Adam Brind – The Globe and Mail

With signs of uncer­tainty in the mar­ket, it has never been more impor­tant to ana­lyze your next real estate invest­ment. Jump­ing into the unknown and hop­ing for the best is risky busi­ness. While this tac­tic may have worked over the past three years dur­ing Canada’s lucra­tive real estate mar­ket, it is no longer the case. Real estate has never been a fool’s game’ and now is the time to switch strate­gies and become dili­gent for a greater chance of success.

It is also unwise to sit on the side­lines in cash. Down­ward mar­ket shifts are healthy for a num­ber of rea­sons because it ampli­fies the good, the bad, and weeds out the average.

Tac­ti­cal invest­ing is the act of lever­ag­ing a strat­egy behind every deci­sion. All too often, real estate investors make deci­sions based on past per­for­mance or suc­cess – the same type of mis­takes are found in cap­i­tal mar­kets. As an investor, it is impor­tant to treat every deci­sion inde­pen­dently, and per­form the proper due dili­gence with the right set of tools.

Just because Uncle Joe bought on spec­u­la­tion and got lucky, doesn’t mean that you have a sure bet. The only cer­tainty in real estate is that the mar­ket can take it away as fast as it can give it. By tak­ing a few sim­ple steps, you will put your­self in a bet­ter posi­tion for suc­cess and max­i­mize your work­ing cap­i­tal. Below, we exam­ine some very rel­e­vant tools for per­form­ing your own due dili­gence, com­mon traps in the mar­ket, some issues that are often over­looked, and some warn­ing signs that the devel­op­ment will fail.

None of these tools are meant to make you invin­ci­ble, but they will def­i­nitely help to put you in a posi­tion to take advan­tage of poten­tial mar­ket changes. If you’re an expert already, they are likely to rein­force your cur­rent invest­ment strategies.

Five crit­i­cal tests of a good condo investment

These five core fil­ters are the bread and but­ter of invest­ing in real estate. If your next pur­chase does not pass at least four of the five fil­ters below, it is likely a good time to recon­sider the investment.

1. Pric­ing
The old proverb remains true: you make money in real estate by what you pay for it, not what you sell it for. Pric­ing is the eas­i­est way to ensure that you are on the right track. If you are buy­ing in a heated mar­ket or in a ‘hot’ neigh­bour­hood, it is likely that you’re buy­ing at the fifty two-week high (or three year high in Toronto’s case). Stay away from inflated prices.

2. Devel­oper expe­ri­ence
The prob­lem with heated mar­kets is that it attracts ama­teurs that want to get in on the action. But, more often than not, these prod­ucts lack qual­ity and design. They may look good on paper, but the under­ly­ing issues will make you want out faster than the ink can dry. Try to buy from a local devel­oper that has a port­fo­lio of suc­cess­ful prod­ucts in the neighbourhood.

3. Devel­op­ment logis­tics
Even if the price is right and the devel­oper is great, you will still need to exam­ine the size of the project, lay­outs, designer, ameni­ties, etc. If the project is reach­ing for the stars, you can bet that it will feel less like a com­mu­nity and more like a tran­sient bus station.

4. Loca­tion and neigh­bour­hood
Condo invest­ments, resale or new, hinge on their loca­tion and the neigh­bour­hood that sur­rounds them. The neigh­bour­hood makes the condo and not the other way around. This doesn’t mean that the neigh­bour­hood has to be com­pletely gen­tri­fied; it just means that it has to have the foun­da­tion for resale and rental capacity.

5. Run­ning the num­bers
Even if you are purely a growth player, the rental num­bers still have to make sense for resale value. Long-term value investors will focus directly on the cap rate of the prop­erty. Future rental capac­ity is crit­i­cal to a strong invest­ment and build­ing a pas­sive portfolio.

Traps to avoid when buy­ing condos

Beyond exam­in­ing the core fil­ters, it is crit­i­cal to under­stand com­mon traps in the mar­ket. These sim­ple mis­takes can mean the dif­fer­ence between a great investor and an aver­age one. Why not learn from oth­ers’ mistakes?

1. Get­ting caught in the devel­oper hype.
Remem­ber, devel­op­ers spend thou­sands of dol­lars on mar­ket­ing and pro­mot­ing the launch of a new prod­uct. So, it is incred­i­bly easy to get lost in the vor­tex of devel­oper greed. Take a step back and think about your next pur­chase. Don’t be fooled into over­pay­ing for a prod­uct because you are get­ting the ‘friends and fam­ily’ discount.

2. Believ­ing you can sell it before it reg­is­ters (on assign­ment).
If you are not in a posi­tion where you can obtain a mort­gage when the project reg­is­ters, stay away from buy­ing new con­struc­tion. The mar­ket is being flooded with condo assign­ments and many are sell­ing below their orig­i­nal pur­chase price. This trend is likely to con­tinue as more projects near com­ple­tion and the sup­ply increases.

3. Buy­ing with­out motive / not hav­ing a plan.
Are you a pas­sive investor? Will you man­age the prop­erty your­self? Do you know about cap­i­tal gains taxes? Is res­i­den­tial real estate the best approach? Before invest­ing in real estate assets, it is impor­tant to hash out a very spe­cific plan; oth­er­wise, you run the risk of los­ing your cap­i­tal or worse.

4. Cap­i­tal appre­ci­a­tion vs. income approach.
Every­one can tol­er­ate risk dif­fer­ently, but what is your approach? This goes back to the last point about plan­ning. Real estate is very sim­i­lar to invest­ing in the equity mar­ket. Every invest­ment oppor­tu­nity is dif­fer­ent, and know­ing your motives will help you to place your cap­i­tal in the most appro­pri­ate way.

5. Over upgrad­ing
Over upgrad­ing is a very com­mon mis­take made by ama­teurs, and one that can be costly. Devel­op­ers have tried to spear­head this prob­lem by pro­vid­ing palettes , but own­ers still make this mis­take. Over upgrad­ing to your tastes may not be reflected in the mar­ket value of the prop­erty and likely, do not appeal to the masses. By default, this decreases your buyer pool and demand for the product.

Costly mis­takes investors make

Next, we will take a look at some issues that are often over­looked by investors. Fail­ing to con­sider these issues could be disastrous.

1. Not under­stand­ing the tax impli­ca­tions.
The whole point of invest­ing is to make money, cor­rect? Before you jump into any invest­ment, you must under­stand the tax impli­ca­tions of buy­ing, own­ing and sell­ing that invest­ment. Using an accoun­tant that spe­cial­izes in real estate will help you under­stand terms such as Recap­ture of Cap­i­tal Cost Allowance.

2. Assum­ing that it will appre­ci­ate.
Over the past three years, Canada has seen some explo­sive growth, espe­cially in the major cities. But appre­ci­a­tion is never guar­an­teed. Aggres­sive growth investors look­ing to buy and sell under three years of own­er­ship could run into prob­lems if they don’t con­sider this fact.

3. Not dou­ble check­ing sur­round­ing real estate lots.
There is noth­ing worse than buy­ing real estate only to find out that your view and build­ing will be com­pletely obstructed by a new build­ing. Any sign of cranes or even a zon­ing amend­ment appli­ca­tion can be detri­men­tal to the value of the prop­erty. Even if you are sur­rounded by pro­tected her­itage prop­er­ties, do some research with the city.

4. Not run­ning the num­bers.
Real estate is a game of num­bers. The upside is that these num­bers make real estate invest­ments pre­dictable and con­trol­lable. Run­ning the num­bers before tak­ing the plunge puts you in con­trol of the sit­u­a­tion and ensures that you max­i­mize your cap­i­tal placement.

5. Ignor­ing the mar­ket signs and sig­nals.
Ignor­ing the mar­ket signs and sig­nals is an ama­teur move that can be dev­as­tat­ing to your bot­tom line. Ignore the media, read indus­try reports and ask the right questions.

Dan­ger! 5 warn­ing signs to beware of

Even after an invest­ment has gone through copi­ous amounts of due dili­gence, it is still very pos­si­ble that the project is going to be a dud. Here are some clear warn­ing signs that you should consider:

1. Trou­ble with the city/planning depart­ment.
If you find that a devel­oper is hav­ing dif­fi­cul­ties with the city’s plan­ning depart­ment, it is usu­ally for a good rea­son. Even if they resolve their issues, the project tim­ing would be extended and at the very least, your cap­i­tal will be tied up and not earn­ing money. On the more aggres­sive side, you could lose your entire deposit to an unfin­ished project.

2. Slow sales.
Ever won­der why a devel­oper pushes Real­tor com­mis­sion to 5% or offers a Mer­cedes as an incen­tive bonus? It is because sales are slow so they do every­thing in their power to attract buy­ers and their agents. Unfor­tu­nately, some­times it works. But a project should sell itself. If buy­ers are cur­rently stay­ing clear, what will hap­pen when it is built?

3. Ter­ri­ble curb appeal.
Sell­ing real estate will never change – some devel­op­ers get it and some do not. It sounds sim­ple but some devel­op­ments fail because of the curb appeal.

4. Exten­u­at­ing cir­cum­stances
Some devel­op­ments just can’t get away from exten­u­at­ing cir­cum­stances , either by design or due to the build­ing code. For instance, one build­ing in Toronto was pro­hib­ited from hav­ing any oper­at­ing win­dows on the north side of the build­ing. This does not hurt the south fac­ing suites, but the build­ing now has a neg­a­tive rep­u­ta­tion. Using com­mon sense is the best way to avoid involve­ment in a build­ing that has the poten­tial to gain neg­a­tive publicity.

5. Too good to be true.
If you find a build­ing or devel­op­ment that is sell­ing far below the mar­ket and neigh­bour­hood value, and it seems like it is too good to be true – it usu­ally is and will likely attract the wrong investors. Every mar­ket has these devel­op­ers and they usu­ally mask their awful prod­ucts with great mar­ket­ing. Be cau­tious of below mar­ket prices.

The impor­tant point to remem­ber is that invest­ing in real estate can still be very risky. It is a big com­mit­ment to under­stand and find the right oppor­tu­ni­ties in the mar­ket place. The good news is that there are pro­fes­sion­als that can help you with this.

Whether you decide to work alone or hire a pro­fes­sional, make sure that you have a solid plan; one that is dynamic and flex­i­ble enough to shift with the chang­ing mar­kets. The plan should have a time­line, pro­jec­tions, mile­stones and goals. It is very sim­i­lar to craft­ing a com­pre­hen­sive busi­ness plan with your ulti­mate goal as the under­ly­ing moti­va­tor. Your strat­egy and processes will most likely adapt but your goal should not.

Once the plan is in place, due dili­gence is only a means to an end. Run­ning the num­bers, research­ing and find­ing the right oppor­tu­nity is the best part of the game and it only becomes eas­ier after the first cou­ple of deals are behind you.

Really savvy investors will look at hun­dreds of deals before they deploy their cap­i­tal and that is what makes them so suc­cess­ful. It is also their abil­ity to think cre­atively and act on instincts. This tal­ent is devel­oped with expe­ri­ence, but it is impor­tant to note that savvy investors have one dis­tinct advan­tage: they can think out­side the box when it comes to craft­ing deals.

As soon as you can under­stand that there are no rules, it will auto­mat­i­cally put you at a dis­tinct advan­tage com­pared to the gen­eral pop­u­la­tion that believes that buy­ing and sell­ing real estate has boundaries.

—————————————————————————————————–
Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
—————————————————————————————————–

is finance min­is­ter flat­terly likely to ease mort­gage lend­ing rules in spring of 2013

Related posts:

1. Toronto condo mar­ket hits down but­ton So far, prices are hold­ing firm: In the sec­ond quarter,…
2. Buy­ing a Home for Your Child Some par­ents are buy­ing homes for their kids. It’s a…
3. Condo boom may avoid crash on demo­graph­ics Canada’s boom­ing con­do­minium mar­ket, which has filled the sky­lines of…
4. New Condo Buy­ing Like all mar­kets, real estate expe­ri­ences fluc­tu­a­tions in activ­ity. One…
5. Buy­ing an invest­ment condo It is not so easy to find a condo that…