Boom Issue 20

BOOM

Magazine b e s t

o f

o u r

m a r k e t

Top 5 Articles: Editor’s Pick issue 20: Special Edition

contents

08 12

16 20 24

Explosion of the 2nd Tier A roller-coaster year has gone by. Many investors are curious to see how the year of the Snake will turn out for the real estate market. This article explains why in this year, we expect to see foreign money flowing to the less popular but highly profitable cities in Canada.

Combining House Buying and Financial Planning for Young Adults Many young adults experience difficulties with managing their finances while trying to purchase a new home. As a result, banks and realtors oftencontrol the deals with little say or autonomy left to the owners. In this article you will learn about how figures determined by banks can affect your other expenses or savings, as well as the ideal solution for creating a holistic financial planning strategy.

4 Steps to Reaching Retirement Goals Through Real Estate

Before you start planning your retirement, you need to know exactly how much you need at retirement. Once you’ve figured that out, remember to take inflationary rate into account. Then, you are ready to start planning the steps ahead. This article will show you the 4 steps you need to follow in order to achieve financial freedom in your golden years.

How to Analyze a Real Estate Deal How do you know if a property is worth purchasing? For Julie, she can figure out this question in about 60 seconds after she steps into a property. Of course, a lot of it has to do with experience, but there are some rules and questions to consider in order become an expert at this!

Real Estate Clichés When it comes to real estate advice, we all hear the same overused sayings and clichés.

How much truth do these clichés really hold? This article will discuss four different common real estate adages regarding purchasing real estate and share the significance of each saying. While some statements hold valuable truths, others produce misleading information.

In celebration of our 20th issue, this special edition will cover our top 5 picks from the past 20 issues.

about BOOM Magazine BOOM Magazine is all about property investment. When this magazine was conceived, the market lacked some real content relating directly to property investment. It seemed like just about every realtor could contribute an article about selling your home, and it would be in blogs and magazines all over the place.

BOOM Magazine was created for the property investor, by the property investor. Each month, you will see contributions from professionals in the market as they share their experience in the field.

Within BOOM Magazine, you can expect the very best of our market - whether it relates to property investment, financing and leveraging or the different asset types, BOOM Magazine will be sure to have it as an editorial.

Would you like to contribute to BOOM Magazine? Email editor@bestofourmarket.com and we’ll talk. Would you like to influence the direction of the magazine? Register to subscribe and vote on the polls on what type of articles you would like to see more of.

contributors Simeon Garratt

Simeon Garratt has a huge passion for the marketing and business development industries. He is the founder of Allur Group Inc., an online real estate software company based in Vancouver, BC. Working in all aspects of the sales and marketing world, Allur has launched both an online real estate portal (Allur.com), as well as a online CRM platform for new real estate called Spark (Allurspark.com) in its first year of business.

Julie Broad

Julie Broad has been investing in residential real estate for over a decade across Canada. She’s a featured keynote speaker and an award winning real estate blogger with a passion for helping others transform their financial future with real estate investing.

Connect with her at: www.revnyou.com

For more info, please visit www.allur.com

Susan Mallin Susan Mallin, CIM, CFP is in charge of the Financial Planning Division of Goodreid Investment Counsel. Her clients’ needs typically range from basic retirement planning, to the more complex cross border planning strategies. She is based out of Toronto, but works with clients in all parts of Canada.

She looks at her role in financial planning as the centre of the financial puzzle to help find the missing pieces needed to make the plan complete. Often this means connecting and coordinating with other professionals such as lawyers, or accountants to help fulfill the entire needs of the client.

Contact information 1-888-466-3734 smallin@goodreid.com

Sylvia Sigurdson For over 14 years, Sylvia has been assisting people with their mortgage needs, originally as a licensed realtor and now as an Accredited Mortgage Professional (AMP) at Mortgage Depot in Victoria, BC since 2004. She has specialized in helping her clients acquire investment real estate as part of a wealth-building strategy and excels at structuring mortgages with the greatest tax advantage in mind. www.mortgagecanada.com

Melody Cheung Melody is real estate writer out of the Richard Ivey School of Business, one of Canada’s leading business schools. Her interests lie in researching and analyzing market trends and statistics that point to long-term investment growth. Melody has authored a multitude of e-books that include anything from basic real estate investment tips to an analytical overview of real estate trends in different global markets.

Explosion of the Second Tier A roller-coaster year has gone by. Many investors are curious to see how the year of the Snake will turn out for the real estate market. This article explains why in this year, we expect to see foreign money flowing to the less popular but highly profitable cities in Canada.

Explosion of the Second Tier By: Simeon Garratt It’s 2013, aka the bounce-back year for Canadian real estate. We’ve weathered the economic storm and our national interest rate gum boots aren’t showing the slightest signs of seepage. It seems to be the talk of the town that this year is the year for real estate to brighten up our spirits and put money back into our bank accounts. But is it really?

It doesn’t take a scientist to figure out that the Canadian government hasn’t done a good job (if any) keeping track of some key statistics related to real estate and property investment — mainly, ‘What % of local purchases go to offshore buyers’, and ‘what is the reason they are buying.’

With access to statistics on these simple questions, not only would we understand where the demand for Canadian real estate really lies, but we’d also be able to appropriate policy that both protects local interests and still promotes economic growth via international investment.

But thankfully for me, they haven’t been keeping track, and therefore my theory still holds out. The theory that there is truly inherent difference between demand and the translation of that demand into hard sales. Just because the raw number of property transactions went down on average 10% in the past 6 months doesn’t mean that there is 10% less demand for Vancouver real estate.

In fact, demand for Canadian property could be higher now than ever before, they just aren’t in as much of a rush. If you directly compare the Canadian real estate market on a percentage of growth basis to Chinese GDP growth over the same time period, the results are shockingly similar, as shown in the graph.

And seeing that China’s economy is currently on the upswing, it seems a bit hard to argue.

To the majority of international investors , Canada is affordable, but it’s not ‘on sale’. Markets like the United States on the other hand, are on sale. And since our demand is based on affordability, not sale based hysteria, we have to understand that patience is going to be one of our best friends for the next few years.

In 2013 we can be sure that immigration is, and will continue to play, a substantial role in how Canadian real estate is sold, marketed and developed. The year of the Snake marks the official shift of China’s nouveau riche from first wave to second. Family roots and money that has been coming over here, Vancouver and Toronto specifically, will now be used as a spring board into the rest of Canada.

We will see a definite pick up in the overall amount as well as the volume of international transactions in cities such as Montreal, Calgary and Edmonton. This trend has happened in many other countries around the world. Most notably, the UK and Australia, as Chinese love to be part of the first movers advantage, yet will never seek out brand new opportunities on their own.

China’s economic policies toward Canada have seen a radical shift in focus under the new rule of Xi Jinping.

Having gone from 1st level retail and development, to a 2nd level commodity and resource focus, the investor level is sure to follow suit. Because as the Chinese

say, “the deeper the roots, the further the leaves will fall from the tree.” And with the strength of the Chinese government’s ever-deep pockets lighting the path ahead, it will only take a few cups of tea for this trend to take off.

So in Toronto, we’ve got a mass of Russian and Iranian buyers, flush with cash, that are snapping up condos.

In Vancouver, Chinese investors are buying luxury apartments and developing single family lots for themselves and their children. In the Maritimes, wealthy Americans and Europeans are acquiring coastal vacation properties for the summer months. With all of this international action, it’s adamant that we as Canadians have a solid understanding of the underlying forces tugging on our real estate.

So I’m coining 2013, the year of the Snake, “The explosion of the 2nd tier”. Where we will see a slow but contagious trend of both first and second generation foreign money penetrate the less popular but highly profitable cities in Canada. The Vancouver’s and Toronto’s will always remain hot, but those that can use them as a catalyst into the rest will be the ones with the biggest smiles at the end of the day.

Many young adults experience difficulties with managing their finances while trying to purchase a new home. As a result, banks and realtors oftencontrol the deals with little say or autonomy left to the owners. In this article you will learn about how figures determined by banks can affect your other expenses or savings, as well as the ideal solution for creating a holistic financial planning strategy.

Combining House Buying & Financial Planning for Young Adults

Combining House Buying & Financial Planning for Young Adults By: Susan Mallin If you’re taking the financial plunge to buy a house, the first stop you will likely make is at your bank to talk about mortgages. There, they will gather your personal and financial information and plug it into their mortgage software program. After a few minutes, they will print out what looks like a giant certificate of a pre-approved mortgage amount and a limited time interest rate guarantee.

Most likely your next step will be a realty office where a real estate agent will show you houses priced in the range of your pre-approved mortgage plus your down payment. Throughout this process, the “experts� are calling the shots, or at least taking charge of your decision making. Stop the madness!

Looking at the various parties involved, we can ascertain that it is in the best interest of the bank, for profitability reasons, to approve you for the largest mortgage available relative to your financial situation. However, one should not lose sight of your interests, which should be to buy a suitable home while maximizing your entire financial situation.

Often people tend to compartmentalize financial planning by focusing on one thing at a time, such as paying off a mortgage as fast as they can, then starting a retirement savings account, then purchasing life insurance, and listgoes on. But, as you may know, life cannot be put into neat little boxes. The best way to maximize your financial plan is to construct a multi-faceted strategy to accomplish all of your financial goals.

Going back to the bank mortgage pre-approval, most financial institutions use a formula based on 32% of your gross income. That figure is what they deem a reasonable amount to go towards mortgage payments and property taxes. The reality is that it does

not really provide a very large cushion for other expenses or savings, especially on a more realistic net income basis. Many situations arise that can stretch the budget out of the comfort zone, such as an increase in interest rates, increasing property taxes, unexpected repairs, loss of income etc.

This reduces the ability for one to save money to fund other needs, such as retirement assets. In severe cases, older adults may find they have to borrow money against the equity in their house to provide an income stream for retirement-which of course, defeats the purpose of paying down the mortgage in the first place.

What is the ideal solution for combining a house purchase while having a holistic financial planning strategy? My rule of thumb is to use 25-29% of gross income towards the mortgage and property taxes and 10-18% towards other appreciable assets such as stocks and bonds to be used for retirement or other financial needs. Having other assets,besides your house, increases your choices later in life as to what your most suitable strategy will be when eventually drawing a retirement income.

4 Steps to Reaching Your Retirement Goals Through Real Estate

Before you start planning your retirement, you need to know exactly how much you need at retirement. Once you’ve figured that out, remember to take inflationary rate into account. Then, you are ready to start planning the steps ahead. This article will show you the 4 steps you need to follow in order to achieve financial freedom in your golden years.

4 Steps to Reaching Your Retirement Goals Through Real Estate

By Sylvia Sigurdson One of the most important questions to first ask yourself about your retirement is, “How much do I need?” Until you have a clear monetary goal laid out it’s very difficult to plan the steps required to get you there. A good financial planner can work with you to sort out the details of those needs and base those figures on inflation (the future value of money). For example, if you think $4,000/month is a comfortable income, you would need to earn $7,000/month (almost double) in 20 years (based on a 2.75% average inflationary rate). If your goal is to have income in addition to your pension when you retire, owning your own home and one other unit could achieve that. But if you don’t have a pension to rely on, or you’re wanting to do more than merely boost your retirement income, owning two or more rental properties would likely be needed.

Let’s assume you have no pension, or the $7,000 inflated income is what you will need to earn in addition to any pensions. How can you generate that much income through real estate investing?

Step #1: Own Your Own Home Investing in your own home is one of the best retirement strategies out there. By buying your own home today, you can pay off your mortgage by the time you reach retirement. Being mortgage or rent free when you retire dictates how much money you’ll actually need in order to be financially comfortable. And adding a revenue suite to your own home is a great way to pay off your mortgage even more quickly.

Step #2: Buy Investment Real Estate Now – the Power of Compounding Investing in real estate has a triple benefit in its compounding effects. First, in time, real estate eventually goes up in value. Is this true over short stretches?

Not necessarily. But in 10, 20, 30 years? History has proven itself over and over again – as a long-term

investment, it is hard to beat. Second, mortgages are paid off over time, even in 10 years, tenants help pay down the mortgage and in turn build up your equity. And thirdly, if you own a revenue property or a rental suite in your home, rents also go up with inflation. Even if you have the same tenants for 10 years, when they eventually move out, the future market rents will be significantly higher than they are today. They could be 30% higher in 10 years and almost double in 20 years, just using averages in Canadian inflation.

Here’s an example of the future potential of purchasing a $400,000 property today: Today 20 Years From Now 1) $400,000 Value $800,000 (based on a conservative 3.5% increase/year) 2) $2,000/mo Rents $3,500/mo (based on a 2.75% average inflation rate) 3) $400,000 Mortgage $0 (using increased rents to pay down mortgage) Let’s say you purchase a revenue property today, and it has a neutral cash flow – neither positive nor negative. Using a rate of less than 3% for inflation, your $2,000 rent today would be over $3,500 in 20 years. If you refinance the property every five years and take any rent increases and add them to the mortgage payment, instead of taking 30 or even 35 years to pay off the mortgage, you would be able to do it in 20 years or less.

By purchasing one property today – 20 years from retirement – the $3,500/month in future rents puts you halfway there. If you were able to purchase two properties today (using the above example), and using the same rates of inflation, you could have $1,600,000 worth of real estate and gross rents of $7,000/month before expenses. And that’s not taking into account that you followed Step #1 – owning your own home.

Step #3: Pay Off Your Own Mortgage First Any extra money you have to throw at your mortgages needs to go towards paying off your own home (the non-tax deductible debt) first. This also includes any positive cash flow from any rental properties. Once your own home is paid off, or you’ve converted the debt to tax-deductible debt, you can then pay off any of your mortgage debt.

Step #4: Downsize If you decide to buy the most expensive home you can afford when you’re first starting out, by the time you’re ready to retire, you will likely be ready to downsize. The biggest benefit to this is that you won’t have to pay any capital gains tax when you sell your own home (based on today’s rules). If you decide to purchase something smaller, it will likely also be less expensive. That extra money can be used to pay off any mortgage debt you may still have on your revenue properties, or it can put away into a safe investment and the monthly return can help supplement your retirement.

Even if you don’t have 20 years before retirement, Steps #1 through #4 can still help get you to where you want to go financially. In 10 years, you may still have mortgages on all three properties, but your net worth could be much higher, giving you many more options. Once you take the first couple of steps, you may find that it is easier than you thought, and you may decide to become a more dedicated investor. Start small, if that’s more within your comfort. But definitely start soon...

How to Analyze a Real Estate Deal How do you know if a property is worth purchasing? For Julie, she can figure out this question in about 60 seconds after she steps into a property. Of course, a lot of it has to do with experience, but there are some rules and questions to consider in order become an expert at this!

How to Analyze a Real Estate Deal By: Julie Broad I walk into a property and can figure out whether we should buy it in about sixty seconds. I can quickly guesstimate what the rent we can get is (we’re submarket area experts, so I know what rents for what price in this area off the top of my head); and I know the price range within which I can buy this place and make it work because we’ve done so many deals. I also get a feeling from a property. You probably do too – even if you don’t pay attention to it yet!

Feelings, of course, aren’t enough to buy a property on, though. You are looking for the real estate deal that is going to meet your goals. To achieve that, you’ll need to be able to analyze and value the property and figure out if it’s going to make you money.

Your job as you evaluate specific properties is to disregard the list price or what the sellers may want for it and focus solely on what it’s worth to you!

Don’t worry about the city’s property assessment or what the sellers paid for it. Those numbers are mostly irrelevant. You may be able to use them in your negotiation if it comes to that, but for the purposes of evaluating the property they’re not important.

As you look at the property, consider the following: • What is the area zoned for? (What else can you do with it? Can you add retail or office space or additional units?). What is its highest and best use?

• Are there any restrictions on the use of the property?

• What is the immediate area like? Are the other houses well maintained or not? Are there parks?

• What is in the area that is attractive for someone living there? Schools, shopping, medical services, police/fire and other services?

• What kind of transportation options are within a few blocks?

• What condition is the property in? Exterior and interior?

• What is your gut telling you when you see the property? How do you feel when you’re in the

• • • •

property?

Are there easy things you can do to improve the appearance of the property?

Are there any environmental risks to consider?

Earthquakes, hurricanes, mold, termites, asbes tos, bed bugs, etc.?

Who lives there now? Tenants or the owners?

Some of these things you can assess using maps and information you can gather from the internet, but most of these questions require you to physically be there to properly answer them.

Then, to figure out value, you’ll need to do the same evaluation for other properties that are on the market, as well as those that have recently sold in the area. You’ll also have to spend some time figuring out what kind of rent rate you can get for the property.

If two properties are comparable in size and location, yet one property (on a dollar per sq. ft. basis) is much more expensive or much cheaper, it’s your job to figure out why. The cheaper property may be in a slightly worse location. Or it could be on a noisier street, or near a garbage dump, or in a position where it gets less sun, etc. These are some of the things you’ll need to determine to figure out value and possible rent rates.

You will need to gather most of the following information to calculate cash flow: • Rent • Property taxes • Heat/hydro (and who pays for it – the potential tenant or the owner?)

• Electricity (again, who pays for it?)

• Garbage/sewer/recycling fees • Property insurance (you can speak with an Insurance Broker for an estimate) • Property management (again, you will want to research this to get an estimate) • Maintenance of the building/property.

Separate from the above, you will want to come up with a rough idea of how much you will have for a down payment – so you can estimate your financing costs – and also get an estimate of the current interest rates. (You can check this online or speak to your bank or a mortgage broker.)

Many of the items above can be estimated until you have an accepted offer on the property, at which point you’ll have easier access to the real numbers. However, the more actual numbers you can obtain from the seller (or seller’s agent) and from your various sources (banker, broker, insurance agent, etc.), the more accurate your cash flow prediction will be.

Whenever we begin analyzing a real estate deal, we always use the following rule: Income/Financing Ratio: 65% of income should be the maximum financing (mortgage principal and interest ) cost.

E.g., if rent is $2,000/month, financing should not exceed $1,300/month (2,000 x .65 = $1,300).

Hopefully it is obvious that you are going to take the monthly rent (and any other income like monthly parking or laundry income) and subtract all the monthly costs. If an expense only comes in an annual amount (like insurance or property taxes, for example) simply divide by 12 months in order to get your monthly rate.

We look for deals that are going to cash flow at least $300-$400 each month. That gives us room to wiggle if rent rates drop or we have some other surprise.

A Few Words of Caution … Just Because Your Number is Positive Doesn’t Mean It’s a Good Deal:

Did you include an amount for property management (usually 10% of your monthly rent cost)?

Even if you are going to manage the property yourself, it’s always wise to have a buffer – in the event there comes a time where you can no longer manage the building yourself and need to hire a professional. Sometimes, when we’ve moved cities, changed to more demanding jobs, or just couldn’t handle the strain and stress of managing the properties, we’ve gone from self-managing to professional management!

What rent did you use? Is it likely?

Knowing only the expenses won’t help you if you haven’t determined what rent you’ll be getting.

It’s imperative that you obtain accurate rental information in your chosen area and for comparable properties. You need to be a shopper of comparable properties. If it is a bedroom house with a 2 bedroom suite, you need to look at all the local listings and see what is comparable and what they are asking. Ideally, call a property manager and ask them what it would rent for.

If your chosen property is already rented, then hopefully you were able to find out the current rent from the listing, the listing agent, or your agent. Are the current tenants in a lease already, or is it just month to month? Asking the rent rate that the current tenants are paying is not enough research. It’s entirely possible they are paying way more or way less for some other reason (family, friends, etc.) but it’s still important to know what they are paying.

Real Estate Clichés: What Truths Do They Really Hold?

We’ve all heard the typical sayings when looking into the real estate market, but how much truth do these statements hold and how seriously are we supposed to take them? Every real estate cliché holds several layers of meaning that do sometimes hold valuable truths.

Real Estate Clichés: What Truths Do They Really Hold?

By: Melody Cheung We’ve all heard the typical sayings when looking into the real estate market, but how much truth do these statements hold and how seriously are we supposed to take them? Every real estate cliché holds several layers of meaning that do sometimes hold valuable truths.

Location, location, location This age-old adage holds a significant amount of truth. Realtors and other property connoisseurs always stick to this statement when providing advice on where to purchase. When purchasing real estate property, choosing the right location can make or break a good investment. This is because an identical house can be priced entirely differently in two different locations – $1 million in Vancouver will only buy you a one-bedroom condo, whereas in Charlottetown it can buy you an eight-bedroom house.

Whether purchasing a home to live in or just looking for a property to invest in, the area surrounding your future property is very important.

If you’re searching for a place to live, you want to look at costs of living, crime rates, nearby conveniences and more. If you’re searching for investment properties, you want to pick an area with good tenants, high demand, and lower vacancies that will bring you the best return-oninvestment.

Buy the worst house on the best street This saying goes hand-in-hand with the previous adage about location. You can’t change the qualities of a location, but you can change the qualities of a house. If you purchase the worst house in a prime location, your role is to fix it up and turn it into something people will want; however, if you choose to do nothing, your house will do nothing for you. If you purchase a property and sit around, your house cannot and will not be able

to generate interest for you. Despite having the prime location, you need to put in effort, time, and money in order to create improvements.

Despite this famous saying, it is not always the best to purchase the worst house on the best street. Because these houses are typically the cheapest, they also have the most buyers. This makes the competition steeper. Furthermore, renovations do not always turn out to work out as smoothly as planned. As a home buyer, chances are you will not know how to do the renovations yourself. This means you will need to hire someone to fix up your place. This will quickly increase your costs and also take up a lot of your time and effort. By purchasing on the “best street”, you are also going to be paying a premium for the location of your property, despite the actual house being a dump.

Why pay someone else’s mortgage?

This saying refers to the argument that purchasing your own home may be better than renting, which is equivalent to paying for someone’s home for them. This seems logical and is reflected in the fact that approximately 70% of Canadians are now homeowners, but is it entirely true?

From the view of a property investor it is good to see people continue to rent.

So why rent? Renting still provides many advantages that homeowners do not receive. Despite the saying that purchasing is more advantageous, renting is actually better suited to young couples, new immigrants, or other people who are trying to get settled into a stable position. Data has shown that for the first five years, renting is actually more beneficial than purchasing. This is because there are many costs renters do not have to pay that homeowners do. These costs include property taxes, home maintenance, mortgage interest, home insurance, real estate and legal fees,

landscaping and lawn care, and potential Home Owners’ Association fees. Renters also benefit from increased mobility and greater ease when wanting to move.

Real estate always goes up There are many sources with graphs that illustrate how real estate always increases in value – but how accurate are these graphs? Often, many graphs with increasing trends do not account for inflation. So what do they really mean? The truth is real estate trends vary depending on how you look at them. Not only does the time period you are examining the real estate market, but also the location. When examining markets on a shorter scale, there are more fluctuations; however, when examining trends on a longer scale there is an upwards trend. What seems to be true is that real estate experiences cycles of ups and downs.

Although prices may seem to increase in the long-

run, it is not entirely true that real estate always goes up.

Despite predictions both of an incoming crash or an increasing trend, real estate remains difficult to predict. Looking at detailed past data, it is clear that the market does indeed fluctuate and may or may not continue to rise.

In general, real estate clichés do hold some truths.

When listening to a real estate agent or any other expert, do not take these commons sayings word for word. Instead, unpack their statements, do some research, and understand what these sayings are really trying to say.

BOOM

Magazine b e s t

o f

o u r

m a r k e t

issue 20: Special Edition