What follows is a note I shared with my inner circle clients last year (Feb. 2021). Unfortunately, as another year has passed, I see this situation has not improved.
The ‘lenses’ that I will be looking at this is from the perspective of Investment Real Estate; owning a property a personal residence is an entirely different set of lenses.
Yes, I can see what price anchoring is and how it is applied. However, we can agree that the price is almost meaningless when looked at in isolation.
I’m not concerned that prices are higher; as a Caring Capitalist, I want the prices to be higher in the future. Isn’t this is why we all take risks to create a profit and fund our financial futures?
I hope all the prices are over 1M+++++ to the moon, baby.
What I focus on are the following:
** Has the recent price growth outpaced the economic fundamentals (GDP growth, Population, Employment, wages, vacancies, affordability, etc.)
** Is the price growth speculative (the only way to make money is if the asset goes up in value)
** Are the recent gains based upon ‘Black Swan’ events
** What is the yield on the assets
** What are the rents, and can they support the operation costs of running the business/house with surplus cash flow?
Whenever I see an article about a new price record in a market, I always ask the question, “what are the rents for that property?”
To me, A $1.1M+ Ontario duplex that rents for $4,200 don’t make sense. Perhaps that is why I’m having 2-3 conversations a day about investing in Edmonton. You can get over $6,200 in rents for the same asset price (brand new construction property).
An asset that generates $2K more/ month has a greater chance of cash flowing and performing for the long term.
To build on your analogy regarding the higher price of the same bottle of Johnny Walker Black.
I don’t have any issues that my Johnny Walker black now costs $125 ($25 more). Where I potentially have an issue is;
If I run a business (own a bar), the same Johnny Walker Black now costs more and comes in a smaller bottle with less alcohol content.
Per bottle, I now pour fewer drinks to my customers. Plus, based upon Government regulations, I can’t charge more per drink to my patrons, this is not a recipe for long-term business success.
Quick Side note: What follows below are 100% my opinions, and yes, I realize some of them may not be popular (and that’s ok). I’ve made a few edits to the original document, but most of this is from the original note over a year ago.
Some context from where I am coming from. I’ve been investing for more than 20+ years. I have the blessings to have a National perspective network & connections. I’ve personally been through ALL the different stages of a Real Estate cycle (up, down & sideways.)
Perhaps it’s just my age, and this isn’t ‘my first rodeo.’
A few Real Estate markets across Canada are starting to concern me. The rapid appreciation without cash flow is a recipe for disaster.
Yes, I know hindsight is always 20/20, but I’m starting to get that “deja vu feeling all over again” ~Yogi Berra.
Perhaps a trip back in time to give you some perspective (as an FYI, for complete transparency, I made every one of these mistakes below)
Here were some of the things that were happening in the 2006-2008 market that I was investing in:
** Rapid appreciation, multiple years of double-digit price growth, heck there was one year with a 50%+ year over year growth
** Ego and greed were high; “Hey, look, we just made $100K for doing nothing” was commonly heard
** Impatience and unrealistic expectations were running rampant “I bought my property only three months ago, and the property *only* increased $75K”
** People were ‘equity drunk,’ refinancing multiple properties, quitting jobs, living off the borrowed money.
** Refinanced money from a peak market was used to buy more properties at the peak.
** Multiple offers were the norm and not an exception** Unconditional offers were the only way you can get your deals accepted.
** Cash flows margins were compressed to the point of non-existence (and negative)
** Multiple wholesalers were reselling properties numerous times to beginner investors’ that have a severe case of FOMO (Fear of Missing Out)
** Interest-only and 40-year amortization mortgages were very common
** Negative cash flows were tolerated because the equity gains will more than off-set your negative cash flow
Do you see any of these things at play in specific markets today?
I
f I (2022 Russell) were to jump into a time machine and go back to 2006 and have a coffee with myself (2006 Russell), here is the advice I would provide. I’m not sure if 2006 Russell would have listened, I might have been too stuck in my Ego and thick-headed to hear, but it would not stop 2022 Russell for sharing this advice.
** Do not lower your standards (Tenant profile, Cash Flow, areas, etc.) on your acquisitions.
** Do not try to force something to happen. Lowering your investment standards and criteria will not end well.
** Do not take interest-only or 40-year amortization mortgages. These are just band-aids, and you will regret them later.
** Sell your ‘dog’ and underperforming properties; this is a fantastic time to sell.
**Be ok that you leave some equity on the table for someone else.
** Only keep the best performing properties (Cash flow, good condition, excellent tenant profiles, low PIA factor)
** Take a short-term speculative approach in that market. Get in and out with speed, transact properties, make some $$$, but do not take a long-term hold position on any new acquisitions (unless the numbers work based upon your standards of purchase).
** Buy-fix-sell, wholesale, condo convert & sell, transact and move with velocity.
** Take the funds from selling the dog properties, flips, conversions, etc. and re-invest it into another buy and hold market at the beginning of its growth curve; for me, at that time (in 2007) would have BC or Ontario (remember hindsight is 20/20)
** Hug & kiss your wife and family more
Buying for appreciation only with no cash flow is a very speculative & risky play. The cash flow is what you need to absorb (survive) the market ups downs to hold the property for the long term. Remember, staying power is more important than growth…
You have zero margins for error, zero option to negotiation, minimal options to complete your comprehensive due diligence/ research on your purchases. Plus, holding for the long-term can prove costly (tenant turnovers, deferred maintenance, property upgrades, wear & tear, special assessments, etc.) If you have no cash flow to cover these expenditures, it is coming out of your pocket or further borrowed monies, and this is a very slippery slope (ask me how I know this).
The market moves in cycles and always has… Astute and veteran investors (ones that have been around for more than 20 years) know this and follow these patterns of buy low and sell high and ALWAYS BUY FOR CASH FLOW!
I hope this helps, and all of the above is for information purposes only and intends to share some wisdom that only time and taking many lumps provide.
Welcome your thoughts, and please share; this community is a safe place to share your thoughts…
Russell Westcott
RussellWestcott.com