Real Estate as a wealth building strategy

Dan, I am writing out of the blue today, because I need a change. I took a glimpse at an investment book last night, and one thing that it said is to talk to those in the know about investments.

Could I pick your brain about real estate? Is there still a lot of potential in our market for house flipping? Is it worth getting involved in flipping or would it be better to find real estate (commercial) to invest in? What is your opinion on flipping? Where does one start, to minimize headaches/failures? My book suggests having good team players, and you have always been a strong player when it comes to real estate.

Interesting that you have dropped a note of this flavour as I have been dealing with quite a few clients that are curious on how to move forward as a real estate investor to assist them in wealth building, as a matter of fact, I think this note may very well turn into a Blog…

There are many "real estate investment groups" books and seminars that can give you a lot of insight and different takes as to their investment strategies in the market, both long and short term. I am not a member, nor do I support any of these groups, however, I would suggest exploring some of these may be a good start for your quest. I would also suggest there are literally thousands of "potential investors" that have been through seminars, read books and joined organizations giving direction on how to go about investing in real estate (especially with little or no money down.) There is rarely a corner I drive by that doesn't have a sign that says "we will buy your home"… I would also suggest you take whatever information you gather from these self-proclaimed "guru's" with a grain (or a pound) of salt!

Don't get me wrong, I am definitely a proponent of real estate as an excellent wealth building strategy, as a matter of fact I believe there are none better. What I am saying is that one needs to take a conservative stance on returns on your investment, especially in our current world economy. There will also be opportunities for short term gains, however, most of these will have a very high risk factor. Taking a gamble with your hard earned cash is something I would never adhere to and certainly an avenue I would not personally advise for anyone.

Flipping, renovating, developing, modernizing, updating and such for short term profit is an extremely volatile and risky position to be in today, I suppose without some risk there would be little potential for gain. I have a variety of developers that are constantly on the hunt for ideal purchases for redevelopment and/or quick renovations for profit. I often consider developing, especially in the city core, myself. True developers often have a variety of "holding" properties at any point in time in anticipation of the value in a certain area going up at a future point in time to meet their profitability criterion. Spending a lot of time and effort researching where a potential future development or rebuild would be most profitable should be a major component of a developers protocol. There are no guarantees as to where the next popular or trendy place will be, and I would suggest that if you were consistent in making those predictions you would do very well for yourself.

Let me give you an example… five or ten years ago it was fashionable for the "upper middle" and "higher" wage earners and wealth builders to move to the outskirts of the city to large acreages and huge homes. Great examples of this would be Elbow Valley, Springbank and Bearspaw. We still see a certain amount of activity in these areas, however, there has certainly been a shift in paradigm for the wealthier echelon of our society. If we could have seen this coming more clearly we could have profited from the current trend - and that trend is a movement to the city core. A few years back we saw smaller builders and developers buying properties with 50' frontages to tear down and rebuild high end attached homes and infill's. This was (and still is) quite popular, but here is where things have changed… where in past it was investors and developers buying to redevelop at a profit, a good portion of the purchases and redevelopment are now for personal use. Why is that important? Quite simply, profitability. Where an investor needs to analyze a profit margin, someone developing simply for the pleasure of living in a specific area, profitability takes on a more minor role. If you have deep pockets and do not anticipate selling anytime soon, analyzing the bottom line is less fundamental. So prices in these pockets (such as Altadore) rapidly increase, purchasing land for development and profitability becomes more of an issue, so spec home builders start to look for other areas that may be more profitable.

And this has certainly happened… many small builders have looked into other communities in anticipation of the "next thing". And here is where the issue lies… finding that next area to develop is quite complex, and often accurate predictability is difficult if not impossible. I have seen many start up builders move to areas such as Highland Park, as an example, in anticipation of seeing the same popularity blossom in that community as we have seen in others. Cost of land in an area such as this is considerably less than somewhere like Altadore, and they feel they can develop and sell for a larger profit. What we have seen in this situation is that potential buyers are not willing to pay the same premium as the builder anticipated. We have seen many, many small builders fall by the wayside as they have invested into areas that did not support their expectations. I would suggest that an area such as Highland Park may do well in future, however, that time is not necessarily now. Perhaps purchasing a holding property in a community such as this would be something to analyze and consider for a future development.

Another interesting example of an area that showed promise, but slowed considerably is Bowness. Early this year there were quite a few homes for sale in the mid to light $300k's. Many of the homes in the centre part of the community are quite similar in size and land (50 x 120 lots with similar sized bungalows). At the same time there were some "upgraded" homes that were selling in the mid $400k's in the exact same area. Investors looked at this and thought they could sink $40k - $60k into the building, then "flip" the home for a decent profit. Here is what happened… quite a few investors purchased the fixer uppers at the same time with the same end goal… fix up the run down and dated property, then bring them to market at the premium price point… however, many came back on the market at about the same time. What they did not consider was the sustainability of the volume of potential buyers for that higher listing price. A pure example of supply and demand, there were too many renovated homes in Bowness for the demand. Now many of the investors will need to make some important decisions. Will I sell for the current market value, and possibly lose money, or should I hold this property for a while in anticipation of an upward swing in values in future? If they decide to hold on for a short term, perhaps waiting until the spring rush, they may face further decline in market value over the next few months… Alternatively, they may decide to use the development as a rental property and look at it as a more long term holding property.

Holding the property for a longer term than anticipated now brings a new issue to the forefront. If this redevelopment was originally put together as a short term project, they will now have to lock up some of their operational budget and funding. That means less (or no) cash for a future project. I believe we have more and more of these scenarios happening and what that does is slow much of the potential future development we could have if the market continued to more upward, or even if it stayed the same. I wonder how many "I am holding but wish I didn't have to hold" properties there are today?

So I guess that brings me to your next observation, would it be better to find commercial properties to invest in? I absolutely am a proponent of long-term holding properties whether it is commercial holding, or residential rental properties. There are many opportunities that present themselves in any market as far as a long-term holding and also in terms of profitability. Perhaps one of the hottest holding properties would be a self storage facility, I would also suspect there are a great many investors looking for such an animal. Warehousing, apartment buildings, office space, strip malls, the list goes on and on. A major component of a holding portfolio is the money necessary to put financing in place. Regardless of which financial institution you work with, they will expect you to invest a portion of your own assets into the project. Many of the organizations, seminars, books and speakers that preach long term holding or short term flipping talk about using "other people's money" (OPM) for securing the property. Financing, and especially "creative" financing, is way beyond my area of expertise, however, I do adhere to the old saying, "if it sounds too good to be true…" I have been to seminars that encourage you to utilize the equity in your home or other investments to secure a new real estate direction. Regardless of how you leverage or liquidate your current wealth and assets, let me remind you that money is not free and there will be a premium on what you borrow, and that needs to be addressed when deciding to move forward with your business plan and wealth building strategies.

The unique and beautiful aspect of a real estate investment is that there is the opportunity to have someone else pay your mortgage, or at least a good portion of your mortgage. I think you will have difficulty finding another investment that gives you that opportunity. And as you slowly build your portfolio and pay down the mortgage, you can then access that new equity to borrow against for new investment properties. Keep in mind it takes time to pay down your loan, patience - in this case - is very important. Time will also start to increase the value of your investment, accelerating your equity. We are currently in a very volatile market, and we will most likely see some short-term downward movement in real estate values (see my last Blog, Downsizing and Building.) However, you need to keep an eye on your long-term goals to help weather the storm. We cannot predict exactly what will happen in future, and if we keep waiting for the "perfect" time, "perfect" plan or "perfect" opportunity, we may never make the commitment that is needed to move forward in building our wealth.

What one needs to do is plot out your long term goals and forecast, and that is where aligning yourself with an experienced and diverse circle of influence will assist you in making informed and educated decisions and choices that will assist you in moving forward. I would, of course, be happy to assist you any way I can. Do not hesitate to ask if you have questions or concerns you feel I can help you with.

Good luck with this new life direction!

Downsizing and Building

I was recently contacted by clients that are considering downsizing their home to take advantage of a lower mortgage debt load. After spending a great deal of time putting together information to assist them in making a decision on how to move forward, I felt this information would be useful and is pertinent to anyone considering a similar scenario or considering building a new home. Enjoy!


Their current home is a beautiful, modernized two storey in a lake community that was developed in the early 1970's. It was originally listed in August 2007 after the extensive renovations were completed for $819,900. I assisted them in purchasing this lovely home for $645k in September of the following year. That huge drop of 21% in anticipated value must have been a tough pill to swallow for the previous owners. I suppose that would be an interesting lesson in timing and perhaps a topic for a future Blog…

This family is looking at reducing their mortgage by about $200k and staying within the same community. With that large debt reduction, they will also be looking at downsizing their home, both literally and figuratively speaking. With this significant value change, some of their choices for a new home will certainly be fixer-uppers or "dated" homes that will need some significant renovations to bring the property to today's standards. There will also be some recently upgraded homes, they will just be of a different style, size and perhaps in a less desirable location within the community when compared to their current home. What they really need to decide is whether they are interested in purchasing a home that may need an extensive makeover, or whether they would be happy in a much smaller home than they are currently accustomed to.

In the case they decide to renovate an older home, another major decision is whether they are willing to live in the house while the work is being done, or will the renovations be completed prior to moving in. I would suggest that living in a home that is getting major renovations is certainly a challenge, especially if you have children. If you are deciding to take on a similar project, I would encourage you to consider renting a property to live in for the interim, or finding someone that will take you in (such as a relative) while the work is being done. Another option that many consider is to stay in their existing home while the work is being done, then to sell the first home once the work is completed. The big issue here is predicting what will happen to the market value while this process is taking place, and this is a similar process as to when building a new home.

To move to the next stage in making this change, we need to be sure to have a good plan in place, especially if considering holding two properties for a time as you renovate or build your new home. We are certainly in a volatile market, and have been for a long time (since 2005?)… Imagine being in the same position as the previous owner above in August 2008 and considering a similar scenario - purchasing a fixer upper in anticipation of renovating and enjoying the lower mortgage and new development in a few months. If they made this decision with the preconceived notion that they were expecting close to $800k for their home, you can see the dilemma… that value certainly slipped away from them in a big hurry. I am in no way saying that the same thing will happen over the next while, as a matter of fact, the complete opposite could also happen as did happen to anyone that would have considered this scenario in late 2005, prices literally doubled in many areas of the city in a matter of a few months. If you are buying and selling at the same time, whether the market is high or low is relative as you are buying and selling in the same market. However, when you are buying and selling at different times, anticipating the gap between the two values becomes a bit of a gamble. The same can be said for building a new home. You buy a "new build" at today's price, however, you take possession of that home at a future date (perhaps six to nine months or more) where the value can possibly change dramatically depending on what has happened in the market. What I would like to do now is give you my take on the current market and the probability of where it could possibly go - to assist you with the decision on moving forward with this new direction and how to approach the change.

I am taking the position of optimistic caution for where the market is heading over the next few weeks, months and years. There was an interesting article in the Herald yesterday with the headline "MLS sales and prices both ascend in September" (Calgary Herald, Business Section, Page C3, October 2nd, 2012). Upon initial review, it certainly seems to paint a rosy picture of our current state of affairs in the local real estate market. Let me delve a bit deeper into what I personally see going on to get a better gage of how things are looking, and where they could be heading.

The first point to ponder is that all of the "growth" increases and leaps in value and movement that we are seeing in the media are in comparison to last year at the same time. In a city of our size, we should see sales figures of somewhere between 1,000 and 1,400 single family homes sold per month. Our peak season (March to June) should be at the higher end of that number, and perhaps even peak over that amount. Alternatively, our low season (October to January) will typically dip below this range, especially December and January which historically see very slow sales. I would caution you that we are heading into our slowest period of the year. That fact is always a big question mark for values of homes and certainly for the time on the market it requires to find the right buyer for a home. Our average monthly sales figure from 2008-2011 has been just over 1,100 sales per month. Last year saw moderate growth at best as our general sales figures were flat. Our peak month in 2011 was in June when we reached 1,385 sales. That is within the range I mentioned above, however, a very mediocre "peak" number. We then saw a steady month-by-month decline in sales from July 2011 until January of this year. Without a doubt, much of the growth we saw at the beginning of this year can be contributed to that lackluster seven month period.

When we look at a shorter term we can see that we have actually seen a decrease in sales and the average price of a home in metro Calgary in recent months… as a matter of fact, prices have declined month by month since our year peak in May to the tune of -7%! (Average price in May was $502,065 and average price in September was $468,360 for a single family home in Metro Calgary - CREB Monthly Housing Statistics, September 2012).

There are certainly areas within the city that do better than others and there does seem to be a lack of inventory of certain types of homes in specific areas, especially those closer to the city core. So when we look at the city as a whole, we do see that our inventory is down as well as our new listings. However, when we look specifically at many of our suburbs, we see a different story. In the subject property's community of Lake Bonavista, there are currently 15 active listings and last month there were only four sales. Other areas in Calgary are seeing a major slowing in activity. For example, there are 32 homes for sale in Kincora, last month there were only two sales. Sherwood had one sale last month (16 active listings) and Hanson Ranch had one sale (8 active listings). Evanston fared a bit better with 13 sales, however, there are 64 active listings over there. We can go throughout the city to see similar trends in the suburban areas in the outskirts of the city limits. (Active listings taken from MLS on October 1st, 2012)

There are also many external contributing factors to real estate sales, and I am sure there are few areas that are more affected by extraneous factors than we see in Calgary… where are oil and gas prices? Do we have a net "in" migration to the city? And what about global factors such as the economic conditions in the rest of the world? What is going on with the European union? What is happening politically in other oil producing nations, especially those in the middle east? We often maintain optimism in Alberta that contributes to our micro economic conditions… however, it is very difficult to maintain steady growth that trends against what is happening in the rest of the world, especially for prolonged periods of time.

Also consider the fact that in Canada we are seeing a slowing national real estate market outside of our province, and in a world of uncertainly in the global economy, consumer confidence in Alberta and the prairie provinces has certainly improved this year… my question is how long can we maintain our optimism? We seem to always do better than most other areas in economic crunches, however, we ARE eventually affected.

To summarize, I do believe that what is happening in the global economy will affect us over the next few months. I would suggest we will see a bit of a cooling period and the chances of the same dramatic jump in the market we saw early this year happening again next year are slim. I would hope we see a bit of growth in values, however, if we stay steady over the next year I think we will be doing well.

In making the decision to purchase or build a new home today, whether downsizing or upsizing, I would suggest that the gamble in anticipating the value of your current home in a few months may be a dangerous venture. As in the real case scenario of the home above, if your budget depends on a certain sales price of your existing home, perhaps it would be prudent to sell the home in the current market (whenever that is) as the current price you can sell your home for is the only guaranteed price you can "bank on" and will eliminate the stress of an unknown profit margin in the process of building or redeveloping your new home.

Well, stress-free for what you know you have for a budget for the financial aspect of your new project. Dealing with building and renovations and that stress is a topic for another day…