SUMMERTIME REFLECTIONS
Even as we enjoy these long, warm, summer evenings, it seems like everyone is still talking real estate. Homeowners, renters, investors, bankers, even government officials are all sharing their opinions. Oh, and what a variety of opinions there are out there!
There are the firm believers. “Buying real estate is a tried and true wealth-building strategy.” These folks will tell you that 90% of the world’s millionaires invest in real estate. And how do they make money?: monthly cashflow, mortgage paydown, passive appreciation (when the market goes up) and active/forced appreciation (when an investor improves a property to make it more valuable).
Then there are a variety of naysayers and doubting Thomas’s (apologies to all the Tom’s in the world). Media headlines are full of doom and gloom about the real estate market these days. Renters are truly having a tough time. And who doesn’t love talking about interest rates and recessions?!?
But here’s the common undercurrent that we’ve noticed: expectations and risk tolerance. We’ve noticed that many people’s opinions about real estate come from these two parameters.
For example, some investors truly expect that real estate will return 20%, 30%, 50% or more PER YEAR! Clearly, these investors have not been living in Alberta! Are those numbers possible? YES. Are they common—not recently! And are they guaranteed? Absolutely NOT. But if an investor has lived in Toronto recently (sorry to pick on the Center of the Universe), real estate has created the illusion that housing prices just keep going up. Indefinitely. Until, uh oh, they didn’t. Wait, what?! A basic expectation about price appreciation just got wolloped (definitely an Albertan technical term).
So it’s no surprise that some of these investors currently have a negative mindset. They had plans with those expectations. In addition to the “how much money” conversation, some investors also expect to see their returns, fast. May we simply say that real estate does not do Fast. Generally, the more time “in the game,” the better the returns will be.
Risk tolerance is the other undercurrent that we’ve been noticing in so many of our recent conversations. It seems like every banker and every financial advisor that we’ve ever spoken with does a “risk analysis” profile of some kind. In our opinion, this needs to apply to real estate investors as well. Markets change, and sometimes quickly. Look at Calgary for a recent example. Real estate was setting all kinds of price and volume records in January, February and March. Yes, I really said January! Then it started to shift in April. Then the cooling started in May and June. BUT, in the meantime, the rental housing market took off! Landlords have been screening multiple excellent applicants on their properties and raising rents appropriately.
And some risks are unforeseen. Like Covid – enough said. With rental housing, having the expense of a bad tenant is a genuine risk, despite our best efforts to screen diligently. Hail storms happen. We all set out with our best intentions, but owning any property comes with some risk.
We are big believers in real estate investing. And we’re thrilled with the opportunities in and around Calgary, in this phase of the real estate cycle. However, we recognize that real estate investing is not for everyone. Neither are stocks, mutual funds, EFT’s or Crypto currency.
So today we’re encouraging our friends and family to make their own choices. Decide where your risk tolerance truly lies. Do you need full control of your property? Or do you value saving your time, and partnering with an experienced investor? Right now, are there simply too many unknowns for your comfort level? So is it maybe time to sit on the sidelines? Or are you willing to give your investment 5, 10, 20 years to truly create the wealth you desire? And ride the ups and downs over that amount of time?
As for those pesky expectations, are they realistic? If that proforma says 40% Return on Investment per year, would you really believe it? Truth: Joint Ventures have some risk. Truth: no real estate investment is guaranteed. Choice: does real estate investing still fit with your risk tolerance? Our summertime reflection: there is no right answer. There is simply the right answer for each person, each family, each real estate investor.
