Sending out an S.O.S….. Frustration & Chaos in Real Estate Investing
Sending out an S.O.S….. Frustration & Chaos in Real Estate Investing

S.O.S.  The Surfer May Be Getting Drowned By The Rogue Wave!

Frustration, chaos, fear, disappointment, fear (yes, I said fear twice). This is the emotional roller coaster that many investors have been riding on for the past 18 months, especially in Alberta as markets slowed to a crawl, jobs were lost, deficits were created. Now but a few months later, we see talk of ‘real estate bubbles’ (especially in Vancouver and Toronto) coupled with interest rate increases sparking some fear this time because the market is too hot (but wasn’t it just called ‘too cold’ too cold?).

These emotions and economic roller coasters, when acknowledged and harnessed, can become a source of great success for the informed investor as opportunities are hidden within the highs and lows. Back in 2009 during the last big downturn, many people allowed themselves to be defeated.

They gave up on their investing strategy, they put their financial dreams aside, all because they did not understand the source of these emotions and that source is “unmanaged expectation.”  Immediately following this ‘defeated’ attitude, people got TOO enthusiastic about the market especially in Toronto and Vancouver and bought properties they really couldn’t afford, the exact opposite the market emotions of 2009.

Prediction: We have entered that emotion cycle again in 2018-2019. People have become despondent and fearful again. The waves and cycles of emotions is hitting and hitting hard. Just as it has in just about every decade on record.  The emotions are real, however it is important to note that when the emotions begin to rule, bad decisions begin to flourish.

What’s Needed is A List of Proven Solutions

Our world is run on waves with peaks and troughs. We all are subject to waves in our relationships, in our businesses, in the economies that surround us: interest rates, vacancy rates, stock markets, property prices, government policy mistakes. The ups and downs are inevitable. Yet whenever a shift occurs, you’ll still witness investors becoming frustrated with the change. They are not managing their expectations – they are non-strategically fighting reality.

Real estate investing is not a passive investment (despite what the tax department says). Once you own one piece of property, you now own a business. It takes management, awareness and adjustment in order to safely and profitably ride the inevitable waves. The first stage is identifying the waves as they come. Let’s look at a few of the most obvious ones:

What Will Happen To The Free Money? Interest Rates Will Rise

The next interest rate wave will hit and investors must be realistic and realize mortgage rates eventually have to go up – no question about it. We are currently enjoying what the Bank of Canada has called “a move off of emergency low rates.’ No one should be fooled when we start to climb out of these historically low rates… but when they do start to move up, it will create frustration and chaos for those who aren’t prepared.  Impossible to predict the speed of interest rate changes, and they won’t change in a  predictable straight line, so don’t even try.

Yes, we will eventually see inflation start to rise in our larger markets due to economic stimulus, drought  and lower dollar will drive food prices upwards. Right now the inflation rate is ‘protected’ due to lower oil prices and a lowering of confidence in job market and therefore fewer people demanding wage increases… but inflation is inevitable.  The central bank will not be caught off-guard. They know that increasing interest rates increases too quickly or by too much will drive our dollar even higher which will decrease the demand for our exports which will lead to job losses.  It is a balancing act with a lot of wind trying to knock it over.

Suffice it to say that if you are obsessing about the Bank of Canada rate, you are wasting energy. Energy that you could be using to think more strategically.  If you are afraid of an interest rate rise, factor it into your analysis, find out what your comfortable rate is and then lock it in when the rate hits there.  It won’t stop the rates from moving and gyrating… but it will definitely stop YOURS from doing so.

Review your current portfolio and start planning ahead. You will discover that many sophisticated investors have already started making monthly mortgage payments based on 1% above their current rate. This serves 2 purposes:

# 1 Pay Yourself Not The Bank – Don’t Worry, They’ll Still be Profitable 🙂

The first is the immediate reduction of frustration or fear. They’ve managed their expectations around the inevitable up-tick by already paying a higher amount – there will be no frustration, surprises or even decrease in cash flow when the rates rise (they are already making higher payments). The second bonus is the extra money you pay monthly now, before rates increase, is applied directly to the pay down of your mortgage balance. As the rates begin to rise, your payments remain the same but less money goes toward principal pay down. This is a super simple strategy, yet a very powerful way to manage your portfolio with a future view.

Then, when a storm hits and you need to reduce your costs, you can just adjust your mortgage payment back down to provide you at least a bit of a financial buffer.

I recommend this strategy as long as you stay in positive cash flow territory. If you can’t, start planning on how you are going to make it cash flow with increased mortgage costs. Don’t allow yourself to be surprised by the inevitable. It is also important to remember if inflation increases, interest rates go up but so do real estate values and the rents we receive.

Bubble, Bubble, Toil & Trouble… Real Estate Market Will Rebound in Certain Regions

If you are investing, it is critical that you virtually ignore national real estate statistics. Sure they make a great story around the water-cooler, but these numbers will misdirect many uninformed investors.

During this period of economic turmoil, we will witness large regional disparities in real estate market strength. In fact, real estate has become a more regional story than ever before. For instance, over the last couple of years, the national real estate average sale price showed large average gains with all the pundits talking of a ‘bubble’ forming. However, if you drill down into these numbers, you will see they were being skewed upwards by the strength of two large markets – Toronto and Vancouver. Those two markets alone make up the statistical weight of 49.5% in the national number. Conversely, Edmonton and Calgary combined make up a total of only 15.96%. This means if you are investing outside of Vancouver and Toronto and you are basing your decisions on national trends and statistics, you are setting unrealistic expectations which will inevitably lead to increased frustration and poor investment decisions.

Click HERE for all of the details: REIN Canada Presents the Real Estate S.O.S. Conference of Solutions March 1 – 3, 2019 

Toronto & Vancouver “Do Not A Nation Make”

As of today, Toronto and Vancouver markets have over-shot their underlying economic fundamentals and therefore will need to move closer to the fundamentals of the market in the next 12 months. Vancouver is already showing signs of slowdown in volumes pushing average sale prices down as well. In Toronto, the oversupply situation that has been forming is now going to be exacerbated with the new “Stress-Test” mortgage rules. Supply will be up right when demand will have peaked, creating a buyer’s market and putting downward pressure on average sale prices.  Not immediately but inevitably.  This will then put upward pressure on rental demand, increasing monthly rents as demand outstrips supply.

When the Toronto-Vancouver slowdown occurs, the national number will also adjust, driving pundits and headlines to yell, “The Bubble Is Bursting!” This will all be occurring right when smaller markets will be showing signs of recovery or stability.  That is why you MUST focus on your own region’s position on the real estate cycle. The fear the headlines will bring will affect uninformed investors even in regions just beginning to hit long term growth patterns, especially in rentals.

Don’t be the “Goldilocks” of Investing

It seems like most people are looking for reasons not to act, much like Goldilocks (of nursery tale fame). In their world the market is always too hot or too cold… never just right. Strategic investors understand that the market will never, ever be perfect.

These are just a few of the many waves that are coming our way. Awareness of these inevitable waves and the facts behind them will assist you in becoming a calm and sophisticated investor who takes advantage of the peaks and troughs versus being frustrated by them. If you let the markets dictate your emotions, you will have a lot of difficulty building a long-term positive cash flow portfolio. However, if you focus on reality, you stand to take advantage of the ebbs and flows and make them work to your advantage. Become a geographic specialist – know your target region better than anyone else so you can quietly get on with managing your investment properties to work for you… not the other way around.

Do Not Sit Still On The Sidelines

Reality is reality.  Strategic investor know that sitting idly by hoping that the world will change is a recipe for financial disaster. An even WORSE strategy is an investor continuing to take the same actions they did during a boom even though the market have slowed substantially… another recipe for financial pain.

Evolve, Adapt, Adjust  MUST be the mantra of any investor, in any market conditions.  Finding solutions, not creating more pain. Whether you are getting smashed around by the waves in Calgary, or riding high on the waves in Waterloo, planning for and adjusting your approach is critical in early 2019.

Surfers know that waves end, and they just get them selves set up for the next one. You can too.

 

If you feel like you’re getting sea sick from the waves of the real estate market, come steady your feet on solid ground as the REIN Team throws out a ‘life raft’ of solutions to you at the coming me S.O.S. Conference in Calgary: Click HERE for all of the details: REIN Canada Presents the Real Estate S.O.S. Conference of Solutions March 1 – 3, 2019  

Stay on top of the inevitable waves and follow my regular regional Canadian real estate market updates on Twitter – www.twitter.com/DonRCampbell.

 

 

Sending out an S.O.S….. Frustration & Chaos in Real Estate Investing was last modified: January 24th, 2019 by maddy
 

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