Is Investing in Real Estate in 2018 a Good Idea?
As you’ve probably heard me preach in the past, I am a member of the Real Estate Investing Network.
REIN is a Canada wide organization that teaches people how to invest in Real Estate. I trust their advisors, as they themselves, have created and preserved a financial legacy via real estate, worth inheriting. I get a lot of my real estate resources and news from them, and this article will be based on some of the education they (specifically Don.R Campbell) provided to their members. I also LOVE listening to Podcasts, like the Real Estate Investing Guys and The Best Real Estate Investing Advice Ever.
Having my boots on the ground as a Realtor in Hamilton and Burlington, I see some Amazing Real Estate Opportunities for Investors to take advantage of in the New Year. Here are some of my predictions for the Real Estate Market in 2018.
Is the Real Estate Market going to Crash?!?
Let’s first understand that Real Estate is not a commodity. Unlike the Stock or Bond Market, we can help what happens with our investment. We can physically renovate our property to make it worth more. We have assorted tax advantages, hedging against inflation, and many more benefits of investing in real estate. When people use the word “Crash”, it sounds very harsh. Crash sounds like the ceiling is going to fall on your head in an instant. It’s hard for the Real Estate Market to ‘Crash’, because it’s based on multiple economic driver’s (outlined below). If there are jobs, and a demand to live in a certain location that is highly sought after, and there’s no supply, then the prices are likely to go up! (More about Supply and Demand later). Real Estate is different and unique and YOU can make choices for change, unlike buying stocks and bonds and hoping that someone will come along at a later date and buy your stocks for more money. You can Negotiate on the Front End, and Manage on the Back End. YOU are in control of your real estate investment.
Unravelling the intricacy of the real estate market takes longer then over night to ‘crash’. Yes, there are market influencer’s (like mortgage stress testing and government intervention), that can have a very negative affect on real estate values, directly or indirectly. There are some things we can help to preserve our investment, but these ‘Wild Cards’ can be unpredictable, and YOU need to learn how to protect your investments before it’s too late, and there is a market downturn.
Let’s remind ourselves, that just because prices are high, it doesn’t mean there’s a bubble. A bubble means, it’s full of nothing, there’s nothing there. The good thing – Homes are a Hard, Tangible Asset. Now, we, as real estate investors, need to realize if there are fundamentals backing our investment, to make sure it’s not like a bubble; empty, or burst. Money has been cheap to borrow and easily found since the 2008 recession. When the banks increase interest rates, making it harder for people to access funds and leverage like they used to, then yes, it’s likely going to have an impact on the real estate market.
It is SO important to ask, Why? Where is the demand coming from and Why? Is it going to subside soon? Why are you investing in real estate? Make Quick Money? Long Term Appreciation? Why are you investing in a certain location? New Jobs or Better Schools to Attract Great Tenants? Why are you choosing that Mortgage or Financing Structure? Is it the best Long Term option? Can you find better mortgage products, not just focus on rate?
Real Estate is SO Local! Yes, each market is dependant on Provincial or Federal Rules & Regulations, but real estate markets across the country, or even city – are different. If you know WHY you’re investing in a certain area, you will take the opportunity to make a purchase and learn WHY that will benefit your personal short or long term investing goals (ie: large companies are relocating here creating new jobs, new transit lines planned or honourable schools). Due Diligence on specific property’s can make or break your deal, but today, we’re going to talk a bit about The Wild Cards – policies and economics, and how they will play out in our real estate investments.
I outlined below, some reasons and opportunities why Hamilton and Burlington’s current and future economic strength will prosper for real estate decisions made today.
DISCLOSURE **** I am a -long term- Investor. I aim to Buy, (Renovate) and Rent a property for at least 5 years, so the strategies I am talking about today might affect you differently, depending on your portfolio goals. I want investing in Real Estate to be BORING! I want to get a tenant in the home, and not ever hear from them. If you are seriously considering investing in real estate, I would recommend sitting down with me so we can customize your real estate purchasing plan to suit your financial goals, and figure out if you want to be a passive, or active investor****
As you know, the current market situation is based on Supply and Demand. Prices go up when there is high Demand (Like the Competition we had for homes between 2015-2017), and when Demand goes down, typically so do Prices.
What fuels Supply and Demand?
Immigration , Job Growth , GDP Growth , Industry , Interest Rates , Mortgage Qualification Rules , Vacancy Rates , and the Cost of Living (to name a few).
Hamilton and Burlington have very strong Economic Drivers:
- Healthcare/ Life Sciences
- Transportation (Land, Air and Water)
- Industry (Steel, Entrepreneurship etc)
- Education (Mohawk/McMaster/ Columbia etc)
- Growing Tech Industry
- Agricultural Industry
- Goods Movement (John C Munro Airport)
- Creative Industries
Because of this (job creation and immigration), we have a low vacancy rate, which means there are more tenants then houses to rent. (Good news for an investor!)
Historically Low Interest Rates have caused a lot of people to take advantage of ‘Easy Money’, and leverage the use of tomorrow’s money, today. However.. that caused the market to grow to these hot levels.
As Real Estate Investors, we must understand some how some Market Influencers on Ontario (that are out of our control), like:
- Rising Interest Rates
- Tightening Mortgage Rules
- Mortgage Stress Testing
- Private Corporation Tax Rules
- Capping Rents
- High Hydro Rates
- Minimum Wage Increase
- Tightening/Reduction of Jobs
Ontario, as the leading GDP producer in our country, really isn’t making itself look desirable versus Alberta and other provinces who seem like they are actively pursuing ways to attract jobs and people. These new government rules are going to tighten the housing market AND the rental market, making it even harder for Canadians to get into home ownership, and making it harder to find a decent place to rent, because Landlords have minimal initiatives to be a Landlord in this province… Landlord and Tenant Act in the tenant’s favour, Rent Controls etc…(That’s why you need to educated yourself to be a sophisticated investor and invest strategically). If you’re a tenant however, you’ll be seeing a lot of rental initiatives in the future, if the Liberal Government executes on their promises)
The “Fair Housing Act”/ National Housing Strategy (which, if you didn’t realize by now, isn’t fair at all). These regulatory changes are going to be Huge. But Remember… the legislation isn’t enacted yet, it’s just an announcement.. and in Don R Campbell’s words, “In that legislation will be the Land mines, and the Goldmines”. It’s thought that the new Provincial and Federal Rules will really start seeing an affect in about 6 months.
“History repeats itself” they say… It seems our government is repeating itself and what it did in 1973 with a very similar act (National Housing Strategy), which they abolished 5 years later after realizing that citizens weren’t benefitting, only developers, funding institutions and land owners. Hopefully they will learn from their mistakes and do better this time.
When you don’t understand new regulations, they can be scary. Will they even affect you? I can help you find out and strategize accordingly. I can only assume the new rules will take a TON of people OUT of the housing market, because they can’t qualify for a house they want, in the area they want. Most people’s purchasing power will be reduced by 20% with the new stress test!
This means, there will be less Buyers. That could potentially make the prices go down, if supply goes up. Less Buyers means, more tenants, and less competition when Buying a Home. As a fellow Millennial, it does sadden me to see my people get pushed out of the housing market. It’s really not fair to our generation to be able to attain homeownership like past generations (although we have a lot more everyday conveniences then they did!). The point is – it sucks the millennials can’t get into homeownership – but that just means that they will be your Renter, for longer. It’s like the Canadian Government is pushing us into being a generation of renters, like London and Germany…
The past few years have been fantastic in Ontario! (Think, Barrie, Orillia, Hamilton). 2018 is a provincial election year. Guess what, they want to win your TENANTS vote! So stay tuned for TONS of promises and announcements for tightening of rental rules, rental incentives
What is the bottom line here?
- Real Estate Markets are different from other commodity’s – YOU have control.
- Just because Markets and Prices are going up, it doesn’t mean there’s a bubble, if the fundamentals are there)
- Leverage can Create Market Upticks, but can also help us Amplify Returns.
- If more people can’t afford a mortgage – there will be more Renters! That is fantastic for you as a Real Estate Investor. You will have a pick of so many great Tenants who can’t quite qualify for a mortgage.
BEGIN WITH THE END IN MIND! When you are choosing a property to purchase for investment purposes, think about who your end user will be – do they want to be close to a great School? Highway?
**** BE CAREFUL IF YOU ARE BUYING PRE SALE *****
Because Mortgage Rules are changing, you may be able to qualify for that pre construction mortgage TODAY, but when it is built in a couple years, and interest rates have went up, the Mortgage Stress Test means you can only qualify for a portion of the mortgage that you can today, and you may not be able to close on it because you can’t get a mortgage!
However, this could be a great opportunity for us, sophisticated real estate investors to purchase those properties at the time people can’t, because there is going to be a big demand for rentals because of regulatory rules pushing people out of the housing market.
~ Pick your Properties based on Sound Analysis and Underwriting (Due Diligence).
~ You Cannot Underwrite Risk. Take the time to Analyze Acquisition Cost, Rehab Budget, Capital Expenditures etc. **Can you Increase Rents? Can you Roll Cap Ex Costs into Mortgage?**
Breaking this down by Community, we can take a look how I think Burlington and Hamilton will specifically be affected:
What’s up in Burlington?
In Burlington, there is literally no where else to build but UP! Because of the Places to Grow Act restricting builders from developing on Escarpment Lands and initiating Urban Sprawl. I’m all about preserving nature, but this will inevitably force the City of Burlington to re zone local lands for more high rises buildings, if we want to build more doors in Burlington and grow our community. If the City chooses not to adapt new zoning, therefore builders are restricted, home prices will go up, if demand continues to increase.
There are a TON of people who want to live in Burlington (It is continually rated one of the best cities in Canada to live in by Money Sense Magazine – we were #9 in 2017). So, the demand for housing will continue to grow with people who work in the city and want to live in a nice Suburb, from Down sizer’s wanting to move to a slower community, and people who are moving into their 2nd or 3rd house and want their kids to go to an amazing school. This goes for Renters too!
Baby Boomers are the largest cohort in Canada and they are all getting old! Burlington is an ideal place for them to live and play, with the waterfront, great restaurants, and retirement communities. But – WE NEED MORE UNITS! One story apartments and homes will be in huge demand, as our population ages. Downsizers want 1000+ sq ft, 2 bedrooms, and one level. And – they are not opposed to renting! They sold their house for an amazing profit, and like to see cash savings for their retirement. They’ve ‘been there done that’ in homeownership and are ready to have everything taken care of for them.
The Demand is there for Burlington , we aren’t building many more doors, so, most of the homes will stay at least stagnant for 2018, perhaps taking a dip in the $750,000-$1.2M range because those people are going to be bit hardest with the stress test. I don’t see homes below $600,000 being affected by stress testing, or homes over $1.5M. There is going to be upwards pressure on homes under $600,000, because that’s what most people can afford. Between 600k-1.2M, are people who have probably seen some good price appreciation with their home over the past few years, but are going to be hit with the stress test pretty hard. Only time will tell what the market in Burlington will do, but I think if you own there, you have a solid future ahead of you.
Let’s talk about the opportunities here. I have seen A LOT happen in the Hamilton real estate market over the past few years. The market went up up up! Then in the Summer of 2017 prices dipped after the new housing rules came out. The good news is (for home owners), I believe the prices will stabilize in the next 3 months, and the demand will continue for properties under $500,000. Millennials are a MASSIVE cohort and they are coming to Hamilton. It’s only a Go train ride away from Toronto, there are heaps of amazing restaurants, bars and an entrepreneurial food scene. There are tons of hiking trails and waterfront scenery to enjoy, and there is a great selection of home styles, from condos to bungalows to townhouses and detached homes, older and new. Hamilton has a lot going for it – other then the points above, because real estate is still cheap! (Compared to the rest of the GTA). Hamilton is growing as a place to live, play and work, and the Hamilton Economic Department is doing a fantastic job of attracting business to the city, bringing in IBM in 2017 and creating business parks and rejuvenating different parts of the city.
Having a solid city development department is very important when investing in a city because you want to know there are jobs, that are going to attract good people – aka your clients – aka your tenants. Hamilton is home to an array of different people:
- 14,000 people are employed by Hamilton Health Services
- Professionals are commuting to Toronto from Hamilton
- Entrepreneurship is everywhere to be found in Hamilton
- Transportation Sector keeps many people employed, and moving from Waterdown to Stoney Creek.
- Hot Cultural Scene attracting Millennials and such to the restaurants, boutiques and art galleries around town.
- You can be a Landlord for safe Student Housing and make Killer Cash Flow
- Different Communities for different life styles to choose from.
Hamilton is only becoming a better and better place to live in each day, because of the great people who are moving into communities and making it a better place. I would recommend investing in Hamilton, if I can help you find a cash producing asset.
In 2018, it’s not a matter of, will my customers (tenants) be there (YES THEY WILL BE!), your job is to figure out HOW to purchase and manage these properties, and give your customers what they want, while it making sense to both of you.
If you are interested in getting to know what investing in real estate is all about, I am more then happy to be your real estate resource.
I appreciate your trust, and if you have any friends or family who are thinking about investing in real estate, I would be thrilled to help them become a sophisticated real estate investor.