I have never been and probably
will never be mistaken for a “world class investor”. Actually I have never made
an investment that has ever paid off on the stock exchange and I found that I managed my
repeated failed attempts in spite of substantial investments in research.
I find it frustrating to throw money at companies that I have no control over in the hope
of seeing my money grow (RRSP or not). All I’ve ever managed to see is it wilt away
to nothing usually. The recent dot com crash is an excellent example. Most recent the
Nortel situation rings loud in the back of my head.
I researched the dot com phenomena closely trying to make my money work for me but every
time I felt confident in making an investment the market would hit a new all time low!
Example, I set aside $50,000 last fall to potentially invest in Nortel of Mississauga who
had long been the Microsoft of Canada to most investors.
Watching the stock tumble from the $80 range down to $12 or so last September I felt
confident that this stock had nowhere to go but up. Fortunately every time I tried to get
around to actually investing the money (I got my E-Trade Account operational twice)
something always seemed to come up and I didn’t make my move. I watched the $12 price
drop to five and became absolutely convinced that now was the time to buy.
Yesterday’s $1.67 price sealed my fate to never again jump into such uncharted
waters.
On the other side of the investment coin is investing in real estate, specifically condos.
Most people know that wealth is not generated from the conventional growth in real estate.
The long term holding of quality real estate certainly pays huge dividends but to the
average small investor five star commercial real estate holdings are a little beyond our
grasp.
The Worldcom, Teleglobe, Enron fiascoes that are still reverberating throughout the global
investment industry set a pretty clear example of the true potential underlying investing
in stocks. Far from an accountant, it is not difficult for me to understand that millions
on millions of dollars in stock options not expensed on the companies books can only lead
to destruction. Who allows such ridiculous rules over this industry any way?
I have yet to find an investment that offers the upside that condo investing offers built
off of sound conservative investment principals offering minimum risk. After all you
always need to live someplace and to most small investors their home conventionally is
their major investment. Residential condo investing (whether strictly as an investment or
also as a home) offers three excellent alternatives that are unique in all other forms of
investment.
A conservative investment strategy would suggest that purchasing a presale condo to live
in while focusing on paying down your mortgage (using accelerated and flexible banking
options) to be a good first step. Of course, you have got to know when to buy in and then
which suite within the building thus requiring familiarity with reading floorplans. These
are both reasons to have your own experienced agent work with you and not really the focus
of our communication here (see “How To Purchase a New/Presale Condo” or
“How to Purchase a Resale Condo”).
From an investment perspective when assessing condos it is important to understand that
condos furnish 3 unique options that hedge your investment significantly. Before going
into these three alternatives it is important to set a foundation of return on investment
when assessing condos.
Without professing specific financial analysis knowledge, it is reasonable to say that
growth on equity on condos is pretty much consistent with growth on equity of real estate
in general. For ease of establishing a common understanding lets say that over the long
run Toronto condos grow in value consistent with growth of cost of living. Let’s say
that based on historic data we can expect a 4% growth in real estate values per annum.
Therefore, if we purchase resale (an existing previously lived in condo) we can expect our
equity base to grow each year by approximately 4%. This is not to say that 4% return on a
$300,000 asset is to be sneered at.
The major return in condos comes from purchasing a presale (nonexistent). A recent example
of your projected or possible return on investment is reflected in a recent purchase of a
loft at 1029 King St., that I handled. We were actually buying an “Assignment”.
The unit was offered on MLS. The development had originally been marketed approximately 2
years earlier and now the building was just about complete (see new vs resale) and units
were being offered for sale by the original purchasers (be careful here - additional
serious legal concerns apply).
As the transaction was an “Assignment” we required disclosure of the original
sales agreement. In this case it |
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showed the original
price to be $60,000 less than we were offering to buy it for. The original purchaser had
bought it at $150,000 and we were paying $210,000 two years after they entered into a
presale agreement and agreed to advance 15% of the $150,000 ($22,500 in 3 spread out
installments) resulting in basically a 250% Profit to the investor. Not bad if you have
the time and position to allow yourself to wait a couple of years and providing that you
are good at reading floorplans and/or site plans and have the ability to juxtapose these
concepts into the physical environment where the building is to be built. From occupancy
you can expect the 4% conventional growth in real estate.
Whether you are intending to live in the unit or rent it out or resell (as above) it is
extremely difficult for the value of your investment to go down (unlike all those blue
chip companies now admitting to Billions in Fraud under public offerings). Even if we
assume the worst and the market takes a dip (with the constant demand for core condos it
is highly unlikely as everyone needs somewhere to live) condos offer the best hedge in the
world in that you can always live in your investment.
To invest in a condo that you will live in is the best investment that you can make,
providing you live in it. Your unit represents the ONLY tax free investment that you can
make (providing that it is your principal residence and not something that you buy and
sell frequently or it will be considered an investment and you will face capital gains
taxes). But, providing that you live in your condo you pay NO INCOME OR CAPITAL GAINS
TAXES when you sell it! Using the scenario above that will equate to a 250% return on
investment equal to $60,000 TAX FREE! Compare that to the stock market!
The ideal, from my street kid understanding to personal finance is to buy your first condo
and get the mortgage paid off in full. From here you face only maintenance fees and taxes
of approximately 25% of the going rental rate (my condo costs me $325/month in maintenance
fees and approximately $200/month in property tax and a comparable unit to rent will run
you $2500 per month).
Once you have your home paid for (or depending on your financial advisor’s advise)
the next best investment is . . . . . you’ve got it . . . . . a condo. In the
“old days” developers built rental buildings (they are starting to do this again
in Toronto) and rented out the units, then somewhat influenced by Rent Control they
stopped with the introduction of “condos” in the late 1960’s. With condos
every “little guy” could become a landlord and today there are small guy
landlords with investment portfolios of condo units paying them monthly incomes with
appreciating real estate values. Again, let’s compare that with these blue chip
investments like worldcom, Nortel, Teleglobe, etc.
It is important that you buy at the right stage of the sales process as well. To
understand how pricing works I’ll set out a very basic snap shot of selling a condo
development. The developers do not get deposit money from buyers. This money is held in
trust with the developer getting construction financing from the bank.
The developer has done all of his accounting, forecasting, market analysis and come up
with a “mean price” or the price that he intends to net out at after all units
are sold. For convenience sake only, let’s use a visual prop of a ladder with five
rungs, the middle of which being the market price that he intends to net out at. The two
rungs below are discount prices that he will offer to early buyers. These buyers allow the
developer to show his bank how well early sales are going thus motivating the banker to
advance approval on the construction funds. Banks require 60% sold or there abouts today
to grant this funding. As sales are achieved he will move the price up the rungs
eventually getting to the delivered market price (top rung) when the building is completed
(this is why developers don’t mind not selling suites until the end as lots of people
walk into the site once the building is built).
You have got to know what rung the developer is working on when you arrive or you may buy
a unit that others paid decidedly less for higher in the building simply because they got
to the sales site before you. You will never be able to sell out at prices that these
earlier buyers can sell at down the road, thereby being at a financial disadvantage simply
by buying in late. A knowledgeable professional condo specialist will know what rung the
development is working on.
The science in investing wisely in condos rests in your ability to select the right
developer, in the right location, with the right development and once having done so going
on to find the right suite, negotiating up front any/all changes, modifications or
alterations to be built into the suite. Again you are strongly advised to have a
professional handle the purchase for you. Some developers will not co-operate with
Realtors and that, in itself, should tell you something. |
