RISK MANAGEMENT IN A VOLATILE MARKET
These days it can feel like we’re assessing the economic tectonics of real estate, rather than the economic fundamentals. Investors are hearing about geopolitical uncertainty, increasing interest rates, inflation and a possible recession. Even the stock market has been on a wild ride.
So how can a real estate investor hedge against, or even control, the risks and potential downside? Well, the Alberta investors will have a bunch of ideas, that’s for sure! We’ve been through the downside—recently.
Let’s begin with Focus. We are not absolute experts, but we truly believe that there is no such thing as a Canadian real estate market. Worse, there is no such thing as an Alberta real estate market. For example, right now Calgary and Edmonton are seeing an explosive growth in prices and sales volume. Meanwhile Fort McMurray continues to struggle, not to grow, but just to return to a 2014 ish baseline. It is critical to assess your city/town, and even one specific neighbourhood or street.
Once the risk analysis has been narrowed down to a geographical area that makes sense, we look to Define if the risk is real, perceived or possible. A real risk is when the prices have already dropped 10%, or the main employer is moving out of that town. A perceived risk, is often a theory; for example, the theory that rising interest rates will cool the housing market in your area. We seem to see evidence of this in Toronto, but not so much in Calgary. And a possible risk is somewhere between real and perceived. For example, if real estate values have dropped 10%, it’s possible they could drop another 10%.
With a little more clarity, the next thing we’re doing is taking Action. Yes, I said it. Action. What policies can we put in place for our real estate investing business? What “rules” do we have for buying new properties? What can we control, or even improve on? In our opinion, risk management is about making the best possible choices with the best possible information in the moment.
Right now, we think Buy and Hold properties are a great idea in Calgary and the surrounding areas. Unless we need to sell or refinance, price fluctuations won’t matter much to us. And we are looking for properties that have some positive cashflow (money leftover after all expenses are paid on the property) at today’s current rental rates (a moving target for sure). That positive cashflow will allow us to weather a potential drop in rent rates, but more importantly it strengthens our portfolio if we apply for future mortgages. Banks like businesses that show profit, even if “it’s just” a real estate investment property.
We’re also aware of the rental demand in and around Calgary. So we’re choosing the best tenants possible, and those with the most likelihood to continue renting for a number of years. Then we value our tenants=our customers. From a tenant’s perspective, “there’s no place like home.” From our business perspective, how can we retain that good tenant for many years? Prompt repairs and maintenance? Dealing with complaints efficiently? Valuing them at a birthday, or an annual holiday? We would usually rather keep a tenant happy, rather than deal with the extra time and expense of a tenant turnover.
We believe there is risk in any investment: real estate, stocks, cryptocurrency, etc…. In addition, if we learned anything during Covid, it is that Black Swan events are real and unpredictable. But rather than living in a scarcity and fear mindset, we are actively looking at what we can control in our area, for our customers. And we’re always thinking about backup plans, just in case those economic tectonics shift with little warning. We’re actually very excited about the opportunities for our friends and colleagues in and around Calgary. Reach out to us anytime to chat real estate investing.
