By Ozzie Jurock
(This story is copyright and an excerpt from Ozzie Jurock's book Forget About 'Location, Location, Location'. Reproduction - in whole or in part without permission is strictly prohibited. Listed here are the first 5 principles. Get all 25 FREE with your subscription to Jurock's Facts by Facts by Email)
It's amazing how we're constantly exhorted and bombarded by financial planners, banks, trust companies, government agencies -- you name it -- to plan for our retirement income.
Scary claims are made. We are told the Canada Pension Plan simply won't be there when we pass through those temple gates into "seniordom". We are subjected to endless homilies: "If you have an income of $50,000 now, in 20 years when you retire you must have a portfolio of $10 million (or so) to enjoy the same standard of living (because of inflation) you enjoy today." And then based on this or that speculated interest or inflation rate, you'll be scared to death for the next years as you heave along to age 65 and beyond. (Perhaps, that is the marketing theory...?)
In fact, had you listened to the best advice 20 years ago and locked yourself and your wealth into a plan which guaranteed to remit the then-prevailing "safe amount" of an income stream of $500 per month (a lot back then; nothing now) for the rest of your life.... imagine how desperately retired you would be now scrounging today? Stone soup would be a luxury.
Yes, we need more money now, but who knows what this money will be worth tomorrow? Yes, we need more income, but who can possibly know the state of the world three months hence...much less than 20 years from now? Who can truly predict the "what and where" of interest rates? the inflation rate? the value of money? Impossible.
All that is certain is that "safe and sound" and "big" income of 20 years ago is now a pitiful joke today.
Forecasting is Never Easy... Particularly When It's About the Future....
Crystal balls crack, vaunted talk-show soothsayers wither and drop off the cable, almost nothing is consistent. During the last three decades, stock markets crashed up and down, certain iron-clad mutual funds sprung leaks and sank others rose meteor-like only to falter later, the average folk saw his or her savings chewed up by insidious inflation. But in all of this froth and fury, one asset has weathered the changes. Three decades ago, had you bought good quality real estate, you would not be worried about the future, today. That dirt would have kept up with inflation, secure in value and steadily appreciating -- even in those markets which have experienced some temporary dips in value since then. Real estate is cyclical by nature. However, one thing is certain -- over the years, the base values have been steadily increasing. Back to that purchase 30 years ago. Today, it would be paid off and clear title. Which means either a mortgage-free home (no more monthly 'rent' payments to the bank) and/or a steady rental income courtesy your own clutch of tenants. Meanwhile, the poor benighted renter is still endlessly doling out his coppers to the landlord.
Simply put, if you place a good portion of your assets in real estate today, you won't have to worry about tomorrow either! Home ownership has been the single largest grower of wealth for the average Canadian. Firstly, because of straight appreciation. Secondly, because of the leverage involved. While the basic principle of appreciation holds true for pretty well any healthy major urban center in Canada from Toronto to Calgary, let's use Vancouver as the example.
A Vancouver Home Will Be Worth $7.1 Million in 2021? On average and based on historical performance... it could be!
In 1960, the average Vancouver home sold for $13,105. Thirty-five years later (1995), the Real Estate Board of Vancouver reported the average sale price as $309,540. Assuming 'long-ago you' had plunked down ten per cent or $1,310 as downpayment and hung in there, you would now be gloating over a 23,000-per-cent return on that original downpayment. And you have a roof over your noggin to boot. Amazing. Exercise in fantasy but if this "lift" kept right on trucking for the next 25 years, by the year 2021 that $13,000 home will be commanding $7,119,420. And 'antique you' will still have a roof over your gray hairs. The great secret of real estate appreciation: leverage. When appreciation is measured on capital invested, not full price, some really astounding results take place. Little wonder the old argument of 'rent versus buy' has always and ultimately come down hard on those folks who somehow prefer life under a landlord, to being an owner and possibly a landlord themselves. But this isn't meant to be a diatribe on home-ownership. Instead, it's an attempt to dispel some myths about real estate as an investment and, once the smoke has blown away, putting your hands on some sold...sorry, Freudian slip...solid fundamentals and principles of real estate investing.
The baseline: change is to be expected. The constant: know how to adapt to it. Clearly, the 1980s were benign writ with a capital "b". As in "bucks" and "brainless". Back then, you could have bought almost any kind of real estate, anywhere, and still made money. If you paid too much, you just had bought too soon. Thanks to inflation, prices soon caught up to you and bailed you out. The 1990s will not be as forgiving. For some investors, they will be frightening. This decade will be one of sudden change. Markets will fluctuate, area by area, both in volume and price. Different real estate products will rise and fall in value with no apparent linkage to each other. For example, in Vancouver the average single-family detached home rose in value by 40 per cent from 1990 to 1995. Meanwhile, at the same time and within the same market area, downtown condos slumped in value by 12 to 20 per cent.
To be successful real estate investors, we must understand ourselves. We must understand the New Consumer -- you and I -- and what motivates us, what actions are we likely to take in any given situation.
First premise: we're contrary creatures. We say one thing...and then promptly do the opposite. We bemoan the lack of "service" and human interaction in our daily lives...and then blithely drive past the local friendly corner store and into the endless Costco or Canadian Superstore canyons o' goods. "But gee, I'm saving money," we argue. So we load up 27 years' worth of pink toilet paper (grunt, grunt), into our hulking Rambo-approved off-road vehicle (which will never see a mud splatter in its life but does cost more than a Cadillac) and then, to celebrate our frugality, we'll pull up to Starbucks and drop six bucks on a "no-fat, double latte with an almond biscotti on the side, please." (In other words, a coffee and cookie.)
Little wonder the marketers are going mad.
are different, we pre-, post- and current baby boomers. What actions
we will take, where, how and in what type of home will we likely strive
to live, these are the questions to which today's savvy investor must
have answers -- before he/she makes that investment.
The New Consumer (moi and thou) are most concerned with living longer and healthier. We cram ourselves with oat bran, we devour lettuce and spinach by the bale. We worship our physical being. "My body is my Temple," we insist. Fine, but when it comes to spiritual, mental and/or financial health, many a time svelte us act like lumpen oafs. What we forget is that the body is indeed a temple, but of your mind, your humanity, the essence of you as an individual. Instead of becoming fixated over what you put into your stomach, take some interest over what you are putting into your head. Seek out 'heath food' for the old noodle. Exercise your mind, involve it in your life, understand some basic principles about life and guess what? Your mind will create the reliance, resilience and security you crave.
So, what does this all have to do with real-estate investment? It's just my way of bashing home a point. Before you invest in property, invest in yourself. Time, thought, action all help to create opportunity. Inertia, mental sloth and an unwillingness to roll up your mental sleeves and do your own research will all help to create problems. This seems to be particularly true in the area of real estate. It seems some 'investors' will spend more time reading the fine print on a can of Clamato juice than they do reading the fine print of an investment prospectus or examining a house before they buy it.
Many of these feckless souls are long on hope and gullibility, short on incredulity. When someone comes up and offers to involve them in a 'slam-dunk' deal that'll make them $100,000 overnight, guaranteed, they fall over themselves to sign aboard. Easy money, and someone else does the work. The investor is rich and that is it. No more worries. Well, I have news for you. Anyone who knows of $100,000 overnight deal doesn't hive it off to outsiders. He or she buys it himself. Either that, or they do make money, lots of it, off of the investors and then do an overnight scamper to places unknown.
real estate investing is like anything else. It requires personal work,
imagination and individual enterprise. You must simply do some of
the work yourself. Sorry, no substitutes. I do not know of any successful
investor in real estate (other than the homeowner, happily and unknowingly
riding up the ladder of inflation) that doesn't actively and consistently
scour the market place, makes offers and learns the ins and outs of
For those people, the opportunities are everywhere. For example, prior to a recent JREI seminar, we picked up the phone and did a little digging. Within a few short days, we had a list of more than 250 B.C. and Alberta properties which could be purchased for no or little money down. Amazing.
Top investors don't have wings, nor are they more beautiful, taller or speak better English than we average folk. Top investors aren't privy to arcane magic, no exclusive systems or special "in". They are neither better or worse human beings than most everyone else. But -- and it's a big one -- top investors do have a different way of thinking. They also share a common resilience. They are ahead of the crowd because they stay informed, and they have the courage and confidence to use this information.
Joining this elusive group of successful investors doesn't require a magic wand or secret handshake. However, it does require an understanding of some basic principles that -- if consistently applied -- will get you started.
Never forget: real estate remains -- even in a low or zero-inflation environment -- a solid growth opportunity. And always remember: you can be part of that opportunity too. And now, the Principles:
You Make the Most Money On the Day You Buy
Common wisdom says to buy a property, hold it for awhile as the appreciation mounts and then reap this add-on reward when you finally sell. While this no-brainer strategy may be viable in an inflationary environment, in today's non-inflationary world... it is not. In such a flat-land world, your profit will be determined by how you bought, what you bought and what price you paid. It's absolutely vital that you first determine current market value -- and then buy below this market. What with GST, the Property Transfer Tax, real estate commissions paid in and out, closing costs etc. the price you pay must be at least 12 per cent below current market value for you to simply break even when it comes time to sell.
As an investor, 'buying right' is crucial.
Location? Location? Location? ....Ha! Today, It's All in the
If lucky you had bought a home, any home, in any location in Burnaby back in 1990 and kept it until the end of 1994, you would have ridden an average-price "lift" from $280,000 to $400,000. Fine, but if I had then bought this abode from you and shelled out $400,000...I would now be whimpering. Since 1995, Burnaby home prices in all locations have slipped by 10 per cent. Or to me, an effective $40,000 loss.
Today, the old cry of 'location, location, location' has been superseded. Today, it all has to do with timing and little or nothing to do with location. Back in the 1980s, you could have bought pretty well any property in B.C. anywhere and be assured of doubling your downpayment within a very short time. Those days are over.
The world is in turmoil. The very fabric of our society is in flux. The Internet, job gyrations, currency devaluation, stock market rises/crashes; change is upon us. Understand that the old ways are finished, gone. In the 1990s, investment success will be determined by those people who understand timing and know when and how to quickly move within the markets. It's vital to ask yourself: where are we now in the cycle/timing arena. Yes, you can still double and redouble your money and in a matter of months in some cases, but not everywhere and certainly not with just any kind of property.
Location? Location? Location? Ha! Today, It's All in the Trend
If unlucky you had bought a high-rise condominium in any of the Vancouver's False Creek luxury towers back in 1991, you would have indeed bought into the world's finest location. And yet, today you'd be wincing as local condo values have since dropped by up to 20 per cent.
Then again, if you had instead put part of the money into a $60,000 building lot in (sniff, sniff) Surrey back then, four years later you'd be chuckling. That building lot is now worth $150,000.
Lesson: Rather than be swooned by the location cliché, as an investor it would have been far more important to understand the demographic trend which saw some 65,000 people flock into Surrey in a mere four years. (As a simple municipality, Surrey's inflow growth outpaced that of the Maritime provinces, Manitoba and Saskatchewan -- combined. Amazing.)
Lesson: Identify a trend and jump aboard. What, where, how to, and -- most importantly -- when and what not to buy is everything. Today, in some parts of the country, certain real-estate sectors won't recover for another ten years, no matter how well the real estate in these areas is located. Other regions are cooking right along.
Timing and the ability to read trends have served some investors very well indeed. For example, those folks who ID'd the 'penturbite' trend (people yearning to move from the congested urban centers and into smaller towns) and put their money into suitable places from Kelowna to Courtenay, did very well indeed when the boom hit a few years later. Of course, these same cunning investors also knew when to sell.
Ask The Five Simple Questions
Real estate operates in a cycle. It also operates in relation to other, greater cycles. Sometimes they all work in conjunction, sometimes in opposition. Wheels within wheels. Knowing where the real estate cycle stands in terms of these other forces is key to determining trend and timing.
Ask yourself these five questions:
1) Are we in a deflationary or inflationary environment? If inflation rising, it's a clear buying signal.
2) Are more people coming than going? If inward migration strong, again, a clear signal to buy.
3) Can the average earner afford the property? If people can afford to buy, this means salaries are rising. More buyers going after a limited inventory means prices will are due to rise. Again, a buying signal.
4) Are interest rates rising or falling? Helpful only in relation to affordability. People will actually hold off buying when rates fall and jump in when rates rise. However, values will only rise when people expect to make a profit.
5) What is the demand and supply of the kind of real estate I wish to buy? How much of this specific product is being built, what's on the market and how does it compare to previous bull or bear markets?
Appreciation For the Small Investor
Take this mantra to heart. While there are exceptions (there are always exception) in general and over time, the following appreciation hierarchy holds true:
homes outperforms townhouses and condominiums;
Ground-oriented units outperforms high-rise units;
Resort properties do well only in upper-end resorts;
New condominiums automatically depreciate on the day of purchase;
Used condominiums appreciate.
In general, single-family homes have appreciated three times faster than townhouses and/or condominiums. But all real estate (even condos) have outperformed rental properties (at least, that's been true here in the west).
Obviously, single-family homes have proven to be the clear winner in terms of appreciation. Condos have not. However, condos may come into their own in some cities over the next five years as the expected sales ratio of condo versus single-family rises sharply in favor of condos (at present, the ratio is almost 50/50 in Vancouver), but not yet.
Below is a list of the remaining principles, avaliable in my book, Forget About Location, Location, Location.
the Basics, Understand Yourself
7. Have a Clearly Defined Personal Real Estate Investment Action Plan "Today's reality comes from yesterday's dreams."
8. Do Your Own Due Diligence
9. Make a Lot of Offers
10. Ask Questions
11. Always, Always Personally Inspect the Property
12. Expect It to Involve Hard Work
13. Know to Who and When You'll Re-sell the Property, Before You Buy
14. - KISS: Keep It Simple, Stupid
15. Get Your Finances In Order -- Fix Your Debt
16. Understand 'Value'
17. Make Money Now! AKA Flippers Rejoice!
18. Lose Money Now! AKA Sharks Rejoice!
19. Buying a Condo?
20. Buy Where the Immigrant Buys, Build What He Buys 21. Buying Out of Town
22. A Resort by Any Other Name
23. Buy Local, Sell Long Distance
24. Avoid Government Towns
25. How to Find Good Deals
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Recent Articles by this columnist:
Debunking the Myths of Yuletide Home Selling
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Should You Sell Your Old Home Before Buying a New Home?
What's a cap rate anyhow?
Developers ignore Feng Shui at their peril
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