Edge-u-cate SeriesInvestor's Edge

Real Estate Investment 101

By January 7, 2019 No Comments
Economic Analysis - Edge Real Estate Group

EDGE REAL ESTATE INVESTOR SERIES:

Edge Real Estate uses in-depth market insight and specialized investment analysis to provide our clients with the best returns possible. We are proud to announce that a new series of blogs, the Real Edge Investor Series, will be written with the sole focus of helping you learn more about real estate investment. Our goal is to help you make the best investment decision possible through risk mitigation and profit maximization with optimized cashflow.

There are great long term real estate investment opportunities everywhere, but they must be discovered though careful consideration and comprehensive due diligence. Edge Real Estate has developed a keen eye for diamonds-in-the-rough investment opportunities which may otherwise go un-noticed.

It is critical to develop a natural instinct for discovering hidden investment potential, but this can only be gained through experience, and being seasoned and vetted through the market cycles.

The state of our economy, and a pending market correction is easy to worry about when there is constant news and media reporting on the matter. Have mortgage rules gone too far? Are you and other Canadians taking on more debt than you can handle? Is there a housing bubble and if so, is it going to burst?

Well, for starters, BC has survived economic turmoil in the past and has always benefitted greatly from the lessons learned during these periods. British Columbia boasts great economic diversity by region. For example, the Greater Vancouver area boasts many financial and tech businesses; whereas, the northeast of BC is a major energy producer and forestry and mining is the main focus in central regions. This means that the economy of the province is not dependent on one sole region or sector of business.

The common misconception is that a real estate boom felt in country leading areas like Vancouver and Victoria will be felt in the more diverse regions of the province. Infrastructure, employment rates, population growth/decline and economic drivers are diverse across all regions. However, it is not necessary that this one region is signalling a trend shift for BC as a whole. Investors do not purchase “British Columbia Real Estate”, they purchase specific properties in specific regions on specific streets within the province.

WHAT TYPE OF INVESTOR ARE YOU?

The key factor which helps decide which type of investor you are is your risk threshold. Simply put, some investors what quick and high yields and are content with taking high risk with their capital to do so. Others, meanwhile, are happy to take the “slow and steady” appreciation with moderate cash flow all while assuming low risk on their capital.

4 STEPS TO BECOMING A STRATEGIC INVESTOR

Throughout our experience in real estate investing, we have found that there are 4 crucial steps one must take in order to become a strategic and savvy investor and they are as follows:

  1. Remove emotions, such as fear or greed from it, and make decisions based on the fundamentals of the real estate cycle. This will give you a major EDGE in the marketplace.

  2. Stay focused and only buy properties which fit your unique investor criteria at a price point which fits within your budgets. The market drivers will take care of the rest. Just put it on auto pilot!

  3. Stay strategic and adjust your strategy iteratively based on which stage the market cycle is in. Constantly adapting your own investment mantra will help you know exactly when to sell and when to buy.

  4. Don’t speculate. Only invest in areas which have a promise of future growth and not based on an area’s past performance. Just like the stock market, do your research first! Those who speculate are constantly chasing the market with no sound knowledge of what’s really happening.

  5. Set Goals and be in it for the long run. Whether it is high risk, high reward investing or low risk and steady returns you are looking for, the real estate industry is one that requires patience.

3 STEPS TO REAL ESTATE INVESTMENT SUCCESS

The following 3 steps help simplify the key steps you must take in order to acquire success in the field of real estate investment:

  1. Know where the market is at in terms of phase in the Real Estate Cycle (REC)

  2. Understand the key drivers of your region

  3. Apply the long term real estate success formula

UNLOCKING THE MARKET: KEY ECONOMIC DRIVERS

The metrics involved in market fundamentals include 17 key drivers, and over a dozen different market influencers. Our team works diligently to measure, track and analyze this information, which can affect real estate values both positively and negatively. Depending on the combination of drivers, if the right sequence is in place, we can pinpoint where the market is sitting in terms of the REC, and also predict where it is going next.

The one constant is that the market cycle only moves one way like a clock through all phases. So, the cycle is predictable; however, the duration of each stage remains variable. It is next to impossible to perfectly time any market, yet you may be able to get a good approximation. This in itself is enough to give you that extra edge on the market. It is essential to remember that there is money to be made in each stage of the cycle by utilizing a different strategy. We at Real Edge can help you employ market tactics that get results.

All kinds of real estate opportunities can also be discovered by simply watching the news and paying attention to the media and government announcements. But, you need to start looking at this information with a new strategic set of eyes. Try thinking about how other buyers and sellers in the general public will react, and never forget about the bigger picture.

A closer look at the economic drivers may reveal all kinds of treasures and caution signals. So, it is important to keep looking forward at the real motivators and influencers of real estate prices instead of just looking behind to the housing numbers.

The types of key drivers of the real estate market include: demographic, financial and emotional.

All key drivers for any region must be analyzed and put into context in comparison to provincial and national averages. This can be done with either GDP growth, population growth, or any one of the other factors involved. The goal is to find a place that has higher growth percentages then the province or the country.

Demographic Drivers

Demographic drivers determine the level of physical demand for real estate and can be categorized as follows:

  • Employment Levels, Trends and New Job Creation

    • More Employment = Higher Incomes = Greater Ability to Buy/Rent Real Estate

  • Net Migration & Changes in Population

    • Components on In-migration = Immigration (from other countries) & Intra-migration (from other parts of Canada)

    • Younger demographics stimulate markets faster

  • Vacancy Rates

    • Make sure increased demand is fuelled by fundamentals, not speculation.

  • New Housing Construction

    • Rear view mirror, always lag time, eventually leads to oversupply when demand dissipates as it cannot react fast enough.

  • Critical Infrastructure Expansion

    • Major infrastructure improvements indicate signs of growth and potential

    • Lack of essential infrastructure is detrimental to future growth

  • Transportation Improvements

    • Distance is not measured in KM it is measured in minutes

      • For example: light rail transit (LRT) in Surrey, BC can drive prices up as high as 15% compared to other properties not in proximity.

    • Accessibility => population inflow => higher demand => increased property values

    • Only buy AFTER it is approved and the work begins.

  • The Real Estate Ripple Effect

    • Invest around the BOOM, not in the middle of it. Like throwing a stone in a pond.

    • Invest around redeveloping areas.

FINANCIAL DRIVERS

Financial drivers relate to the financial viability of real estate, either as an investment or owner occupation and can be categorized as follows:

  • ROI/Cashflow Trend

    • Gross Annual Rental Income / Market Value of Real Estate

    • ROI Peaks during the Recovery Phase and reaches a Trough during the early stages of the Slump Phase

  • Average Rent Trend

  • Property Taxes

  • Average Income Trend

  • Inflation: Increased Costs of Goods and Labour

  • Gross Domestic Product (GDP)

  • More than One Employer in a Region

  • Affordability Index

EMOTIONAL DRIVERS

Although traditionally thought of as qualitative factors, there are in fact 4 quantitative metrics that help measure these drivers as follows:

  1. Number of Days on the Market

  2. Areas of Gentrification, Revitalization, and Renewal

  3. Number of New Listings per month

  4. Number of Sales per month

MARKET INFLUENCERS

Market influencers generate temporary shifts in the market place within the phases. This may cause market confusion for many who think these are actual changes in the cycle. The following are 7 key influencers of the real estate market:

  1. Mortgage Interest Rates

  2. Availability of Financing

  3. Inflation Rate

  4. Local Regional and Provincial Political Climate

  5. Media Driven Public Confidence of the RE Market

  6. Foreign Investment

  7. Access to Alternative Investments

LEVEL 1 – ECONOMIC FUNDAMENTAL ANALYSIS

The first level of investigating the investment potential of any community begins with the underlying economic fundamentals. We analyze real estate markets based on five different categories.Economic Analysis - Edge Real Estate Group

  1. Economic Risk

    • GDP

    • Job Creation

    • Population growth

    • Access to Post-Secondary Education

    • Accessibility: Movement of goods & people to attract jobs and residents

    • Airports

    • Ports

    • Highways

    • Bridges

    • Infrastructure that supports the community:

    • Hospitals & emergency services

    • Water and sewers

    • Schools

  2. Yield Growth Potential

    • Housing prices to rent ratio

    • Rental increase potential

  3. Political Climate

    • Secondary suite legislation

    • Rent control

    • Commercial and residential mill rates (property taxes)

    • Community’s attitude towards business development

    • Community’s economic development plan

    • Tax breaks for new businesses

  4. Access to Transportation

    • Presence of transportation attractive to Baby Boomers & Generation Y

    • Are there multiple ways in and out of the city available

  5. Investors’ Insights

    • Call volume on rental ads

    • Time to take to fill vacancies

    • Tenant profiles

    • Buyer/Seller market balance and market competition

    • Distance between sales price and list price

    • Rental trends

LEVEL 2 – LONG TERM SUCCESS FORMULA

Home buyers and property investors should use the following formula to make it easier to predict their local real estate market trends, as it illustrates the correlation between economic growth (GDP) and long term price increases of real estate.

GDP Growth = Job Growth = (12 months later) Population Growth = Increased Rental Demand = Decreased Vacancies = Increased Rents = (18 months later) Property Purchase Demand = Increase in Property Prices

Here are a few key notes you should review when using the formula:

  • This formula works both ways, over roughly the same time lines.

  • Sustainable real estate price increases occur approximately 18 months after a region’s economy begins to grow and they drop approximately 18 months after the economy in a region begins to shrink.

  • As a real estate investor, it is absolutely critical that you consider the underlying economic structure propping up your region and confirm that it has long-term sustainability.

  • Identifying regions with a well-structured and well-supported future must remain your number one priority.

Here’s a simple takeaway: when there is no economic growth, the real estate market isn’t sustainable. Short periods of growth may be seen due to outside interference, such as governmental influence; however, these blips will not signify a trend.

Real Estate Market Growth - Edge Real Estate GroupBoth good and bad deals exist in every real estate market regardless of if the market is hot or not. In order to take advantage of the conditions of a specific market, you should follow a proven investment system that ignores misinformation and market hype. A systematic approach to investing will allow you to avoid underperforming properties. Now, this may seem complicated, but is essential that you become a savvy follower of your region’s economical activity and macro policies, as current market conditions are not great indicators of what the future will hold.

As an investor, you must do your due diligence with any real estate deal and conduct thorough research individually, or with the help of experts like the award winning team at Edge Real Estate. Allow us to help you better analyze and verify the information surrounding your specific area of investing in Surrey, as we utilize multiple sources of localized data when helping our clients create successful investment strategies.

Sources:

  1. Real Estate Investment Network (REIN)

  2. Canadian Mortgage and Housing Corporation (CMHC)

  3. Statistics Canada

  4. Multiple Listing Service (MLS)

  5. Canadian Home Builders’ Association

  6. City and Regional Real Estate Boards

  7. Local economic development offices

  8. Office of Budget and Management.

  9. Real Estate Investors

  10. REALTORS

Important Disclaimer:

The following information is based on investment principles created by the Real Estate Investment Network of Canada in good faith without warranty or liability for any erroneous, incomplete or misleading information. Edge Real Estate is not responsible for any results or the results of any actions taken in reliance up on any information contained neither in this publication, nor for any errors contained therein or presented thereat or omissions in relation thereto. Edge Real Estate hereby disclaims all and any liability to any person arising in respect of this information and of the consequences of anything done or purported to be done by any such person in reliance, whether in whole or part, upon the whole or any part of the contents of this information.

edgerealestate

Author edgerealestate

More posts by edgerealestate