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Back to the Basics Real Estate Investing

Portrait Andrew Schulhof

#303-1338 West Broadway
Vancouver
British Columbia
V6H 1H2

Changing regulations, evolving markets, and a million different opinions on what to do with real estate. A great time to get back to the basics of real estate investing.

Real Estate is A Function of the Economy! 

2024 has been an interesting year so far for real estate and it is likely to continue to evolve in many ways. With so many changes in the lending rules, direct and indirect government policies at all three levels, no wonder it is confusing to so many as to what to do. Different circumstances call for adaption.

Understanding Population Migration

Simplistically, people go where there are jobs, a reasonable expectation of earning a decent living, and having an acceptable quality of life. So if an economy in a particular area is growing, people will move there and the real estate demand will increase as the population grows. And the opposite can happen as well when these things turn negative.

Right now, there is a definite movement for a certain part of the population moving away from unaffordable places, to cities and towns where they more easily can live, work, and play.

This statement is important because understanding the fundamentals of real estate can provide you powerful information and demystify a bit of what is currently happening in the various real estate markets across the country. There are always ebbs and flows within the country but when certain market influencers become more exaggerated, the migration becomes more noticeable.

With all the recent changes in conditions, it is no wonder people are confused about what to do. These changing conditions have caused so many home-owners and real estate investors grief because they were unprepared for any significant changes to the real estate landscape.

In fact, there have been several real estate investments that have greatly suffered and a growing number that have gone into bankruptcy, leaving the investors with a potential 100% loss of their funds and more.

Understanding Market Fundamentals

One of the reasons I started investing in real estate once I understood the fundamentals and eventually wrote my book Look Before you Leap, BUT LEAP!, was because my parents lost money in their real estate investment. Why did they lose money on real estate? They were following the herd and yet were unprepared for significant changes that happened in the early 1980’s.

Hmm, here we are again. In a recent blog I shared my thoughts on the striking similarities between the late 70’s/ early 80’s and now.

With change, there are always opportunities for those who are aware, well-informed, and prepared to take action.  Everything in life goes through cycles and real estate also has its cycles.

Although many of specific events are unique to this time, changes to the status quo are part of the cyclical nature of real estate.  There is always something that causes real estate to move in a cycle. And when you think of it, why would it be different than anything else in life, when it is directly affected by human behaviour.

The major causes of change in the real estate market conditions are events/things that either affect/drive the market in a long lasting manner or temporarily influence the market.

The events/things that are currently affecting the various markets across Canada would be referred to as market influencers and are discussed in Chapter 20 of my book.  These are worth studying, so that you better understand how you can benefit from them through adapting to different strategies, locations, etc.

Market Influencers

Market Influencers are factors that impact the impression or understanding of an impending change in the real estate cycle. These market influencers typically have a temporarily and sometimes strong impact or shift on the market conditions, so it’s wise to be aware of them, but they don’t usually have a permanent impact.

While not as long lasting as market drivers, they can shift the market direction in the real estate cycle and that is key to investors in order to adapt and benefit from these changes.

Here are several market influencers currently in play at the same time:

Interest Rates

There have been significant changes and in a short period from what was the norm for so many years.

Inflation

All Canadians and people throughout the western world have been suffering from what seemed to be ever-increasing rates of inflation across all facets of life, food, services, clothing, and housing. People have been struggling with not only the inflation, but combining massive increases in interest rates have people scrambling to make ends meet.

Ease of Borrowing (or lack thereof)

With the stress test tightening lending policies based upon different criteria than the past, mortgage financing has become even more challenging. Some of the hoops that a borrower has to jump through include income-based qualifications, maximum mortgage borrowing of 400% of income, maximum of allowable properties in a portfolio, higher requirement of asset and income verification, etc.). This influencer combined with the higher interest rates has made buying a home impossible for many who wish to get in to the market.

Legislative Amendments

There have been so many changes and intervention at all three levels of government that there are few provinces where it makes sense to invest (not speculate) and in fact with all the changes (capital gains treatment both at the personal and corporate levels, empty home tax, speculation tax, flipping tax, STR restrictions, rent controls, foreign buyer ban, etc.), it has many local and international investors at all levels questioning the value of investing in real estate anywhere in Canada. One of the biggest impacts that has influenced markets across the country, is stemming from legislative amendments has been the seemingly unbridled and uncontrolled international immigration without addressing the strain on the housing, jobs, and healthcare related infrastructures in the country. The only defense against all of this legislation is to educate yourself on the different regions.

Foreign Investors in Local Real Estate

With the recent extension to the foreign buyer ban (which turns out to be an incredibly small portion of the local and national markets), there is less foreign investment in Canada which can translate loss of growth in GDP, jobs, housing construction, etc.

Investment Alternatives

There has been a real growth in individuals and companies offering investment alternatives to the traditional residential real estate investing models such as crowd funding, peer to peer lending, limited partnerships in several different real estate options, private lending, REITs, Mortgage Investment Corporations, seniors housing, self-storage, mobile home parks, international real estate opportunities etc.

Confidence in Real Estate as an Investment Vehicle

This influencer is a result of the cumulative effects of the many of the previous market influencers where investors are sitting on their hands waiting or are looking to invest elsewhere where their investment dollars are welcomed.

Applied Knowledge is Power

This doesn’t mean that it is all bad. As I mentioned at the beginning these changes are creating opportunities for those that are ready willing and able to take appropriate action. Not all real estate markets are functioning or are in the same segments of the real estate cycles. In fact currently there are 4 cities that are bucking the trend of the rest of the country in terms of home prices.

By understanding the market influencers and how they are affecting various markets that you may be targeting, can help you benefit. For example, if a particular market is in a boom, slump or recovery segments of the real estate cycle, you can adapt your real estate investing strategies, styles, activities accordingly.

Please note that there is a beginning, middle, and end each to segment. If you look at this chart below, you can see how certain real estate investment tactics work better in certain market conditions than others, and there are points in the cycle where to avoid employing certain tactics.

 

TACTICRECOVERYBOOMSLUMP
BEGINNINGMIDDLEENDBEGINNINGMIDDLEENDBEGINNINGMIDDLEEND
Buy & HoldGOODGOODGOODPOSSIBLETRICKYAVOIDPOSSIBLEGOODOPTIMAL
Rent to OwnGOODOPTIMALTRICKYGOODTRICKYAVOIDTRICKYPOSSIBLEGOOD
Fix & FlipPOSSIBLEGOODGOODOPTIMALGOODTRICKYAVOIDTRICKYPOSSIBLE

Source: Real Estate Investment Network

Conclusion

By understanding what is driving and or influencing the real estate market in which you are interested, you will be able to make more informed decisions as to what strategies, tactics, or actions to take or not to take.

Maybe you will need to shift your focus to a different approach, investment vehicle, real estate category, asset class, community, country, etc. Sometimes, temporarily taking no action can be the right decision for your particular situation based upon your desired outcome and risk tolerance.

The particular details of the current situation may be somewhat unique, but remember, it is a cycle and change is the only constant. If you are questioning what to do, speak with your trusted and experienced advisors/mentors that understand your vision and current situation, or Email me with any questions you may have on the specific market influencers in your market of interest.

 

Get in Touch

If your are interested in investing in real estate, or looking to list your current home, I can help you form the appropriate strategy and answer any questions you may have. 

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