BOOM Magazine Issue 9 by Boom Magazine

issue 9

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Direct Property Ownership vs. Land Banking

Gentrification and the Real Estate Market

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For the uneducated investor, real estate can have a reputation of being a giant scam. This is due to the fault of few, which happens to affect many. In light of the latest property scam by land investment company, Edgeworth Inc., it’s important that investors are reminded to practice their due diligence. If they do, they will find that it is much safe to invest directly in hard property rather than land.

Gentrification can be described basically as revitalization. It is a good economic indicator that points towards the notion that an area will be experiencing a major economic boom. This economic boom will then lead to the necessary factors that allow for a strong potential housing market. Investors should be wary of gentrification, as it’s a useful tool to source high-income properties.

How to Get Into the Game Now This article is for all the people who are on the fence about real estate investing. How do I get started? How do I make that leap? Well, it’s not as hard as you think it is. The first step to becoming a real estate investor can be as simple as investing in your first home.

Should You Lock Into a 10-year rate?

The question is always the same – should I go with a fixed mortgage or should I go with a variable mortgage? What is not always the same, however, is the state of Canada’s mortgage industry. With interest rates increasing and promotional offerings disappearing, it’s a whole new question that needs a brand new answer.

Questions to Ask

As the saying goes, there’s no such thing as a stupid question. When investing in real estate, it’s important to be educated and to be an informed investor – especially when working with other people such as real estate investment companies.

Boom Interview Spotlight: Eugene Orr

A BOOM contributor sat down with real estate pro, Eugene Orr, to discuss his views on the Canadian real estate market. In the interview, Eugene touches upon his insights on the powerful Canadian West Coast and foreign investment from mainland China.

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 weâ&#x20AC;&#x2122;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 Julie Broad Julie Broad has been investing in residential real estate for over a decade across Canada. Sheâ&#x20AC;&#x2122;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

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 wealthbuilding strategy and excels at structuring mortgages with the greatest tax advantage in mind. www.mortgagecanada.com

Stephanie Shiu Stephanie is a licensed Mortgage Broker with TMG (The Mortgage Group) and REALTOR® at Sutton Westcoast. With a Diploma in Urban Land Economics from the University of British Columbia and over five years experience in the Real Estate Industry, she has the knowledge and skills to help you buy, sell, or arrange financing for your home. These processes can be daunting to many as there are a wide assortment of housing and mortgage options in today’s marketplace. It’s her job to work closely with you in order to ensure that she not only negotiate the best price and rate but also ensure that your transaction proceeds smoothly. Stephanie takes great pride in the customer service she provides and relies on referrals and your repeat business. www.stephanieshiu.ca

Direct Pro

operty Ownership vs. Land Banking For the uneducated investor, real estate can have a reputation of being a giant scam. This is due to the fault of few, which happens to affect many. In light of the latest property scam by land investment company, Edgeworth Inc., itâ&#x20AC;&#x2122;s important that investors are reminded to practice their due diligence. If they do, they will find that it is much safe to invest directly in hard property rather than land.

Direct Property Ownership vs. Land Banking By A. Heung, BOOM Contributor When investing your hard-earned dollars, it’s important to invest wisely in low risk investment opportunities, such as direct property ownership. Investing in property directly gives you control, security and positive returns within the short-term, whereas investing in raw land does not. If you’ve been paying attention to the latest in financial news, you’re probably aware of the recent land investment scheme by property company, Edgeworth Properties Inc. The company is currently under liquidation and cannot pay back its many investors. This major fiasco could have all been avoided had the investors practiced their due diligence and asked the right questions. If they did, they would have fully understood the high risks that come with investing in raw land, aka land banking, and invested in direct property ownership instead. Direct Property ownership provides you with security. The investment theory behind land banking is simple. If you buy a parcel of land and hold onto it, the value will increase once the land is developed, leaving you with a sizeable return on investment. Since raw, undeveloped land is not profitable until it is developed, it is hard for an investor to assess its future worth, much less compare a plot of raw land with another when deciding to invest. How do you know when the land will be developed, or if it will ever be developed at all? As an investor, you will have to rely on the land’s management company to ensure that the land is developed. There are too many unknowns and because of that, land valuations are not easily attained and are very costly. On the other hand, when you invest in property, it is already built. You know what you are purchasing and what you see is what you get. Valuations are straightforward and easily obtained. The best way to look at it is as follows – banks are one of the smartest institutions in the world. Banks will not provide financing

on raw land due to its high risk. On the other hand, they will provide up to 70% financing on property. What does this say about property and its security? Direct Property ownership provides you with control. When you invest in raw land, you are generally investing with a pool of investors. In most cases, the title is either shared with all investors or a management company holds the title. This takes away the amount of control an individual investor has. Ultimately, the control lies within unanimous decisions by all investors or a management company. Say, for example, you are in dire need of capital and need an exit strategy from the land investment; you are locked in unless you have the consent of all investors or the management company. When you invest in direct property ownership, you own everything. The title is under your name. You are in complete control. If you want to sell, you can sell. There is no one you need to consult first before doing anything. Direct Property ownership provides you with positive returns within the short-term. As mentioned earlier, you do not receive returns on your raw land investment until it is developed. There are too many unknowns in land-banking to know when this will happen. But regardless, it generally will not occur in the short-term. The most important thing to note is – while you wait, you will receive zero cash flow. It is possible that you will not see any returns in many years. Direct property ownership, on the other hand, provides you with built property that is ready to be rented out. From day one, you will receive positive cash flow from rental income. As a bonus, this income will go towards covering expenses and paying off your mortgage. Whenever you invest, invest safely and wisely. Protect yourself with the low risk, strong returns and complete control from day one that comes with direct property ownership.

Gentrification and the Gentrification can be described basically as revitalization. It is a good economic indicator that points towards the notion that an area will be experiencing a major economic boom. This economic boom will then lead to the necessary factors that allow for a strong potential housing market. Investors should be wary of gentrification, as itâ&#x20AC;&#x2122;s a useful tool to source high-income properties.

e Real Estate Market

Gentrification and the Real Estate Market By J. Von Sprecken - BOOM Contributor

with high architectural value will have undergone a period of ‘disinvestment,’ during which these older buildings were neglected, resulting in loss of value. However, the character in these buildings remains Gentrification, or the revitalization of a neighbor- and can be restored through renovation, and will athood and the subsequent rise in property prices, can tract both renters and homebuyers. benefit investors who know how to play their cards right. Investing in a neighborhood with the potential Comparatively Low Housing Values/High Rate of to gentrify is riskier, but the investment potential Renters: will be reason enough for the more adventurous. For Low real estate prices can be extremely attractive to those looking to invest ahead of the curve, it pays to the pioneers of gentrified neighborhoods, and is ofknow the signs. ten a reason for the influx of wealthier investors. As prices continue to soar in other parts of a city, adA neighborhood on the cusp of revitalizing is less venturous investors are attracted to the character of risky because the signs are already there, and if the some of the buildings in a neighborhood and the low investor recognizes them and makes their move be- purchase prices. The high rate of renters is simply an fore everyone else does, significant gains can still be indicator of the lower income residents that inhabit a made. Being aware of a few leading and primary neighborhood prior to gentrification. indicators will help the investor predict an up-andcoming neighborhood before the first boutique cof- Shift in Land Use: fee shop foams up their first latte. Once the process of gentrification has begun, the area will see a shift in land use. A decline in indusImproved Public Transport: trial developments will be replaced by an increase in When public transit to a neighborhood increases it high-end housing, retail, and restaurants. Take Vanattracts newcomers and provides an added boost to couver’s trendy neighborhood of Yaletown for exhousing prices. Part and parcel of improved public ample. Up until the 1960s, the area was a warehouse transport is that job centers are easily accessible, district. Due to its proximity to downtown, its attracwhich is another leading indicator of gentrification. If tive architecture and relatively low price tag, Yaleurban centers are easily accessed by a certain neigh- town’s 19th century warehouses now house nightborhoods, those who work in those centers will find clubs, shops and some of the city’s finest restaurants. the area more desirable. There is a proven relationship between improved transit, and higher rents and Arrival of Urban Pioneers/Artists: owner-occupied property, both of which are indicate Another telltale sign is the influx of so-called, “urthat a neighborhood is in the midst of revitalization. ban pioneers.” Educated, young, adventurous, and artistically minded, these newcomers will not fit the High Architectural Value: traditional demographic of the neighborhood; howSo-called period properties also play a part in gen- ever, they are likely to be lower-income and attracted trification. In neighborhoods where ‘characterless’ to the lower prices. Once these pioneers have estabbuildings dominate, the chance of gentrification is lished themselves, investors and real estate developlowered significantly. An area that features buildings ers become interested in a neighborhood that was

previously considered low-income and unsafe. At this point however, gentrification is in full swing. Further signs that an area is in the middle of gentrification include a movement from rental tenure to homeownership, the arrival of people that are interested in urban amenities and culture, and an increase in businesses targeted towards higher income clientele. This shift can manifest itself in a number of ways, sometimes occurring as a visible shift in demographic, to simple improvements to the neighborhoodâ&#x20AC;&#x2122;s public transportation. However, the investor that watches for these indicators may be able to see potential in an area that would otherwise be overlooked.

This article is for all the people who are on the fence about real estate investing. How do I get started? How do I make that leap? Well, itâ&#x20AC;&#x2122;s not as hard as you think it is. The first step to becoming a real estate investor can be as simple as investing in your first home.

How

to Get Into the Game NOW

How to Get Into the Game NOW money saved By Sylvia Sigurdson

When you think about investing in real estate, it often conjures up images of four-plexes and apartment buildings – something grand and seemingly out of reach. When you know you want to become a real estate investor but don’t own anything yet, the prospect can feel daunting and unrealistic. By taking one small step at a time, you can become the real estate investor you aspire to be; and that first step is often so obvious that it isn’t even considered as part of your long-term investment goal. What’s the step? Invest in your first home. When you think of your first home as making up part of your investment portfolio, it changes the approach significantly. Often, first-time buyers wait until they can save enough money for the down payment for a cute little bungalow and a picket fence. They continue renting out their tiny apartment to save money, all the while not enjoying their living situation and suffering in silence until that magical day when they purchase their dream home. My suggestion of starting with a small condo is usually met with resistance. ‘We don’t want to live in a condo,’ they say. ‘We want a house.’ Fair enough. But what I think is worth considering is purchasing the condo as that first stepping stone and, instead of selling it down the road to buy something ‘better,’ keep it as a holding property. Here are a few advantages to this approach: 1) You get into the market now, instead of some future date when you may or may not have enough

2) You can purchase with as little as 5% down (you need 20% for an investment property) 3) If you’re renting an apartment now anyway, it’s easier to adjust to living in something that’s not necessarily ‘perfect,’ but perfect for right now when you know it’s building up your net worth 4) The sooner you take out a mortgage, the sooner it gets paid down. With rates as low as they are, on a $230,000 mortgage, you could easily pay down over $30,000 of principal over the next 5 years, and that doesn’t take into account any potential increase in value on the property 5) The low rates also make it more affordable than ever, keeping the monthly costs in line with rents Here are a few things to consider when purchasing your first property: 1) If you’re buying a condo, make sure there are no rental restrictions. Or they’re not too restrictive so they can accommodate rentals in the future (Some have a maximum number of rentals, for example, and you can put your name on a waiting list when it gets close to the time to convert it to a rental) 2) Consider buying a house with additional accommodation (basement, attic suite, or garden suite) 3) Consider living in the secondary accommodation for the first few years. For example, if the main floor rents for $1500/month and the basement for $1,000, that additional $500/month you’d be getting from the tenant is an additional $30,000 towards your equity (plus the interest savings) and you still have the advantage of living in your own home. This works especially well when the suite

needs to be fixed up. You can live in the unit while you’re renovating so you’re not disturbing the tenants or losing rental income. After a couple of years, when you’re ready to move up, you now have a much nicer suite that will generate even more income Here’s an example so we can look at the numbers more closely: $400,000 house purchase with a suite $20,000 (5% down – look back at Issue 8 for some possibilities for the down payment) $11,210 Mortgage insurance fee (added to the mortgage) $391,210 Total Mortgage $1700/month mortgage payment (based on 3.25%, 30-year am) $200/month property taxes (estimate) $200/month utilities (shared with upstairs tenant) $2100 Total - $1500 main floor rent $600/month is approx balance you pay If you’re already paying $1,000 where you’re renting now, considering taking the extra $400/month you’re used to paying and adding that to the mortgage payment. At the end of 5 years, instead of having a mortgage balance of $350,000, you’d have it paid down to $323,000, or $27,000 more your equity pocket. Whether you buy a condo or a house with a suite, (or you already own your own home) your first home can still be the first investment property you own. After a couple of years of living in it, you may be able to refinance it and reduce the mortgage payments back down to $1700/month (or whatever the lowest payment would be at that time). Now the two suites could actually generate a positive cash flow. Then take out some of the equity to purchase the next one – and so on, and so forth. This is one of the most straightforward strategies for wealth building.

Should You L 10-year Rate

Lock into a e?

Should You Lock into a 10-year rate? By Stephanie Shiu Canadian mortgage holders and new homebuyers have enjoyed a long period of low interest rates. These rates are now rumored to be going to increasing in small increments. Recently, the highly popular variable rate option has slumped in attractiveness as discounts off of the 3% prime rate have disappeared. At the same time, some financial institutions have dropped rates to as low as 2.99% for terms as long as four or five years. These promotions have now been discontinued with 5-year rates now hovering around 3.39% to 3.59%. Naturally, homeowners with variable rate mortgages want to know if they should lock into a fixed rate. The most common question, historically, is, “Should I get a fixed or variable mortgage?” However, the even bigger question today is whether to lock into the 10-year rate at 3.99%. The simple answer is: It all depends.

you’d pay an extra $4745 over the first 60 months. Most homeowners choose a fixed rate because they know exactly how much principal and interest they pay on each regular mortgage payment throughout the term. However, when interest rates go down, they can’t take advantage of that to save money on interest. The 10-year product is ideal for clients who are on fixed incomes, have limited incomes or even seasonal income because it gives them stability. The choice is ultimately a personal decision. The 10-year represents the ultimate option in security. Typically for fixed rate products, the penalty to break the term would be the greater of three months interest or the interest rate differential. However, one key factor about the 10-year is that under Canadian law, after five years, the penalty to break the mortgage reverts to three months interest, similar to the penalty for a variable rate. That is a much lower penalty than the interest rate differential, which can be in the tens of thousands of dollars!

7 and 10-year mortgages are an extreme, and as such, are an infrequently-used way of insuring yourself against higher rates in the future. A survey released in 2010 by the Canadian Association of Accredited Mortgage Professionals (CAAMP) showed that just 7 per cent of mortgage holders had terms of five to 10 years, while 66 per cent of mortgage holders had Homeowners should base their decision based on terms of 4-5 years. A 10-year mortgage is basically their overall financial picture. A mortgage profesan insurance policy for the last five years of the term. sional and financial planner should be able to help analyze your financial situation and give you the best For example: advice on whether to choose a 10 year mortgage. Take a $100,000 mortgage amortized over 25 years, for example. You’d pay $2,853 more interest over the first 60 months with a 10-year at 3.99%, compared to today’s typical 3.39% 5-year fixed mortgage. If you managed to jump on the recent 2.99% train, then

Question

As the saying goes, thereâ&#x20AC;&#x2122;s no such thing a estate, itâ&#x20AC;&#x2122;s important to be educated and to working with other people such as real es

ns to Ask

as a stupid question. When investing in real o be an informed investor â&#x20AC;&#x201C; especially when state investment companies.

Questions to Ask By Julie Broad I was at a Business New Network event the other day, and they were presenting the results of a viewer survey. They had asked viewers about their retirement investments and what the returns were on their investment portfolio. Surprisingly enough, only 43% had any idea as to what their returns on investments were! As I speak to family and friends about investing in real estate and putting their RRSP’s into real estate mortgages, I have found that very few people really know the kind of return they are getting.

• If things are not going well, do they have alternative plans for this investment? • What are your exit strategies? • Do they earn fees even if you don’t? That is, if the market goes down, do they still make money from managing your money? And if you are specifically looking at partnering on a real estate deal I would also ask for: • A credit report (and possibly a criminal report), • Proof of ownership of any properties they say Why would you work so hard for your investment they own, dollars and only to be irresponsible about it? That • What a good deal looks like to them. does not mean you have to always be the active investor. I am certainly not suggesting that everyone And then, once you have decided to hand over your has to be an active real estate investor or even an investment dollars to them, check on it every 3 active stock investor. When you are busy with work, months or so, and ask how things are going. Ask for kids, family and having a life, it is understandable proof of what they say and if things are not going the that it is not easy to spend a large amount of time way you expected, look into it to understand why and investing your money. what is being done about it. Luckily, investing your money doesn’t have to be a There is no easy street when it comes to loving and part-time job, there are plenty of solutions for this caring for your money. Even when somebody else dilemma. For example, you can find great financial is taking care of the details for you, you still have advisers to help you, you can invest with the help to be proactive. Always remember that nobody loves of an property investment company, or you can find your money as much as you do. And if you don’t love real estate investors to partner with who will do all your money, then you shouldn’t be so surprised if it the work and invest your money in a great real estate doesn’t all return to you at the end of an investment. investment. But as they say in all real estate circles, whenever you invest your money, even when you are not investing directly yourself, practice your due diligence before handing your money over to anyone. If something happens and you lose money, you have nobody to blame but yourself. There is no such place as easy street. When teaming up with others to invest in real estate, here are some questions you need to ask: • What are they investing in? • Why are they investing in it? • Can you speak to other people who have invested with them? • What are the estimated returns?

BOOM Interview Spotlight: Eugene Orr A BOOM contributor sat down with real estate pro, Eugene Orr, to discuss his views on the Canadian real estate market. In the interview, Eugene touches upon his insights on the powerful Canadian West Coast and foreign investment from mainland China.

BOOM Interview Spotlight: Eugene Orr By M. Chiahemen - BOOM Contributor At the heart of the housing market are the real estate professionals that act as a liaison between hot property sellers and buyers. I recently sat down with real estate agent Eugene Orr - a native of Vancouver with a keen eye for the burgeoning Alberta market. We talked about what makes real estate such a viable investment, and in particular, why Canada’s west coast makes for such an ideal haven: BOOM: Give us a quick self background – how did you get into real estate?

Houses can be leased for up to a maximum of seventy years whereas here [Canada] you buy and own your home outright – for life if you wish. BOOM: There have been reports that this foreign demand is causing some locals to harbor the ill sentiments over being edged out of the market. How legitimate are these kinds of concerns?

E.O: Well, people hear figures like the cost of the average apartment is about 70% of the average salary [then] they see immigrants coming in with lots of money and E.O: I was a litigation and real estate attorney for ten buying houses that they themselves can’t afford. It unyears. I represented clients as an attorney buying and derstandably raises some resentful feelings; as foreign selling real estate. That was absolutely my favorite buying and investing continues, prices increase along part of my law practice and I decided why not just with local worries do what I’m truly passionate about and what I truly enjoy doing. And after ten years as an attorney I de- BOOM: So, how worried should locals be? cided I’m going to transition and go into residential real estate. I’ve been a residential realtor, real estate E.O: Well, as former Vancouver councilman Kirk Wilagent now for nine and a half years ... you could say liams said, “[i]t’s a problem that many cities would love I’m a veteran! to have.” I would be hard pressed to say that foreign speculators are the key problem. Our fundamental isBOOM: Given your experience, what would you say sues here are: population growth [driven by immigramakes Canada’s West Coast such a unique housing tion] and a limited land supply. At the end of the day, market? High prices, for example, continue to make this has to be a provincial issue. headlines BOOM: Finally, what about other West Coast locales? E.O: B.C. and Vancouver in particular regularly ranks Can we expect to see similar trends? among top cities in the world to live, for a number of obvious reasons. That’s not the only factor fuelling E.O: As I had mentioned, I am dealing with a complex housing prices though. An ongoing burst of foreign with about 50% foreign landlords, however my foreign buyers, particularly from main land China families is clients are only driving up prices in a few select locale, contributing to the rise. Half of the purchases in one while areas such as Fraser Valley or the Okanagan are of complexes that I am attached to are by landlords largely wanting for that clientele. from mainland China. As with all things real estate, time will certainly tell. BOOM: Why mainland China in particular? E.O: Well, it always goes back to politics – under a Communist regime it’s not possible to buy a home.