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.
A personal story of joint venturing and how you can prosper
People often ask me to share the secret to building a multi-million dollar portfolio when not starting with a mountain of cash, or having banks tripping over themselves to lend you money.
The answer is simple, don’t go it alone.
One thing I learned early in life is the power of joint ventures. There is no chance I would be where I am today in real estate, if not for amazing partnerships. It is the key to getting started, or unstuck, because when people join forces to create win/win scenarios that otherwise would not have been obtainable, amazing things happen, and fortunes are made. A well structured JV is one of the most gratifying things one can do in business.
My personal story of joint venturing starts with my very first home. As a completely naïve 19 year old, all fired up after reading Rich Dad Poor Dad, I was ready to jump in head first.
One night in a bar, where most great ideas are conceived, I struck up a partnership with an acquaintance from high school. He had sterling credit, and I had a bit of cash saved up. We bought a basic bi-level home, put some sweat equity into it (read terrible DIY renovations the future owners couldn’t wait to tear up), and sub-letted our basement to our buddies.
As a couple of 19 year old home owners, you can bet we had a heck of a time living there (if those walls could talk). Little did we know, it would be the decision that gave us both a massive head start financially and a lifelong friendship.
Fun fact: The process of buying that house was what led me to take my real estate course.
The following year, I came across a downtown condo that I wanted real bad. Same problem, the banks can’t get new realtors out of their offices fast enough.
Give up? No way!
I approached a friend from baseball who also had terrific credit. We went 50/50 on the condo and held it for 10 years, running it together as a successful vacation rental. We recently sold it for a tidy six figure profit. I was sad to sell it, but joint ventures do end eventually. That little condo at discovery bay was a cash-flow rock star bringing in $1800/week through VRBO.
As an aside, I highly recommend those units as an investment, and believe they are still undervalued.
Now, it hasn’t all been sugar plums and lollipops for me, this next one haunts me to this day.
Days before my 24th birthday, the market is on fire, and I’ve got a serious case of hubris. I’ve joined forces with a client of mine to purchase ‘The Big One’, a 1.3 million dollar palace on two acres that had development potential. As this was out of our league, we went to a Vancouver business man, one of my partner’s contacts, and structured a joint venture to subdivide and build.
This was my first attempt at a something more complicated than your typical 50/50 JV - it included Investors and commercial financing. We formed a corporation, created a partnership agreement, and off we went. It was looking as though it would be a home run.
A few weeks later, we bull-dozed the home. The headlines surrounding the 2008 crash came out . . . aaaaannnd we were caught with our proverbial pants down.
To add insult to injury, my partner and I had purchased two units in waterscapes for a combined value of a million and a half dollars. We lost every single cent we had invested in that deal, a lesson that both cost, and taught, me as well as any Ivy League education could.
The lesson: Don’t be a speculator!
From that day forward I have purchased nothing but positive cash-flow investments.
Every crash brings opportunity. Prices in Arizona had been sliced in half, and this time I linked up with a guy I knew from a boxing club who also had a little bit of cash. Between his mother, myself, and my girl friend - now wife - we put together a little fund, and began buying up distressed condos in Scottsdale. Six years later, it has turned out to be one of the best investments of my career. It was made possible only through collaboration.
I have continued to buy property every year. Sometimes I’m in a position to do it on my own, and I do, but sometimes I’m maxed out at that moment. I don’t let that stop me, there’s always a way to create something great.
What I’m about to share with you is the formula for creating equitable and profitable joint venture partnerships.
First: The Quadrant
This chart shows a quick way to figure out who is doing what, and who is entitled to what in a partnership. In each corner of the quadrant, you will see the appropriate share hold for each component. Many successful joint ventures involve an expert deal finder who will take on all but the initial capital contribution. This allows the investor a hands-free investment that requires none of his own time or personal borrowing power.
There are no shortages of people out there who will warn that family and business don’t mix, or that the easiest way to ruin a friendship is to jump into business together. As someone who has made almost every mistake in the book and come out the other side a little smarter each time, I can tell you with confidence that the times when things go wrong will only stem from expectations not properly set.
Most partnerships out there are done based on a handshake and a pile of assumptions. This is doing everyone involved a huge disservice. For starters, when things aren’t laid out clearly in writing, you are putting your relationship in serious jeopardy. All of this can be avoided with a simple memorandum of understanding that will later be the basis of a partnership agreement drafted by your lawyer.
Who will do what? For how long? How does one of us get out of this partnership if need be? These are the kinds of things often overlooked by overly eager ‘honeymoon phase’ partners. Don’t fall into this trap!
Second: The Partnership Agreement
Your next step is to draft a partnership agreement. I’ve got a great pft that I obtained through my affiliation with REIN. It has a phenomenal checklist to ensure that you get all the expectations and ‘What Ifs’ sorted out prior to committing to a property. Armed with this checklist you are ready to strike up a partnership that could be just the synergistic force that makes both of you very very rich.
Lastly, I’ll say this, the one thing I know for sure: There is zero chance that a 19 year old kid with $8,500 bucks burning a hole in his pocket and no credit goes on to become a multi millionaire by age 30 without utilizing the awesome power of teamwork. I would hedge a guess that the vast majority of self made people did so through a series of win/win partnerships along the way. I encourage you to go out there and do likewise, but learn from my mistakes.
Here is what a typical 50/50 joint venture looks like when one party has the cash and the other has the time and the expertise.
Seven reasons investors are drooling over Kelowna in 2016
We’re back, baby!
These are exciting times for Kelowna homeowners and investors. We are going to explore why sales for Kelowna investment real estate have shot up 30%, and why there has never been a better time to invest.
It wasn’t long ago that we were the talk of the proverbial real estate town, but after slipping into a six year slump following the global financial crisis, all the money seemed to flow into Alberta, Vancouver and Arizona. With the Canadian dollar on par with the US, we couldn’t compete with deals south of the border no matter how nice our view of Okanagan Lake.
Like a once immortal high school quarterback, we faded into obscurity.
Well it's our time once again. With much of Canada battening down the hatches since oil went below 40 bucks and new government leaders emerged, this four-season playground has been setting records.
We have our own unique micro climate here in Kelowna, and I'm not talking about the stellar weather. I'm talking economics. It’s easy to get caught up in what's happening in Alberta, and to make the assumption that Kelowna will be suffering along with them. Maybe that's because half the cars on the road in Kelowna have red license plates.
People are surprised to learn that Alberta only represents 13% of our total sales, and despite the loss of thousands of jobs in Alberta last year, that number held true to within a couple percent. Is it possible that fewer Albertans will stake their claim in Kelowna in 2016?
Perhaps, but with the opportunity in resource work in northern BC, as well as our bustling construction industry and a couple hundred baby boomer Albertans reaching retirement age every single day, the smart money says no. Regardless, Alberta is not the driving force of the Okanagan market.
Let's look at the economic fundamentals that are underpinning this strong economy, and understand the indicators that tell us what we need to know to reliably predict the direction of real estate for the foreseeable future.
One ~Job growth
BC is experiencing solid growth in current economic conditions. Kelowna, in particular, was just rated the number two hottest job market in Canada. We have an emerging technology sector, a thriving tourism industry, and endless work for skilled labourers, due, in large part, to a construction industry on fire. Experience shows that people will go where the jobs are. After years of losing our workers to the Alberta job market, we are now seeing the pendulum swing the other way.
Two ~ Population growth
Over the past 12 months, we have seen an influx from across Canada, and other parts of the world. Students are piling in, as UBCO continues its expansion. Young families are migrating to Kelowna for the lifestyle and the opportunities. Retirees continue to flock here because of our world class amenities, good hospital, and agreeable weather. Kelowna is very much a destination town that is garnering attention on a world stage.
Three ~ Increased rental demand
Demand is up, as people move to the city and rent for a period before putting down roots and buying a property. Ask any local property manager, they will tell you that they have their pick of quality applicants. There is a frenzy for new rental listings. There has never been a better time to be a landlord in Kelowna.
Four ~ Increased rental prices
Of course, near zero vacancy rates lead to sky rocketing rents. In the past year, we have seen average rents increase by 20% or more. For example: What was once $1500 is now $1800. This has turned average performing properties into home runs.
Five ~ Increased property demand
Combine upward trending rents with cheap mortgage rates to create the perfect storm. We have just finished our strongest year for demand, with record setting months in 2015. Sales were up 13% year over year. This has been the trend since the slump ended and the recovery began in 2013. As a result, the number of properties being purchased for investment has risen dramatically. We saw an increase of over 30% in the number of properties purchased for investment last year.
Six ~ Decrease in supply
Our inventory levels have plummeted to the levels of our peak boom period in 2007, putting us in a seller's market since the spring of last year.
Seven ~ Increase in prices
Always the result of low inventory and high demand, we are seeing prices rise in a steady, sustainable way. Values in 2015 were up roughly 8% year over year, and our average home here in Kelowna is again poised to meet, or exceed, that level of growth in 2016.
Now, as savvy investors, we know better than to buy for appreciation, even though it's hard not to think about the huge, levered return we get when prices trend upward. However, by definition, that is mere speculation. As real investors, cash flow is king, and this is actually why Kelowna deserves your attention.
An average five bedroom house for $420,000 with a suite in the basement will bring in as much as $2,800 per month (that's $1,650 up and $1,150 down). On the cash flow alone, you are seeing a 12% return. Factor in the mortgage pay-down and completely ignore appreciation: You see returns of 20% on your Investment.
Seven big reasons why you should strongly consider adding some prime Kelowna real estate to your portfolio this year, before prices and interest rates inevitably rise.
For a list of the top 10 cash flow properties, email me and I will send them right over.
Eight things you need to know about suites, so you can PROFIT in 2016
There have been some interesting changes in the world of secondary suites of late. And it seems that nearly everyone is confused, or working off old information, when it comes to rental suites.
I’m going to share with you the recent game-changers that have really made things open up, what it all means to you as an owner of Kelowna Real Estate and ultimately how you can use this info to make yourself some money.
So let’s start at the top:
In fall of this year, the Federal government and CMHC changed its rules:
“The changes from CMHC would allow homeowners to count the income from their secondary units when qualifying for a loan, something that would seemingly bring more people into the housing market. Under the new rules, CMHC will consider up to 100 per cent of gross rental income from a two-unit owner-occupied property. This includes basement rental units and in-law apartments.” ~ Financial Post
At the same time, almost serendipitously, local governments decided to open things up for us from a zoning by-law perspective,
Council heard a plan in October that would change current rules against mortgage-helping suites at Gallagher’s Canyon, Tower Ranch and Quail Ridge.
“Planner Ryan Smith told council, staff is working on zoning revisions for the three golf course communities that would allow secondary suites to be legalized in much the same manner as they are in other neighbourhoods, without a public hearing.” ~ Kelowna Daily Courier
Affecting even more households, the City of West Kelowna just amended their zoning bylaws. This is huge:
Nearly every residential zoning in West Kelowna now allows carriage houses, and with far fewer stipulations than on the Kelowna side. The largest being that you don’t need a rear lane access on your lot. The property value increase created when a property has two dwellings is exceptional, not to mention the additional cash-flow. I
had my first client this month follow my advice and buy a rental property in West Kelowna, specifically to take advantage of this rule change. I expect many more to follow suit.
So let’s shift our focus away from rules and regulations, and on to something even more influential when it comes to the real estate markets, and suited properties in particular: Demographics.
Baby-boomers, massive in numbers, were ‘busy’ enough to repopulate the earth at a rate of approx. 2.2 kids per household. Consequently, they have created the largest generation in human history. This generation known as Generation Y, born between 1981 and 1993, is entering the real estate market in droves.
The eldest of the Y Generation turned 33 last year, and in the next decade, there will be more people turning 33 than ever before.
Why is that important? Because the average age of a first-time buyer is, in fact, 33. Due to rising prices and affordability issues, these buyers will be looking at suited homes to allow them to make the jump from renter to homeowner.
While at the same time, and just as much of an economic driver:
Baby boomers are looking to augment their retirement, and are turning to investment real estate to pump up their passive income, as they cruise towards their mid 60’s. Suited homes make a great investment for this demographic.
Add to that, baby boomer parents are opting to move into suites and coach houses rather than retirement homes. This puts even more demand on these kinds of properties.
Now lets talk dollars and cents:
Building a secondary suite doesn’t cost anywhere near what most people think it does (especially if you know who to call), and the revenues have never been higher. Here’s the rent you can expect for a rental suite today:
So what does it cost to put one in?
Here is a basic breakdown of the investment, if you paid a contractor to do the entire job (suggested):
Permits and licensing
Cash and carry for $3500, includes counter tops
$1,500 for basic appliances, or treat yourself to state of the art new ones upstairs and bring your current ones down.
(Fire-rated and sound dampening) $3,000
vinyl planking @ 3.50/sq ft x 800 feet -$3,000
$2,000, Includes new hook-ups
Upgrading electrical panel
Upgrading new bathtub, and vanity and toilet
$7,500 (framer, flooring installer, finish carpenter)
It can be done for as low as $15,000 and as high as $35,000, depending on complexity and quality of finish.
You don’t actually need to have any cash on hand to do this, whether you are putting a suite into a home you already own, or are wanting to put one in a house you are buying, there are really cheap financing options available to you through either a home equity line or a purchase plus improvements line.
Here’s what it would cost you on a line of credit using the highest estimate:
Prime plus .60 = 3.3% $35,000 x 0.03 = $96.25/mo. Now let’s say you build a basic/average suite and rent it for $1100, you are netting $1,000+ per month.
The ROI on the $35,000 is 34%, and keep in mind you didn’t spend a dime of your cash on hand.
Now for the big burning question: To legalize or not to legalize.
Many of my clients come to me with hang-ups with regards to in-law suites. People often say that they only want to look at listings with a legal suite. Fact: If you limit yourself to only properties that have legal suites, you will have way less from which to choose. For example, right now on the MLS, there are 13 homes between 350 and 400 with suites, only two of those are legal. And guess what, they are at the top of the price range.
Here’s a cool stat I’ve never seen anyone publish . . . until now:
In the second half of 2015, the average sale price for a home with a legal suite was $436,000
For the same period of time the average sale price of a non-conforming suite was $413,000
This means that the value the market place is putting on the legalizing of a suite is $23,000.
The question becomes, can you legalize an existing suite for less than $15,000 and double your money? The answer, in most cases, is a resounding YES.
So, let’s look at what it means to have a ‘legal’ secondary suite in Kelowna:
Need a building permit
Need a business license
Need 2 designated parking stalls for tenant
A lit pathway
At least 30m(2) of private, open space
The suite cannot exceed 40% of the total square footage of the principal living area
Several building code standards must be met such as:
Minimum ceiling heights
Hard-wired CO2 and smoke detector
If you’re interested in learning more about the subject of suites and real estate investment, I’ve prepared a free .pdf report just email and I will send it over.
More Investment Real Estate articles
- 15 years - in the clear! Oct 26
- Right strategy for this market Aug 11
- Where are all the deals? Jun 23
- Like an RESP... only better Apr 30
- Retirement rescue 911 Feb 18
- Apartment buildings: absolute gold mine Nov 10
- Become a millionaire in 7 years...this time Aug 15
- Cash flow or flipper? Jul 15
- The power of 10 May 20
- 5 Deadly mistakes house flippers make Mar 21
- 2013 review: What worked...what didn't Feb 2
- How far can $100,000 get you? Jul 19