The Gord Piper & Associates Real Estate Blog

December 2016 Calgary Real Estate Market Snapshot

December 2nd, 2016

Did the new mortgage rules affect the Calgary Real Estate Market? The answer is a resounding YES! Here is why.

December 2016 Absoption Rate Graph

Stay ahead of everyone else by following our Monthly Market Snapshot of the Calgary Real Estate Market This shows what’s really happening! The market is driven by supply and demand so here we show the inventory (supply) and sales (demand) and most importantly the relationship between the two and how it affects the price of Calgary Real Estate. A simple way to keep up to date with how the market is trending and to stay ahead of most! All numbers are taken from the Calgary Real Estate Boards Stats package for Realtors. I have also included some general comments which are simply my opinion.

Absorption Rate (Months of Inventory) (the inventory divided by the number of sales in the last month). What does this mean you might ask?

Buyer’s Market	>4.0	Drives prices down
Balanced Market	Between 2.4 to 4.0	Prices typically remain stable
Seller’s Market	<2.4	Drives prices up

*** Absorption Rate***

The absorption rate for all categories increased this month. When the Mortgage rules changed in Oct we saw these numbers decrease as people jumped into the market before it was too late. The November decrease in sales results in a higher absorption rate.

	October 2016	November 2016	Change
Detached	2.49	2.99	0.50
Semi Detached	2.96	4.01	1.05
Attached – Row	4.21	5.42	1.21
Apartment	6.14	7.33	1.19
Total City	3.30	4.05	0.75

Calgary Listing Inventory

November saw a decrease in inventory levels in all categories. This is very normal for the month of November as people start to focus on Christmas and not Real Estate.

Inventory	October 2016	November 2016	Change
Detached	2565	2322	-243
Semi Detached	486	453	-33
Attached – Row	834	770	-64
Apartment	1542	1430	-112
Total City	5427	4975	-452

Calgary Sales:

Sales in all categories decreased substantially this month. To put things in perspective let’s compare with last year.

2017 Sales from Oct to Nov decreased by 25.3%

2016 Sales from Oct to Nov decreased by 11.3%

This shows a 14% drop over our normal drop in November sales. Knowing that we has a small surge of sales in October tells me going forward the decrease from last year to this simply due to new mortgage rules should end up at about a 10% increase.

Calgary Sales	October 2016	November 2016	Change	% Change
Detached	1031	777	-254	-24.64%
Semi Detached	164	113	-51	-31.10%
Attached – Row	198	142	-56	-28.28%
Apartment	251	195	-56	-22.31%
Total City	1644	1227	-417	-25.36%

Calgary Real Estate Sales Prices:

All categories showed a decrease in prices this month with the exception of Attached row houses which increased slightly. Last month we saw a larger decrease in Attached Row houses so I believe it’s just balancing out. Moving forward how much prices are affected will depend on how much our inventory increases. Typically we will see a decline in inventory & sales in December and then they will start to increase in January.

Sales Prices	October 2016 Benchmark Price	Nov 2016 Benchmark Price	Change
Detached	502,200	498,300	-3,900
Semi Detached	386,500	384,800	-1,700
Attached – Row	308,100	309,400	1,300
Apartment	273,800	271,300	-2,500
Total City	438,900	436,200	-2,700

Sales Prices “Year to Date”

Year to date prices

Sales Prices	Dec 31, 2015 Benchmark Price	Nov 2016 Benchmark Price	Change $	% Change
Detached	514100	498,300	-15,800	-3.07%
Semi Detached	393100	384,800	-8,300	-2.11%
Attached – Row	318500	309,400	-9,100	-2.86%
Apartment	288,000	271,300	-16,700	-5.80%
Total City	452800	436,200	-16,600	-3.67%

Price Sensitivity

**Please note that these numbers do change on a community basis and more so for towns. This report does not include rural properties. If you would like to find stats on your community just let me know. If you have any questions about this summary or Real Estate questions please contact us.

Tags: Calgary Home Prices, calgary real estate boards stats, Calgary Real Estate Market, northwest calgary real estate market
Posted in Blog, Mortgage News, Property Values, Real Estate Board's Statistics | Comments Closed

The #1 Investing Mistake – Fighting Your Emotions

November 21st, 2016

Try an experiment. Pick a stock, a business venture, a real estate area, or another kind of investment and ask your friends and family what they think about it. What do you think will happen? We are willing to bet you will get as many different answers (or at least variations of answers), as the number of people that you ask. The question is: Why?

Where Do Our Emotions Come From?

Everyone has past experiences that shape the way they view the world today. Without delving deep into the psychological, everyone carries emotional baggage attached to the events that have occurred at previous times in their life. This is unavoidable; however, the key is to recognize the facts from your own jaded perception.

If someone heard their parents warn them about a potential real estate crash (similar to that in the 1980’s), and never looked deeper into it, then it is likely they will avoid real estate investments. If someone read an article in the paper about a murder in a certain area of town, they may feel the area is dangerous. Had that same person never been subjected to these stories, they would likely never have had any fear attached to real estate, or a particular area of town.

The Origin of Fear

We are actually only born with two natural fears: the fear of falling and the fear of loud noises. But what does this mean for all of the other fears we have? Every other fear in our life has been learned and taught to us. Someone with different experiences will have completely different fears. How do we know if something is dangerous or should be feared?

Think back to some of the fears you may have: spiders, snakes, etc? Or maybe things a little more pertinent: bankruptcy, certain areas of town, technology stocks (especially after 2001), etc? What do we have to believe to feel these fears? Chances are our fears are based on a small piece of information we gained in the past. We have now spent our lives focusing on supporting evidence for this fear and perhaps overlooked real, refuting evidence.

Your Emotions’ Role in Investing

Since emotions and fear are based on “hearsay” and false evidence that seems real, and not on facts and fundamentals… they have no place in investing. It is impossible to make an unbiased investment decision when emotions rule the basis of that decision.

Investing out of emotion and not fundamentals is the #1 investment mistake.

Fear is not the only emotion to be careful of. If you are choosing a place to invest because you grew up there or because it is close to your home, or you think the house is cute, or worse yet, because your parents told you too . . . Be Wary.

Fundamentals vs. Emotions

Investing fundamentals are based on objective, unchanging, non-deviating facts, whereas emotions are based on . . . well . . . very little, if any facts. If your research and due diligence meets the criteria, and is in line with your ultimate goal, then make the investment. However, if you are basing your decision on the past advice of a friend or relative that no longer applies to a marketplace, then run away until you can get the facts straight. You want undeniable, measurable facts.

Real Estate Fundamentals

If a city is growing in income level & population, the development in the area is starting to take off, the price to income ratios are low, vacancy is low, interest rates are low, unemployment is low, and prices have begun to climb after a plateau . . . then invest. If an area is beginning to redevelop (i.e. new buildings) with a few projects and things are starting to clean up, where traditionally this has been a “tough” area of town, then invest and ignore the fear.

There are lots of economic indicators that will make a particular city (or area) a good place to invest in real estate. These indicators are what you need to make your investment decisions based upon. If the type of transaction fits into your portfolio (flip, wrap, lease option, joint venture, cash flow, etc.) and will help you meet your goals, then the decision is unquestionable.

The Boring Side of Investing

After you have done 1 or 2 transactions, real estate investing should become boring. It is a mindless game. Either the fundamentals are there, or they’re not. The numbers work or they don’t. You don’t care what the house looks like, where it is located, or what nationality is prevalent in the area. The only thing you care about is this: Are the facts good and will it help me reach my goal? Investing in real estate is a mindless process that can be repeated over and over.

The fun of real estate investing is rising above your fears & emotions, and enjoying your wealthy retirement as a result.

Tags: Real Estate Investing
Posted in Education, Investing | Comments Closed

The 5 Reasons Homes Don’t Sell

November 18th, 2016

Most people believe there are lots of reasons why a home doesn’t sell. However, there are actually only five. If you address these five common mistakes, then you will never have a problem getting your home sold.

Over Pricing and Speculating

We all wish we could ask whatever we wanted for our homes, but unfortunately price is set by comparable properties and market conditions. If you are priced above either of these, then your home will sit for a long time.

Looking at the price of homes currently listed for sale in your neighborhood only tells part of the story. You must research how much homes are actually selling for, and price your home accordingly. Your home will only sell for what buyers are willing to pay for it.

Exposure

Even a well priced property can’t sell, if no one knows about it. If you are not marketing your home where the buyers are looking, then you will not sell it. The greater the percentage of your target market that sees your home, the better chance you have of selling.

More and more, people are using the Internet as their primary source of research. Be sure your home is easy to find in the most common places that people look.

Poor Marketing

You have to make buyers WANT to look at your home. If your marketing makes your property look like every other listing, then you are simply “rolling the dice” and hoping for the best. Is your marketing truly compelling?

A great question to ask is… Why should someone buy my home, versus any other home in the neighborhood or city? If you don’t believe that you have a compelling reason, then the buyer won’t either.

Presentation

So now you’ve got someone to look at your home, but it’s a mess, smells bad, or simply shows poorly. If a buyer doesn’t feel comfortable in your home, you can forget about the sale.

If you can, don’t be around during showings, keep the house clean, and do some research on staging your home for selling. A small investment can make, or save you thousands.

Lack of Buyer Confidence

Purchases fall through every day, because sellers cannot confidently answer the buyer’s questions, provide accurate paperwork, or verify important details. If you are not organized before you sell, then you may watch all of your hard work go to waste, as a potential buyer walks away due to a lack of confidence.

Do Your Homework

You need to be very realistic with your goals when you are selling and you must do your homework. As the marketplace changes, so must your strategy. Too many people spend thousands of dollars, hours of their time (not to mention stress) and miss the best opportunities to sell because they don’t have the proper information to make a sale possible.

“Get the advice of experts when you can.”

Gather all of the information that you need and get the advice of experts when you can. At the end of the day, hiring a professional to ensure your sale is handled properly may be one of the best investments you can make.

For a free home consultation contact us.

Tags: Calgary home sales, Why homes don't sell
Posted in Blog, Education, Home Sellers, Home Sellers | Comments Closed

10 Ways to Get Your House in Tip Top Shape Prior to Selling It! And Maximize the Most Income!

November 14th, 2016

Many people want to know what the secret is to getting the most out of their real estate and to appeal most consumers looking for real estate today. This report will guide you through doing many of those things to help get the most dollars when selling your property.

Paint the interior! Most buyers appreciate a good fresh coat of paint and this will help enhance your properties value. It will also help brighten your rooms giving a new clean appearance. Stay away from bold and bright colors and focus more on lighter and softer earth tone shades. This will also help make the rooms feel larger and appeal to a bigger group of potential buyers.
Paint the outside! Curb appeal is important and there is nothing worse for area estate professional to try and market a home that has peeling paint or is in desperate need of painting. Of course depending on the time of year and the weather conditions if you can paint but if at all possible paint the exterior. As noted with the interior suggestion of using soft lighter neutral colors do the same for painting the outside of your home. Stay away from bright colors that others may not like.
Pick Up Any Outside Debris, Trash or Clutter! First impressions make a huge impact on potential buyers. Should your property have unwanted clutter at the initial greeting to consumers when your property is shown, it will not help in the marketing and selling of your home. A few hard hours of raking cleaning and picking up odds and ends could add “thousands” to the sales price of your home.
Reduce Extras and Odds and Ends From Your Home! Rooms with too much furniture or decorations can often detract from the showing of your home. Usually too much décor can make the rooms look smaller and hurt your chances of selling your home. Store unneeded furniture or items that you can do without during the marketing stage of your property listing. Your goal is to make your property look spacious and comfortable. Buyers also want to see rooms that appear and look spacious to them.
Be sure and Open Blinds and Draperies! This is a great idea to help aid the salesperson sell your home. When your property is in tip top share and ready to show having as much light as possible helps brighten your home and give it a good feel.
Avoid Playing Music! Although you may like the music playing in the background it can be a deterrent to the agent and buyers while looking at your home. Keep music off while your home is being shown.
Price Your Property Right from the Beginning! Many buyers take the approach and attitude that they can always come down on price. This can be a bad thing to do. Many buyers feel if a home has been listed for a long time that there is something wrong with it. Most agents will tell you that the best activity occurs during the first two to three weeks of the listing begin date. After a few weeks the activity will begin to taper off and showings will cease. If your home is priced incorrectly from the beginning it will not get a lot of showings and the longer your home is on the market the more buyers will feel that it’s tainted or something’s wrong. Price your home right at the beginning to help get the most activity and a quicker sale.
Have Your Carpets Cleaned! It’s a good idea to have your carpets cleaned or your hardwood floors polished or waxed. This is normally not too expensive and can usually add a lot of appeal to potential buyers.
Hire a Staging Company! If possible hire a staging company to help show you ways to maximize room appeal and value to your residence. Many real estate firms have a staging company or people on staff who can aid in this service. Feel free to ask me about how I can help with staging too.

10. Purchase New Linens and Towels for Bathrooms! This can help aid in giving a new appearance to your bathrooms.

Tags: Top dollar for my home
Posted in Blog, Education, Home Sellers, Home Sellers | Comments Closed

Joint Venture Explanation

November 14th, 2016

Brief Explanation

The Joint Venture is by far the most powerful business concept ever conceived. The ability of two or more people to pool their resources together (money, time, skills, etc) to achieve a greater goal, has been the hallmark of the world’s most successful companies and business ventures.

The joint venture’s application to real estate is absolutely natural, and has allowed hundreds of thousands (if not millions) of people to accelerate and multiply their results.

Two or more people with a common goal (typically financial) get together and offer each other their resources. One partner may offer their time and services, whereas the other may front the money for the transaction. Since the active partner (time and service) may not have the money, and the investing partner (the source of financing) may not have the time or expertise, both parties are required to successfully bring a transaction together.

An agreement between the two partners is formed. The nature of this agreement is truly mutually beneficial to both parties and huge rewards can be realized.

The Benefits

Investing Partners

Higher ROI
Increased Investment Possibilities
Passive Income
No Time Commitment
Opportunity to Diversify Portfolio
Increased Net Worth
Minimized Risk Due to Investment Nature
Proven Systems and Clear Cut Agreements
Opens the Door to Otherwise Unavailable Investments

Active Partners

No Money Required
Infinitely Repeatable
Increased Net Worth
Minimized Risk Due to Investment Nature
Unlimited Purchase Power
Monthly Cash Flow
Leverage Your Time
Proven Systems and Clear Cut Agreements
Opens the Door to Otherwise Unavailable Investments

How It Works

Once the partners agree to work together, it is time to figure out how the details of the arrangement will unfold. It is important to note that there are no concrete laws involved in determining how the terms of this agreement will look, however, we recommend looking at past successful models for guidance. This is what will be discussed here.

A common joint venture agreement is between two parties. One person has some money to invest, however, maybe not the time or desire to properly manage a real estate investment, and usually also lacks the specific skills necessary to acquire, maintain and properly assess such a venture. The second partner may not wish to front any money, however, has the time, wherewithal and commitment to appropriately acquire, maintain and assess the value of a property.

In this arrangement, the investor typically fronts all of the required money and the active partner contributes their time, effort and skills respectively. The investor will cut a cheque, and the active partner will find the property and take care of everything else. Since both parties are equally important, the ownership is divided up 50/50.

Each party will split the income from the property equally after the investor receives their initial investment back. This means that there will be a return of the investment and a return on the investment.

There are three ways you will make money. First, is through the equity that comes from the mortgage being paid down. This has nothing to do with the investor’s down payment, but is the amount that is paid down after possession is taken. Second, is through the cash flow that occurs if the property is rented and the amount of rent collected each month exceeds the monthly expenses (typically paid out quarterly). Finally, the appreciation that is gained as the property increases in value.

A Quick Example:

A property is purchased for $250,000 and the investor fronts $65,000 for the down payment and initial costs. Rents are collected and there is $200.00 per month positive cash flow. Meanwhile, the mortgage is paid down $4000 per year. After 3 years, the property is now valued at $330,000 dollars and you decide to sell.

Here is the simple break down (not including selling costs):

The investor would get back their $65,000 initial investment

Income from Cash flow: $7,200

Amount of Equity Paid Down: $12,000

Income from Appreciation: $80,000

Total Income: $99,200

50% share to each partner: $49,100

ROI for the investor: 25% annually or 76% overall

Tags: Joint Venture
Posted in Education, Investing | Comments Closed

Building Your Real Estate Investment Team

November 7th, 2016

Whether you like it or not, you can’t do it all by yourself. Investing in real estate requires many different professionals. There are REALTOR®s, appraisers, inspectors, builders, renovators, mortgage companies, banks, property managers, lawyers, partners, accountants, sign companies, printing companies and yes even mentors, buyers, sellers and tenants. I have heard in business that you are only as good as your weakest link. I want to suggest that you choose your real estate investment team carefully. You may even want to go as far as interviewing your team players.

After all, this is a business and the dollar amounts can be substantial, so you want to make sure that your team members have the same morals, ethics, business philosophy and complimentary personality to you. This is not to say that you will not make some mistakes and/or changes along the way, but when you start out with a list of the qualities that you are looking for in your team, it makes the decision-making process much easier. Yes, I did say qualities, and not experience or education. It’s easy to find someone who knows the business or has experience, but it can be a challenge to find the right qualities and personality to match you and your goals.

I would start my search by seeking a referral from someone who is already in the business and is successful. Make sure you know the person you are asking for the referral from, well enough to know that you will be well received when you contact whomever they referred. Notice that I indicated that you seek a referral from someone who is not only in the business, but is “successful”.

It doesn’t do any good to contact a banker for a line of credit when you have been referred by someone the banker just turned down, nor does it look good to contact a REALTOR® referred from someone who just backed out of the last deal they had under contract. I think it is only appropriate to note here, that if you are making a referral to someone who is building their team, make sure you know a little about this person as well. It doesn’t help you to refer someone to your banker, who just got out of bankruptcy and has a history of shady deals. Protect your reputation.

Once you establish your team players, you should be loyal to them. Let me give you an example. Who are you going to call when you find a listing online or another REALTOR®’s listing while driving the neighborhood? Most people would say I would call the listing agent. I used to do the same thing. Let me suggest you call your team player and let them go to work for you.

If you call the listing agent and buy the house, it may be the only sale you give that REALTOR® this year. By calling your REALTOR®, that closed 30 transactions for you last year, they will go to bat for you to get you the price and terms that they already know you are looking for. Not to mention the fact, that you will be the one they call when they find an awesome deal that fits your model. Trust me on this, as I know from experience.

Tags: Real Estate Investing
Posted in Education, Investing | Comments Closed

Consequences of Mortgage Rules Change

November 3rd, 2016

As you are most likely aware by now, the mortgage rules changed on October 17th – if not here you can find a summary of changes. I am going to give you my opinion of what this means to the Calgary Real estate Market.

First some facts: Sales for the month of October were

Week 1 – 352

Week 2 – 375

Week 3 – 463 (rule change week)

Week 4 – 386

Looking at our sales by week makes it very clear that we saw a large spike in sales that was driven by buyers jumping in before the changes took effect. This to me means that the new rules are going to have a large effect of Calgary Real Estate sales volumes.

I forecast that:

We will now see a substantial decrease in sales as buyers can no longer buy what they thought they would be able to afford. This will increase the number of homes for sale in Calgary putting us into more of a buyers market than we were. Ultimately this will put further downward pressure on pricing.
Buyers will back off buying as they believe that less people can buy so prices will come down.
Over the next 3 months we will see a shift in what people are buying due to affordability. IE: Those that were looking at starter homes will now be buying Townhouses and those looking at townhouses will now look at apartment condos.
I predict that it will take 3 to 4 months before we start to find out what the new normal really is.

Unintended Consequences:

Buyers may be driven to borrrow private money (at a higher cost) just to secure the home they want putting them more at risk than before the rule change.
Mortgage interest rates are going to increase. Already the TD Canada Trust increased their rates as the cost & risk of lending money for mortgages has increased.

For a great article explaining above click here

Tags: Calgary Real Estate Market, Mortgage Rule Changes 2016, Northwest Calgary homes
Posted in Blog, Education, Property Values | Comments Closed

Nov 1, 2016 Calgary Real Estate Market Snapshot

November 2nd, 2016

Welcome to our Nov 2016 Calgary Real Estate Market snapshot.

The big news for October is that the government changed the rules for mortgage qualification. This month the stats show increased sales and declining inventory and I believe it is 100% due to people scrambling to get their home before the rules changed. Next month we may see a totally different picture but only time will tell for sure.

Absorption Rate (Months of Inventory) (the inventory divided by the number of sales in the last month). What does this mean you might ask?

Buyer’s Market	>4.0	Drives prices down
Balanced Market	Between 2.4 to 4.0	Prices typically remain stable
Seller’s Market	<2.4	Drives prices up

*** Absorption Rate***

The absorption rate for all categories decreased this month. I believe this is because we saw a spike in sales due to people entering the market before the mortgage rules changed. It should be interesting to see our stats for next month once the new rules have been in place for a while.

Absorption Rate Cont.

	July 2016	August 2016	Change
Detached	2.99	2.49	-0.50
Semi Detached	3.30	2.96	-0.34
Attached – Row	4.88	4.21	-0.67
Apartment	8.26	6.14	-2.11
Total City	3.95	3.30	-0.65

Calgary Listing Inventory

October Inventory levels decreased in all categories. I believe that the change is due to increased sales and a normal amount of new listings. The bottom line is there are less Calgary Homes and Condos for sale than last month.

Inventory	July 2016	August 2016	Change
Detached	2823	2565	-258
Semi Detached	515	486	-29
Attached – Row	888	834	-54
Apartment	1651	1542	-109
Total City	5877	5427	-450

Calgary Sales:

Sales in all categories increased this month. Again I believe that the new mortgage rules are 100% responsible for this increase. For many people if they did not buy before the changes they would simply not be able to qualify so this created a sense of urgency for buyers. Note that apartment condos saw the largest increase (25.5%) which was needed in this sector.

Calgary Sales	July 2016	August 2016	Change	% Change
Detached	945	1031	86	9.10%
Semi Detached	156	164	8	5.13%
Attached – Row	182	198	16	8.79%
Apartment	200	251	51	25.50%
Total City	1488	1644	156	10.48%

Calgary Real Estate Sales Prices:

All categories showed a slight decrease in prices this month. Typically you will see a direct correlation between the absorption rate and prices – this month that is not the case and I believe it is again caused by the government rule changes and everyone trying to figure out what the market might look like next month. Attached – row houses (townhouses) saw the largest decrease even though apartment condos have the highest absorption rate.

Sales Prices	July 2016 Benchmark Price	August 2016 Benchmark Price	Change
Detached	503,400	502,200	-1,200
Semi Detached	386,500	386,500	0
Attached – Row	311,100	308,100	-3,000
Apartment	274,700	273,800	-900
Total City	440,400	438,900	-1,500

Sales Prices “Year to Date”

Year to date prices

Sales Prices	Dec 31, 2015 Benchmark Price	August 2016 Benchmark Price	Change $	% Change
Detached	514100	502,200	-11,900	-2.31%
Semi Detached	393100	386,500	-6,600	-1.68%
Attached – Row	318500	308,100	-10,400	-3.27%
Apartment	288,000	273,800	-14,200	-4.93%
Total City	452800	438,900	-13,900	-3.07%

Community Variations

Tags: Calgary Condo Prices, Calgary Home Prices, Calgary Real Estate Market Snapshot
Posted in Blog, Real Estate Board's Statistics | Comments Closed

Be a smart Real Estate Investor – Do the math

October 31st, 2016

Should I use cash or credit? A variable rate loan or fixed rate? Ten percent down or twenty percent? Should I pay down debt or keep a cash reserve? These are all good questions, and here are some of the answers.

Cash vs. Credit: The Concept of Leverage

In order to understand real estate financing, it is important that you understand the time value of money. Because of inflation, a dollar today is generally worth less in the future. Thus, while real estate values may increase, an all-cash purchase may not be economically feasible or wise, since the investor’s cash may be utilized in more effective ways. Leverage is the concept of using borrowed money to make a return on an investment. Let’s say you bought a house using all of your cash for $100,000. If the property were to increase in value 10% over 12 months, it would now be worth $110,000. Your return on investment would 10% annually (of course, you would actually net less, since you would incur costs in selling the property).

If you purchased a property using $10,000 of your own cash and $90,000 in borrowed money, a 10% increase in value would still result in $10,000 of increased equity, but your return on your invested cash is 100% ($10,000 investment yielding $20,000 in equity). Of course, the borrowed money isn’t free; you would have to incur loan costs and interest payments in borrowing the money. However, you could also rent the property in the meantime, which should offset the interest expense of the loan.

Taking leverage a step further, you could purchase ten properties with 10% down and 90% financing. If you could rent these properties for breakeven cash flow, you would have a very large nest egg in 20 years, when the properties are paid off. Balance that with what you could make by investing the cash flow from one free and clear property for 20 years. And, of course, look at the potential risk of negative cash flow from repairs and vacancies on ten properties. Finally, consider the tax implications – if you have cash flow, you have taxable income; if you have an increase in equity, there’s no tax (capital gains) until you sell.

Cash Flow vs. Cash Reserves

On a similar note, the size of your down payment will affect your cash flow on rental properties. Let’s consider two examples.

Example 1: $100,000 property with $20,000 down. $80,000 loan @ 6% interest, including taxes and insurance is about $600/month. Assuming you could rent the property for $800/month, you have $200/month cash flow or $2,400/year. Not bad.

Example 2: $100,000 with no money down. $100,000 loan @ 8% (higher rate is generally common for zero-down/cash-back loans) would make your payments closer to $900/month. With zero down, you have $100/month negative cash flow.

Which is better? Well, it depends on what your goals are and what the rest of your financial picture looks like. Let’s say your goal was to hold the property for 10 years. In the first example, you have $200/month cash flow, but no cash reserve. In the second example, you would have $100/month negative cash flow, but you have $20,000 in reserve. The knee-jerk reaction of some people is that example #1 is safer. But is it really?

Think about it… in the first example, if your property becomes vacant for one month, you’d be out of pocket $600. It would take three months to make that up. In the second example, you have $20,000 in cash cushion to make up the deficit. With $20,000 in the bank, you could handle $1200/year negative cash flow for 16 years. If the property were in an appreciating market, you’d come out fine, even with negative cash flow. Another factor is the choice of mortgage. You could buy a property with nothing down and an interest-only loan fixed at 5% for three years. If your exit strategy is a lease/option that should cash you out within 36 months, why do a fixed-rate traditional loan?

The point here, is that you should not automatically go with traditional fixed-rate financing. Nor should you seek positive cash flow as the only goal. Likewise, you should not buy properties with nothing down and negative cash flow and assume that short-term market appreciation will be the only source of your profit.

Paying Down Debt

For years, our parents’ generation discouraged debt as a “very bad” thing. For some investors, the goal is to own properties “free and clear,” that is, with no mortgage debt. While this is a worthy goal, it does not always make financial sense. If you have free and clear properties, you will make a certain amount of cash flow and pay a certain amount of income tax. If you need more cash, you are forced to sell the asset, creating a taxable gain.

If you refinance a property, there’s no taxable event. And, since mortgage interest is a deductible expense against income from the property, the investor does better tax-wise by saving his cash. Think about it… the higher the monthly mortgage payment, the less cash flow, the less taxable income each year. While positive cash flow is desirable, it does not necessarily mean that a property is more profitable because it has more cash flow. More equity will obviously increase monthly cash flow, but it is not always the best use of your money. On the other hand, paying down debt may make sense if you can’t get a higher return elsewhere in the market. Also, if paying down debt can have other rewards, such as bringing a loan below 80% LTV, you may be able to avoid paying mortgage insurance and save additional money.

In Short, Don’t Rely on Assumptions… Do the Math!

Tags: Real Estate Investing
Posted in Articles, Education, Investing | Comments Closed

Fall 2016 edition of CMHC’s Housing Market Outlook – Calgary

October 28th, 2016

Every quarter CMHC produces their Housing Market Outlook for all of Canada and for Major cities like Calgary. It is interesting as it shows not only the state of the market but it contains predictions for the future and an explanation of Why?

Here is a link to the full report for Calgary

The Fall 2016 edition of CMHC’s Housing Market Outlook – Calgary is now available and can be accessed by clicking on the link below.
http://www.cmhc-schl.gc.ca/odpub/esub/64339/64339_2016_B02.pdf

Highlight of the report include

Total housing starts forecast to remain relatively low in 2016 and 2017, before improving in 2018.
Significant changes in MLS® sales are not expected over the forecast period.
The purpose-built apartment vacancy rate is expected to stay above historical averages.

Thanks to CMHC for giving u this valuable information.

Posted in Articles, Blog, CMHC | Comments Closed