How to invest when the market is High!

St.Catharines, Ontario · Member since 2016 · 10 posts · 0 votes

Hello BP Community! My name is Andrew, I'm 25, married and brand new to BP and real estate investing. My father and I are hoping to build a portfolio of buy and hold homes for rent. We live in Niagara, Ontario, Canada about 1 hour south of Toronto.

The market in our area is on record high right now, everything is in a bidding war with many homes going as high as $40K higher than asking price. Most homes we're considering are single either detached or semi and are listed between $200K-$300K

My question is, even if we can afford to buy a home is now a bad time to invest and should we be waiting this out? Or should we get in now before things get out of control?

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David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

10y

My operating philosophy is the hotter the market, the higher the market risk. The higher the market risk, the shorter the hold period I want on new acquisitions. 2009-2012 the markets were tanking, which meant that cash flow was good and there was still a lot of upside; great time to be a buy and hold investor. 2012-2015 the markets heated up, the buy and hold numbers didn't look as good but then the flippers started killing it, with shorter hold times. Now in 2016 the markets are crazy high, the margins are totally gone for most buy and hold, and the margins for flippers are squeezed as well, so it is time to be a wholesaler or RE agent in my opinion to take advantage of the hot market with zero hold time and market risk.

The other variable that can be played with is location. If it is too hot of a market in the close, desirable neighborhoods, then a bit further out and a bit rougher areas may offer better pricing. This is a very dangerous variable to play with at this phase of the cycle, though, in my opinion, because it is typically these further out and less desireable neighborhoods that get hit the hardest in both price and rental vacancies during a downturn. I actually like to flip it and buy there after they get hit hard, then come in closer and more desirable properties (via new purchases or 1031 exchange) as the market starts to recover.

In most dynamic markets it is unrealistic to think that just one strategy or area will work at every point in the market cycle. Your just need to study your history and other successful local investors to understand the governing dynamics of how different strategies and locations perform at different phases, pick the strategy and location that works in the current phase, and always, always make sure you are prepared for the next phase be it an upturn or downturn.

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Jason Hartley
Vancouver, WA · Member since 2016 · 230 posts · 161 votes
10y
Not a market I would enter. I would advise keeping your funds liquid and when the market corrects again (it will), buy then. It won't take that long.
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
My operating philosophy is the hotter the market, the higher the market risk. The higher the market risk, the shorter the hold period I want on new acquisitions. 2009-2012 the markets were tanking, which meant that cash flow was good and there was still a lot of upside; great time to be a buy and hold investor. 2012-2015 the markets heated up, the buy and hold numbers didn't look as good but then the flippers started killing it, with shorter hold times. Now in 2016 the markets are crazy high, the margins are totally gone for most buy and hold, and the margins for flippers are squeezed as well, so it is time to be a wholesaler or RE agent in my opinion to take advantage of the hot market with zero hold time and market risk.
The other variable that can be played with is location. If it is too hot of a market in the close, desirable neighborhoods, then a bit further out and a bit rougher areas may offer better pricing. This is a very dangerous variable to play with at this phase of the cycle, though, in my opinion, because it is typically these further out and less desireable neighborhoods that get hit the hardest in both price and rental vacancies during a downturn. I actually like to flip it and buy there after they get hit hard, then come in closer and more desirable properties (via new purchases or 1031 exchange) as the market starts to recover.
In most dynamic markets it is unrealistic to think that just one strategy or area will work at every point in the market cycle. Your just need to study your history and other successful local investors to understand the governing dynamics of how different strategies and locations perform at different phases, pick the strategy and location that works in the current phase, and always, always make sure you are prepared for the next phase be it an upturn or downturn.
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Matt Geerts
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
10y
Andrew, I love Niagara as an investing area right now. They arent making any more wine country and our population isn't about to shrink. Buy it before it is all gone. Find the towns that will be rising with the tide in a few years.
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Dave Vogt
Investor · Port Colborne, Ontario · Member since 2013 · 137 posts · 31 votes
10y
@Matt Geerts St. Catharines, Niagara Falls, and some niche pockets throughout the area are seeing double digit increases in value right now. That being said...multiple offers and over asking is happening on a regular basis and showing no sign of slowing down. Like anything, it's close to a major transportation route and a possibility of a go train in the area is an absolute bonus. Time will tell, but this is something I've been saying for at least 5 years. Glad I got started early.
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Matt Geerts
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
10y
A Toronto crash may bring down the highest peak areas of the QEW, but the houses that an average person rents will only rise in value out there as the GTA spills constantly down that highway. Same goes for highway 400, 404 and 407.
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Andrew Hildebrand
OP
St.Catharines, Ontario · Member since 2016 · 10 posts · 0 votes
10y
Thanks guys! This is great stuff!
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Andrew Hildebrand
OP
St.Catharines, Ontario · Member since 2016 · 10 posts · 0 votes
10y
So even buying a $250,000 rental home in a nice area of St. Catharines is still a good investment? Even though a year ago it would be worth $220K? Should I still get into the game now or would I regret not doing so as prices rise and rise? Thoughts?
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Eric Delcol
Investor · Tampa, FL · Member since 2016 · 334 posts · 215 votes
10y
The most optimal time to buy is a few months after a bottom. The last GTA bottom was in '96. With that said you have to ask yourself what is your tolerance of risk. If the market corrects (or declines depending on how you look at it) - can you weather a 20% decline in the value of your property? If your strategy is to hold the property for 10 years or more than I would say go for it. If you're trying to do a fix and flip - now might not be the best time.
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Samuel Sedore
Real Estate Agent · Kitchener-Waterloo-Cambridge, Ontario · Member since 2013 · 408 posts · 90 votes
10y
All major markets are incredibly hot right now, KWC is absolutely ridiculous. I still manage to find my investors great deals though.
You may need a better realtor in the Niagara area, someone a little more motivated for finding high quality investment properties.
I find the best deals at this point are either off market or sold within the first 3 Days on the market of the MLS.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
Smart investors do not buy when the market is high. Being able to afford to buy in a high market does not make buying a good idea. Eventually it will drop as it did in 08. Move further out and stay away from purchasing SFHs as they do not cash flow. Because Ontario has crippling rent controls long term tenants are a major negative. Tenants will likely stay longer in a SFH which is something you do not want to happen. To maintain market rents with rapid appreciation you need a turn over every 2-3 years at max. otherwise you will have negative cash flow.
Expand your search area and target multi plex properties. If not put your money elsewhere.
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Matt Geerts
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
10y
@Thomas S. Yes, you can buy cash flowing property and you are in (in my opinion) the best place in Ontario to do it. I'm wiling to bet you could score some deals by cherry picking new construction owners who are selling within the first year. If their area is surrounded by new builds they aren't going to get top dollar.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
I am suggesting he broaden his field not sit and wait.
Yes SFHs are a very high risk of not cash flowing. I would be willing to bet that most individual investors claiming positive cash flow are only looking back over their shoulder because they do not have a crystal ball. One vacancy wipes out months if not years of positive cash flow. Maybe you do cash flow today but your risk factor is exponentially higher than with a Multi and I do believe most do not cash flow over a 30 year term.
You see investors claiming a $200,000 property with rent of $1000/month cash flow. That is impossible long term. In the US it can work due to very low property values but generally not in Ontario without very high risk.
Matt if your numbers look different you are the exception.
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Zachary H.
Realtor · Springfield, MO · Member since 2015 · 29 posts · 11 votes
10y
The cycle always repeats itself. I am currently sitting out for the time being as cap rates for MUH are at historic lows. Many markets are overbuilding multifamily housing and the looming rate hike point to a potential correction, so I am keeping my capital liquid until that happens.
I see so many people on here saying that you need to just jump in and get started, and while there is definitely merit to that I would not buy a bad deal just to get your investing career started. The market will probably go up more and it may seem like you're missing out, but it will also go down again and that's your opportunity to make money.
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Matt Geerts
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
10y
Originally posted by @Thomas S.:

I am suggesting he broaden his field not sit and wait.
Yes SFHs are a very high risk of not cash flowing. I would be willing to bet that most individual investors claiming positive cash flow are only looking back over their shoulder because they do not have a crystal ball. One vacancy wipes out months if not years of positive cash flow. Maybe you do cash flow today but your risk factor is exponentially higher than with a Multi and I do believe most do not cash flow over a 30 year term.
You see investors claiming a $200,000 property with rent of $1000/month cash flow. That is impossible long term. In the US it can work due to very low property values but generally not in Ontario without very high risk.
Matt if your numbers look different you are the exception.
I see where you're coming from, but I think you've done a bit of apples and oranges comparison. 10 SFH's have the same risk balance as a 10-unit multi... rather, I'd say that the type of people who rent a door of a multi are MORE likely turn over, leave vacancy, leave unpaid balances, etc than the renter of a SFH door.
I am an exception because I choose to be an exception. We don't crowd into an education forum looking for how to not be exceptional. $1k/mo for a $200k property sounds unexceptional. I'm not doing anything particularly special by renting a $150k property for $1200/mo.
And of course, anyone but a fool accounts for capex and vacancy. My numbers work wonderfully with both accounted for. My only sad point is that with all accounted for my cash flow is only 8%. I want >25% for my next property, and with some creative purchasing I may get >100% - that's the ticket.
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Alex Franks
Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
10y
Originally posted by @Andrew Hildebrand:
Hello BP Community! My name is Andrew, I'm 25, married and brand new to BP and real estate investing. My father and I are hoping to build a portfolio of buy and hold homes for rent. We live in Niagara, Ontario, Canada about 1 hour south of Toronto.
The market in our area is on record high right now, everything is in a bidding war with many homes going as high as $40K higher than asking price. Most homes we're considering are single either detached or semi and are listed between $200K-$300K
My question is, even if we can afford to buy a home is now a bad time to invest and should we be waiting this out? Or should we get in now before things get out of control?
Depends on your goals and needs. Some markets will keep going up then you will scream why did I not buy.
Touch base with @Tyler Bruce he is smart young man investing in the same area.
Sorry so little information on this but some times in real estate timing is everything.
Alex
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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
10y
I think cash flow is king. I know someone in Cleveland Ohio that has over 100 properties valued between 20,000 and 40,000 running out between $700 and $900 a month
All section 8
@Andrew Hildebrand
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Matt Geerts
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
10y
@Brian Gibbons
In defense of @Thomas S. 's point, I don't think your Cleveland buddy would be too happy about $900/mo on a 20k property that he bought at 250k. However, one would have to the tinfoil hat type to believe that sort of drop is going to happen Niagara.
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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
10y
@Matt Geerts
??
I am talking about annual rent to FMV (fair market value)
10.8K ann rent to 20,000 FMV SFR
vs
24K ann rent to $500,000 FMV
vs
36K ann rent to $800K FMV
It is a concept of yield on the money.
My buddy in Cleveland has not overpaid for these 100+ properties, and has held them for over 10 years.
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Lee Jackson
Peterborough , Ontario · Member since 2015 · 111 posts · 15 votes
10y
Welcome to BP @Andrew Hildebrand. Great way to get everyone involved!
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Rachel Oliver
Real Estate Investor · Whitchurch Stouffville, Ontario · Member since 2015 · 8 posts · 3 votes
10y
In a hot market where it is tough to cash flow on Buy-Rent-Holds, we've had great success with Rent to Own income properties. We have done RTO's all over Ontario, including Niagara/St. Catharines, Peterborough, St. Thomas, KW. Most properties cash flow over $500/month and the tenants look after repairs and maintenance. Rent to Own's are short-term (about 3 or 4 years) but it is a great strategy to inject passive cash flow and profit in a booming market. There's way less landlord stress too. If you are unfamiliar with RTO, work with reputable investors who know what they're doing to ensure the RTO is set up for win-win-win. Happy to help if you need.
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Claude Boiron
Real Estate Educator, Mentor, Investor · Toronto, Ontario · Member since 2015 · 206 posts · 86 votes
10y
Agree with @Matt Geerts' first comment. Also, I have clients who have been waiting for a "crash" for 10 years. If you do historical searches on Google, you will find people 1, 2, 3, 5, and more years ago calling for a "crash" because they believed we were in a "bubble". You have to decide if you're relying on direct or indirect returns from your Real Estate investments (evidently better if you get both, but you should invest if you can survive with only direct returns). If you're counting on appreciation, then you're gambling - doesn't matter where we're at in a Real Estate cycle.
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Michael Lee
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
10y
Hello and welcome to BP! I agree with all you said. You just have to hustle more to find something that will work for you incuding your new market. You have to be flexible but do not cut any corners. Being a cash buyer will help you too. Being a quick offerer will help you too. Sometimes you will not have time to look so make sure you have a clause in the sales contract that allows that. Good luck to you and thank you for joining this club!
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
The key is your comfort level to your risk of capital.
I do not know the market mentioned very well. Rent control can definitely be an issue if you have a tenant stuck with a great rate for a long time.
Most areas here in the U.S. you do not see it much unless New York or California.
Cash flow is cash flow but I have seen much bigger equity gains from my friends buying at the bottom of a cycle. They cash out and 1031 into another larger property. That property might be the same asset class or a different one lower down in the cycle recovery phase. You could refi and hold instead but not access 100% of the equity growth like with an exchange.
In Canada you might not even have exchanges there so a non-factor anyways. If investors do not like what properties are selling for you have to change the area, build value in, or find off market properties.
Stuff on the MLS tons of buyers will be bidding on.
An example of value change would be buying an old 8 unit building that hardly cash flows but on the same land with new development rules you can now build 30 units on the same parcel and increase the income and value of the property.
Another option is say a 10 unit building sells for a 6 cap in your market which you do not like. Instead you find an off market deal that needs work.You rehab and lease up and your cap rate to all in cost is now a 9 cap. You created the property you wanted by putting in the work. Now you have the higher cash flow and cap rate you couldn't find in an already performing product.
In most asset classes and cycles the time is gone where you buy at a high cap rate and let compression do it's thing. Now you can create value through stabilizing properties, new development, increasing rents, reducing taxes, etc.
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Kedian Jimenez
Specialist · New York City, NY · Member since 2016 · 97 posts · 24 votes
10y
@joel
@Joel Owens love what you had to say. I'm currently in a hot market in New York City andit can definitely be an issue to find the best deals. Offmarket would be the way to go but also going for value where others arent seeing like what joel mentioned about getting a distressed property where you can get a better price. I would also look into properties that allow for you to add units which will bring up the cashflow and cap. Just make sure you factor the building costs into the offer.
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Tyler Walker
Investor · Saint Catharines, Ontario · Member since 2016 · 8 posts · 4 votes
9y
In Niagara Falls, I used Lawyer Brian Wilcox a few times. I found him well priced, generous with his time and knowledgeable. Hope that helps. Not sure if he handles American transactions or not.
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