Tag Archives: US Real Estate

HIGH NET WORTH – Why the wealthy are heavily focused on real estate

Real estate averages 27 per cent of the investments of the ultra wealthy. (Sheldon Kralstein/Getty Images/iStockphoto)

Real estate averages 27 per cent of the investments of the ultra wealthy.
(Sheldon Kralstein/Getty Images)

With markets roiling in 2016 and commodities lingering in low-price limbo, the holdings of high-net-worth investors can serve as indicators of where the rest of us might consider parking our nest eggs. It turns out that a good chunk of wealthy peoples’ investments is in real estate.

“Real estate is generally accepted as an alternative investment [by high-net-worth investors],” says Simon Jochlin, portfolio analytics associate at StennerZohny Investment Partners, part of Richardson GMP in Vancouver.

“It has the characteristics of an inflation hedge: yield, leverage and cap gains. It does well in upwardly trending markets, it pays you to wait during market corrections and typically it lags equities in market declines – it buys you time to assess the market.”

While the definition of high net worth can be flexible, in Canada and the United States it is generally considered to be someone who has at least $1-million in investable assets.

Thane Stenner, StennerZohny’s director of wealth management and portfolio manager, says a good way for determining what the wealthy do with their investments is to look at reports from Tiger 21, an ultra-high-net-worth peer-to-peer network for North American investors who have a minimum of $10-million to invest and want to manage their capital carefully.

Every quarter the network surveys its members, who number about 400 members across Canada and the United States. Some of the participants are billionaires, and most have a keen eye for business, Mr. Stenner says.

Though the Tiger 21’s Asset Allocation Report for the fourth quarter of 2015 found that its members were becoming cautious about Canadian real estate, they still on average put 27 per cent of their investment into real estate, the largest portion of their allocations. The next largest were public equities (23 per cent) and private equity (22 per cent) with smaller percentages going to hedge funds, fixed income, commodities, foreign currencies, cash and miscellaneous investments.

The real estate portion declined by 1 percentage point from the previous quarter. “While this is the lowest we have seen this year, it is at the same level observed in the fourth quarter of last year, which consequently was the high of 2014,” the report said.

“Real estate is very popular and one of the reasons, in my opinion, is that investors can actually see and touch their investment,” says Darren Coleman, senior vice-president and portfolio manager at Raymond James Ltd. in Toronto.

In his experience, real-estate investors, wealthy or otherwise, seem to behave with more logic than those who focus on markets. “For example, if you own a rental condo, and the one across the hall goes on sale for 30 per cent less than you think it’s worth, you wouldn’t automatically put yours on the market and sell, too, because you think there is a problem. Indeed, you may actually buy the other condo,” he says.

“And yet when a stock drops on the market, instead of thinking of buying more, most people automatically become fearful and think they should sell.”

Real estate also allows for considerable leverage, Mr. Coleman adds: “Banks love to lend against it. Over time, this lets you own a property with a much smaller investment than if you had to buy all of it at once.”

At the same time, Mr. Jochlin says there are disadvantages to real estate that investors should beware of. Property is not particularly liquid, so if you need to sell you could be stuck for a while.

“It’s also sensitive to interest rates and risks from project development,” he says. There are administrative and maintenance costs, and an investor who buys commercial rental property will be exposed to the ups and downs of the entire economy – look at Calgary’s glut of unleased office space, for example.

“Timing is key. You do not want to chase the performance of a hot real estate market,” Mr. Jochlin says.

“Buying at highs will significantly reduce your overall return on investment. You want to buy in very depressed markets at a discount. In other words, look toward relative multiples, as you would an equity.”

As to how one goes about investing in real estate, Mr. Jochlin says it depends. The factors to consider include determining whether your investment objective is short- or longer-term, your liquidity requirements, your targeted return and whether you have any experience as a real estate manager.

“Sophisticated high-net-worth investors have a family office, and thus a specialist to manage their real estate assets,” he says.

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How the rich buy real estate

The wealthy don’t necessarily buy and sell real estate the same way ordinary investors do, says Mr. Stenner. Ordinary people buy something and hope that when they sell it they’ll get a better price. Meanwhile, they like to do things like live on the property or rent it out, whether it is residential or commercial. If it is vacant land they might build something. Not always so for high-net-worth (HNW) investors, Mr. Stenner says. While everyone who invests hopes their investment will rise, Mr. Stenner says that in real estate, HNW people tend to fall into four categories:

Developers

“The real estate developer is looking for substantial returns from individual/basket real estate projects, typically 30-50 per cent IRRs [internal rates of return],” Mr. Stenner says. Developers are highly experienced investors who often take big risks, looking at a raw, undeveloped property and envisioning what it could look like with, say, a shopping mall or office tower. This requires lots of access to capital and a strong stomach, as there can be huge delays and setbacks.

Income Investors

“These HNW investors typically look for a stable, secure yield, tax-preferred in nature and structure if possible, with modest capital growth potential,” Mr. Stenner says. They take the same businesslike approach to property as the developer-types, but they’re more conservative, focusing on cash flow and long-term profit as opposed to getting money out after a development is complete. Often they’re building a legacy that they hope to pass down through generations. Mr. Stenner says lower net worth people can emulate income investors, for example, through REITs that are based on apartment buildings.

Opportunists

These HNW investors tend to look for more short-term higher risk, higher return “asymmetric” payoffs. Income from the investment or project is secondary — they’re in it for the quick buck. Often they see real estate in contrarian terms – investments to look at when the market is low and to sell on the way up, rather than hold. After 2008, many HNW investors bought up depressed-price housing in the U.S. Sunbelt. The sizzling Vancouver and Toronto markets might be the opposite of what they’re looking for right now; commercial property in the stagnant Canadian economy that can be purchased for low-trading loonies right now might be more interesting.

Lenders

This refers to HNW investors who lend capital to developers or opportunistic investors, for a fixed return, plus as much asset coverage from the property as possible. They fund mortgages, invest in real estate financing pools or put money into companies involved in this type of investment. “Because wealthier investors tend to have more liquidity, this also creates more optionality to deploy capital in various ways, while using the real estate as collateral or protection,” Mr. Stenner says.

Being a lender is a way to diversify. In addition, money lent in this way puts the lender high up in the creditor line if something goes wrong. If things go right, it generates income as the mortgage is paid back to the HNW investors or the funds they buy into.

Source: DAVID ISRAELSON Special to The Globe and Mail Published Thursday, Feb. 18, 2016

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Have you committed one of the seven deadly sins?

No, I’m not referring to gluttony, wrath, or sloth. I’m talking about the Seven Deadly Sins of Real Estate Investing.

Ok, maybe they aren’t physically deadly – but they are possibly catastrophic to your business.

If you are concerned about the health of your investments, make sure to steer clear from these seven sins:

  1. Buying Based On Future Value
    Also known as “pro forma” numbers, many investors buy property based on what it “could” be worth, not what it is worth. Real estate agents are especially known for emphasizing the future possible value (they are the eternal optimists) but neglecting the facts on the ground. Make sure you don’t fall victim to this sin and always know exactly what the current value is and don’t buy anything for what could be.
  2. Blindly Following A Guru
    Real estate investing is not a system. Anytime I see that phrase I cringe just a little bit. The typical real estate guru would have you believe that by simply following a step-by-step system you can make millions in real estate. Millions can be made, but its not by following a system – it’s from following your brain. Investing is about solving problems, and if your “system” is unable to account for flexibility or challenges – your dead in the water.
  3. Being Unrealistic With the Math
    The one deadly sin nearly every investor has made is not being realistic with the math. Whether overestimating future value, underestimating the repair costs on a project, or simply not taking the time to actually do the numbers- poor math will destroy an investment.
  4. Relaxing on the Record Keeping
    For many investors, “record keeping” is nothing more than an attic full of vintage Barry Manilow albums (get it? “record keeping”… no? Okay, easy – I’m an investor, not a stand up comedian!) If you don’t know the health of your investments – how can you make informed decisions for the future of your investments? By keeping adequate records and staying up-to-date with your finances, you position yourself to know exactly how well your investments are performing while also ensuring the long-term stability of your investment plan. Additionally, keeping good records makes tax time a breeze as well as simplifying the process when applying for a loan. For more information on record keeping for investors, check out Arthur’s post on record keeping.
  5. Confusing Investing with Gambling
    Do you invest or do you gamble? Do you even know the difference? Buying something with the hopes that it may someday bring a profit is gambling (or speculating). Flipping, building spec homes, and investing in raw land often resemble gambling much closer than investing. Notice I didn’t say that gambling was one of the Seven Deadly Sins of Real Estate Investing. The sin is not in gambling, but in confusing the two. Each strategy requires a different skill set and different financial resources. Be sure of what you are trying to accomplish and make sure you have the tools necessary.
  6. Over Leveraging Yourself
    Perhaps the most common real estate sin over the first decade of this century, over leveraging is the act of carrying too much debt than what the properties can maintain. If you are financing everything to the point that there is no cashflow, it is very difficult to weather the storms when they rise up. Just ask the thousands of bankrupt investors who learned this lesson the hard way.
  7. Getting Bored and Getting Fancy
    The path to wealth through real estate investing is not difficult, but it also isn’t super fast. In an earlier post on BiggerPockets, I mentioned how real estate investing was like playing a game of Super Mario Bros. The game is fairly simple and straightforward, thus easy to master. The difficulty, however, is that once the system has been mastered it is easy to get bored and decide to get fancy. Many investors know that wealth and retirement can be created using real estate, but get bored and try to hurry the process up by speculating and buying deals that don’t fit their plan. This is a sure-fire way to lose most or all of one’s wealth. Remember, it can take years to build up a solid retirement portfolio but only one stupid mistake to lose it all.

Source: Business Insider; Sep. 10, 2012

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4 Factors That Will Determine Canada’s Real Estate Market In 2016

REAL ESTATE GRAPH

Other than the weather, 2016 has not been particularly kind to Canada.

The Loonie is the lowest it has been in 15 years, a barrel of gas is trading for less than $30 and Canada’s National Men’s Junior hockey team didn’t even reach the semi-finals! Compare these factors against the rising U.S. greenback and you get one gloomy economic forecast. However, there is one section of our economy that seems to be unaffected, as the real estate market is showing little signs of slowing down on a national level.

Despite the troubling forecast, don’t expect any price breaks in Canada’s real estate market for 2016. TREB is predicting an increase in the average price of a home to rise by nearly 10 per cent, a number skewed by big markets where demand outweighs supply like the GTA.

The Canadian housing market is coming off a truly remarkable run, and RentSeeker is here to help you prepare for the road ahead. These will be some of the biggest factors affecting the housing market in 2016 and must be considered by anyone who is currently in or thinking about entering it.

Oil Prices

Oil prices have hit lows we haven’t seen in decades as the price of a barrel plummeted more than 60 per cent since June of 2014. Currently trading for less than $29 a barrel, the ‘bottom of the barrel’ seems more like an endless pit.

Certain oil producing countries and companies have flooded the market with a surplus of supply, driving down the cost of crude. As a result it’s been a downhill slide for the Canadian energy sector that plays a huge role in the national economy.

The oil, gas and mining sector accounts for more than a quarter of the national GDPand many workers have been laid off as Canadian oil production has come screeching to a halt.

When the energy sector is in good shape, so is real estate, particularly in Western Canada. However, the market in British Columbia is soaring as house prices in Vancouver continue to skyrocket, although Alberta is definitely taking a hit after experiencing numerous years of growth.

The Low Loonie

The Canadian dollar is worth less than 70 cents U.S., a rate we haven’t seen since 2003 — a time before Netflix and when most people didn’t have Internet access on their cell phone.

Furthermore, our currency has lost more value against the U.S. than other major currency, including the Pound or Yen, leading some economists to state that we’reflirting with recession.

Depending on where you live in Canada, these overwhelming numbers will have a drastic affect on the housing market in your area. At this point, many economists believe the worst is still yet to come, and that may be tough to believe for those living in Western Canada.

Many companies in Canada are suffering from increased expenses and people are loosing jobs. The Toronto Star has shut down its printing plant, and Goodwill shut down 16 stores in Ontario — two examples of companies that have experienced hard times and are cutting jobs.

When Canadians lose jobs, the real estate market suffers. We will see how the low Loonie affects the unemployment rate and which provinces will be hit the hardest.

Borrowing Costs

Mortgage rates can’t get much lower! The low, low Loonie and price of oil have been major contributors to muted borrowing costs for Canadians. Mortgage rates are extremely affordable, making it easier than ever for many new home-buyers (despite the modest increase in a minimum down payment for properties over $500,000), especially in smaller markets outside the Big Three (Vancouver, Toronto, Montreal).

This CBC article states that “many economists predict Bank of Canada governor Stephen Poloz will be forced to lower the interest rate yet again because low crude prices are cutting into Canada’s economic growth.”

As long as borrowing money is cheap, real estate prices won’t be. For those who are priced out of the housing market, while rents have also risen across the country, it is the only option for many. Apartment finders like RentSeeker.ca and classifieds like Craigslist and Kijiji are a good place to search for those looking for an apartment to rent across the country.

Foreign Investment

Foreign investment in the Canadian real estate market has always been a double-edged sword. For those who own property, increased foreign investment has been welcomed as they have seen their own property value increase. However, for the majority of Canadians who rent, foreign investment means increased real estate prices that were already unaffordable.

Many people who have lived in Vancouver for years are being driven out of the city due to over inflated real estate costs, and locals are demanding government intervention. A prime example of the double-edged sword, Dirk Meissner of theCanadian Press pointed out that the B.C. Finance Ministry could lose $1 billion in real estate sales and nearly 4,000 construction jobs if the government intervenes to minimize foreign investment activity.

For better or for worse, foreign investment is a major factor, and a low Canadian dollar makes foreign investment very attractive. Don’t expect a decrease for in-demand cities like Vancouver, despite a gloomy economic outlook.

Our new prime minister inherited a difficult situation on the economic and political front, and the Liberal Party has a tough road ahead. The Liberals have traditionally not been a “finance first” organization, and the current economic situation is one of the worse we have experienced in decades.

Rona Ambrose has clearly stated her concerns that a “very new and untested” Liberal Government isn’t prepared to deal with the future, but let’s hope she’s wrong.

Despite the rocky start to 2016, our real estate market isn’t showing signs of slowing down. We’ll just have to wait and see how things turn out.

Source: HuffingtonPost.ca Posted: 01/22/2016 2:25 pm EST

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What are the top U.S. markets for investing in rental properties?

Want to buy an affordable rental property? HomeUnion, an online real estate investment management firm, has just released its latest list of the top 10 U.S. markets for affordable rental properties.

“Like any other investment, the focus for SFR investors should be on long-term rate of return, and each of the markets on this list has favorable rental yields, low-cost entry points and solid, long-term economic fundamentals,” said HomeUnion CEO Don Ganguly. “Natrually, macro-economic factors such as low homeownership rates are quite favorable for SFR investing, but real estate is still all about location and finding accessible markets that have low entry points, like Cincinnati and Birmingham, or high gross rental yields, like Milwaukee.”

To create the list, HomeUnion looked at non-owner occupied properties and considered a combination of year-over-year job growth, median prices of investment properties, housing affordability and gross rental yield.

Charlotte, N.C., topped the list. It had the highest job growth of any of HomeUnion’s top 10 city, and the third-best job-growth rate of the top 55 U.S. metro areas.

HomeUnion’s top SFR investment markets

  1. Nashville-Davidson-Murfreesboro-Franklin, Tennessee
  2. Milwaukee-Waukesha-West Allis, Wisconsin
  3. Indianapolis-Carmel-Anderson, Indiana
  4. Tampa-St. Petersburg-Clearwater, Florida
  5. Birmingham-Hoover, Alabama
  6. Jacksonville, Florida
  7. Cincinnati, Ohio-Kentucky-Indiana
  8. Baltimore-Columbia-Towson, Maryland
  9. Orlando-Kissimmee-Sanford, Florida
  10. Charlotte-Concord-Gastonia, North Carolina-South Carolina

Source: Mortgage Professional America by Ryan Smith11 Nov 2015

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