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Looking to increase your homes property value? Here are five of the best renovations you can do to your home to increase property value.

home renovations, increase property value, Income properties, real estate, real estate wealth, real estate income, Genworth Canada

Looking to increase your homes property value? Here are five of the best renovations you can do to your home to increase property value. These five renovations can sometimes have a return on investment 5-6x what they cost.

#5 Flooring

Flooring is one of the most important aspects of your house. You will see an immediate rise in property valuation with the installation of hardwood floors. Existing hardwood floors that you can refinish are ideal as they are less costly to restore and in higher demand than new flooring materials. For the bathroom, tile will always be in demand and retain value exceptionally well.

home renovations, increase property value, Income properties, real estate, real estate wealth, real estate income, Genworth Canada

#4 Fixtures

Kitchens often look tired and dated, in large part due to old fixtures. Replacing or updating cabinet hardware, light fixtures, countertops and faucets will result in an immediate increase in your home’s value. This small, but effective upgrade will also revitalize the entire home. Pot lights are in high demand in open concept style homes.

#3 Bathroom

The bathroom is the second most important room in the home in terms of valuation. If you can add a three-piece bathroom to a home with only one full bathroom, you will see a dramatic rise in the market value of your home. While you should never compromise bedroom space for a bathroom, try sneaking one in dead space in the home. Scott managed to fit in a 3-piece bathroom under a staircase – the width of the room measured just 44 inches. As an added tip, use glass for the shower to make the bathroom feel more spacious.

#2 Kitchen

Kitchens are the single most important room in the home relating to valuation. The kitchen can make a significant difference in the value of your home. As such, it is crucial that you invest in having a modern, fresh and desirable kitchen. Modern cabinetry, under cabinet lighting and new appliances will all significantly increase the value of your home on the market. To save on cost without compromising construction and desirability, look at options like Ikea cabinets as opposed to custom cabinetry.

#1 An Income Suite

No surprise, but the single biggest way to increase the value of your home is to build an income suite within the property. Whether this is converting your basement into a rental, or another floor in the home, an income property will increase your home’s worth. The main reason for this is that it covers a portion, or sometimes all of your mortgage payments, and results in your home being cash flow positive – which creates real wealth that can supplement your income.

Source: Homeownership.ca

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Toronto explores laneway homes as a solution to the housing crunch

Laneway homes could be a solution to Toronto's housing crisis, advocates say. The city is holding public consultations about this.

Laneway homes could be a solution to Toronto’s housing crisis, advocates say. The city is holding public consultations about this. (CBC News)

The solution to Toronto’s housing affordability crisis could be found in your own backyard.

In response to skyrocketing home prices, the city’s looking to loosen the bylaws around developing one of its few sources of underused land: laneways.

A proposal went to public consultation Monday, exploring the possibility of letting homeowners build a secondary suite on the edge of a property leading into a laneway.

But don’t call your realtor just yet.

Those smaller homes wouldn’t be for sale, said Alex Sharpe, one of the co-founders of the policy groups co-ordinating the public discussion.

“It’s not going to create a whole new crop of cheap houses that people can buy,” said Sharpe, who lives in one of the city’s few legal laneway homes and runs a group called Lanescape.

Laneway Toronto house

Alex Sharpe lives in a laneway home in Toronto and is the co-founder of Lanescape, which looks at the development of laneways. (CBC News)

Instead, it would build on the idea of a basement apartment. A laneway home would have more natural light, but unlike a basement apartment there would be more privacy because the backyard acts as a buffer between the main home and secondary suite, Sharpe said.

In theory, the move could benefit both Toronto’s renters and homeowners.

For property owners, it translates into an extra unit to cover the mortgage and house adult children or relatives. But it’s also a way to cool down the long-term rental market, which has seen supply shrink alongside the rise of AirBNB, studies have found.

“We view laneways as an opportunity to expand the supply of units in existing residential neighbourhoods,” Sharpe said. “They have the services, [they] have the infrastructure, the transit and they’re well-connected.

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Toronto laneway home owner1:06

“We’ve had a shortage of housing in Toronto in the last number of years and it’s growing in intensity because we’ve run out of land.”

Tiny home fever

Laneway homes may be new to Toronto, but Vancouver’s city council gave landowners the green light to start building them in 2009. Regina and Ottawa have also followed suit.

In fact, Vancouver actually provides a how-to guide to residents that includes potential floor plans for the tiny homes.

Toronto city councillors Ana Bailao and Mary-Margaret McMahon say laneways could be critical to the future of the city’s development.

Laneway Toronto

Sharpe lives in a laneway home with two bedrooms and a streamlined design. (CBC News)

McMahon represents Ward 32, Beaches-East York, where she said there’s a concern about the effect that high-rises would have on streetscapes.

“So this is a very measured approach to density,” she said of the laneway discussions. “We have concerns about privacy creep and what-not so you’re not going to see the Taj Mahal of four-storey laneway home; it’s going to be in keeping with the character of the neighbourhoods.”

Laneways rejected before

Toronto city staff cited privacy concerns — that secondary homes might overlook their neighbour’s backyards or cast shadows — among their reasons in a 2006 report that recommended against allowing laneway housing.

Uncertainty about how to deliver public services like garbage pick-up, barriers to emergency access and the possibility that residential properties would be subdivided also killed the idea from going ahead at the time.

Ana Bailao

Coun. Ana Bailao says that laneway homes are no different than allowing a property owner to rent out a basement suite. (CBC News)

But the current plan at the public debate would see all public services delivered from the front of the property, in the same way that it’s done for rental suites, Coun. Bailao said.

“We already have basement apartments in the city of Toronto,” said the Ward 18, Davenport councillor. “All we’re saying is maybe we should allow it at the back of the houses as well.”

Consultations are also happening within the planning departments about those changes and there’s a push to name the city’s laneways so that first responders would be able to navigate them more easily, she said.

Province supports laneways

And, unlike in 2006, laneway advocates now have the support of Ontario law.

The province made changes to its Planning Act in 2011, when it introduced new legislation that requires municipalities to “establish official plan policies and zoning bylaw provisions” for secondary units — including those for laneways.

“The policy at the province level is disjointed from the local level,” Sharpe said, something he said he hopes the public consultations will change.

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Mike Holmes: How to turn your basement into a (proper) rental apartment

It takes a lot of work and a lot of planning — more than most people think — to properly turn a basement into an apartment that can be rented out. Sometimes it’s like opening a can of worms. Just to plan it out right and to get the appropriate permits takes about three months.

The first step should be to figure out if it can even be done, because if it can’t, you don’t want to waste your money or your time.

Go to your municipality (you can call, go in person or go online) and check the rules and regulations on turning a basement into a rental unit. Every municipality is different; some allow it, some don’t, and each one might have a different set of requirements for how they want it to be done properly.

Once you know it can be done, your next step is to go to an architect, engineer or, if you live in Ontario, a qualified person with a BCIN (Building Code Inspection Number) to create the plans/drawings for the project.

And yes, you will need plans! Without plans, you can’t get permits, and if you don’t have permits you’re asking for trouble.

If you don’t have a permit when construction starts, not only can you be ordered to stop the project, you might also have to uncover or remove any finished work to expose what’s been done so it can be inspected. Plus, getting a permit means the city will send an inspector to make sure the work is being done properly. Without a permit, it’s a crapshoot.

The professional you hire to create the drawings or plans should work with you to include the design elements you want, but more important, they’ll also make sure the plans are to code.

There are certain requirements for a basement apartment. Means of egress (i.e. exit) is a biggie. There must be a safe and unobstructed exit, so anyone in the basement apartment can safely exit, especially in case of an emergency, like a fire.

If your basement doesn’t have a safe exit, the project can get very expensive very quickly. You will have to hire an engineer to make the proper plans for a separate exit, and engineers aren’t cheap. But if you’re not touching the building structure, you don’t necessarily need an engineer.

The first step should be to figure out if it can even be done,
because if it can’t, you don’t want to waste your money or your time.

Fireproofing or fire separation is another big thing to consider.

For example, on one project I worked on, the city wanted a resilient channel on the ceiling, which is basically a metal channel that drops the ceiling down about an inch or an inch and a half, plus two layers of 5/8-inch drywall on the ceiling.

The city might also request fire-rated windows (or windows with fire-rated glass), which might not be available in different areas. That means looking at different options, such as glass block instead of a window, so you still get natural light but it’s also fire-rated.

There’s also a limit to how much glass or how many windows you can have, depending on how close your home is to the property line, again to reduce the chance of a fire spreading to adjacent properties. This can be an issue if local code requires that you add windows to the basement apartment.

Some municipalities might also want sound separation, so sound doesn’t travel from the basement up.

Then there are the mechanics: electricity, plumbing and HVAC. That might mean rewiring the basement and changing the electrical panel, or maybe breaking through the concrete floor to run sewer lines to a new toilet and shower. In one case, after we did this we realized the weeping tiles were tied into the sewer lines, which prevented us installing a backwater valve (or backflow preventer), so we had to install a sump pump, which meant more money.

That’s why it’s important to do your homework. Invest in getting the proper drawings, be involved, ask plenty of questions, and go to the city — because it could turn out to be a massive project that could take years to recover financially — and maybe mentally, too!

I always recommend homeowners get involved in any home renovation. You don’t want to hand everything off to a contractor and assume they will take care of everything for you — and do it right. It’s your house and your money; no one will care about it as much as you.

Source: National Post. Watch Mike in his new series, Holmes Makes It Right, on HGTV. For more information, visit makeitright.ca.

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Guidelines for buying investment real estate

The first factor to consider when buying real estate for investment is your budget. Ensure that you have sufficient funds for the initial fees and the long-term expenses; the only thing worse than having no property at all is being unable to fully pay for your investment.

After checking your budget, the next step is to scan the market so that you can have a good idea of what future buyers might look for, thus establishing a profitable investment. Compare the prices of the properties you are considering with authoritative market projections and current design trends. Take into account the locale of your purchase: the community, the neighborhood, the existing amenities, and the accessibility of core facilities (e.g. hospitals and schools).

Consider fixer upper properties, as well. The initial expenses required to bring up the home to a presentable, salable condition would be small compared to the potential profits down the line; this is especially applicable if the property is already aesthetically pleasing and situated in a good neighborhood to begin with. Also, going for this option would guarantee that any hidden problems would be addressed prior to the sale, as such issues would otherwise be undetectable in a property that looks good only at first glance.

Most importantly, tap the help of a professional such as a real estate agent. Specialist knowledge would be invaluable in assessing the previous factors to ensure that you get the best long-term benefits for your purchase.

Source: Canadian Real Estate Wealth – 11 Dec 2015

To find out more about financing investment real estate, contact the Ray McMillan Mortgage Team at 905-813-4354 or visit www.RayMcMillan.com

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How landlords can steer clear of bad tenants

for rent

Any landlord who has been involved in the real estate rental business for more than a few years has likely come across a tenant disaster, or at least knows somebody who has. One of the most common comments we hear from prospective, current, and former landlords relates to the headaches caused by accidentally renting to a bad tenant.

The relationship between landlord and tenant is known to be rocky, at the very least, and disastrous or expensive in a worst-case situation. Bad tenants have left landlords with garbage to clean up after suddenly leaving a property, pet damage and repairs in suites clearly marked as not allowing pets, damage to property after massive parties, junk removal requirements after night-time move-outs, and everything in between.

Horror stories are everywhere, and news travels fast: selecting the right tenants is the most important step in the real estate rental business. Landlords who can master this skill will succeed in the business, while the opposite is also true, unfortunately. Bad tenants are the number one reason for landlords leaving the industry and selling their properties in search of greener pastures.

Landlording is a risky business. Selecting a disreputable tenant who causes major damage to a unit can leave a landlord with a significant bill for clean-up and repairs, scare off other regularly paying tenants, and even label the landlord as inattentive or with the classic slumlord designation.

Unfortunately, there is rarely any insurance that can protect landlords in this area, and a problematic tenancy resulting in a massive expense will almost never pass the strict criteria that an insurance policy will require prior to paying out on a repair claim.

Tenancy laws throughout Canada differ greatly, but they all set out specific protections for both landlords and tenants. Most landlords assert that the laws favour tenants in almost every situation. Certain provinces, such as Alberta, offer slightly more protection to landlords than other provinces, where landlords can be forced to endure a problematic tenancy for months, or even years.

How to screen your prospective tenant
The best and most sure-fire way for landlords to avoid having to deal with this problem starts at the very beginning of the landlord-tenant relationship. Landlords who screen their tenants properly will greatly reduce the risk of future loss, maintain their reputation in the greater community without blemish, and not be constantly stressed about their rental properties.

Here are three tried and true methods of selecting the best and most qualified tenants and learning ways to avoid costly disasters.

1.) Rental documents
As any real estate or courtroom lawyer will tell you, good documents are the starting point of any successful business relationship. Having a successful tenancy requires good, clear, concise definitions of everybody’s responsibilities and rights. Skipping this step means a tenancy relationship is beginning without a solid foundation, and during times of difficulty there may be nothing to refer to for clarification.

Rental application form

This document is probably the most important of any document in the entire rental process, which comes as a surprise to many new landlords.

A good rental application will require information on:
the applicant’s job
their supervisor
their income
current address
landlord reference, friends and referees
government identification
next of kin and extended family members
any additional details believed to be relevant to the approval process

This information will help landlords gain a better understanding of the tenant’s characteristics. More importantly, however, it gives the landlord some good contacts to track down the tenant if they should disappear. Visithttp://hopestreet.ca/rental_resources/ for a free download of a comprehensive Rental Application Form.

Move-in inspection report
This is the second-most important document in the landlord-tenant relationship. Unfortunately, it is often overlooked.

Most provinces require a landlord and tenant to complete a move-in report upon onset of a tenancy. This quantifies and documents the condition of a property so that, when the tenant leaves, any damage caused is clear. A thorough and concise move-in report card is a sure-fire way of avoiding significant disputes over tenant-related damage. Most provinces require a landlord to produce this report prior to deducting any funds from a tenant’s security deposit.

Residential tenancy agreement
As the name suggests, this document will establish the terms of the working relationship between the tenant and landlord. In general, the more detail it provides the better, and sourcing a free online residential tenancy document is not sufficient to cover a landlord’s interests.

Most local rental associations will sell well-written and well-researched versions of residential tenancy agreement documents with several carbon copies for each party. Landlords and tenants fill in various fields relating to names, address, and rental amounts.

Addendum to residential tenancy agreement
This can be a small side document that forms part of the agreement and sets out additional rules for items such as pets, smoking in the unit, or penalties for late rental payments. These documents are harder to enforce but establish good guidelines for the day-to-day operations of a rental property.

2.) What to look for when showing rental property
The first interaction with a tenant provides a great opportunity to gain an impression of them. During the initial showing, the tenant may be more concerned with looking around their new home than acting in a manner consistent with getting their application approved. Some careful observations by the landlord can be extremely useful when considering the tenant’s application.

Here are a few things to look for:

Did the tenants arrive on time?
Tenants who are respectful of their landlord’s time are good tenants to have. Common excuses for showing up late are that the tenant got lost, or was not able to round up family members or kids. Are these seemingly minor excuses reasonable? Probably not. Tenants who do not arrive on time for a showing are not likely to pay their rent on time either. Avoid these tenants at all costs.

Are the children well behaved?
Tenants who want something – in this case, to move into your rental property – are likely to be on their best behaviour. They will speak politely, act respectfully, and maintain a professional manner. Kids, on the other hand, can be cautioned numerous times to behave but have shorter attention spans. Are the kids bouncing around the property in a rambunctious manner? Be sure their behaviour will become much worse when the landlord leaves the premises. If the tenant’s kids are behaving poorly during the showing, expect the property to be returned to you with obvious damage from rambunctious kids.

Did tenant take off their shoes?
If a landlord has to ask the tenant to remove their shoes, this is a good indication that they are not in the habit of doing so. While this may be a personal choice, and can be a cultural issue, tenants who remove their shoes are likely to cause less stress on the flooring of a rental property. Avoid tenants who plan to wear shoes inside their rental property.

What does the back seat of the tenant’s car look like?
This is a tried and true technique for learning whether the prospective renter will keep the rental property clean, or let clutter, dirt and debris build up. Avoid tenants with garbage in their car, as this will mirror the cleanliness of their home.

3.) Verifying information in a rental application
The rental application contains the most comprehensive set of information about the prospective renters and should take the most time to review and confirm.

Renters are extremely unlikely to include information in their application that they know will hinder their chance of having it approved. In addition to thorough follow-up of the details in the application, follow the smell test for your rental tenants. If a landlord happens to smell a skunk hiding in the rental application, then the balance of probabilities suggests there is in fact a skunk hiding there. In practice this means that if a tenant’s information seems too good to be true, it usually is. Ask the following questions:

Does the tenant’s stated income seem unreasonably high?
Look for ways to confirm this income, such as a letter of employment from a reputable business. If the income is from self-employment, ask for a recent tax return to confirm it. Remember: the more intrusive the questioning, the less likelihood of a disaster or massive repair bill from a problematic tenancy.

Is the employer reputable?
A quick Google search to confirm the existence of the company or place of work provided by the tenant should be sufficient. If it does not exist or is extremely difficult to find online, then it is likely to have been made up. If the tenant claims to be self-employed, ask for a business card or marketing/promotional materials to prove the company’s existence. If it cannot be confirmed, decline the tenant’s application.

Are there gaps in the tenant’s rental history?
If a tenant’s application lacks previous landlord information for a period of time (typically six or 12 months), they may be trying to hide a less than positive past tenancy. If they refuse to provide comprehensive chronological information for the past two years, ask where they lived during the missing time. A backpacking trip overseas or living with parents are acceptable responses; disclosure of a problematic tenancy followed by court eviction is not an acceptable response.

Ask the current referees if they can provide names and contact information for other referees
Following these strategies will help you weed out undesirable applicants and greatly reduce, if not eliminate, the likelihood of a rental catastrophe.

Source: SHAMON KURESHI Special to The Globe and Mail Published Tuesday, Sep. 03, 2013 6:00AM EDT

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IN FOCUS: Property Management Charging too much rent is costly

The temptation to get as much revenue you can is understandable, but investment property ownership is a long-game and long-games can be lost by bad short-game choices.

“Many new condo apartment landlords suffer the greatest temptation as they face the reality that the rents they thought they could get on delivery aren’t possible in the current market,” says Brandon Sage of LandLord Property & Rental Management, Inc. “Many make the mistake of trying to pass that off to the tenant.”

As your partner in real estate investing, the property manager should be the best source of information when it comes to rental values.

“They should be someone you can count on to tell you what you need to hear which is not always what you want to,” he says. “Sometimes the rent you want is just too high – and that can make a property unprofitable.”

Unfortunately few Realtor agents specialize in leasing and so finding one that understands optimal pricing is difficult, and even then most agents are only there until closing and not around to see how the tenancy plays out.

“When you are growing your portfolio you will really want to have a firm grasp of fair market rental values before making a move,” he says.

Present-day renters have never been more informed, better connected or had more choice than now.

“There’s no pulling the wool over their eyes but there is ensuring you know your competition and understand your customer,” says Sage. “Every time you list $50 above market you lower the odds in your favour, resulting in fewer enquiries that lead to fewer showings and fewer applications to consider. Then, when an application does come in, you can fall victim to ‘showing fatigue’ and settle for a less-than-desirable tenant, especially if the rental unit has been vacant for some time.”

You really have to ask yourself what type of person would agree to pay more for something. In the case of tenants they are often one or more of the following:

An “Unaware” Tenant
This is typically the tenant who did not do their market research or give any serious thought as to whether or not the property was a good fit for them – and usually places the blame for the failure to do their due diligence on anyone but themselves.

They can turn into a tenant from hell as they seek to get better value, often making unrealistic demands, only to leave after a few months, which contributes to your turnover.

An “Irresponsible” Tenant
This person doesn’t have a handle on their finances and over-estimates what they can afford, which means they will be unreliable in paying the rent.

This person also seems to bounce from job to job, without a steady income.

A “Predator” Tenant
This creature never intended to pay rent in the first place, and unfortunately will stay as long as they can and force you to fight to get them out.

They are the most hellish of the tenants from hell.

A “Desperate” Tenant
These tenants had no choice but to rent at the higher rate, often due to a time pressure or a need to be in a specific location, and will almost always not stay too long, adding to your turnover.

They will often capitalize on any chance to break the lease.

None of the above is ideal and each in their own way is a ticking time bomb that poses a risk to the cash flow needed to sustain the property, he says.

“Anyone who has been dragged through a hearing at the Landlord and Tenant Board can attest to how bad that hit can be in the worse of cases,” says Sage, “but even in the most benign of cases you’ll be taking a hit from turnover costs, gaps between tenancies and commissions.”

Price fairly, market honestly, and act responsibly and you’ll find your tenants are ones you’ll come to know as fair, honest and responsible, he says.

“Tenants like that pay on time, stay longer and keep better care of the property, making for a better home for the tenants and a better investment for landlords,” says Sage.

Source: Canadian Real Estate Wealth, October 2015

Thinking of investing in rental properties sit down with The Ray C. McMillan Mortgage Team and we will show how how simple it is. Contact us at 905-813-4354 or visit www.RayMcmillan.com

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How to make money investing in real estate

There are several ways to invest in real estate including secondary properties, real estate income trusts and alternatives such as real estate limited partnerships.

Don Campbell thinks everyone should consider real estate. Of course, you’d expect him to think that given his firm has advised clients on real estate purchases of more than $4 billion. The senior analyst at the Real Estate Investment Network in Vancouver, says every investor should be pondering where they can fit real estate into their overall strategy given the volatilities and uncertainties of the equities market.

“A portion of your portfolio should be in housing or hard assets,” he says. “Our clients lean towards owning their own homes and direct real estate. Our philosophy is that a good piece of real estate is like a blue chip stock. It won’t make you rich overnight, but it will perform well.”

Many investors already own their own homes or are paying off mortgages, so they have a sizeable portion of their overall net worth tied to a hard asset. But there are several other ways to invest in real estate including secondary properties, real estate income trusts and alternatives such as real estate limited partnerships. The key thing to remember is that no one asset type should take up more than 50% of an investor’s portfolio, but how you get to that level can be dramatically different from person to person.

Home ownership and secondary properties

At a time when condo sales in Toronto were reported to have fallen 18% year-over-year, many raised the question of whether residential property, be it a primary residence, second home or vacation place, is actually an investment. Some, like David Kaufman, CEO of Toronto-based Westcourt Capital Corp., simply don’t see homes as investment options. “A lot of people treat their primary residence as an investment, but they aren’t in a traditional way,” Kaufman says. “One of the things people forget is that if you live in an appreciating area, unless you are willing to exit the market and move to some other area, it is hard to make money on it.”

Kaufman adds many think they’ll always make money off their properties because of the leverage involved and the long-term growth of real estate prices in recent years. “They think real estate will always go up in value ahead of inflation, but that assumption must be fallacious at some point,” he says. “The music has to stop when there’s no real estate affordable for people to live in.”

But Campbell thinks you can make smart real estate investments by looking at trends in the area you are buying into. He says buyers must look at more than current real estate values and investigate other issues such as job growth in the region, GDP growth and economic development to determine whether those factors will positively impact prices. “If you are going to buy, buy where job growth and GDP growth is,” he says. “Don’t buy cheap, but where long-term demand is good.”

As for vacation properties, Wayman Crosby, CEO of Nicola Crosby Real Estate Asset Management Ltd. in Vancouver, says although prices have dramatically risen in the past decade, expenses have also increased and need to be considered. “Costs associated with vacation properties are often greater than a primary home,” he says, adding that funding the costs associated with these properties are done in after-tax dollars. “My belief is that the market for recreational properties may have peaked and, given the costs, no longer represents the kind of investment opportunity of the past.”

Some pundits claim personal real estate isn’t a very liquid investment, and is limiting for those who may need access to capital. Campbell disagrees. “If you need to sell a piece of property, you can,“ he says. “But if you want to squeeze the last nickel out of it, it might appear illiquid. Canadians have this incredible emotional attachment to property. But once you get by that and recognize you can pay someone 7% for looking after the place and that there aren’t that many issues that come up anyway, then you can put it in your portfolio like your other investments.“

The REIT Conundrum

Real estate income trusts have long been considered a safe way for the average investor to gain exposure to the property market. Experts, however, see REITs as investment vehicles that are linked to the volatility of the overall stock market. Yes, REITs offer liquidity, but they come with a series of potential pitfalls, Kaufman says. His company is concerned REITs can be readily affected by equity market trends as well as by interest rates. For example, many Canadian REITs were hit hard by rising interest rates in May, with several showing declines of more than 5% in the months that have followed. Kaufman isn’t sure the damage is complete.

“We have fears that we will witness that the publicly traded REIT market could face volatility that vastly exceeds the volatility of the stock market because it has three elements affecting value,” he says. “There’s the net asset value, there’s the stock market and the effect of rising interest rates that operate independently of the stock market. You could have a double whammy.”

Crosby agrees REITs are linked to market sentiments, and at some points in recent history represented a discount to the underlying real estate values. However, many REITs more recently have traded above the value of the underlying property as investors chased distributions.

Campbell says you have to do your research if you chose to invest in REITs: Find out where and what they are buying. What is the strategy? Are they speculating on higher-risk turnarounds or relatively safe investments such as apartments and commercial properties? “Why would I dramatically increase my risk for the small chance of a greater return? You need to understand where they are putting your money,” he says.

The RELP Opportunity

Investment advisors looking to open up real estate possibilities for clients are increasingly pondering the option of real estate limited partnerships, which are essentially privately-held versions of REITs. Some provinces have rules that make it easier to invest in these real estate options, but in Ontario you have to be an “accredited investor” with assets exceeding $1 million or a household income of more than $350,000 to invest in RELPs.

Kaufman likes the RELP opportunity because it isn’t tied to the public markets, thereby limiting the volatility that commonly plagues REITs, while still typically offering a total return in the 10% range. “The reason some pooh-pooh them is because they say these REITs aren’t publicly traded,” he says. “I say I don’t care. If I’m able to redeem at the net asset value rather than some price set by some day trader in his pajamas from his basement, then that’s what I care about. I’ll give up 29 days of liquidity for the lack of ridiculous volatility.”

Liquidity is an issue, says David MacNicol, president and portfolio manager at Toronto-based MacNicol & Associates Asset Management Inc. MacNicol started offering real estate investments to his clients five years ago, and now many come seeking them specifically. He says RELPs have less liquidity — his clients can typically get out after two years without penalties — but adds these investments aren’t for people looking to make a quick buck. Instead, they are aimed at those looking for longer-term returns. “We have more and more people looking for direct investment into real estate — 10% per year with 2-3% volatility,” he says, noting the volatility of the public markets can be four times higher.

Some investors are scared of RELPs because they feel private investment is where frauds are more likely to occur. But Kaufman says many put too much faith in a prospectus, a document that doesn’t offer any real protection against fraud. And Campbell says the notion of malfeasance in the RELP market is overdone, and certainly no worse than what has happened in the publicly-traded sector. “The checklist for RELPs is easy,” Campbell says. “Where are they buying and who is doing the buying? What’s their track record? Are they quality investors?”

He recommends digging deep into the history of those running the RELP before plunking down any cash. He also says to look for companies with management experience in the real estate market and past successes. “I’m not a fan of putting money into the first time someone does an LP,” he says. “Just because they have a high profile doesn’t make them great investors. I see people write $150,000 cheques because they like the investor. I’d rather people checked out the investor and their track record.”

MacNicol says one of the good things about owning alternative real estate investments is that they have limited the peaks and valleys that the public markets have experienced in recent years. The TSX in 2011 was down about 11%, while his company’s real estate fund was up 3.5%.

“That’s what our investors are looking for,” he says. “They don’t want to be up 20% one year and down the next. In the old days, a balanced portfolio got you through the highs and lows of the equities market. That won’t cut it any more. To try to achieve a 3-4% cash flow return like you might be able to in a bond portfolio, we can do that in a half-weighting position in our real estate portfolio.”

In the end, Campbell says the fundamentals work for all forms of real estate investments, regardless of whether they are a personal acquisition of a vacation home, a stake in a publicly-traded REIT or looking at the RELP market.

“No matter what you are analyzing, go back to the basics: where and who is involved, and is there a good solid future?” he says. “I’ve done this for 21 years and these things have never changed. I’m looking for a place with a future and not a past.”

Source; Financial Post Rob Thompson, Special to Financial Post | September 6, 2013 

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