood, saw it as being unique and irreplaceable...how could you possibly build roots if my partner couldn't even get financing?


Can you imagine the impact this would have on the neighborhood? It is essentially impossible for new residents to grow into the middle class and stay.


This has the following impacts:

1) Huge turnover in population but low vacancy
2) Vacant properties or occupied properties with many code violations (showing that residents have little attachment to neighborhoods)
3) Houses for sale with extremely high days on market
4) Accidental landlords (people who couldn't sell their properties and are forced to rent them out with little expertise)
5) Lenders blacklisting the entire town or neighborhood
6) No changes in the numbers of dwellings
7) Most of the property has similar architecture (showing new homes are being built)
8) No changes in the number of dwellings built

If you see these fundamentals you might want to reconsider it as an area in transition.

If the US doesn't change things, these areas will get worse and worse because as time goes by any potential for a sense of community will be destroyed as more new residents move in they are unlikely to invest in the neighborhood and are unlikely to have little in common with their neighbors (possibly being bitter for living there in the first place).


Keys of seeking opportunities

1) Programs and grants encouraging people to set up roots in the neighborhoods. These grants should be adequately funded and disbursed regularly.
2) Populations slowly decreasing but vacancy remains the same (people are choosing to live there, rather than being forced to live there because of their situation causing the household size to decrease)
3) Average incomes increasing
4) Existing infrastructure of businesses staying and new businesses moving in
5) Increasing home ownership
6) Few code violations
7) Low crime (community policing themselves)



You can take a look at my research report here on Rochester to find the neighborhoods that I found that have the potential to transition.