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Think of each property as a small business in its own right and manage it until it is throwing off cash, author says
Susan Smith – Globe and Mail
Building a real estate portfolio can mean working toward financial freedom – or it can mean taking risks that will give you more sleepless nights than days on the golf course.
The difference, according to Don Campbell, is cash flow.
“I would never buy a property that didn’t have positive cash flow,” says Mr. Campbell, president of the Real Estate Investment Network. “A lot of people, unsophisticated investors, buy properties as if they were stocks – the only way they’re going to make money is if they rise in value.”
Of course, it’s great if your properties do rise in value. But this is the “buy and pray” strategy, not the best for real estate investing, says Mr. Campbell, author of 81 Financial and Tax Tips for the Canadian Real Estate Investor, released in February.
Mr. Campbell’s advice is to look for properties in areas that have a future, not a past. And don’t make the mistake of thinking they have to be close to home. Look for places where the average income is increasing, where the population is growing faster than the provincial average, areas that are in transition and where there is spending on transportation infrastructure.
Then as you add properties, think of each as a small business in its own right and manage it until it is throwing off cash. Get your expenses where you want them to be, get your rents where you want them to be, develop a good relationship with clients, i.e. your tenants, and build loyalty.
When each property reaches that “normalized state,” you can think about adding another one. Adding properties too soon, Mr. Campbell says, is a recipe for chaos and frustration.
This is where cash flow becomes most important – because if yours isn’t positive, the bank isn’t going to lend you more money.
“If you have a positive-cash-flowing portfolio, the bank adores you,” Mr. Campbell says. “It shows that you know what you’re doing, that you have the ability to manage your investments, and that you have some business acumen.”
In fact, he adds, banks are insisting on positive cash flow now for investment properties. “You know you can expand when the bank says you can expand.”
Continually manage your portfolio with this in mind, and don’t be afraid to get rid of a property if it isn’t performing. Beginning investors often make the mistake of holding on for dear life to that one money-losing investment in an otherwise healthy portfolio because they don’t want to admit they’ve made a mistake. Mr. Campbell’s advice: Sell it, even if you take a loss, use the loss wisely from a tax perspective and move on.
Another reason cash flow is king is the show of intention when it does come time to sell. Showing that you intended to hold a property as a money-making instrument may qualify for a capital gains exemption, which means you would pay capital gains on only 50% of your proceeds, instead of 100%.
So-called flippers and blatant speculation do not qualify, as far as the tax man is concerned.
“If you’re lining up around the block for a box in the sky that doesn’t exist – and you hope to flip it – it’s not cash flow and it’s not a capital-gain-exempt investment,” Mr. Campbell says. “Therefore you’re going to be paying a lot more tax.”
You also may be left under water when the market goes south, a lesson some people learned during this last economic downturn.
While positive cash flow may mean paying taxes in the short term, Mr. Campbell says that’s a good thing. “I’m a big proponent in paying lots of tax,” he says. “It means you’re making lots of money.”
Offshore accounting schemes or other tax-avoidance measures are something to be avoided. The Canada Revenue Agency has been in this business a lot longer than any of us, he points out, and they’ve seen all the schemes come and go.
Remember, too, that cash flow does not necessarily mean net profit. If you have a good accountant – one who understands the ins and outs of real estate investing – you won’t be paying more taxes than you should be.
But since you will be paying taxes, it’s best to plan.
One pitfall Mr. Campbell says he sees, especially with new real estate investors, is that a positive cash flow can get spent rather quickly, leaving the well dry when tax time comes around.
“Estimate your profit,” he says. “If 80% of your net cash flow is going to be taxable, put 40% aside.” Checking profit-and-loss statements monthly is a must, he says. And another bit of important, if rather prosaic advice – hire a good bookkeeper.
Above all, he counsels, try not to get emotional.
“It’s all about the numbers,” he says. “We all do it – fall in love with a property – but you really can’t afford to get emotionally involved.”
It may not be romantic, and it may not be exciting, but “you have to fall in love with cash flow.”
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Single-detached housing values remain slightly off 2008 levels in 27% of Toronto Real Estate Board districts
Despite limited inventory levels in the Greater Toronto Area (GTA) in the latter half of the year, double-digit price appreciation failed to materialize in the single-detached housing category in 2009.
In fact, an in-depth analysis 63 districts within the Toronto Real Estate Board found that detached housing values in 27% of districts remained slightly off 2008 levels, while 57% reported price appreciation of less than 5% in 2009. Sixteen percent of districts recorded an increase in average price in excess of 5%. No double-digit gains were noted.
“There is simply no evidence of a housing bubble,” says Michael Polzler, Executive Vice President, RE/MAX Ontario-Atlantic Canada. “While sales were up considerably over one year ago – and supply was tight in many of the city’s hot pocket areas – the expected surge in average price did not occur. Buyers remained cautious in their pursuit of homeownership – with most unwilling to overpay for the privilege. “
While one quarter of all Toronto Real Estate Board districts saw prices in the detached housing category soften in 2009, just over half declined by less than 2%. Those that saw prices fall by more than 2% were primarily upper-end neighbourhoods – the vast majority located in the central core – which were slower to rebound once the market regained momentum. By year-end, however, sales in all of these areas posted double-digit growth – a fact that clearly indicates a greater number of transactions at the lower end of the price spectrum. Inventory may have also played a role as sellers held off listing their luxury properties until market conditions improved.
Leading the GTA in terms of price appreciation was South Pickering (E12) where the average has risen 9.4% to $358,493; Malvern, Hillside, Rouge (E11) takes second place with a 7.3% upswing to $368,095; North Pickering (E13) was ranked third with values climbing 7.2% to $396,973; fourth spot goes to Port Credit (W12) in Mississauga where values have climbed seven% to $614,144; and rounding out the top five – the lone downtown Toronto district – was Riverdale, Leslieville (E01) where prices escalated 6.7% to $522,017.
Ballantrae, Cedar Valley (N13) ranked sixth with a reported 6.4% increase to $662,268. In seventh place is Richmond Hill – North End (N05) with a 6.3% increase in average price to $574,642. The Applewood, Rathwood neigbhourhoods (W14) in Mississauga ranked eighth in terms of price appreciation, rising 6.1% to $505,994, while Markham (N10) claimed ninth spot with a 5.3% escalation in detached housing values, bringing the average to $510,268. Bathurst Manor, Armour Heights (C06) in the city’s north end secured tenth place with a 5.1% upswing in average price to $597,025.
The East clearly dominated the top five and affordability factored in heavily, with single-detached homes in both Pickering districts and Malvern, Hillside, Rouge, priced under $400,000. Young families – most buying their first home – were attracted to communities like Riverdale and up-and-coming Leslieville, while move-up buyers looked to Port Credit, which has steadily increased in popularity in recent years.
“First-time buyers were a driving force throughout much of the year, but their role was most noticeable in early 2009,” says Polzler. “Almost one in every two homes sold was priced under $400,000 in the first quarter of the year. An entirely different picture emerged in the final quarter when just one-third of homes moved under the $400,000 price point.”
As the move-up segment swelled, so too did demand for more upscale properties across the board. Yet, despite the upswing, average price registered only a small percentage increase. In the central core, for example, where the average price ranges from $572,529 in Don Mills to as high as $1,717,190 in Rosedale, overall values rose 1% to $919,838, compared to 2008. Unit sales in C-district jumped 31% to close to 4,000 units.
The number of homes sold in the city’s north end saw the greatest percentage increase at 32% to 8,843 units. Average price in North district, which ranges from $398,864 in Newmarket to $700,499 in King City, rose 2% overall to $555,616. Housing sales climbed in the west, where values range from $298,136 in Brampton to $790,060 in the Kingsway, by close to 19% to 12,453 units. West district’s average price rose a nominal 1.5% to $467,227. The increase in sales was more moderate in the East End (including Scarborough and Pickering, Ajax), where values range from $325,393 in Bendale, Woburn to $691,128 in the Beach. The number of detached homes sold increased 15% year over year to 6,690. Average price in East Toronto rose 2.6% overall to $400,813.
“After a dismal start, the stats confirm that 2009 returned to the healthy, upward trajectory that we have followed for much of the last decade,” says Polzler. “We see detached homes continuing on that course in 2010, with moderate gains expected. The detached housing category continues to be a solid gauge of the market’s overall performance, accounting for approximately half of the activity in GTA.”
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ctvtoronto.ca – with a report from CTV Toronto’s Paul Bliss
The development industry says new home sales in the GTA are at their highest level in more than two years.
The Building Industry and Land Development Association (BILD) said Friday that there were 4,150 sales in October, the best results since July 2007.
Sales of homes, primarily in the 905 area, “were up an astounding 173%,” it said Friday.
High-rise condo sales, primarily in Toronto, “rose by an impressive 77%,” BILD said, citing RealNet Canada Inc. as the data source.
“The turnaround in new home sales has been nothing short of remarkable, with homebuyers taking advantage of ultra-low interest rates and intense competition among builders,” Stephen Dupuis, BILD’s president and CEO, said in a statement.
“The low-rise new housing market picked-up in late Spring while the high-rise condo market has sprung back this fall, accounting for 60% of total new home sales in October,” he said.
“With year-to-date sales now running 2.5% ahead of last year and a decidedly up-note in the market, it looks like total new home sales in 2009 will end up far higher than anyone could have anticipated earlier in the year.”
In Toronto, real estate agent Krysten Fleischhacker of Coldwell Banker told CTV Toronto that the condo business has been crazy.
“There’s so much competition. There’s been multiple offers on every unit that’s under $400,000, it seems — even higher,” she said.
One issue is that inventory is low. Fleischhacker said it’s so tough to get into the resale market, many are finding better deals in new condos.
“They do offer incentives, like cash-back on closing or up to $5,000 in upgrades, which could include laminate floors throughout …,” she said.
So long as interest rates and inventory stays low, Fleischhacker said it’s likely to remain a seller’s market.
CTV Toronto’s Paul Bliss said some agents are lining up to buying units in new buildings before turning around and selling them again.
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