The difference between speculation and Investing
Like clock work, every time the market cycle heats up, the opportunist in us comes out to play.
The slow-and-steady-wins-the-race mentality gets abandoned as people chase the sexier, faster buck.
Great people with admirable intentions to do right by their families look to “invest” some of the freshly minted equity in their home into something that has the potential to pay off big.
The right idea, but lately the conversation has begun to shift from solid, yet agreeably less sexy investments like single-family homes with suites, and duplexes, to this idea of “buying” three units in the latest pre sales condo development.
The thinking is: I could spread out my $150,000 by putting deposits on three units and then in a year or two, when the market has climbed up another 10 per cent each of my $500,000 units are now worth $550,000.
Since I only have a deposit of $50,000 with the developer, I have doubled my money on each unit just for sitting on them for a year.
Is the above scenario possible? Sure. Is it a forgone conclusion? Absolutely not! There are countless other ways this can go, including losing all your investment.
I use that word reluctantly because although the intention of the person was to invest their equity, what they were actually doing is speculating.
Speculation means: Ideas or guesses about something that is not known.
The cruel teacher of experience has taught me that to win big in this real-estate game you must avoid guesswork at all costs.
- Forget about timing the market.
- Forget about trying to predict where pricing is headed, and focus on the fundamentals.
- Focus on positive cash flow.
- Focus on creating your own appreciation through value-adding renovations.
I fell into the trap of speculating the last time the market was hot in 2006/2007.
I put $1.5 million worth of the hottest condo project under contract for $150,000 and had expectations of doubling my money at least.
I wasn’t alone as I waited at the front of a 300 plus person line from 2 a.m. the night before the sales centre opened to the ravenous public.
I lost every penny of my six-figure investment when things went sideways in 2008. And that hurt like a you-know-what.
Contrast that with a duplex I bought around the same time in 2007, at the peak of things.
I put a similar amount down on this property, $140,000. I bought this property because the cash–flow made sense.
I wasn’t trying to guess what the market would do; I was investing my capital into a proven revenue stream.
In this case, it made about $1,000 per month net. Between that, and the equity I was building each month through my mortgage being paid off by the tenant, the returns were actually pretty good (18 per cent) despite paying peak pricing for the duplex.
Around the same time my $1.5 million in a half completed condominiums saw their values sliced by 20 per cent, my duplex value had plummeted to a mere 80 per cent of its former value as well.
The difference between the two was that I wasn’t forced to sell my duplex at a loss, it cash flowed through the entire five-year market slump.
My mortgage got paid down by nearly $50,000 and I had approximately $50,000 in cash flow paid to me during that time.
Today, that duplex is worth about 10 per cent more than what I paid for it and the cash flow is about 20 per cent better than what it once was thanks to rents climbing at about three per cent per year.
The $150,000 I dumped into the condos was an expensive lesson, but one I’m glad I learned as we go into this next boom cycle.
As exciting and alluring as some of these shiny new projects seem as an investment, sinking that same money into a boring, old duplex or multi-family building will always be my choice.
I know what I’m getting into. I know where I can add value, and I know that as long as it cash-flows, there’s no down turn in prices that will ever force me to take a loss.
As an investor, I like control; I don’t like putting my fate in the hands of bankers, politicians or even public opinion. I like to see my returns on paper in black and white and I like to be able to influence my upside.
My challenge is I also love the smell of opportunity and, if I’m honest ,I love the thrill of a good wager as well.
Knowing this about myself, I have to work hard at finding the discipline to stay the course with my investments and follow the plan I’ve laid out, as unsexy and tortoise like as it may be.
If you’re a boring old tortoise as well and want to see my hand-picked selection of painfully unglamorous cash flow properties with PDF analysis of each showing the predictable double-digit returns, click here and prepare to be underwhelmed.
Most vacation-property owners will tell you that breaking even off their seasonal tenants is a pipe dream and unattainable.
The negative cash flow of beachfront condos is tolerated because historically they’ve offered great appreciation, personal enjoyment and that bit of prestige.
It feels better to say you have a beach spot than it does to say you have a duplex.
Beach condos tend to appreciate better than the average property because demand is high and the supply of projects that can be situated on the water is extremely finite.
Over the long term, people have done quite well buying this type of property if they can afford to subsidize it over the years.
Rarely do you get to have your cake and eat it too. Where do you find a nice piece of downtown beachfront that offers the ideal vacation property for your personal use four weeks per year, and have it cash flow spectacularly?
There are two developments in Kelowna that will tick both boxes. One is Discovery Bay on Sunset Drive and the other is also on Sunset, appropriately named Sunset Waterfront Resort.
They’re a stone’s throw from one another, and by the same developer. Discovery has 236 units and they sell for $392/sq ft. Sunset Resort is a concrete high rise with fewer units (128), so it commands $470/sq ft.
Both rent for about the same, but Discovery Bay is a slightly better cash-flow property.
I have a decade's worth of experience owning units in both complexes through good markets and bad, so I know the numbers and the secret to getting enjoyment and cash flow.
They cash flow so well because the demand for them in both on- and off-season is great and the values are still comparatively low compared to other tourism destinations.
These two developments have a special kind of zoning known as resort residential. This allows the owner to do nightly and weekly rentals and charge handsomely for it. You’ll pay $275/night or $1,800/week if you plan to stay on Sunset Drive during our beautiful summer months
The units in this complex switch back and forth each year from furnished long-term rentals to vacation rentals. Because of the location, demand is extremely strong. Keeping the units booked was not a problem, even during the great recession from 2008-2012
In the off-season, there is a frenzy of people waiting to rent them for 1,800/month. I opt for an eight-month lease From Sept. 15 to May 15. This allows me to get the place summer ready in time for the May long weekend, and I get to enjoy it for at least a week in May and then again in June. I chose these dates since, historically, I only got the last two weeks of June booked by vacationers.
July and August will be booked solid and will bring in over $15,000 in revenue. So this is prime rental time.
September, I typically block off a week for myself to enjoy the late summer weather, which is almost always perfection and the resort is more peaceful and relaxing as we enter the shoulder season. I’ll still accept one week’s booking for my usual $1,800.
As a nice little bonus, I park my boat in the protected lagoon and enjoy the most affordable moorage in the city. I can utilize the resorts many amenities whether I have the units rented or not. Spend the day by the pool and then walk to best restaurants in the city
Here is an average year’s revenue for a two-bed unit.
- Jan. – $1,800
- Feb. – $1,800
- Mar. – $1,800
- April – $1,800
- May – $1,500 (Half month rent plus 3 night rental)
- June – $3,600
- July – $7,950
- Aug. – $7,950
- Sept. – $2,700 (One week plus half month)
- Oct. – $1,800
- Nov. – $1,800
- Dec. – $1,800
- Total $36,300
Expenses for the year are pretty low as the heating and cooling and water is covered in the strata fee of $360/month, the taxes are quite low at around 2,300/year. Tenants pay for the cleaning, so you have about another $1,000 in incidentals for advertising and supplies.
Neither complex requires you to be part of a rental pool so you can manage them yourself on VRBO with relative ease and save the 20-30 per cent. For many however, the $8-10K investment in a manager is worth it to be totally hands off.
The net operating income of these investments is $28,680, which makes these a perfect 7 CAP while you can still buy them for around $400,000 multi-family residential and commercial properties are selling for approximately 5.5 CAP in Kelowna so this is extremely good.
And when was the last time you spent four weeks poolside at your duplex?
For a list of properties for sale on Sunset Drive and others that perform similarly to the above examples, email me and I will send it right over.
I've been writing for Castanet since 2013 and I have written only about strategies for acquiring property.
But now that we are in the full throes of a boom cycle, my best advice to many will be to sell. Sell anything that isn't a cash-flow rock star and take the cash, ready to re deploy for the right opportunity.
Many of us, myself included, are sitting on properties that aren't serving us well. We have too much equity in them, they don’t have good cash flow or they don't fit our current model.
We would have sold these cash vampires years ago, but the market wasn't right. Well, here we are at the edge of summer 2016, in the busiest market we’ve ever had, with inventory at levels reminiscent of 2006/2007.
If ever there was a time to seriously consider selling, it's now.
Some might argue that there's more appreciation yet to come. I would agree, but the largest returns on property are when you add value to them.
Take the cash out, and sink it into something where you can get the full three-course meal — immediate value gains with renovation, strong positive cash flow, and the rest of the appreciation this boom has left in ’er.
Having cash back in the till during a boom and, even more important, during the slump that follows every boom is paramount. What would you have done during the last slump if you had been sitting on a large sum of liquidity?
Now, there’s selling a property, and then there’s selling a property. I’m talking about specific steps you can take to create a bidding war and get over list price on your terms. There’s a formula, and I’m going to share it with you free of charge.
This is divided into two sections. What to do in advance of listing to get the value as high as possible, and what to do to create a frenzy for the property when its time to go to market.
- Get a consultation on the most profitable renovations you can do before hitting the market. It’s not uncommon that $5,000-10,000 wisely spent will return 15,000-20,000 or more on the sale price. This consult is free from an investor-focused realtor.
- Bring in the stager – Now, it's time to get the decor right, from minimizing clutter to adding the right accents. A staged home will sell for up to five per cent more than an un-staged one. The cost is only a couple hundred dollars and it returns thousands.
- Get it inspected – It's common practice in the U.S. and Australia. A pre-listing inspection has a few not so obvious, but major benefits.
Buyers will negotiate a price before inspection and often attempt to re-negotiate once issues are uncovered. Dealing with them ahead of time prevents this often adversarial and costly renegotiation at the 11th hour.
It creates more trust and good will. Again, having the inspection open on the counter puts buyers at ease, allowing them to get out of defect-detection mode and back into deciding if their life fits in the space.
You get more for a home in great condition than one that comes with a list of deferred maintenance. Fixer-uppers appeal to only experienced buyers or ones looking for a deal. They often take longer to sell and are more likely to attract lowball offers.
By investing in an inspection, you greatly increase your chances for a multiple offer situation, of having a bidder come in without any conditions, because you made it safe for them to do so. You can even get a one-year warranty for around $300, like a certified pre-owned car. We know those go for more.
Now, to the actual launch of the listing.
- One week out, place a coming soon sign in the front yard to build demand and intrigue for the home, but don’t show it just yet.
- Next, get 35 plus architectural digest quality photos taken of the property for use in your marketing to get buyers.
- Create a video walk through because buyers in Vancouver and Calgary will often buy homes sight unseen because they know they don’t have the luxury of time to fly out when the market is this hot. A good video broadens who can bid on the home.
- Go Live on a Thursday afternoon. When you hit the MLS is a subtle nuance that can make a heap of difference. You are only on the hot sheets for 24 hours, so let's make the most of this small window. Realtors are far more likely to see your listing if its featured between 3 p.m. Thursday and 3 p.m. Friday than competing for their attention as the weekend hits.
Now, you should get a ton of showings for the weekend. Make it clear that you will be entertaining offers at 5 p.m. on Monday and then let the demand and competition build for the property until then.
Come Monday, if all goes as planned you will have your choice of offers some well above your asking price. Just remember, you don’t get what you deserve, you get what you negotiate.
Well there you have it, not my typical cash flow investment, real estate centric article, but one thing I’ve learned over the years is that part of being a good investor is knowing when to it’s time to cash out and look for the next deal.
If you would like a list of the service providers I’ve mentioned in this article including my trusted Inspectors, appraisers, stagers, contractors, photographers, videographers, please email [email protected] and I’ll send it to you.
Hot market mayhem - and how to escape the insanity
All we hear about these days is that the Kelowna real estate market is on fire, houses are selling in multiple offer and for over list price.
This is not untrue, but it doesn’t tell the full story. Adding to the mayhem is a massive influx of Vancouver investors pouring into Kelowna right now, driving up the price of our cash flow properties, be it suited homes, downtown RU6 property or duplexes.
Inventory is low, but did you know it is now down to near 2007 levels?
It is most certainly a seller’s market in that we have far more buyers than we do sellers right now. The average days on market are plummeting, and it seems all we hear about are the bidding wars, especially with investment properties.
Proportionally we have almost 50% more properties selling to investors this year versus last. This translates to hundreds of investors set up on auto searches, waiting for that next hot listing.
While everyone is waiting for the ping of an alert from their new property search, there is a secret pocket of inventory equating to roughly 25% of the total inventory on the market for over 100 days.
One thing I can tell you for sure, those particular sellers have heard just about enough of realtors, the media, and the general public talking about how great the market is, while their home sits on the market desperately hoping for showings.
People forget about these listings that came on the market too high, got overlooked, and are now aging away being ignored as though they were last to be picked for dodge ball.
I get it, new is sexy, who wants what everyone else has overlooked? But that’s a follow the masses mentality.
It is the same reason why the vast majority of these “investors” were sitting on the sidelines when things were really depressed three years ago. Sellers were willing to throw in a kidney to get you to take their property, but it just wasn’t popular then.
In previous articles I have written about ways to let the numbers and cash flow potential guide your decisions around price. Based on that, every property is a good deal at the right number.
Consider this: A hot foreclosure listing just came on the market downtown on Walrod Street. It came on for 425k, the sweet spot for investors. Now all these people competing for this hot new listing will likely bid it up 30-40k over list.
So let’s assume it sells for 455k, to be conservative - although I expect it go for more. Is that a good deal? Sure, the winning bidder is happy as a clam, and the runners up go back, discouraged, to wait by their computer for the next one, telling themselves they will have to be more aggressive on their next bid. Euphoria ensues Euphoria ensues in a market like this, but. . . .
This is not the way, people. I can’t make it 2011 for you, but what I can say is, there are precisely 308 sellers of single family homes who have sat on the market for at least 100 days (I just checked). They are as close as you are going to get to a 2011 seller.
Some of them might be unrealistic and won’t listen to reason, but others have a real need to move on. They made a tactical error in the beginning by listing in what I call “no man’s land”, and now they are paying the price. These sellers would love to see an offer from you. They might even be willing to let you negotiate. Imagine that.
So, thinking back to the 425k foreclosure house on Walrod that will sell for at least 455k. Would it not be just as good, or potentially better, to approach a seller optimistically listed at $469,900 for 100+ days and offer them 450,000 or less?
In addition to the better price, you can actually get favourable terms and the dates that work for you. Go figure.
Now, armed with this info, it is your job to evaluate at what price and on what terms this property goes from being an overpriced stale listing to a home run investment that everyone else missed because they were all too focused on the new sexy.
For a specific list of properties in your price range that have spent no less than 100 days on the market, with sellers who would be thrilled to let you negotiate with them, just email me and I’ll send it right over.
Also, for those of you looking for a crash course on how investment properties are analyzed on the fly in the real world: On April 30th we are bringing back our famous Ugly House Tour. We have room for 20 on the limo bus on a first come first serve, click here for more info.
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- Right strategy for this market Aug 11
- Where are all the deals? Jun 23
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- Apartment buildings: absolute gold mine Nov 10
- Become a millionaire in 7 years...this time Aug 15
- Cash flow or flipper? Jul 15
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