Tag Archives: real estate investments
Appetite in Canadian real estate investments remains strong despite lull: survey
By Mario Toneguzzi, Calgary Herald
Canadian real estate investors are cautiously optimistic that a fast recovery is on the horizon even though the market has yet to reach its lowest point.
But according to Colliers International’s 2010 Global Investor Sentiment Survey, 65% of Canadian institutional and private real estate investors said they are considering further acquisitions over the next 12 months, mirroring the global trend (64%).
The global survey of more than 240 major real estate investors (including 26 large Canadian institutional property investors) with a total investment portfolio of over $300 billion, also found a strong appetite for domestic investments. The vast majority (85%) of Canadian respondents who indicated acquisition plans intend to focus on the domestic market, especially in locations such as Toronto (27.8%), Vancouver and Montreal (16.7% each), Edmonton and Calgary (14.8% and 11.1% respectively).
The lack of appetite for foreign investments is also reflected globally with eight out of ten respondents having no offshore portfolio or intentions to invest overseas.
“On a risk adjusted basis, Canadian investors still see Canada as a preferred investment destination that offers a higher return on investment compared to the U.S., in part because of the turmoil that still lingers south of the border,” said Milton Lamb, Chair, National Investment Team, with Colliers International in Canada. “Additional reasons respondents gave for focusing on domestic investments range from the quality of assets to diversification of income stream, availability of capital or better valuation matching income.”
The survey also found that 73% of Canadian investors feel that access to capital became easier over the past year and 54% say the movement toward easier access to debt to continue.
The inaugural 2010 Global Investor Sentiment Survey was conducted by Colliers International between Feb. 15 and March 1 and includes responses from 244 major institutional and private investors whose combined investment portfolio exceeds $300 billion.
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Climbs rankings among foreigners seeking stable and secure returns from real estate investments
By Tony Wong – Toronto Star
Foreign investors looking for global real estate investments have ranked Canada among the top three countries to park their money.
The U.S. and Germany were in first and second place, but Canada ranked third in the survey for providing the most “stable and secure” investment by the Association of Foreign Investors in Real Estate (AFIRE) released Monday.
Last year Canada placed sixth. Canada also ranked sixth as the country best seen as providing the most opportunity for capital appreciation. Last year Canada ranked 13th.
“Canada is a core investment for many investors who see our market for its stability,” said George Carras, president of commercial real estate consultancy RealNet Canada Inc. “This bodes well for the future, where we might see more interest from foreign investors this year.”
Despite the promising signs, 2009 was a dismal year for commercial real estate, particularly in the key Greater Toronto Area market.
There was $5.4 billion worth of investment volume in commercial buildings last year, the lowest figure in more than a decade.
“It was definitely a tough year, where a lot of investors just sat on their hands waiting out the market,” said Carras.
The market started to show signs of life in the fourth quarter, however, with an almost four-fold increase from the third quarter.
The biggest sale in the fourth quarter and for the year was 151 Front St. E. for $180 million to Allied REIT. Morguard Investments also purchased two office towers on Bloor St. for $164 million.
The international perception that Canada has withstood the economic downturn particularly well has been beneficial for the real estate markets here.
The perennial frontrunner, the United States, while still in No. 1 spot as being a stable market for investment at 44 per cent of the vote, is down from 53 per cent in 2008 and 57 per cent in 2010.
This is the first time that the United States, a place where investors have traditionally parked their money, has fallen below 50 per cent. Germany received 21 per cent of the vote and Canada was at 14 per cent.
The industry group predicts that 2010 will be a better time for the investment industry.
“Although foreign investors expressed every intent to resume investing in 2009, like everyone else their plans were sidelined by a paralyzed marketplace with no precedent and limited investment opportunities,” said Werner Sohier, chair of AFIRE.
“However new money is becoming available and the survey points to an increased focus and interest in a few select markets.”
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A Great Long Term Investment
Sacha Gera, Ivey School of Business
Growing up, I watched my father accumulate rental income properties. He would spend many hours renting out his units and maintaining his properties while remaining on the outlook for his next acquisition. I always found my father’s real estate activities fascinating – it was like watching a good game of monopoly.
As soon my wife and I accumulated enough wealth, we leaped into the rental income game – we purchased a three bedroom town home in a western Ottawa suburb called Kanata. Kanata was home to a large concentration of high tech firms and the prices were mighty attractive following the high tech bust in the early 2000′s.
The rental market in Ottawa had always been rock solid with its large concentration of government and high tech workers, high household incomes, low unemployment, rampant population and employment growth – they say it’s about location, location, location and we felt that Kanata/Ottawa was a sound place to be.
Why rental income properties make a sound investment?
There are a number of reasons of why real estate and rental income properties specifically make a good investment, but here are few basic reasons:
i) You are leveraging and using OPM (Other People’s Money)
The beauty about rental income properties is that you are making money using OPM: the bank’s money (i.e. via a mortgage loan), and via your renter’s rent money (i.e. the person paying the mortgages and property bills on your behalf). Obtaining a mortgage from a bank is a fairly simple process and bank’s love to loan out money especially when it comes to real estate – I can’t think of another investment whereby a bank will spot you up to 80% or more of the total investment amount so easily (typically banks require 20% down payment for a rental income property).
Further, the rent on a good rental income property should cover all or most of the expenses related to your property including mortgage payments, property taxes, and insurance. As long as you can keep your place rented, and as long the property is in a good area you are likely to profit handsomely over the long term while leveraging OPM.
ii) Real estate is generally a sound/stable investment over the long term and good way to diversify
Most Canadian cities have provided solid real estate returns over the last decades. Sure, we do encounter declines in some centres as cyclical recessions hit, but over the long term real estate has been a sound investment. Ottawa for example has returned 5.5% over the last 54 years and has only had four minor down years during that period. Other centres such as Toronto and Calgary have witnessed rapid appreciation and depreciation over certain time frames, but have both offered significant upside over the long term. In addition, real estate offers an opportunity to diversify one’s portfolio beyond equities and the stock market.
iii) There are favourable tax advantages in owning rental income properties
Most investors are familiar with the two points above, however many are not aware of the favourable tax advantages involved with owning rental income properties. Unlike one’s own primary residence, an investor in a rental income property can make a number of allowable tax deductions to offset income including the interest on your rental income mortgage or associated loan, maintenance and management expenses, advertising expenses, insurance expenses, property taxes, and utilities amongst others.
The key item in this list is that the interest you pay on your mortgage is tax deductible just like it is for home owners in the U.S.! This expense alone will likely offset most of your rental income in a year allowing you to escape having to pay income tax on the rental income.
How do you make money off of rental income properties?
i) The renter pays off your mortgage over time
A good rental income property will bring in enough rent to cover all or most of the mortgage bill, which is comprised of a principal and interest portion. Over time, the rent will pay off more and more of the mortgage principal adding to the investor’s equity and adding to the investment’s returns.
ii) The property appreciates
A property in a good location will typically appreciate over time. As the property appreciates, so does the investor’s equity and return.
iii) The multiplier affect
As time goes by and the investor’s equity grows as per points i) and ii) above, one can refinance the property with the bank and use a percentage of the the gained equity to make an additional rental income investment (i.e. pull out a percentage of the equity from the investment based on the bank’s minimum requirements). I call this the ‘multiplier affect’ – in essence the returns earned from one rental income properties can be used to purchase another property allowing one to add to his/her real estate portfolio and allowing one to grow their returns exponentially. It’s like a fruit tree bearing more and more fruit over time.
Perhaps an example will best sum up how rental income properties can be used to make a solid investment return over the long term:
An investor, let’s call her Susan, buys a 2 bedroom condo in downtown Toronto for $300,000 in the year 2009. The condo fees are $300/month, the property tax is $2,400/yearly and the property insurance expense is $40/monthly. Susan has made a down payment of 20%, or $60,000 as per her bank’s requirement on a rental income property. The bank has granted a mortgage of $240,000 amortized over 25 years on a 5 year fixed, closed rate mortgage of 4.25%/annually. To make things simple we’ll say that the condo is rented for all 12 months of the year at $1,890/month + utilities (i.e. renter pays for utilities).
Monthly Expenses: $1,890, Monthly Rental Income: $1890
Mortgage (including principal and interest): $1295/month
Condo Fees: $300/month
Property Taxes: $200/month
In the first year, the property appreciates in value by 2.0% or $6,000 and about $5,500 of the mortgage principal is paid off based on 12 monthly mortgages payments made using the rental income. Total investor’s equity has increased by $6,000 + $5,500 = $11,500 in one year! What is Susan’s first year return?
Total investment made by Susan: $60,000 for down payment
Total gain in equity in year one: $11,500
Total return (ROIC): $11,500/$60,000 = 19.1%
Wow – Susan was able to use $240,000 of the banks money + rental income to make a handsome 19.1% return on her investment! Okay – this example perhaps makes it seem all too easy but really there isn’t much more to the rental income investment story then what was described!
So how did Susan fair after five years? Well – her 2 bedroom condo appreciated on average by 2.0% over 5 years and was worth about $330,000 in the year 2014. Her apartment was rented for all 60 months because her property was in a highly desirable location near the financial district; home to thousands of jobs. Only $210,000 was left on her mortgage after 5 years and after 60 monthly payments had been made from the rental income.
Susan now had $120,000 of equity ($330,000 – $210,000) in the property! It was now time to refinance/renew her 5 year mortgage, so she talked to her banker who told her that she only needed to leave $66,000 or 20% equity in the condo after she refinanced/renewed her mortgage. Susan therefore withdrew $54,000 from the investment property ($120,000 – $66,000) and used it as a down payment on a second rental income property, which the bank was happy to finance considering her success on the first property.
Susan now owns two rental income properties in just five years. Her gains in the following five years are likely to be double of the first five years now that she has twice the properties – the ‘multiplier affect’. Good job Susan! I wonder how many properties Susan will own at this pace in 25 years, and how much wealth she would have accumulated?
What are the risks involved with rental income properties?
Of course there are risks involved with any investment and rental income properties rarely work out as rosy as Susan’s example above. Here are some common risks to be aware of:
i) Buying at the peak of a market, which is followed by a bust and falling real estate prices
There are plenty of such investors at the moment in Phoenix, Las Vegas, and perhaps even Calgary. Buying at the peak and encountering falling real estate prices can dramatically affect your long run returns. The key is to pickup properties at the right times.
ii) Excess maintenance
Older properties generally require more yearly maintenance and therefore erode your profits. An investor must do a thorough job in assessing the key maintenance components of a property including the furnace, air conditioning, electrical systems, and plumbing. The last thing you want is for your property to become a money pit, although maintenance is tax deductible on rental income properties.
When a rental income property is vacant, it is money out of your own pocket – not fun! Remember location, location, location! The more desirable a location, the less likely you’ll encounter vacancy and the higher the rent you’ll likely command. Of course, some vacancy is always expected and it is fairly common to expect one or more months of vacancy per year.
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