What To Buy and What Not To
Some property classes will rise in value and other fall at the same time in the same marketplace.
This article appeared in The Vancouver Sun on August 25, 2001
In the last 24 months we have seen markets in Ontario, Alberta and throughout the US soar- as in- to the sky. Prices are MUCH higher and are still rising. The question then: Should we buy now in BC and if so ... what and what not?
In the eighties is used to be so easy to buy property, if you paid too much for it, you just bought it too soon. Inflation bailed you out. In the year 2001 it won't be quite that easy. Some property classes will rise in value and other fall at the same time in the same marketplace. Some real estate values in some parts of BC may never recover, others will soar. One thing is for certain the more things change the more they'll bite you. Caveat emptor remains number one.
Before the 'what' we should understand some 'basics':
What to buy?
- As an investor in a new home you need to buy at least 12% below the market.
Take a $400,000 home. Add GST at $28,000, land transfer taxes $5,000 (or so - varies by area) when you sell it will cost you (7% on the first $100,000 and 2.5% on the balance) $14,500. You need to sell the property for $447,500 just to break even. And that does not account for the legal/title transfer costs.
- As an investor in a used home you save GST but all else stays the same - you still need to buy below the market.
- In most markets in Canada more buyers are out hunting between the March to June and September to October months. Sell then, go hunting in the other months.
- In most major markets in Canada prices in any cycle peak during the first half of the year - usually in June and drop for that cycle low into the December to January period. Sell for best price in the spring.
- Prices start rising in small towns and northern towns usually after the winter goes and contract lower after the snow falls. (But look at it BEFORE the snow drops). Also, 'out-of- town' price increases or decreases in the interior generally follow the Lower Mainland down or up within 6 to 18 months of a major change.
- Small towns must have an employment base, better population growth than 4% and a low vacancy rate.
- For the smaller investor single family homes have outperformed townhouses and condominiums every time and for every market. It is in the land. We Canadians still like to own a spot of green to fry that sausage (ok, ok, zucchinis). This may well change in those cities (like Vancouver and Toronto) where the proportion of condo to single family home sales approaches 50%. In Edmonton and Calgary the condominium portion of the market is below 20% with some 80% of the sales found in the single-family home sector. In Vancouver and Toronto however more than 45% of all sales are now condos. Wherever the greater number of people want to trade - price appreciation follows. Particularly when you buy condos in a depressed market.
- Ground-oriented townhouse type units generally outperform high-rises condos
- Don't pay too much for higher floors in a high-rise. If a building is 25 stories high and unless you own the penthouse don't pay more for 'view'. Once you are 'in view' -say on the twelfth floor - don't pay any more for a suite located between the 12th to the 24th floors. You will not get your money back.
- Resort properties do well only in an upper-end resort. If there is only a parking lot and a lift, it may be a great family place to go to. But price appreciation is much slower.
What not to buy:
- Single family homes anywhere.
- Single family homes with basement suites anywhere.
- All (well researched) used downtown condos. Some (well researched) new condos with view, on water, park. Read those minutes for leaks.
- All Waterfront. River, lake, ocean. It will always appreciate within its timing cycle.
- Major resort properties with unlimited personal use.
- Mini Warehouses both as an investor and as an owner. With the greater trend to self-employment more and more small companies look for their own space.
- Mini Storage parks. With some downsizing by families and the trend to move out of town mini storage parks are increasingly attractive. A strong real estate play, good cash flow and little overheads.
- Trailer Parks are always good cashflow and there are never enough.
Whatever I put here, someone will argue that he or she, Aunt Harriet and Uncle Tom made money buying these, but remember we talk about the greater number of people here.
- In Resorts:
- a) Timeshare units are not real estate
- b) Limited personal use units unless there is nothing else and you just gotta be there -Only at major resorts
- c) Hotel type limited use units
- Out-of town
- a) Without proof of the principles. Many out of towns will never have price appreciation
- b) Deals without proven property management
- c) Out-of-town deals that do not cash flow
- Limited Partnerships you can't get out of.
Remember, markets change. When inflation returns, visibly returns, you may buy anything located anywhere and you could do well with it. Until then, understanding the timing of the real estate market cycle and understanding it and seeing a trend will help make right decisions. Condos have lousy years and good years. Vacant land has had lousy and great years. There are no good and bad markets - only good and bad deals YOU personally make. That means work. Oh, yes.
Next time ... Where to buy and where not to.
Ozzie Jurock is the publisher of Jurock's Real Estate Insider an independent real estate advisory service. You can reach him at 604-683-1111 or e-mail firstname.lastname@example.org
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