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Investment-Real-Estate

Where we're going next

When you talk to most people these days, the prevailing attitude is that our real estate market has shifted from greed to fear.

Sellers and developers are fearful that they have missed out on the top of the market.

No matter what way you look at it, there is risk involved. If you take your property off the market or refuse to budge on price, you may kick yourself a few months down the road when more homes come on the market to compete with yours.

However, there’s always the hope that the market will suddenly turn into last year's and you’ll have a chance to realize an amazing sale price.

A crystal ball during these times would be helpful, but it’s almost impossible to time things perfectly.

The concerns of sellers are warranted, and buyers are fearful too. Those looking for property are often scared that they’re going to make a mistake and buy at the peak.

However, those waiting to buy and hoping that prices will fall would be well advised to consider other factors.

In the current market, the potential cost of delaying a purchase, namely interest rate hikes, is often overlooked. Even if housing prices dip five per cent, the would-be savings are more than gobbled up by a half a percentage point increase in interest rates.

Moreover, any significant drop in housing prices is highly unlikely as the economy, inward migration and demographics have all aligned to create a growth market. This multitude of market influencers will prevent a real estate crash.

For the time being though, we will continue to see an increase in housing supply and softer demand as the market continues to balance out.

In some sectors, particularly high-end properties, it will become a buyer's market.

That said, buyers compressed into lower price brackets due to changes in lending will continue to drive demand for property at lower price points.

For this reason, entry-level homes under $600,000 should remain strong.

For most sellers in this market, a good piece of advice would be to have realistic expectations on what price you will get for your home. Increased inventory is forcing those looking to sell to compete with their neighbours to impress the limited and somewhat skeptical buyers who are looking for a deal.

Trends in the market 18 months ago caused me to predict that prices would soften. I believe the shift in supply and demand is just now beginning and the market will likely move even more in the coming months.

How long will it last?

No one knows for sure as many factors come into play. Not the least of which, is what will happen with our provincial government in October.

If our elected officials decide to scrap detrimental policies, the market could rebound aggressively.

However, if those in power decide to continue down the same path, we’re likely to head into a slump phase of the market. Remember though, regardless of government policies, market volatility is natural.

It’s important to remember that with our strong local economy, the sky isn’t falling and we won’t see a devastating correction like the one we saw in 2009.



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Want to be a millionaire?

Fill me in
Looking for a project that’s both challenging and profitable? AJ Hazzi of Vantage West Realty shares an advanced infill strategy that could turn you into a millionaire in as little as five years.

Infill development has become a popular way for small-scale investors and developers to add serious value to a small, manageable plot of land in the urban core. 

This works great in cities such as Edmonton or Kelowna.

Some infill developers are looking for the quick return of capital and a tidy profit by selling four-unit projects for a profit inside of 18 months.

These developers will take the hybrid between a short- to mid-term hold and a pre-determined, profitable exit. Both the sale price and the cash flow are amplified by 15-20 per cent due to the rent-to-own component of this deal.

Let’s take a detailed look at both the strategy and the returns it can generate, which should be pretty enticing to most investors.

I operate in Kelowna, so we’ll use the numbers from this still highly viable market lift and move on to the next venture in hopes of parlaying the new equity into another equally lucrative project.

Others are looking at these newly built four-plexes or row houses as a long-term, cash-flow property, aiming to generate wealth from the three-course meal that is long-term real estate investing:

  • cash flow
  • mortgage pay-down
  • capital gains.

There is, however, a third option that blends these two approaches into a sort of as a base.

The purchase of a small tear-down home in an infill area here will run you roughly $750,000. Constructing four new three-bedroom homes on that lot will cost around another $1.1 million, so expect to need a half-million in capital in order to get started.

These four, freshly constructed units will fetch $550,000 each, or $2.2 million in total. After soft costs, the project should net approximately $300,000.

If you were to take the purpose-built rental approach, you could expect each of these well located, newly built homes to bring in about $2,400 per month in gross rent, or $115,000 per year on your $1.85 million investment.

This is a solid cash-flow equation with a gross rent multiplier of 16, which is similar to what you would get by purchasing older rental stock, but with the added benefit of being new without the deferred maintenance of an older building.

As you can see, both are attractive options, but let’s consider a hybrid option – one that stirs in a rent-to-own component.

In a rent-to-own deal, the rents are based on market-value rent plus equity buildup. It’s also customary to tack on a pre-agreed rate of appreciation to the eventual purchase price.

I have had great success creating win-win deals using 3.5 per cent appreciation.

In a five-year deal, using a 3.5 per cent rate of appreciation, the sale price on the four units will be $650,000 each.

During that five-year window, your tenant-buyer will have been paying $2,900 a month, which includes market-value rent of $2,400, plus $500 worth of equity buildup, which will be credited back upon closing.

This will accumulate and become their five per cent down payment when added to their initial deposit of $10,000.
Returning to the three-course meal analogy, the appetizer in this scenario – cash flow – is very good.

You receive $11,600 every month in revenue to pay your mortgage (at a rate of $7,000 a month) and take care of your additional monthly expenses, taxes, insurance and water, which should total approximately $1,600 a month. That leaves you with a net $3,000 per month in positive cash flow, or $180,000 at the end of five years.

Now, on to the second course.

During the five years of your tenant-buyers making their payments, your loan went from $1,387,500 down to $1,197,000. That’s a significant reduction of about $200,000 in a very short period, if you opt for a bi-weekly payment plan and stick to it.

The dessert in this example is the capital gain when you sell: $2.6 million minus your base cost of $1.85 million leaves you with a gain of $750,000.

But don’t forget about the tenant’s equity buildup of $30,000, which was part of their original deal. Multiplied by the number of ecstatic new homeowners you’ve helped create, that $30,000 balloons to $120,000.

That’s not yours to keep – and also prepare to pay another $10,000 in legal and accounting fees. You will still be left with a million dollars in new wealth after only five years.

  • Profit from sale          $750,000
  • Mortgage reduction   $200,000
  • Cash flow                    $180,000
  • Total gain                    $1,130,000


Great strategy for landlords

The New Tenancy Law Could Mean bump in equity for Landlords

OK, it’s a little off topic, but I think the metaphor works: Professional race-car drivers are all about maintaining momentum – not slowing down.

They know the particular track they’re on. They know every turn, every braking zone, every acceleration point, and every passing zone.

They practise hard and they have a plan, and team, that will give them their best chance at winning the race.

But, the most important ability they possess is the ability, in spite of changes in track conditions and rules, to adjust instantaneously to stay out front.  

Landlords and rental property owners have something in common with race-car drivers.

Having a strategy, executing it on time, knowing when to put on the brakes or accelerate, and having a stellar team are all keys to successful property investing.

But, when conditions change, can you adjust and keep on winning?

Time to Accelerate and Grow Your Investment

If you are currently a landlord or own rental property, then it’s likely you’ve heard about the recent changes to our tenancy law. The bottom line is that the changes make fixed-term tenancy agreements a thing of the past.

This is, of course, a form of rent control intended to take away a landlord’s option of raising their rents to match market value when the market value of their unit(s) has increased during tenancy.

Essentially, what this means is that all tenancy agreements will become month to month at the end of their term.  So now, moving forward, in order for a landlord to retake control of their unit, they must choose one of two options: 

  • move into the unit themselves
  • renovate the unit.

The first, while it is an option, is highly unlikely. And option two sounds costly and time consuming.

But let’s take a closer look.

Renovation Can Equal Better Cash Flow and More

We talked above about how both race-car drivers and property owners must be good at taking advantage of changes in conditions in order to stay out front.

Let’s examine the renovation option and see how property improvements can, and should, be viewed as an investment opportunity — even a win/win.

Let’s break down the numbers and figure out if this really is better than accepting below market value rents while waiting, sometimes for a long period of time, for a tenant to move on.

For our example, let’s assume this is an older rental unit, say 30 plus years old, and that it’s been some time since the last cosmetic overhaul.

The rents are appropriately low due to the age and condition. It’s a 1,000 square foot, two-bedroom, one bath apartment that is rented at $1,200 per month.

Our renovation plan: Find a cost-effective handyman, replace the tired flooring, paint, and install all new hardware and fixtures.

When it's done, the unit will look and feel completely refreshed and will be “renter desirable."

The Budget

  • Flooring — $5/sq.ft = $5,000
  • Paint — $2/sq.ft = $2,000
  • Baseboards = $1,000
  • Fixtures (lights, door knobs, faucets, etc.) = $2,000
  • Total @ $10,000

The ROI

With your $10,000 investment, you are now able to re-rent the unit at market value. And, with its fresh new look, it will now rent toward the top of the two-bedroom apartment price range – more than likely at around $1,700 per month.

That’s a $500 per month improvement in cash flow. Not bad.

The example renovation can be completed in a month. And with the inclusion of the free month’s rent, required when ending a tenancy for this purpose, you are out two months income or $2,400 based on the old rent figure.

But stay with me here.

With a new tenant at $1,700 per month, it will take five months to recoup your lost revenue (5 x $500 = $2,500). Once paid back, the additional $6,000 per year in rent equates to a 60 per cent ROI on the $10,000 investment in the property.

That’s an amazing return for sure, but it’s only the tip of the proverbial iceberg. What you now have is what we in the business call forced appreciation.

This means that you have increased the value of your investment considerably. So, how much did our $10,000 increase our example project’s property value?

More Good News: GRMs

One way that rental and investments properties are valued is by using what’s called a gross rent multiplier or GRM. If you’ve read my articles in the past, you’ve heard me talk about rent multipliers.

The GRM will vary from market to market. It will go up in boom times and down in bust times. It might be as low as 10 in bear markets and as high as 20 in bull markets.

Currently, in Kelowna, we aim for a GRM of 15 on cash-flow property. What this means is that an investor would be willing to pay a multiple of 15 on the gross annual rent.

Let’s apply this valuation method to our example:

When rented at $1,200 per month, our property produced an annual revenue of $14,400. Using a GRM of 15, the price an investor would pay for this revenue would be $216,000.

When rented at $1,700 per month, our refreshed property is producing a annual revenue of $20,400.

Using a GRM of 15 the price an investor would pay has increased to $306,000 – a $90,000 increase over the value of the old/original property.

New laws bring new opportunities

The B.C. government is proposing several changes in order to protect tenants from landlords who might use renovation as an excuse to evict tenants — while having no intention on doing any renovations at all.

Follow the rules and you’ll have no problems.

In fact, part of the new law allows the tenant first right of refusal, at the new rental price, when the renovations are complete and the unit is available again. So, you just may have a built in “instant” tenant — no advertising required.

Impact on Your Net Worth and Future Investments

My strategy clearly shows how you can proactively use the new Tenancy Law as an opportunity to affect a major, positive difference in what an investor would pay for your property(s) — although once you are enjoying the significant additional cash flow, you may never sell.

And, when the bump in equity finds itself onto your net worth statement you can leverage it for future investments.

Is that a win/win or a win/win/win?

Either way, it’s a great strategy and a smart way to move forward.



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Investing in real estate

I am super excited to invite you to the first ever Real Estate Investment Network member meeting to be held in Kelowna.

As a longtime member of REIN, I’ve found that being a part of this community has been a huge asset in all aspects of my own personal real estate investing business.

Utilizing the REIN resources and network has helped me build my portfolio to over 50 doors by following in members' footsteps and through their advice. I have been working for the past year to bring a REIN chapter to Kelowna, and if this event is a success, it will be the first of many ongoing monthly meetings.

I invite you to come down to our member meeting on Jan. 30 from 8 to 10 p.m. to learn about and experience the full power of the REIN community. Typically, these events are $150 to attend, however, for being part of Castanet's network and a reader of my personal investor column, the fee will be waived for this first event! 

Follow the link to register for the meeting. Then click "Come As Our Guest $199" – but don't worry, your registration will be added to your cart for free.

We look forward to seeing you there. 

Please feel free to give my office a call if you have any questions about the event at 250-717-3133



More Investment Real Estate articles

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About the Author

AJ is the owner of Kelowna’s downtown boutique firm, Vantage West Realty. The firm takes pride in breaking the mould when it comes to how they practice real estate. With a well-deserved reputation as a real estate renegade, Hazzi has been shaking up the Kelowna real estate scene since 2002.

Having been a student of real estate through two market cycles, AJ has come to see an absence of truly qualified professionals specializing in investment real estate. This has become AJ’s role within the firm and the community: To educate clients on how to achieve financial freedom through real estate.

Arming his clients with knowledge on where to find positive cash-flow, how to renovate for profit, and other creative avenues that most agents completely ignore, Hazzi has carved out his niche as a real estate investment advisor (REIA), and loves nothing more than educating people on the right strategy to capitalize on both boom and bust years.  AJ is a firm believer that the Kelowna market is rich with opportunity, if one knows where to look.

If you are in search of an advisor who practices what they preach, consider that AJ has built his own real estate portfolio up to include multi and single family cash-flow rental properties, development property, resort property, fix and flips, and commercial properties. By sharing the lessons learned from his own experiences, his clients get the knowledge and confidence to invest without having to make the expensive mistakes he and many new investors have made along the way.

His goal is to impart on people, especially of the X and Y generation, that depending on RRSPs and Government Pension Plans to look after us down the road is risky business. Most people don't realize that as little as one or two properties added to your real estate portfolio now, can secure a comfortable, even lavish, retirement.

Bringing a consultant's approach rather than the tired, old-fashioned sales approach, AJ and his partners offer a world class service from finding, pre analyzing, and negotiating your next acquisition, to property management, all tailored to today’s busy investor.

To hear what AJ Hazzi's clients have to say about his service view the testimonials.

Contact Information

For more details or to reach AJ Hazzi, please visit www.vantagewestrealty.com

Email [email protected] Cell 250.864.6433



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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