The main reason why you should own real estate  is because your equity (the portion of the value which is yours and not the bank’s) will almost certainly grow over time. It’s not so much a question of “if” it will grow as it is a question of “how long”. This is the part which I think loses a lot of those new to the concept of real estate. It takes time. In a boom market it may only be a couple of years, but generally speaking it takes more like 5-10 for a substantial change in the property’s value. Time and time again I see listings for places that have recently sold where the selling price is nearly double what they paid for it ten years ago. If they’ve done more than just replace the roof and the hot water tank in that time, it may be more. It may not be too, as it is very case by case but my point is that such an increase in value is not unusual. Of course, it should be mentioned that we had a boom time for most of the 00’s but I still stand by my point overall as although from 1990 to 2000 we only saw a 50% increase in average sale price for houses in Nanaimo, we saw it triple from 1985 to 1995.

Here are the stats from the real estate board to support my arguement.

Nanaimo-single-family-stats-1982-2009

Just in case that little drop during last year’s slow market is a concern for you let me point out that prices have already begun to climb again. Have a look.

06-jun_10_nanaimo_graphstats

You see, the bubble never burst here. Although there was certainly a big slowdown in numbers of sales we didn’t see a huge drop in prices like so many people who get their info from mainstream media were led to believe. We weren’t inundated with foreclosures, nor were places selling at a fraction of the value they were a couple of years before. People just seem to need something to freak out over once in a while. Besides, real estate was on sale for a time there and those of you who were to scared to buy at the time but could have, missed out on a good opportunity. Don’t fret though. I always say that in terms of the market, there are good times to buy and better times to buy. You just need to figure out what is affordable to you by talking to a mortgage broker.

Ryan Coffey

A piece of advice that I am dispensing more and more often these days is that it is generally wiser to buy real estate than it is to sell it.

The reasoning is quite simple. Real estate values increase over time, and it costs money to sell. You can rent a property at a price that is similar to what it costs to make mortgage payments based on current real estate prices so why not buy today and rent it out tomorrow? If you are patient, you can allow the rental income to increase as the years pass while your mortgage payments decrease. This way, someone else will pay most of of your mortgage at first and eventually all of your mortgage on the property you are renting out. I suppose it is worth pointing out here for the uninitiated that if you already have an existing property you are more appealing to mortgage lenders.

Remember, the golden rule is that real estate prices go up and down in the short term but up in the long term. That’s faster than inflation by the way. So, let’s say you had bought a property  ten years ago and know it to now be worth a little more than twice what it was worth at the time. (This is average right now.) Instead of selling it before buying again, you can rent it out at today’s prices and receive an income from that property which you can use towards paying for your new one. Should you decide to do this again in a few years, it will be even easier. This way, you will accumulate wealth throughout your life.

Most people sell their existing home before buying the next one. This is understandable because the proceeds from the sale gives you more buying power for the next property, but in the long term it holds you back. You see, in the process of making that move you have to pay for a variety of things like lawyers, any fixing up you have to do in order to make the property more appealing and Realtors too. Us Realtors are expensive. I will defend the notion that we’re worth what we charge to my last breath. However, for you and your interests, that money is better left in your pocket, or rather left in your property.

My position is simply that there are good times to buy and better ones. The only bad time to buy is when you can’t afford it.  As for selling, if you don’t have to sell, don’t.  Just rent out your existing property and move into a new one. You’ll be better off in the long run.  This is all providing you can afford the payments and that you don’t get carried away and that you are realistic with how much rent you will get. Obviously, if you’re having kids and you can’t afford a big enough place for the new larger family without selling the existing one, this is an exception. Or if you are retiring and want the cash, or if you have just lost your job and can’t make the payments… these are good reasons not to follow my formula. Conversely, reasons like “I am moving overseas” don’t matter so much because I have a number of clients who are in that position and they own property here which they are renting out via a property management agency which charges 10% of the rent for the service.

Selling costs you a good chunk of change, and holding on to a property and renting it out rather than selling it will increase your net worth in the long run.

My position is not shared by all, and it is certainly not something that every Realtor will promote as listing properties that need to sell is the best kind of business we get. Also, the mainstream media will probably never tell you this because they are usually peddling drama and fear as this sells better than informing people on how to get ahead.

If you are of the more analytically minded, read the following posts for a deeper understanding of where I am coming from:

Good Debt: Yes, There IS Such a Thing!

When Should I Buy My First Home?

When to Buy and Sell Part 1

Ryan Coffey

Ironically, the way most people perceive real estate markets, thanks to our mainstream media, is backwards. The very best times are almost by definition the times when no one is buying because most people are thinking it’s a bad time to buy. (When do you get a better price on skis? In the early winter or the spring?) I bring this up because the article below mentions how a few months ago no one was buying. Well if  by “a few months ago” they mean February or March, then that was the absolute best time to buy a property that you intend to hold onto for a bit. Prices were still on their way down, interest rates were at record lows and no one knew for sure if we were at the bottom yet so sellers were often willing to take quite low prices because for a while there only about one in six places were selling. Only a few months later now, and it’s different story.

Not that things are  now either. Interest rates are still super low (albeit not quite as low as before) and will be until at least part way through next year, prices are still lower than they were at the peak of the boom (only by a bit now) and although there will always be the alarmists and naysayers out there, most believe that 2010 is going to be one helluva year. I know this fall sure has been and Realtors are usually in stand down mode by now as Christmas approaches, but many of us are still working hard myself included.

You may be asking yourself “If Ryan is telling us that whether or not we can afford to make the payments is the most important thing, then why is he talking so much about what markets are doing?” Well, it’s because although the easiest safest way to invest is to buy a place to hold onto and rent it out while the property’s value increase while the rent does too. That’s the bit that anyone can make use of and understand. This is in fact what I am intending to do over the years myself. However there are ways to make some cash off markets for people who are handy for example. People who have professional experience with renos/building can do really well over a short period of time by flipping properties. But that’s not for most people. Desp[ite my knowledge of things real estate, and my ability to recognize a properly done reno or construction job, I don’t think I should be doingthis because I would probably cost myself money rather than make it. I say this because I’ve seen far too many people who presumably watch a lot of HGTV try it, fail miserably and cost themselves lots of money. That’s always sad to see.

For more info on my thinking on this subject, see my six part series on “When To Buy And Sell”

Here is the article that inspired this post.

I just want to add that if a landlord allows a tenant to live in the rental property for three months even though they haven’t paid the rent, that was the landlord’s doing as much as the tenant’s. In B.C. the landlord can kick them out in 10 days if they haven’t paid.

Ryan Coffey

Ryan Coffey

How to Conquer Your Fear and Overcome Homeownership Hurdles

There are many benefits of homeownership. It creates a level of stability in a person’s life and provides a safe environment for children to grow and learn. A home can also have several financial benefits, creating borrowing power for the homeowner and the opportunity to build wealth that can be passed on to children and grandchildren. Still, many Canadians are sitting on the sidelines because of all the negative news they have heard on the radio, seen on television or read in newspapers. Others may not have enough extra money to save for a down payment or have other financial difficulties, such as poor credit scores that make it difficult for them to get approved for a mortgage . This article will help you overcome these hurdles and take advantage of one of the best times in recent memory to buy a home in one of many wonderful communities across Canada. First, how to conquer your fear of a falling market? 1- Stop listening to negative news and people. If you are waiting for “all lights to be green” then you will wait forever. You must stop every negative source of information from coming into your mind and concentrate on the positive aspect of the current market such as lower mortgage rates, lower prices and more selection. 2- Read a self-help book on how to set up goals and achieve success. Every successful person that I know has had to overcome fear of failing in order to reach their goal. You need to fill your mind, body and soul with positive thoughts that keep you encouraged as you embark on your journey towards homeownership. 3- Speak with your real estate agent. He or she will be able to show you many bargain deals that will make your mouth water. Imagine snatching up a beautiful home in your favourite neighbourhood which is priced twenty thousand dollars below market value because the owners have to move in eight weeks. Stop listening to advice from family and friends. When the market turns back to a seller’s market, the deals and the selection will quickly go away. If you find the right home, and the price is below other similar homes that are comparable then go for it. Second, how to come up with the down payment? Using a $300,000 purchase price as an example, the following chart shows the different down payment options available for you and the amount of down payment money needed to qualify for a mortgage: Type of Mortgage % Down payment Amount of down payment required Conventional 20% $60,000 High Ratio 5% $15,000 No Down payment 0% $0 ($4,500 must be available for closing costs) Once you have established the amount of down payment you need, you must put in a solid plan to raise this money in the shortest possible time. Here are a few ideas to help you: Simply start saving by having a pre-determined amount of money transferred from your chequing account to your savings account each month. If you are a first-time buyer, use money from your RSP as a portion of your deposit. Consider moving to a less expensive rental unit and save the difference each month toward your down payment. Pay off your credit cards or consolidate them to reduce your debt and the interest you’re paying. Consider a second job with the income going directly toward saving for your down payment. Borrow from family; relatives may be happy to help. Sell some investments or possessions. Pass up luxuries such as movies and eating out, and deposit the money you would have spent into savings. Take your lunch to work, clip coupons and use them, drive more slowly to avoid unnecessary fuel consumption or take local transit, cut back on long-distance calling – it all adds up. By cutting back on your day-to-day expenses you will be able to put more of your earnings away in a savings account. Budgeting doesn’t have to mean economy meals and nights in with just a book for company – there are many ways you can cut back without feeling like you are depriving yourself. Work up your plan vigorously. Many first time buyers that I know were able to save up the required down payment in around two years, and now are the proud owners of their own dream homes. It only takes some planning, will power and discipline.

January 8th:      When Should I Buy My First Home?

January 15th:    Five things You should not do before buying a Home

February 22nd: Listing Tip #1

February 26th:  Listing Tip #1 (Part 2)

April 9th:          The Basics of Buying Real Estate in B.C.

June 2nd:          Whose Side is Your Realtor On?

June 11th:         Buyer on a Budget? Read This.

October 17th:   Up Markets and Down Markets, When to Buy and Sell (Parts 1 Through 6)

I suppose you could call this my “Coles Notes” for this blog. There are of course plenty of other posts that are also worth reading but these are the ones that contain information that everyone who is buying or selling should have a grasp of.

Enjoy the rest of the holidays. And don’t forget to get some exercise in there somewhere between all the eating and drinking!

Ryan Coffey

A few weeks ago, I started to post a series where I explore some of the views/assumptions commonly held by people regarding how real estate markets work and what they mean to people who are buying themselves a home. The following is the sixth and final part of the series and intended to be read in the context of the rest of the series so I recommend reading the other posts to make this one make more sense.

After this, I’m going to talk less about markets for a little as I would like to prevent this blog from being overly focused on one topic. A topic which, as you can tell by my posts, I feel is already a topic that most people worry too much about as it is. As I said in the very beginning of this series, which is the thesis statement that the reasoning in the series was intended to support, the time to buy yourself real estate (to live in) is when you can afford those payments. Make sure you can make those payments above all, the rest is commentary and methods of maximizing the benefits of making those payments in the long term.

Now, I’ve yet to have anyone challenge me on this topic. Lots and lots of readers though. I would like to hear if anyone feels that I have left anything out or fumbled the reasoning ball. You can always reach me by going here.

Objection #6

“I’ll just rent for now. I’ll wait for the markets to go down.”

Actually this one can work in your favour financially depending on your situation. Particularly if you’re looking at a more expensive property and you don’t mind renting a hovel that is really cheap rent in the meantime. But (yes you were right to expect the “but”) this only going to work if the market is going down quite quickly or if like I say above, you’re looking at something expensive. How expensive? How quickly? Well, it’s case by case so you’ll have to crunch those numbers yourself plus you’ll have to keep right on top of what the real estate market is doing in order to make this work. In the end you have to remember that you have nothing to show for what you pay in rent at the end of the month, but when it’s a mortgage you have something to show for it in terms of equity.

I’ve actually already written this one out in quite a bit of detail in this post:

http://movetonanaimo.com/2008/01/08/when-should-i-buy-my-first-home/

It was one of my very first posts on here because I know that the notion of “I’ll just rent for now…” is common but often held by people who don’t understand how things work.
It’s a long read, but I recommend it. I put a lot of love into it and even though the real estate market was still pretty busy at that point, the same principles still apply.

I’ll wrap up this series of posts by saying again that it’s more important that you’re in a position to buy than what the market is doing. Hopefully, if you’ve read the whole series you now understand why this is my refrain. If you feel I’ve missed something please email me via the contact form on my website and let me know.

Objection #5

“I need to move but I want to move when the market it high because it’s the best time to buy/sell.”

Now, if you’re moving within the same town or general area, it’s almost always the case that your house or condo or whatever is going to move up or down in parallel with others in your vicinity. But as people tend to change price brackets of homes when they move, this is one point where what the market is doing can affect your timing in terms of maximizing your money.

The only exception that comes to mind is if something has changed with your property that will either increase or decrease its value in relation to the rest of what’s out there. For example, the home itself is a condo that has started to leak recently, or the neighbourhood took a sudden turn for the worse, conversely it may have suddenly become a trendy neighbourhood or you may have done some really nice renos to it.

When you change price brackets, a more expensive market means a more expensive difference, and a less expensive market means a less expensive difference.

Think of it this way; Today, Property A is valued at $200,000 and Property B is valued at $400,000.  If you move from A to B right now, there is of course a $200,000 difference today. (I’m eliminating talk of fees and taxes and so on to keep this simple.)

Say you wait until property values have gone up 25% to move from A to B. A is then worth $250,000 and B is worth $500,000. Now you’re paying $250,000 for the same move. In this case, waiting for the market to go up has cost you an extra $50,000.

Now let’s say you wait until the market goes down the same amount (I highly doubt this will happen, but for the simplicity of the example I want to use the same number on both ends.) Now property A is worth $150,000 and property B is worth $300,000. This time you’re paying a $150,000 difference for the move.

So, in the case of upsizing, it makes sense to do it in a lower market.

Of course, if you are downsizing, the numbers work in the reverse direction. This mainly applies to empty nesters for example who don’t want all that extra space or a retiree who wants to live somewhere that doesn’t require a lot up cleaning or maintenane. If this is you, you’ll be moving from Property B to Property A. In the high market that means you get $250,000 in your pocket and in the low market you get $150,000 in your pocket. This is good money to have for your retirement, so time it well if this is the sort of thing you plan to do.

The problem is, that no one can predict with certainty what future markets will do, especially in the long term.  I really don’t know what’s coming next year. I see many reasons why things may go either up or down next year. I do think that things will be soft for the remainder of the year because Christmas is coming and every year sometime in November pretty much everyone stops thinking about real estate and starts thinking about Christmas. Only the more determined sellers and buyers continue to stay at it during that time.

Thinking deeply about timing your move along with the markets can cause you to overlook other important factors like whether or not you need to move right now. There is also the biggest one of all, are you in a financial position to make that move if it’s to a more expensive home? So, I refer you back to my original statement. If you are in a position to be able to make those payments… why worry? Which reminds me, I spend a lot of time reading about things financial to help me with this blog. Everywhere I turn is the same message from variosu experts, the global credit crunch and economic slowdown is something that is being felt the world over, but Canada has managed to be one of it not the least affected. Just one of the many reasons why I still live here despite opportunities elsewhere.

Ryan Coffey

Objection #4

“Aren’t the prices going to fall sharply because of all the foreclosures?”

Things are not falling sharply, nor are they expected to.  You see, the government in Canada pays close attention to the lending practices here, much better than what we have seen in the U.S.. All that sub prime stuff? Not a Canadian problem. Period. As for foreclosures… what foreclosdures? If you were to take the time to look at the stats for foreclosures in British Columbia, you would find that the figures aren’t just low, but surprisingly low.

But don’t take my word for it, look it up for yourself. The stability of Canadian banking is something that has been bandied about in the media of late as well as in the more deeply informed circles of professionals who depend on their stability to make a living.

I like to ask a certain question to long time Realtors who have been in the business for a long time. By long time I mean 20, 30 or more years. I ask them point blank what sort of market they thought we’re in, in the big picture. Recently when I asked this, they all respond that they thought it was actually a pretty normal market. The fact that we had such an incredibly busy market recently makes anything different that follows pale by comparison.

These are the stats of the average sale price of single family properties in Nanaimo from 1982 until the present. I personally wish that it went back further, but 1982 was when they started to calculate these averages around here and there’s not much I can do about changing that.

I’ll let the stats speak for themselves in context of the series I’ve been posting recently. I just want point out that many people have the perception that property values are something like the stock market in that the prices jump up and down a lot. You can see from these stats that this perception is very much not the case.

Here are the stats:

nanaimo-sf-1982-2007

Ryan Coffey

Objection #3

“I just bought my home at the top of the market! If prices are falling, I’ve lost money! How can you tell me not to worry?”

You’ve only lost money if you decide to sell your home before it has had time to appreciate and are leaving the market.  So, don’t sell it yet unless you have to. (Unless you’re moving to a more expensive property. See objection five.)

Remember that the first thing I said was that if you can make the payments, then it’s a good time to buy. But of course, things to change sometimes. Sometimes divorces happen, people lose jobs and so on. This is when you have to consider whether it’s better for you to take a hit in the pocketbook, or rent out one of the rooms until things get better.

But if you aren’t worried about being able to afford the payments, and don’t have to sell. What’s the problem?

If you do have to sell it before it has had time to appreciate and you’re buying something in the same market, the objection number five will be of interest to you.