Investing in realestate

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There's some nice complicated tax laws involved if you ever decide to sell your investment property too if you have been claiming tax breaks from consumables in the rental property (which most do). In summary, unless you're in it for the long haul it isn't pretty and you might be paying a substantial wad of cash back to the government. This is if you have a principal residence aside from the investment property. If you live in the rental property too then it is a little different.
 
Thanks guys, lots of good points. I guess I could have been more forthcoming and clear but I figured everyone has their own perception of how the real estate market will look in the next few years likely anyway and I just wondered what information people were basing it on.
The situation I am in is that I have financed the developers project for a return of 8% on my loan annually plus an additional 12% upon completion of the project. As an investor I am offered a unit for 20% the pre sale price. I can sell before completion of the build. My concern lies with the market 4 years from now. Will there be buyers? Will they get the price they are asking? If I put 20% down on a unit will I be able to sell it for a decent profit?
 
Its more risk than I am willing to take, especially for such an undiversified, relatively illiquid asset.
4 years is a long time... think of the difference between 2006 and 2010.

I don't know how much this will represent of your net worth, but I hope its a small one.

Also keep in mind that buying pre-sale, you also take a wack load of financial risk, if the developer runs out of money, has a big accident on the job site, or credit conditions dry up, this could be a smaller or bigger issue depending on the developer, but each project is separated into different corporations, so solvency is always accessessed on a project by project basis, not if the developer goes down.
 
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In assessing risk, developer history can help a lot. Speak personally with as many previous customers (happy, unhappy and indifferent) as you can. Don't use ones the developer provides to you, unless you seek out ones on your own also..I would use your charm and set about in a bit of a mission on your own. I recall even just foyer chat saved me from renting in more than one high-rise many years ago.

On a different but perhaps somewhat topic (regarding choices) condo vs detached house...I know that in some instances a condo may fit your needs on many levels, but if you fall into the category of considering either one, I know that cockroaches don't really like going outdoors if they don't have to, so their reluctance to do that jaunt across the strip of grass between the houses can be your ace in the hole if you go the detached house route. The more you pay for a condo the less likely you're going to be willing to share your space with critters and if resale is part of your criteria, nowadays future potential buyers are checking into historical issues such as that. It can be a bigger financial deal than some might assume, since the future is unknown on a building that has no history.

Also, if you do go the condo route and satellite TV is important to you, make sure you pick a unit that can see the sats..generally from south/SE south SW a little.
 
silvrsurfr said:
I work as a mortgage broker. i speak with realtors on a daily basis. and from them, they are very cautious about purchasing property as an investment.
if you are to buy so as to live in the property. grow a family etc that is fine.
but as only an investment. people are being cautious
what gets my red flags going is meeting with a young person making $50k per year but has bought two new construction properties, with deposits and all, fully expecting to finance both homes. oh and each purchase is approx $500k each.
this is when i start getting concerned.
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who approved $1 mil in mortgage loans for someone with $50k annual income? is this even possible? how much equity did they bring into the deal?
 
I spoke with the developers for a bit and grilled them as best I could. I know they have financial backing well in place and excellent track records so far but I have to still poke around on my own a bit and do all of my due diligence on both that financiers and developers. I did speak with some of the neighboring condo owners and the numbers were really good and they were looking to buy into the new build. My main concern besides all of the obvious ones regarding permits, zoning, finance, and using a reputable developer with a perfect track record is what the market will look like when it is time to sell. If the market remains stable, I'm very very confident about my potential returns. Still debating whether or not to buy haven't pulled the trigger on anything yet. The condo would be strictly for resale for profit. I wouldn't be living there.
 
afong56 said:
who approved $1 mil in mortgage loans for someone with $50k annual income? is this even possible? how much equity did they bring into the deal?
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I haven't heard quite that bad..but I have heard similar stories. One lender agreed to $962k to someone with 5% down (so CMHC insured..which is important..the bank isn't on the hook..) and their gross income was something south of $100k.. I remember when 3x over gross was considered the upper limit. There is a fundamental disconnect I think in real estate pricing currently. HELOC's are also very risky currently.

I'm no expert..but honestly, I don't think the next few years will be pretty in real estate. I think anyone investing in real estate in Toronto or Vancouver today is about 5 years too late.
 
my concern is not whether you are gonna lose, but whther it will bring you the same return as something else with similar risks.
Thats the reason why i am not real estate heavy. I am looking into buying something, but to live in.

I would personally be looking at REITs if I wanted to dump a chunk of money into real estate. That being said. you woulnd't be able to get a mortgage like that on a bunch of trust units.
 
afong56 said:
who approved $1 mil in mortgage loans for someone with $50k annual income? is this even possible? how much equity did they bring into the deal?
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This is just it - buying pre-construction from builder all you need is the required deposits, no confirmation of approved mortgage. So she bought, but never bothered to worry about financing until it was about to close. And this particular builder was only ask for a 10% deposit a couple years ago.
Her back door exit plan, was to sell (flip) the property closing first - use proceeds to purchase second property. They were closing within a month of each other. Apparently, she was trying to borrow funds from family to help cover the purchases, because she never had enough of a down payment.
I am not sure of the end result, as they went else where to get financing from somebody. But I cannot help but to believe many people were signed onto those mortgages to help cover it.
The issue I have is - when someone is out there buying up pre-contruction in this fashion, trying to flip and play the market for the hope of a return to assist in purchasing a 2nd property - hmm - i dont know.
There was a time when something like this would never have been able to happen.
 
OpenGambit said:
my concern is not whether you are gonna lose, but whther it will bring you the same return as something else with similar risks.
Thats the reason why i am not real estate heavy. I am looking into buying something, but to live in.

I would personally be looking at REITs if I wanted to dump a chunk of money into real estate. That being said. you woulnd't be able to get a mortgage like that on a bunch of trust units.
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What is your concern about not getting the return on real estate based on?
 
invictus43 said:
.. I remember when 3x over gross was considered the upper limit...
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Spot on! There was a time when using rough math, take your income, multiply it by 3, and that is the higher end of what you could afford.

Now adays, with the super low interest rates and 30yr AMs, the higher end is getting close to 5x.
Now factor in higher interest rates - that will automatically cut it down to 4x. Bump those rates higher, Government brings back 25yr AMs, and voila, we are back at 3x gross income.

At those parameters, do you think prices will come down due to people just not being able to afford them? I do.
When DSR ratios on the bulk of applications today are typically ALWAYS at 40%- 43% (which typically is the max) with a 5x household income. The affordability of these home prices will not be there anymore should rates slightly increase and AM gets reduced to 25yrs.

Only time will tell - and i hope its gradual and not suddently all at once.
 
Red695 said:
The condo would be strictly for resale for profit. I wouldn't be living there.
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This says it all. Personally, I wouldn't do it unless you are planning to live there. Too much risk compared to doing other things with the same money.
 
Red695 said:
What is your concern about not getting the return on real estate based on?
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I don't know if it will have a good return, I just feel like there is a lot of uncertainty ( risk ) in getting a good return. You have to keep in mind that immigration numbers doesn't mean a lot, many investor groups that buy whole floors of condo buildings have no immigration plans, its just foreign investment.

The good news is that interest rate risk is still low. But if you are looking for like a 5 % return a year, you could probably get that. 10 %? no way. But thats a lot of risk for 5 %.

I have no idea what type of building you are looking for, the type of return you want, your risk profile etc. So I am trying to stay general. but I am concerned things like this. ( this is luxury condos tho )

http://business.financialpost.com/2...o-glut-about-to-flood-toronto-housing-market/

with condo units in particular. the particular unit you are getting is everything. its common for the same unit in the same buildling on a different floor to be worth over 10 % different because of the view its looking at.

Best of luck with it.
 
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silvrsurfr said:
Only time will tell - and i hope its gradual and not suddently all at once.
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Bubbles seldom pop slowly. The article linked to a few posts up, explains why.

When buyers stop buying, sales slow down, the rumor that there may be a top in the market gets a lot of speculators and marginal players to put their own properties on the market (the ship has already sailed ...), listings go up, sales slow further, and when the players who NEED to sell start dropping prices, the bottom falls out. Marginal players who then become upside down on their loans are driven into the market and forced to sell, contributing to the bottom falling out even faster.

We've been there before. Saw it happen in 1989.

It's not going to happen to me. Total mortgage obligation: 0. And it's staying that way.
 
I read an article in the Globe a few weeks back with a couple who wanted to upsize..their gross was pretty fair, I think in the upper $100k range..and their plan was to get a mortgage for $1.2mil to buy a $1.4mil house..with monthly mortgage payments in the $4500 range. If interest rates went up 1.5%, their monthly would have gone to $6500. I was a little taken aback by that..I mean, I know salaries have gone up..but seriously? I remember 1989 like Brian does..
 
And just to throw it in here..I believe I read that average house prices in Vancouver have dropped 10% in the last 2 months..think about that..
 
Lots of good points, thanks everyone.


OpenGambit said:
I don't know if it will have a good return, I just feel like there is a lot of uncertainty ( risk ) in getting a good return. You have to keep in mind that immigration numbers doesn't mean a lot, many investor groups that buy whole floors of condo buildings have no immigration plans, its just foreign investment.

The good news is that interest rate risk is still low. But if you are looking for like a 5 % return a year, you could probably get that. 10 %? no way. But thats a lot of risk for 5 %.

I have no idea what type of building you are looking for, the type of return you want, your risk profile etc. So I am trying to stay general. but I am concerned things like this. ( this is luxury condos tho )

http://business.financialpost.com/2...o-glut-about-to-flood-toronto-housing-market/

with condo units in particular. the particular unit you are getting is everything. its common for the same unit in the same buildling on a different floor to be worth over 10 % different because of the view its looking at.

Best of luck with it.
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Thanks OpenGambit, appreciate it!
 
No problem. I am kinda getting pounded this week myself...
 
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