The Local Planning Appeal Tribunal recently dismissed the appeal of the City council-approved zoning regulations for short-term rentals, so Toronto will soon have a different rental landscape.
“This is good news for Toronto residents and a step in the right direction when it comes to regulating short-term rentals and keeping our neighbourhoods liveable,” said Mayor John Tory in a release. “When we approved these regulations in 2017, we strived to strike a balance between letting people earn some extra income through Airbnb and others, but we also wanted to ensure that this did not have the effect of withdrawing potential units from the rental market. I have always believed our policy achieves the right balance which in this case falls more on the side of availability of affordable rental housing and the maintenance of reasonable peace and quiet in Toronto neighbourhoods and buildings.”
There are a few new rules that will be implemented soon. Short-term rental will be permitted across the city in all housing types, but only in principal residences (and both homeowners and tenants can participate). If you live in a secondary unit, you can rent out your home short-term, but only if the secondary unit is your primary residence.
You’ll be able to rent up to three bedrooms or your entire residence. If renting your entire home while you are away, you can do so for a maximum of 180 nights a year. If you are renting out any part of your home, you must register with the City and pay a $50 fee.
For companies like Airbnb, they will have to pay a one-time fee of $5,000 to the City, plus $1 for each night booked. This way, the city is benefitting from the success of a company that is leveraging local housing to make a profit.
There will also be a Municipal Accommodation Tax of 4% that you will have to pay on any short-term rentals less than 28 consecutive days. Companies like Airbnb will be able to volunteer to collect and pay the MAT on behalf of their users.
It seems like these changes will mostly impact the condo rental market. Most investors renting their condo units through companies like Airbnb are not renting out their principal residence; it’s usually a secondary residence. Without short-term rental income as an option, we could see a slight drop in investors in the new condo market. Fewer investors means less sales and more supply for end-users. This could result in price moderation or even a price drop in the pre-construction market.
We could also see some condo units hitting the resale market and long-term rental market, as investors look to other options to profit off their properties.
There will be a transition period as investors figure out what to do with their condo units, but in the long-run, this change seems to make sense in that it delivers more supply to the people who are living in the city, as opposed to just visiting.
When a series of tax and mortgage rules was introduced in Canada in 2016 to prevent a housing market bubble, activity slowed down significantly in the years that followed. Given the current circumstances, is it still viable to invest in property?
In a think piece in Macleans, market watcher Romana King said even with fears of a global recession, real estate is still a smart way to invest.
“For investors, the key to making strategically smart decisions is to consider the underlying economic factors that impact your investment,” she said.
King said the housing market could climb out of negative growth forecasts this year. Citing figures from the Canadian Real Estate Association, she said the national sales activity was on target to increase by 5% in 2019 and could expand further by 7.5% in 2020.
“Canada boasts strong population growth, and government budgetary decisions are acting as stimulants for the national housing market, all of which point to a healthy future for Canada’s real estate market,” she said.
Investing in real estate, however, is not without risks. For investors, it is crucial to know some strategies to lessen the potential risks, King said. The first is to be aware of additional debt. Investors must keep an eye on their credit scores and pay bills on time.
“Most investors will require a mortgage to purchase rental real estate. This can alter your debt ratios, which can impact whether or not you get the best mortgage or loan rates. Talk to an advisor before applying for new credit or renewing a current loan,” King said.
Another must-have strategy is budgeting. King said investors need to control how much they spend on maintenance and repairs to ensure that their rental properties are cash-flow positive.
“An investor needs to budget for a contingency fund. If the anticipated monthly rent covers all monthly expenses, including a repair fund, then the property is cash-flow positive, which is fundamental for a good investment,” she said.
Getting insurance could also mitigate the risks of catastrophic events.
“Virtually all insurance policies will cover a catastrophic loss of a building, but as a real estate investor, you must also consider the loss of income due to damage or destruction. A comprehensive rental policy will provide a landlord with income to replace lost rent at fair market value,” she said.
Overall, investors need to treat real estate investing as a business. Citing Edmonton-based investor Jim Yih, King said the key to successful real estate investing is positive cash flow, and not just the purchase price and the potential sale price.
Source; Canadian Real Estate Magazine – by Gerv Tacadena 12 Nov 2019
You’ve decided, for whatever reason, that you want to invest outside of your local area or state. Your next question is—where should I invest?
I’m going to offer you a list of things that you can consider when trying to figure out what market to invest in. These things are in no particular order, and some of them may not apply to you or your particular situation. My intention with each one is to give you something to think about and hopefully some ideas on where and how to start looking for a market that suits your investment needs.
Here we go!
Step #1: Narrow Down Your Market Options
First, if you are brand new to out-of-state investing and don’t have a clue where to start, your location choices are likely going to feel extremely overwhelming. I have two things for you to think about that will hopefully at least get you moving in some kind of direction.
Where do you have friends and family?
Are there any cities where you have friends or family who might be good assets to have on your “team” on the ground? I’m not necessarily saying go into business with your friends or family or make them an official part of the team. But if you already have ties to any particular cities, maybe take a little time to decide if any of those cities might be good ones to get started.
Even if your friends or family there aren’t part of your team, they may be able to occasionally drive by your property once you own it and tell you if anything crazy seems to be going on. It never hurts to have an extra set of trustworthy eyes on an investment property!
Where are other investors buying?
Thanks to technology and the internet (and websites like BiggerPockets!), you can easily and quickly network with other out-of-state investors. Ask people which markets they are buying in, and if they seem friendly and interested in chatting more, find out why they are buying in those markets.
Don’t struggle to reinvent the wheel when experienced investors are already out there succeeding with out-of-state properties. I did secretly throw a keyword in there—experienced. Don’t take just anyone’s word for what they claim to be a good city to invest in. But remember, you’re just trying to get a list started. You can dig into details later as you go along.
Start there. Make a list of the cities that come up when you consider those two things. Again, this isn’t your final list, but at least your list is much shorter now than it was when it had all 19,354 U.S. cities on it as investing options.
You may not have known you had a list of 19,354 cities on it, but if you were starting from scratch, the whole country was a possibility! That would have to be intimidating and overwhelming—and almost an impossible point to start from. Now you have a less intimidating starting point. Related:What Moving Out of State is Teaching Me About Remotely Managing Rentals
Step #2: Analyze Those Markets
So, you are looking at your list of some number of cities or major markets, and now your question is—how do I know a good city to invest in from a bad city?
In my mind, there are only two major questions I ask to determine whether I want to invest in a particular city:
Do the numbers work?
How likely am I going to be able to sustain those numbers?
If you don’t know what numbers I’m talking about, I’m talking about your returns. Returns (aka profits) can be generated in two major ways: cash flow and appreciation. This is at least true for rental properties.
If you are flipping out of state, some of this will not apply to you, and there are some slightly different considerations that you’ll need to incorporate into your analyses. You’re on your own, though, for those—I’ve never flipped, so I definitely shouldn’t be the one to tell you how to rock that method out.
Most likely, if you are wanting to invest out of state, you’re probably doing so because you want cash flow. Most of the investors who invest out of state do so because the numbers locally don’t pencil out. This is often the case in a lot of the bigger markets—Los Angeles, San Francisco, New York, etc.
And while those markets don’t usually pencil out for cash flow, they are the bigger players when it comes to appreciation. So, in thinking of anyone who lives there and wants to buy out of state, it’s probably because they want cash flow. See my logic?
Either way, let’s assume you are going after cash-flowing rental properties out of state because you can’t find cash flow locally. If that’s the case, the numbers need to work in the market you choose to invest in. Otherwise, what’s the point?
So, let’s think about the numbers. What kind of numbers do you need to understand when it comes to cash flow?
In addition to the equations in that article, a term you will want to be familiar with is “price-to-rent ratio.” This term compares the price of a property to how much rent it can collect. The reason these two things matter is because they will determine whether you can cash flow on the property or not.
As you saw in those cash flow equations, you need the rental income you collect on a property to surpass the expenses of buying and owning that property in order to have positive cash flow. If the expenses of buying and owning that property are higher than the rent you can collect from the property, you’re in a negative cash flow situation and losing money (on the cash flow front at least).
Knowing this term now, if someone asks you if you’re interested in a particular market for investing, your first question might be—how are the price-to-rent ratios there? What you’re ultimately asking here is—is there an option for cash flow in that particular city?
For instance, I can tell you that hands-down the price-to-rent ratios in Los Angeles are not supportive of cash flow. I can tell you that the price-to-rent ratios in Indianapolis are generally favorable for cash flow. In no way does that mean every property or every location within Indianapolis will cash flow, but it does mean there is an option for it—whereas in Los Angeles, there’s really no option for cash flow.
Now, let’s say a particular market has generally favorable price-to-rent ratios for cash flow.
Oh wait, I just heard you ask—how do I know if a market has favorable price-to-rent ratios? Great question.
The fastest way to find that out is to network with other investors. You can either ask other people where they are investing, which I already mentioned, or let’s say you have a family member in a particular city and you’re curious about whether or not you can cash flow there. Post in a BiggerPockets Forum and ask people if they have any knowledge of cash flow potential in said market.
Look for people investing there, and find out the best places for cash flow there. If all of that fails, start looking up properties and running those equations I taught you, and see if you’re coming out ahead on cash flow.
Let’s say a particular market has generally favorable price-to-rent ratios for cash flow. This is where that second question I asked comes in—how likely am I going to be able to sustain those numbers?
The answer to this question is lengthy, so I’ll just give you one basic thought to consider for now. Is the market you are looking at a growth market or a declining market? The reason this matters is because you can project cash flow numbers until the cows come home, but if certain factors come into play with your property, you may never see a single bit of that projected cash flow materialize.
Bad tenants, for example, can cause you to not see a penny of your projected flow because they can cost so much in expenses—IF they are even paying the rent.
Your list of potential markets should be even shorter now than it was when you narrowed it down from 19,354 cities to either cities you know people in or have ties to or cities other investors recommend. It should only include markets/cities where the numbers not only work but also where the numbers have good potential of sustaining themselves. (That last part is purely my own personal investment strategy preference—it’s certainly not a requirement.)
You may have one market on your list at this point, or you may have a handful. Which one you ultimately decide on may just come down to personal preference at this point—or it may depend on your situation and your resources.
At this point, here are a few more things you can look at.
You just might not have enough capital to invest in all of the good options out there. For instance, I know of some amazing deals in Baltimore and Philadelphia, but those particular deals require a minimum of $90,000 up front.
You may not have $90,000. You might only have $20,000. Well, good news—$20,000 can get you a great cash-flowing property in other cities!
So, for your budget, you may stay focused on one area over another. I used to work with triplexes in both Chicago and Philadelphia. At that time, you could get a good cash-flowing triplex in Philadelphia for $130,000. The triplexes in Chicago at the time were bigger and nicer, and they were around $270,000.
The cash flow on the Chicago properties was higher, of course, but not everyone’s budget would support buying one of those triplexes. But many of those people could get one of the Philadelphia properties. So, more than anything, your available capital may further limit you on where you can invest. This isn’t always the case, but it is a consideration.
This is simply a personal preference factor. For example, some markets like Philadelphia and Baltimore tend to have properties with more of an urban feel. They are often more of the row house-type of structure. Not everyone likes the urban feel, and not everyone likes adjoined buildings.
The other option would be properties with a suburban feel that are free-standing. You can find lots of these in the Midwest. Additionally, some markets offer a lot of multifamily (MFR) options, and some markets only have single-family (SFR) options that will cash flow. So, if you prefer urban or suburban over another, and if you prefer SFR or MFR over another, those personal preferences will steer you toward particular cities and away from others. Related:Forget the Demographics and Focus on Researching THIS Before Investing Out-of-Area
Look! You’re continuing to narrow down your list! Here’s how to further narrow it.
Returns vs. Risk
At the end of the day, some cities and property types will be more risky than others. Even if you are looking within stable growth markets and none of the areas you are looking in are majorly dangerous, some may have significantly better schools than others, etc.
Maybe one market is slightly more in a “gentrifying” stage than another more matured market. It’s always fine to take on a little more risk, but make sure the proposed returns are high enough to justify it. Or if you are more risk-adverse, you may choose to accept slightly lower returns in exchange for staying with a less risky market and property. That’s totally fine as well.
So, you want to have a feel for the returns versus the risk available to you in each potential market and weigh that against where you are on your own personal scale of desire. What’s more important to you: returns or playing it safer? That should help you further whittle down your list.
Ease of Commute
This one may be less significant than others, but it could play a role. If you have narrowed your list down to say, two markets, and those two markets are weighted pretty evenly against each other—which one is easier to get to? If a nonstop, not-too-lengthy flight is available to one and to get to the other would require a couple stops and a longer travel time (which would also probably be more expensive), go with the one you can get to easier!
Ultimately, the most important thing about whichever market you decide on is whether or not you will lose sleep over investing there. Maybe it’s because you can’t stomach your investment property being so far out of reach, maybe it’s because the market is a little riskier, maybe you hate single family homes and really wanted a multifamily. Whatever the situation, go with what will put a smile on your face (and hopefully some cash flow in your pocket).
A quick summary on the steps you can take to help you decide on a market:
Step 1: Narrow down your market options.
Where do you know people?
Where are other people investing?
Step 2: Analyze those market options to further narrow down your list.
Is it a good market to invest in?
Do the numbers work?
Will you be able to sustain the numbers?
Step 3: Choose what you like!
Decide on your personal preferences and see which markets fit those.
Then, once you have your market decided on, go shopping! Even if you only narrowed your list down to a couple of cities, that’s fine. Two cities is easier to shop in than 19,354.
And here’s one last tidbit for you. At the very end of it, no matter how or why you chose the market(s) you did, you need to confirm one last thing. Are you ready?
The last thing that matters is that you can form a good team in the market you choose.
If you can’t find good team members to help you with your property, go to another market. If you don’t have a solid team as an out-of-state investor, you’ll be up that famous creek without a paddle.
If you’ve narrowed your list down to a couple of cities you’d be willing to invest in, choose the one that offers the best team. If you’ve narrowed your list down to one city you want to invest in but then you can’t form a solid team of good people there, start over and choose a new market. You must have the team!
New York City’s reputation as one of Earth’s most expensive—and daunting—real estate markets is well-earned, thank you very much: $1.8 million studio apartments? Check. Full-cash offers everywhere you look? Check. Freakishly competitive open houses? You bet. Welcome to the big time—with the prices and killer views to match. It’s little wonder that housing is top of mind for just about all of the nearly 8.4 million folks who call the Center of the Universe home.
Everyone, it seems, is angling to hit the NYC trifecta: a decent space in a good neighborhood at an affordable price. That’s why it’s so important to get a handle of what’s going to be the next big neighborhood, before it explodes in popularity and prices get out of reach.
To find out which neighborhoods in this bellwether, nationally scrutinized market are seeing the biggest price climbs—and the biggest falls—we teamed up with real estate appraiser Jonathan Miller, co-founder of Miller Samuel. He compared the median home sale prices in all of New York City’s neighborhoods throughout the five boroughs in 2017 and 2018. We included only the neighborhoods with at least 25 sales in both years.
What we found is a city going through churn, much of it due to the flurry of luxury development in some areas that traditionally have had older—and more affordable—homes. Prices go up, an area gets saturated, the luxury stock sells out, then prices go back down. Rinse and repeat. Meanwhile, the megadevelopment causes people to search out nearby areas that might be cheaper.
It’s the NYC circle of life, and it’s accelerating.
“Developers have left no stone unturned and developed wherever they could,” says Miller. “They went everywhere there was an opportunity. And that caused a lot of price fluctuations, especially in more modestly priced neighborhoods that saw a lot of new, high-end development introduced.”
But New York City hasn’t been immune to national trends. The overall market is slowing throughout all of its five boroughs of Manhattan, Brooklyn, Queens, the Bronx, and “can’t-get-no-respect” Staten Island. The city has been particularly affected by the national tax changes that make it more expensive to own a home in pricier parts of the country, says Miller.
More fun still: This month, New York state’s new mansion tax went into effect, upping the amount of taxes on properties $2 million and up. Sales had been down earlier in the year, but the prospect of giving more to Uncle Sam resulted in a rush of higher-priced home sales. Going forward, the number of sales is expected to fall back down again. Phew … Dramamine, please.
High price tags are pushing many New Yorkers farther out into cheaper communities such as the Bronx, which doesn’t have the hipster cred or water views of Brooklyn. But dollars can stretch way further there.
“A large shift or decline [in a New York neighborhood] is generally not a reflection of weakness,” says Miller. “It’s more of a reflection of … now it’s back to business.”
So which neighborhoods are seeing the largest real estate price spikes? And which expensive communities are getting (a bit) more affordable?
Annual median price increase: 122.7% Median 2018 home price: $612,500
When folks think of the Bronx, the mix of grand Tudors, Georgian Revival estates, and midcentury modern homes and lovely winding streets in suburban Fieldston are rarely what come to mind. Homeowners in this privately owned enclave of tony Riverdale pay property taxes and fees to their property owners association, which maintains the streets and sewers and pays for its own security patrol.
Prices are surging because word has gotten out: Buyers are increasingly drawn to its seductive combo of urban and suburban living. The historically designated community is near top private schools, which include the Horace Mann School and Riverdale Country School. It’s also only steps away from the Hudson River and the 28-acre green oasis of Wave Hill Public Gardens in the northwest swath of the Bronx.
“In Fieldston, you are part of the city but you have the real suburban feeling,” says Chintan Trivedi, a licensed real estate broker with Re/Max In the City. “Here you’re getting a real home, a backyard and a private community.
“For a good house with a larger backyard, a complete renovation, and maybe a pool, you can expect to pay $1.5 million to $2.5 million,” he says. But there are six-bedroom homes listed in the $1 million range. Just tryto get that in Manhattan. (Spoiler: You can’t!)
Annual median price increase: 41.2% Median 2018 home price: $275,000
Just south of Fieldston are the middle-class communities of Kingsbridge and University Heights, where buyers can score deals for a fraction of the price. But the lack of homes for sale and little turnover are causing prices to heat up. And investors are buying up whatever lots and houses they can for new development or rehabbing.
“The Bronx is the new Queens in the sense that there’s been an expansion of demand moving out from Manhattan as consumers search for affordability,” says Miller.
The neighborhood’s become popular with 20- and 30-somethings looking for a reasonably priced community with an urban vibe. Hilly Kingsbridge is filled with century-old, single-family houses and midrise co-op and apartment buildings as well as plenty of shopping, parks, and public transit.
These buyers “are[part of] the new generation that’s learning that real estate should be part of their planning,” says Trivedi. “They want to feel like they’re in Manhattan—a place where they can still go right downstairs and get a smoothie.”
Annual median price increase: 38.7% Median 2018 home price: $1,535,000
Over the past couple of decades, lower Manhattan’s East Village has shed its image as a sketchy, open-air drug market to become a sought-after place known for lively bars, great restaurants, and a defiantly boho vibe—as well as a slew of new, high-priced developments, causing prices to jump. They’re going up everywhere you look.
Annual median price increase: 36.1% Median 2018 home price: $1,226,750
Like the East Village, Prospect Heights has been rapidly gentrifying. Professionals, families, and a few stray hipsters are drawn to its charming rows of stunningly restored early 19th-century, multistory brownstones on tree-lined streets. The neighborhood is near several main subway lines and in close proximity to the 526-acre Prospect Park and the Brooklyn Botanic Garden. It also borders Barclays Center, home to the NBA’s Brooklyn Nets (and soon the team’s new dynamic duo, superstars Kevin Durant and Kyrie Irving).
In recent years, Prospect Heights has become popular with folks priced out of neighboring Park Slope, a community long popular with upper-middle-class families. They gravitate to the brownstones as well as the new high-rises and the used bookstore, artisanal bakeries, and constant stream of new restaurants.
Not surprisingly, the Prospect Heights neighborhood has attracted a slew of developers putting up luxury condo and apartment buildings wherever they can. Those high-end housing developments are skewing the neighborhood’s median prices up to new heights.
This isn’t the kind of place where you’ll find buzzed-about restaurants—you’re more likely to stumble upon a dollar store than a bougie boutique. It’s a more down-to-earth community, populated by old-school Brooklynites, hipsters, as well as Pakistani, Orthodox and Hasidic Jew, Mexican, Chinese, and Latin American immigrant groups.
Annual median price increase: -40.7% Median 2018 home price: $915,500
Once grim downtown Brooklyn has been booming in recent years. It’s become home to a slew of glassy, luxury high-rises. So why are prices in such a vibrant area plummeting?
Well, now there’s a glut of new construction, giving buyers more negotiating power as buildings compete against one another to lure residents. Plus, builders are putting up towers with some smaller, less expensive units. But in NYC, less expensive is relative. Buyers might save themselves a couple hundred thousand on a million-plus-dollar condo.
But many of the condos here, some designed by famous architects, come with just about every amenity imaginable, including sun decks, hot tubs, dog runs, saltwater pools, and even music studios. This two-bedroom, 1.5-bathroom abode in a 57-floor building is going for $2,040,000.
Some believe developers overshot their market.
“Developers there created a mountain of homogenous product,” says agent Blumstein with the Corcoran Group. Buildings in the area “were built on the thought that people are demanding amenities. But the old-school, prewar neighborhood vibe is what’s in.”
Annual median price increase: -39.3% Median 2018 home price: $3,200,000
Even many lifelong New Yorkers have never heard of the Civic Center neighborhood in lower Manhattan. The tiny community encompasses City Hall and courthouses as well as some high-rise co-op, condo, and apartment buildings. It’s just west of ultradesirable Tribeca, where prices are sky-high, and just below Chinatown, guaranteeing plenty of good Asian eats.
Prices are down because the wave of development has pretty much played itself out, says Miller. Many of the older brick and limestone, midrise office buildings had been gut-rehabbed and turned into pricey condos. That led to a spike in prices. Now that those units have been bought, the real estate for sale is a mix of lower- and higher-end properties.
It’s “run its course,” says Miller of the wave of development in Civic Center.
Annual median price increase: -30.2% Median 2018 home price: $450,000
Like Civic Center, Javits Center as a neighborhood isn’t very well-known—but that’s likely to change. Named for the sprawling convention center on the west side of Manhattan where the community is located, it’s wedged between trendy Hell’s Kitchen and Chelsea and abuts Hudson Yards.
Even nonlocals have probably heard of Hudson Yards, Manhattan’s newest neighborhood, built on a formerly desolate stretch of disused train tracks. It’s a glam (and critics say overly generic) development of ultrahigh-priced condo and rental towers overlooking the Hudson River, complete with its own weird tourist attraction, the beehive-like Vessel. The Javits Center’s proximity to this buzzy development will likely have an impact on sales with prices shooting up.
But in the meantime, prices fell because there simply isn’t much of the first wave of luxury real estate left on the market. Now what’s selling is less expensive, older condos.
That’s likely to change as sales heat up in Hudson Yards.
“Sales [in Hudson Yards] will help to increase values in the surrounding area,” says New York real estate agent Matt Crouteau. The place “was designed so people don’t have to leave.” Ever.
Annual median price increase: -30% Median 2018 home price: $997,500
Just south of the Civic Center is the Financial District, home to Wall Street and the World Trade Center on the tip of Manhattan. Like all of the other neighborhoods on this list, FiDi (as it’s called) experienced a spike in development, then a market saturation.
“It’s not that prices are collapsing,” says Miller. “The early wave of high-end new development drove prices higher. … After that activity cooled, the prices for the neighborhood are less than what they were.”
But there are still plenty of new units to choose from, including this three-bedroom, four-bathroom condo going for $5,300,000. The unit features granite countertops, a waterfall island, high ceilings, and floor-to-ceiling windows. On the lower side of the spectrum, buyers can snag this studio with plenty of closet space for $480,000.
The neighborhood is home to a few cobblestone streets, giving it an old-world charm, as well as the South Street Seaport, a tourist fave.
Annual median price increase: -29.6% Median 2018 home price: $1,550,000
Thank the long-awaited Second Avenue Subway line for prices falling in the upper portion of the Upper East Side, from about 96th to 110th streets. Developers flooded the neighborhood putting up buildings near the new train extension, which opened in 2017 after being discussed, planned, and replanned for nearly a century. They believed—rightly so—that this least fashionable part of the Upper East Side would become far more desirable thanks to its close proximity to the new train line.
“That’s essentially East Harlem, which has benefited from a significant amount of new development,” says Miller. Now development is mostly over and there’s fewer sales.
“You’re not seeing the same amount of high-end [sales], because there’s not as much new housing being introduced,” he explains.
The Upper East Side/East Harlem now has a mix of sleek towers, brownstones, low-rise brick buildings and townhomes, and apartment and public housing developments. This new one-bedroom, one-bath condo clocking in at just 609 square feet, which is near the new subway line, is on the market for $786,161.
The real estate crash in 2008 was unique in that we saw a very fragmented industry that was burdened by large-scale systemic risk. This is not what usually happens.
It’s important to realize this situation would not be easy to duplicate; it was sort of a perfect storm of bad circumstances. Since then, we have implemented things to protect us from a similar event. Things like Dodd-Frank, better lending fundamentals, and a lot of growth left to capitalize on all make the possibility of another crash similar to 2008’s very unlikely.
Real estate is usually market-specific, so this isn’t to say prices can’t drop in the near future in your market. But it does imply that those waiting around for the next nationwide crash are going to watch a lot of success pass them by in the meantime.
This is going to frustrate many people who see inflated prices and increased competition making it a harder time to buy. However, the truth is real estate is going to be a good investment for a long time going forward. Now might not be as lucrative of a time to get in as it was in 2012, but investing now is likely better than getting in five years from now. In 20 years, it won’t make any difference at all.
Waiting for the perfect moment costs a lot more in experience and opportunity than the potential downsides could produce. As the saying goes: “Time in the market is better than timing the market.”
When Will the Next Crash Happen?
In 2016, I bought my first rental property. At the time, there were an abundance of threads on BiggerPockets that said, “Don’t buy now. We are about to see a crash.”
Luckily I ignored this noise and bought anyway. In the last three years, I’ve done very well—despite the supposedly imminent danger. Grant Cardone had a bunch of content around this time claiming he was preparing for a crash, as well, but he’s done quite a bit of business since then.
The BiggerPockets forums now reflect much of the same message as a few years ago. Don’t buy! There will be a crash soon!
Maybe those members who are spreading this sentiment are right; maybe they are wrong. Either way, I find that this message seems to have a single constant underlying motive: jealousy.
I really think much of this mindset is coming from people who are actively hoping the market will downturn so they can buy in. They are salty they missed the last big opportunity.
I’m not mad about that. In fact, I’m salty I missed the last downturn, as well! I would have much rather purchased in 2012 than 2016. But unless I create a time machine to go back to 2010 and buy assets, I’m sunk. Fussing about it is never a helpful strategy.
While another recession of some sort is inevitable, no one really knows what it will look like or when it will happen. It most likely will NOT be a repeat of last time though. So waiting for the bottom to drop out of real estate is a mistake, because you’ll be waiting forever while not learning or building experience along the way.
If you don’t have the confidence to buy in an upmarket, you don’t stand a chance to pull the trigger in the down market.
Plan Around Fundamentals—Not Luck
Over the last eight years, many BiggerPockets members (myself included) have bought low and then ridden the wave upward, making money on the sheer luck of being in a good industry at the right time. This is not a sustainable strategy for success in the long term, but it doesn’t mean that real estate only works when you stand to get outsized gains.
Do you only want to buy real estate because you think you might get lucky with an area that’s rising? Or do you want to buy a profitable asset at a discounted price that is going to make money even through market fluctuations?
Waiting for a theoretical crash is just admitting to the world that you can’t compete unless the market is unusually easy to make money in.
In real estate, you make money when you buy. This holds true no matter where we are in the market cycle.
So instead of waiting for your market to downturn, find great deals that are going to make you money no matter what. Have good exit strategies in place, and pass on deals that don’t make sense.
There are two kinds of mania surrounding real estate right now:
Those who are so excited about real estate that they are willing to spend anything to get into an asset and are therefore blind to risk.
Those who are so sure a crash is coming that they are sitting on the sidelines.
Neither of these two parties is going to make as much money as they could. They are too busy making decisions based on emotional hyperbole, anecdotes, and luck instead of solid financial analysis.
Focus on the fundamentals, and you can make money in any market.
Accept That Real Estate Is a Long Play
Why does everyone seem to be playing a two-year game with a 30-year investment? Even if you’re doing fix and flips, there is a long road of education and understanding that goes into this business.
Certainly there are outlier success stories of people doing 20 deals in their first year. However, it’s disingenuous to assume that is universally possible.
In many cases, chasing unrealistic gains gets people into more trouble when ambition outruns reality. Real estate is a slow business filled with complex transactions and ill-liquid assets. Even most superstars go slow!
It’s a patience game that relies on compounding. Trying to force outsized gains at the command of one’s ego is dangerous.
The long game of real estate levels out lots of short-term instability. You need cash reserves to weather economic storms, and you need to buy based on good fundamentals.
You will absolutely experience drops in the future; you can’t avoid them completely. This is why it’s best to get in now (at the right price) and start making money—money that will help you get through a recession.
Even if there were a crash tomorrow, it would be a long time before you felt comfortable at the bottom. The last bottom was in 2009, but people didn’t start buying until 2012 or so.
That’s three years later! Do you really want to wait that long to get started—just because you can’t buy at the discount the last crash offered?
You missed the crash. So what?!
Stop waiting around, nostalgically hoping that opportunity will return. Instead, enter the marketplace. Grab the opportunities that are available right now!
Buying a home isn’t always about finding the perfect place to raise a family or host those summer barbecues — for some first-time buyers, owning real estate is the gateway into the realm of landlordship.
Becoming a small-scale landlord can look easy, but there’s more to it than collecting the rental cheques every month. Whether you lease out an individual property or have a self-contained rental unit in your home, such as a basement apartment, buying to become a landlord requires you to be a hands-on business owner.
“I tell my clients upfront [that] you’ve got to think of it as a business,” says Nawar Naji, a Toronto real estate investor and broker at Chestnut Park Real Estate. “It’s not just about, ‘Let’s go buy a condo and rent it out.’ You’ve got to think of it from a business perspective. Think of the operation side of it, taxation aspect of it, and the other part of it — the exit.”
Want to buy your first home?
With television shows like HGTV’s Income Property showcasing the benefits of owning a rental property, like easy income and a boost in property value, renting out your basement looks appealing. Yet, without proper preparation or knowledge of provincial landlord and tenancy laws, the landlord dream can quickly go sour.
“If people have a bad experience in the first year [of landlording], and the first tenancy is problem-ridden, nine times out of 10 I would think they would get out of the business,” says Susan Wankiewicz, executive director of the Landlord’s Self-Help Centre, a non-profit legal clinic for Ontario’s small landlords.
If you do your homework and plan accordingly, becoming a small landlord can be rewarding. As Naji and Wankiewicz tell it, here’s what you can expect if you’re working towards that first investment property.
Put your back into it
Landlording isn’t a passive investment — it requires maintenance, time and experience to nurture into a successful money-maker. As with any business, being present and aware of your investment’s unique needs will start you on the path to being a successful landlord.
“You’ve got to be active in the business,” says Naji. “It’s not just paying the mortgage, getting the rental cheque and calling it a day. There’s more work to be done to it.”
Naji, who has been investing in real estate since 2006, says a new landlord can expect the operation stage of landlording — running the property — to be the longest and most cumbersome. Semi-annual inspections, repairs, collecting rent and regular maintenance are the landlord’s responsibility. You could hire a property management company to take care of this for you for a percentage of your rental earnings, but Naji advises not to within the first year of a new investment property.
“[That way] when you pass it on to a property manager, and they call you [about a house issue], you’ll understand if it makes sense or doesn’t make sense,” he says. “If you haven’t done it by experience, somebody can call you and can come up with explanations that don’t necessarily make sense — it might not need any repairs.”
Naji also recommends building a team of professionals that specialize in residential investments. Your accountant, repair person or real estate agent, he says, should have knowledge of landlording in order to fully understand your needs.
Know it like the back of your hand
Legal jargon may be a dry read, but understanding tenancy laws in-depth before you become a landlord could save you a whole lot of trouble down the road.
“Usually we meet landlords once they’ve rented and they’re in trouble,” says Wankiewicz. “If they were to do the front-end research and understand what they’re getting into before they rent, I think they’d be better off.”
Wankiewicz has seen every kind of problem come through the LSHC office: tenants that default on rent; pets that suddenly appear unannounced; damage to the property; and tenants that decided to move their whole extended family into the unit. Whatever the issue may be, Wankiewicz explains that landlords who familiarize themselves with the provincial landlord and tenancy laws beforehand have a better understanding of what their rights are. For instance, she still encounters landlords who haven’t fully read Ontario’s Residential Tenancies Actand don’t understand that the law equally applies to both high-rise and second suite rentals.
“Landlords are surprised because they think that [because] they’re renting in their home and they’re the king of the castle. That’s not the case. They’re subject to the same legislation as if it were a high rise rental,” she says.
Photo: James Bombales
If a tenancy isn’t working out and an eviction is required, Wankiewicz warns that the process isn’t a quick fix. If a tenant stops paying rent, a landlord will need to give a termination notice and apply for a court hearing to the Landlord and Tenant Board as soon as possible.
“What we are seeing now is that it’s taking anywhere from four to six months for a landlord to terminate the tenancy and recover possession of the rental unit,” she says.
The price is right
Buying a house ain’t cheap, nor is saving for a downpayment, so you’ll want to ensure that you can get a return on your first investment property, and it starts with picking the right rental unit.
Naji says to follow the money — wherever there’s construction for a master-planned community or an injection of government funding into infrastructure, there will be a demand for rental housing. Highlights of a specific neighbourhood — proximity to transit, a family-friendly community, lots of amenities — will entice tenants over more space. As Naji explains, buying the largest rental unit on the market might allow you to charge slightly higher rent, but it will cost you more to purchase.
Photo: James Bombales
“If you’re buying the largest two-bedroom, two-bathroom condo, it’s not necessarily the best idea because the tenants are not going to pay more rent,” explains Naji. “They might pay a little more rent, but not enough to justify the additional cost of acquisition for that larger, or extra large, unit.”
Instead of focusing on big bedrooms and living areas, Naji says to look for smaller spaces with appealing characteristics. Tenants are feature focused; they’ll value better appliances or a shorter commute time over a bigger kitchen. A semi-detached could bring you in the same amount of money as a fully-detached home with the same number of bedrooms, but will cost you less to buy.
“It might be a little bit smaller, but your cost of acquisition is less, and the numbers are going the be in your favour because your rent is going to be pretty much the same with a lower purchase price,” he says.
When pricing your rental unit, Naji says to compare current neighbourhood rental prices with seasonal demand to determine the right price.
Meet and greet
With a tenant living on your property, you’ll get to know all of their quirks very quickly. Some landlords aren’t prepared for the extra smells, sounds and interesting habits on display that go hand in hand with having a tenant.
“Landlords in a smaller situation, were they’re renting part of their home, they become consumed with tenant behaviour, like if the tenant has an overnight guest and, ‘They didn’t tell me’, ‘The tenant’s taking too many showers’, or ‘The tenant’s leaving the lights on’, or ‘They brought in a pet and I didn’t approve a pet’— issues like that, small-living landlords are unprepared for,” says Wankiewicz.
The landlord-tenant relationship can sometimes be a rocky one. Wankiewicz emphasizes that in addition to good communication and responding to issues quickly, landlords need to conduct a comprehensive screening process to find a trustworthy tenant. She advises that going off face-value alone won’t provide enough information about a person. Using a rental application, speaking to references and checking a tenant applicant’s credit score are good methods to finding a quality tenant.
“So many times the small landlord will just make their decision on how their tenant appears, but they need to dig in and check with previous landlords, not just where they’re living now, but where they lived prior to that, because that’s where they’re going to get accurate information about what their behaviour was like,” says Wankiewicz.
Naji likes to take a personal approach to rental applications; he strongly recommends meeting prospective tenants in-person not only to check for that gut-feeling, but to get to know the person.
“At the end of the day, this is a people business. You’re renting your property to a person or a couple. It’s good to meet them, get to know who they are.”
The renting versus buying dilemma is one my friends have started to face since they’ve begun leaving Manhattan and escaping to the suburbs (I’m still not there yet, but when I think about how much money I “throw away” each year on rent, it’s actually cringe-worthy). But, maybe it’s true when they say the grass is always greener. Buying doesn’t come without its own set of problems, considering both sets of my friends who recently purchased homes faced movers damaging their patio, gas leaks, and even a broken washing machine within the first week. (They’ve confided in me that their bank accounts are still recovering.)
Since we’re no experts on the topics, we decided to tap Scott McGillivray, a real estate/renovation expert and TV host, to get his professional take. “Neither renting or buying is intrinsically right or wrong,” he says. “It basically comes down to your goals and your lifestyle.” That being said, he encourages getting into the real estate market once you feel financially prepared to do so. And what if you’re worried about going all in? McGillivray suggests trying a practice mortgage in which for one year while you’re renting, you put aside the amount you’d have to pay as a homeowner (mortgage, property tax, potential repairs). This gives you a realistic idea of how your lifestyle and budget will be affected if you buy.
“If you can manage, go for it,” the expert says. “And the bonus is that at the end you’ll have some extra cash for a down payment.” Since renting versus buying is no small debate, we asked McGillivray to break down all the pros and cons for each. Keep reading to get the full scoop.
Flexibility to Move: “You’re not tied down with a mortgage and can move as often as you want.” Not having to commit to a neighborhood (or region) means you can try things out until you find the right fit. Or, if something happens in the neighborhood you’re not thrilled with, it’s easy to just move on.
Maintenance/Repairs Are Included: Oven breaks or there’s a leak? Call the landlord and they’re required to make the fix for you, free of charge. “You won’t need an emergency repair fund.”
Possibility for Better Location: If you’re looking to live in a certain neighborhood but can’t afford to buy there, renting can be more affordable. And if you have kids, this can mean a better school system, transportation, and more.
Extra Money to Invest: Depending on the rental market and where you live, you may have extra money to invest outside of your humble abode. “For many homeowners, there isn’t a lot of extra money left over.”
No Equity Built: “The money you pay each month will never be seen by you again.” Even though you’re spending money, you still have no ownership over your spot.
Rent Can Fluctuate: “With mortgages, you can sometimes refinance to make things more manageable, but not so with rent.” Anyone who rents understands that it’s rare for your rental rate not to increase every year.
Limited Ability to Decorate: Many rental buildings are strict, meaning you can’t even paint the walls a different color without approval (some buildings don’t even let you put a doormat outside your door for sake of uniformity). When you buy, you’ll have free rein to decorate and design everything from pendant lights to paint colors to carpeting or wood paneling.
No Return on Investment: “When you own a home, you can make value-adding improvements that will pay off when you sell.” That’s not the case for rentals, which is why you should be careful about spending too much on things like blinds and other custom pieces you won’t be able to take with you when you move out.
Landlord Issues Exist: “If you have to rely on someone who’s irresponsible, it can be a nightmare.” And while you can expect repairs to be made, it’s often not as quick of a turnaround when you’re not paying. (Pro tip: Try to rent from a reputable management company and ask friends and family for referrals.)
“If you’re in a temporary position or planning on moving in the short term, or if you have to take on unrealistic interest rates in order to buy, renting can be the smarter option.”
Equity is Built: When you buy a house or condo, you immediately start to build equity. This is different from renting in that you never see that money again once it’s paid out to the landlord.
Renovation Opportunities: “If there’s something you don’t like, you can simply change it—although you can be somewhat limited in apartments and condos.” Still, your ability to customize and personalize your home is greater when you own it.
Chance to Increase Value: Now when you make improvements and changes, you are actually adding to the value of your home and investment. “This means more money when you sell, and/or the opportunity to refinance and pull money out of the home for other reasons.”
Ability to Be the Boss: “With your own home you can pretty much do what you want.” Want to have pets or build a fence around your yard? Rentals require that you follow certain rules that can limit life choices; buying does not.
Tax Credits Exist: Ask your accountant about available tax credits that can help offset some of the costs when you buy. Although they vary and you may not qualify for all, you may get a tax break.
Long-Term Financial Commitment: You’ll have to be patient to see your return. “While you will build equity over time, it will take many years to see the financial benefit.”
Commitment to Location: “You can change pretty much everything about a house but its location.” If you don’t like your neighbors or a noisy bar or restaurant opens next door, you can’t just move (without a significant expense).
Large Down Payment: Remember you’ll need to put down a significant down payment (20% without paying a penalty). This can be a challenge for many people starting out.
Costly Maintenance and Repairs: Repairs are not free when you own and there’s no landlord to send someone to fix a problem. You’ll need to create an emergency fund for when the oven breaks or there’s a leak in the roof (or something similar).
According to McGillivray, “If you do it right, it can be the best investment you ever make. And if you’re looking for long-term financial gains or stability, this is typically the way to go.”
Now that you’ve learned all about renting versus buying, you’ll be able to make the decision that feels best for you.