The Investment Property Paradox

Here's the investment property paradox in a nutshell:

MORE = LESS

But how can that be???

The formula doesn't seem to make sense, but in fact, real estate investors have to deal with it all the time.

It all begins with the Municipal Property Assessment Corp., better known as "MPAC".  They are responsible for assigning a dollar value to your property based on comparables, age, structure, area, etc...  This assessed value is then used by your local municipality to determine  how much property taxes you will pay.

As an investor, one of your goals is to maximize the value of your investment.  So one would think that a high valuation by MPAC would be third party verification that you are moving in the right direction.  HOWEVER, you would be mistaken. 

A high valuation by MPAC means that your property taxes are going up.  As an expense on the income statement, property taxes affects the overall profitablity and VALUE of your investment.  So in fact, the true market value and profitablity of your investment property goes down when your property's assessed value goes up.

The prudent investor wants the lowest possible property assessment in order to pay the lowest possible amount of property taxes, thereby maximizing the profitablity and value of their investment.

The moral of the story is to do whatever you can to keep your assessed value, and thus your taxes, low.  When it comes time to reassess, make sure to build a case supporting a lower valuation and present it to MPAC.  Supporting evidence could include comparables in the area, a third party appraisal, an inspection to point out the deficiencies, etc...

Here is the formula prudent investment property owners should be working towards:

LESS = MORE (in your pocket).

Author: Paul Kondakos, LL.B, MBA, BA - Professional Real Estate Investor

The timing is right to invest in Ontario real estate

You want to get ahead and your day job just doesn't cut it.  Everyone is talking about real estate.  It sounds like something you could do but you just don't know where to start.

In this month's Canadian Realth Estate Wealth magazine I lay out a simple real estate investment strategy that can turn the average Joe into a Millionaire ... Read Full Article

Quit Your Day Job

If you are like the thousands (and more likely millions) of people out there unsatisfied with their day job and looking to make a change to a career where you can be your own boss, have a flexible schedule, make more money and actually enjoy what you do then read on.

In this month's Canadian Realth Estate Wealth magazine I lay out a simple plan to help the average Joe transition out of their day job into into a career as a full time real estate investor.

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The Global Economy and How Canadians Can Profit

The Global Economy

A very clear global economic landscape is emerging and it is one that indicates that the global economy is slowing.  Even China's growth has slowed to its weakest in 24 years.  To combat this weakness and stimulate their respective economies Central banks are all slashing interest rates.  The US is the one nation that claims they are in growth mode and have recently been hinting at rate hikes, however, the Fed's Chain Janet Yellen went on record today and stated no raises for at least the next 2 meetings. 

The Local Economy

The Bank of Canada surprised the markets just a few weeks ago with an unexpected rate cut in response to the plunging price of oil.  Some analysts expect another rate cut is just around the corner.  As a result the Canada 5 year bond yield is at historic lows and it looks like it may be headed even lower.  We can expect this low interest rate environment to stick around for at least the next 18 to 24 months.

How Does This Tie Into Real Estate?

Canadian bond yields are used to deterine the ultimate cost of funds or interest rates that consumers will pay when borrowing money from financial institutions to purchase commercial real estate.  So while it may be counter-intuitive, a slowing economy could be beneficial for the astute real estate investor.  The caveat is if the economy goes into a full blown recession all bets are off.

Interest Rates

Commercial interest rates are at historic low in Canada.  You can secure financing for multi-unit residential properties anywhere between 3% to 4% for a 5 year term.  The low interest rates would have you thinking its a no brainer to buy real estate and just rake in the profits.  However, nothing is ever that easy.

The Correlation between Interest Rates, Market Caps and Real Estate

An inverse relationship exists between interest rates and the price of real estate.  As interest rates go down, the price of real estate goes up and vice versa.  On the other hand, there is a direct relationship between interest rates and market caps.  This relationship is the more signficant one for income property investors.  Typically interest rates and market caps move in unison.  So while interest rates may have come down, market caps have also come down, which in turn means that the price of real estate has gone up.  To give it some context, 10 years ago commercial interest rates were approx. 6% and cap rates in Toronto were approx. 8%. Today, interest rates are approx. 3.5% and cap rates are 4.5%.  This is what we call market cap compression. 

Market Cap Compression

Market cap compression is much more prevelant in big urban centres.  In cities such as Toronto, Vancouver and Calgary cap rates are typically between 3.5% to 4.5%.  In smaller urban centres such as Kitchener/Waterloo, Oshawa, Barrie and Hamilton cap rates range from 5% to 6.5%.  Thus the greater opportunity to benefit from low interest rates.

CMHC Insured Mortgages

If interest rates weren't already low enough for you, enter CMHC insured mortgages.  Although you pay a premium to have your commercial mortgage insured, investors still come out way ahead in the long run.  In exchange for insuring your mortgage, financial institutions offer investors discounts on their interest rates for the life of their mortgage.  As it stands today, a 5 year CMHC insured mortgage can be had for under 2%.  For those that are concerned about rising rates in the future, you can lock into a 10 year term for just under 3%.

Smaller Urban Centre Real Estate + CMHC Insured Mortgage = Wealth Creation

At this point it's not rocket science.  Instead it's simple mathematics.  Purchase a multi-unit residential property in a smaller urban centre with a cap rate of 6%.  Pay 2% on the interest rate.  That leaves a 4% spread for the investor.  That 4% spread translates into cash flow and long term wealth creation for the astute investor.

Author: Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor - RealtyHub Founder

Your Day Job Won't Make You Rich ... But This Will

Your day job is great for paying the bills, but when it comes to planning for retirement, building assets is the key. 

In this month's Canadian Realth Estate Wealth magazine I lay out a simple plan to achieve true wealth, and you don't have to wait until retirement to enjoy it.

If you have a little capital to work with and are willing to put forth some effort, building a real estate portfolio is within your grasp.

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