Greetings!
I trust the month of January is proving to be a positive start to your year.
To think, we are only about 1 month into the new year and I am having a difficult
time remembering when I have ever heard so much noise and 'hype' (both positive
and negative) around Real Estate. Our office is contacted literally two to three
times a day to 'pitch' us the latest U.S. based 'guru tour,' or if we would like
to get $250,000 to sell our clients a piece of U.S. or Tropical Real Estate (of
course we always say "NO" because once you cross the line of selling real estate
to your clients, your research is no longer valid as it is no longer unbiased).
This is the hardest that these promoters have ever hit Canada during the 16 years
we have been researching the markets. That's a sign that once again Canadian real
estate investors are being targeted with all kinds of 'distractions', taking their
focus off of what is known worldwide as a great place to invest... CANADA. I just
wanted to remind you to always complete your due diligence before taking action
no matter how much 'pressure' you are put under.
As you know, Real Estate investing is based upon educating yourself around solid
economic fundamentals, surrounding yourself with like-minded people, having a long
term vision, taking the emotions out of the equation, and taking action by making
your decisions based upon the numbers that get you closer to your long term plan,
(not pretty pictures).
As a sophisticated investor your job is to quickly cut through the noise and get
down to what is 'Real'.
I urge you to make your Real Estate business decisions based upon using a system
that has proven results in Canada (like $2.3 billion dollars in real estate purchased)
and the system is proven over years of testing that works in up, down and sideways
markets (like 16+ years of testing and improvements each and every year).
The rest of this newsletter is set to provide you insights into the markets and
to share strategies to make your business run better and more profitably.
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*A Quick Event Update*
Our economic and real estate research team is right in the middle of completing
our updated unbiased research. It will be ready for release for the first time on
June 7th & 8th. The market has changed
substantially over the last 5 months and we're going to be able to finally answer
the question "What's Really Going
On - and What Should an Investor Do?"
We'll be releasing the good and the bad that the research is revealing about the
key Western Canada Real Estate markets... then we'll tell you how to use this unbiased
research and what actions to take in today's rolling markets...
As a reader of the Canadian Real Estate insider, we would like to invite you to
attend this exclusive event. We have managed to secure you a $200 discount off the
registration price PLUS you can get access to the private members only meeting (typically
only available for exclusive members of the Real Estate Investment Network™). This
additional bonus event will happen the Friday night before ACRE System, June 6th.
This bonus event alone will be worth your attendance.
You can rest assured that our research will be completely unbiased, as we do not
(and never will) sell Real Estate to you. Our entire goal is to educate and provide
research to people interested in the Canadian Real Estate market...
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Offer Expires: June 4, 2008
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What Really Drives Property Values Up and Down?
Don R. Campbell
Sophisticated Real Estate investors dig much deeper behind the curtain to discover
the hidden gems in any market conditions. Just like the stock market, not all towns
see real estate values increase in a booming market and many actually under-perform
or even drop. Your job as an investor is to pick areas providing the best returns
for the lowest risk by cutting through the negative news and getting to the real
numbers.
There is a simple and easy strategy for doing this and it is called:
Focus on the Fundamentals Not Emotions.
Successful real estate investing is all about identifying a town or neighborhood
that has a future, not a past. Sadly, many investors like to invest based on past
performance and find themselves constantly chasing the market, responding emotionally
to headlines. Although they call themselves investors they are, in reality, speculators
because they don't understand the economics behind their property increases and
decreases. There is a huge difference between investing and speculating, the main
difference being unbiased knowledge and the second difference is having a long term
outlook for their target area.
To dramatically reduce your risk, ask the following key questions, and don't fall
in love with a property or a region. As soon as you fall in love with a region,
you can find many ways to 'justify' your investment. Sophisticated investors don't
care where the property is located - they just want to ensure that it is economically
strong and that it has long term viability.
There are 12 major influences on the long-term values of property. Each of these
affects real estate prices in both directions, and each one is an important component
in finding which way real estate values will be going. Dig deep, the more yes's
you get, the better the market will perform.
- Is the area's average income increasing faster than provincial/state
average?
- Is the area's population growing faster than the provincial/state average?
- Is the area creating jobs faster than the provincial/state average?
- Does the area have more than one major employer?
- Is real estate booming in the surrounding region more than where you're
looking?
- Will property values benefit from a major new development nearby?
- Has the local and provincial/state political leadership created a 'growth
atmosphere?'
- Is the region's Economic Development Office helpful and pro-active?
- Is the neighborhood located in an area of renewal or gentrification?
Or is it in a "war zone?"
- Is there a major transportation improvement occurring nearby?
- Is the area attractive to 'Baby Boomers?'
- Is a short term perceived problem (negative media stories, short term
layoffs) occurring that will disappear?
Don't get caught up in other people's opinions of the market. You can ask 10 different
experts on what the market is going to do over the next 10 years and you get 15
different opinions. The only truth that matters is based in the numbers. Do your
own homework, don't skip any steps in your investment system and most importantly
keep your eye on what it is you want real estate to create for you over the next
decade so you and your family can live the life you know you deserve.
See you at the Upcoming ACRE System Conference in Calgary June 6th - 8th, 2008.
At that conference we will be diving in depth into the above 12 economic fundamentals
PLUS... we will be discussing the following topics regarding the Western Canada
Real Estate Market:
- Property Values Will Explode in Three VERY Specific Areas of Alberta
in the Next 5 Years... While Other Areas May Collapse!
- Property Values In Two Major Towns Will Begin To Drop Dramatically And
Bottom Out In The Next Few Years... Providing You With HUGE Buying Opportunities!
- Exactly What Types Of Real Estate Will Give You The Best 'Bang For Your
Buck' in These Select Towns... Giving You Monthly Cash Flow AND Above Average Increases
In Value!
- Where and How To Invest In Real Estate To Get A Consistently High Return
On Your Money... Every Year For The Next Decade!
- How To Take Advantage Of The Huge Jump In Property For Sale Listings!
You can rest assured that our research will be completely unbiased, as we do not
(and never will) sell Real Estate to you. Our entire goal is to educate and provide
research to people interested in the Canadian Real Estate market...
click on this link to register
for this special event.
Writing Is On The Wall -- Mortgage Market News
Peter Kinch
The 'Spring Real Estate Market' is well under way and this year the launch of the
Spring Market was greatly aided by a half-point discount in the Prime lending rate.
This has made all variable rate mortgages much more attractive and in turn made
home purchases that much more affordable. In all, the Bank of Canada has lowered
rates by a full 1.5 percentage points since December. The question now is - where
do we go from here?
I found it very interesting to note that the new Bank of Canada Governor, Mark Carney,
has made two public announcements since the last rate drop stating very clearly
that consumers may not continue to benefit from ongoing rate reductions.
This is, of course, part of the ongoing fallout from the Global Credit Crunch that
just won't go away. Earlier this year I had the privilege of hearing Alan Greenspan
speak when he was in Vancouver and the one point that struck a chord with me was
the fact that we have yet to see the true global cost of the sub prime meltdown.
I remember Mr. Greenspan noting that it is impossible to predict the full long-term
impact and the possible options for recovery until we actually hit the bottom -
and the problem is that no one seems to know exactly where that bottom is. Translation?
We haven't seen the worst of it yet.
The true translation of this lies in the ongoing Global Credit Crunch. How it impacts
you, the borrower in Canada, will be played out over the upcoming months. Things
that you could take for granted a year ago won't be the case this year.
I think the writing is on the wall and Mr. Carney is making it very clear to anyone
who wants to listen, the Bank of Canada can only do so much and even if they do
continue to lower rates in the future, that doesn't mean that the Chartered Banks
will follow suit. In fact, we've already seen evidence of this.
As I've mentioned before in this Newsletter, the gap between the bond rate and the
long-term fixed rate is double what it should be. The Chartered Banks have been
in a position for quite some time to pass on significant savings to mortgage borrowers
on the long-term fixed rates but have chosen not to because of what they call 're-pricing
risk' in the wake of the collapse of the U.S. Sub-Prime mortgage market.
In a nutshell, the banks need to recuperate funds somewhere to offset the massive
write-downs they have incurred. In other words, they have to try to balance the
books somehow.
So why choose the long-term rates instead of the Prime lending rate? Simple, it's
a lot easier to hide. If a Chartered Bank chose not to lower their Prime lending
rate following the Bank of Canada announcement, there would have been a massive
public outcry. But, if the bond drops a bit and the 5 yr rate doesn't follow suit
- it's a bit akin to a tree falling in the forest.
I would think that the banks would be happy to make up for their sub-prime losses
by increasing the spread they get on the bond rates (remember - bond rates dictate
the long-term mortgage rates and the Bank of Canada dictates the Prime lending rate),
but now they've come up with ways to cover their losses on the Variable rates as
well.
Banks know that there would be public outcry if they decided not to lower Prime
after the BOC lowered its overnight lending rate, so what they did instead is lessen
the amount they discount off of Prime. In August, the trend in Variable Rate Mortgages
(VRMs) was a higher discount such as Prime - .90, but now you're lucky to get Prime
- .65 - and the trend is moving downward.
True, the cost of borrowing is getting more expensive, which accounts for something,
but the trend and the language coming from the banks does not bode well for Canadian
homebuyers. In fact, comments from Mr. Carney last week indicate that future rate
decreases from the Central Bank may not translate into an automatic drop in the
Prime lending rate offered by the Chartered Banks.
Clearly, no one is under any false illusion that the Canadian market is impervious
to the perils south of the border, but it should be noted that Canada is maintaining
a strong economy in relation to the pending U.S. recession. We can hope that the
markets have already priced in the future losses and that we will soon find out
where that bottom actually is. In the meantime, look for three definite trends over
the next few months:
- Rates (both long and short-term) will be very steady and may even dip
a little lower.
- The discount off of the bank's Prime lending rate will be less than
it has been in the past.
- Since the long-term rates are more profitable than the VRMs, look for banks to continue
to offer 'Quick Close Specials' to entice you to lock in today.
For my money, even though the discount off the variable is not as much as it was
in the past - it still beats going with the long-term today. But I do have one major
disclaimer - a year from now it could be a completely different story - so until
we actually see the bottom of the market that Mr. Greenspan was looking for, all
bets are off. Go with the variable today - but be prepared to lock in on short notice.
Until then, Happy Investing,
Peter Kinch
Peter Kinch is the owner and senior mortgage broker with Port Moody B.C.-based The
Mortgage Centre - Canadian Mortgage Team. He is a co-author of 97 Tips for Canadian
Real Estate Investors. Peter will be one of the key presenters at the upcoming REIN™
ACRE System Program in Alberta.
Click
here to read all the details.
Overleveraged?
Question of the month...
courtesy from the members only section of
www.myREINspace.com
Question:
If you are using Secured (or unsecured) Lines of Credit to finance all your purchases
how do you establish when you have gone far enough before this strategy becomes
too risky?
Answer:
Great question, and one question every Real Estate Investor needs to ask themself,
"What is my risk tolerance when it comes to leverage?"
Leverage in Real Estate is a key fundamental but it is like a double edged sword,
sometimes it can cut both ways (creating substantial Returns on Your Investment...
or creating Substantial Losses). So treat leverage with cautious optimism.
There are a couple of key measurements built into the 'system' to keep you from
overleveraging yourself... however people can get into trouble if they do not measure
and monitor this on a monthly (even weekly) basis. Sometimes people with 'Cavalier'
attitudes with debt can be caught in something they cannot manage.
I recommend you get very clear visibility for yourself when it comes to the measurement
of these indicators below. You might even want to keep a simple spread sheet handy,
or better yet use your REMA™ analysis tool, as it is very powerful to help you keep
track of your numbers. Once you have clear visibility with your numbers, you will
want to monitor and constantly improve your situation.
- Debt Service Ratios-
Typically banks want you to be at 40% of your income to be able to qualify for more
mortgages. You will want to measure your debt service ratios on a monthly basis.
Can you service your debts within the 40% guidelines? This is also a good measurement
to determine if you will be able to qualify for more financing.
- Net Worth-
How does your net worth look? Are you paper rich, cash flow poor? Can you manage
the low cash flow (if applicable)? Having significant net worth and not being able
to support the payments is not a model for long term sustainability.
- Loan to Value Ratio-
Most banks typically want to see at least the conventional level of a LTV of 80%.
How is your Loan to Value ratio, less than 80% or greater?
- Reserve Fund -
What is the minimum level of cash you want to have on hand? $1,000/ property? 1
month of rents? 3 months of rents? As we learned at ACRE System, having that staying
power fund is a great way to ensure business sustainability, and you can absorb
any *surprises* that pop up that you have to take care of. I always find having
the reserve fund in CASH, not credit, is the best model to have. Monitoring the
bank account levels of your reserve funds AT LEAST on a monthly basis is a necessity.
At the end of the month, if the reserve fund is below your acceptable level, contribute
to it and bring it up to the minimal threshold you set for your properties.
- Bottom Line Cash Flow-
Simple in theory... at the end of the month is the chunk of money coming in greater
than the chunk of money going out? If you have positive cash flow your portfolio
can sustain itself, and you have long term business longevity. If the portfolio
is negative cash flow (or cannot be sustained by yourself, or income from other
sources) you have to take measures to correct this (i.e. increase income, decrease
expenses, restructure your mortgage, longer amortizations, keep larger reserve funds
on hand to handle the drain, sell a couple of the 'dog' properties, etc, etc...)
These numbers are ones that I measure on a monthly basis, and having a handle on
them helps me sleep at night...
As well, if you are concerned that you are using too much of your own money (or
credit) to buy Real Estate and you feel you may be overleveraging yourself personally,
and you want to continue to buy Real Estate to achieve your goals, you will want
to master the art of Joint Venturing, where you can work with other peoples money
to buy Real Estate.
You will have to give away a percentage of your deals but it can potentially lower
your personal leverage... As a quick side note, if you were to go the route of JV'ing,
your partners will want to ensure you have a handle on your numbers that were outlined
above.
Trust this helps...
Russell Westcott
Professional Real Estate Investor
VP Marketing REIN™ Canada
Russell Westcott is a Professional Real Estate Investor, VP of Marketing for REIN™
Canada and a co-author of 97 Tips for Canadian Real Estate Investors. You can see
Russell live at the upcoming REIN™ ACRE System Program in Alberta.
Click here to read all the details.
Keep your eyes peeled for key, fundamentally strong Real Estate deals, and no matter
who you are dealing with always do your complete due diligence.
Stay focused and on track during these times of uncertainty. Suffice it to say,
knowledge and support is incredibly important right now, and because we REFUSE to
sell property to our clients, we can remain totally unbiased.
See you on myreinspace.com and we will see you at the next ACRE System program in
Calgary. Bring your questions, all will be answered.
Sincerely,
Don R. Campbell and The REIN™ Team
"Turning Real Estate Dreams Into Realities... One Investor At A Time!"
Copyright 1996-2008 by Real Estate Investment Network™. All rights reserved.
PS... As mentioned, the next event where you can learn the brand
new research is only a few weeks away and is already 72% full...
click here to instantly register for this exclusive event.
PPS... Please feel free to forward this e-mail to anyone you know
who is concerned about what is really happening in the Canadian real estate market.
They too can access this research, so they don't get caught. It might be the biggest
favour you have ever done for them. People need the truth, and you can give them
access to it.
Thank You for Reading the Real Estate Insider
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Don R. Campbell
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