Every man needs a plan: you have your career goals, your work-out routine, and your growing stack of cash you’ve set aside for retirement. After all, you aren’t one of the forty per cent of Canadians who don’t save, right?
Of course, you can’t just let that money wilt at the bank. You need to make it work for you—but since 2008, the wisdom of a low-risk, steady reward strategy looks even better. That’s why we sat down with the CEO of MP Private Capital, Mitch Parker, who gave us the low-down on a conservative real estate strategy.
Why is real estate a worthwhile investment in Canada?
Canada has done a fantastic job so far weathering the world economic recession. Many reports have indicated that we will be one of the leading G20 countries for many years to come thanks to our government’s ultra-conservative style of policy and decision-making.
The real estate market is directly related to economic factors like immigration, the job market, job growth, average salaries, cost of living, and more. Here in Canada, especially out west, all of these factors look very positive and more importantly, will continue to stay strong. Because Canada is such a large country, there are many sub-markets that vary from great investment cities to ones to stay away from. Overall, I would say that we are a great place for real estate investment.
What kind of return should investors be satisfied with? What kind of investment opportunities exist in real estate that Canadians don’t normally think of?
If an investor educates themselves on what’s out there and how to properly analyse a potential investment, I think they can expect returns to start around 6% per year and go as high as 30% depending on risk tolerance, length of investment, project type, etc. For someone that’s looking to invest their RRSP or TFSA, projects that are very secure and stable can earn between 8-12% per year.
One main thing to remember is that real estate is not like stocks and mutual funds. There is much less volatility and risk if invested properly because there is a physical asset backing the investment. This enables investors to create a much more consistent and predictable portfolio while still generating above average returns.
An example of an opportunity that many people aren’t aware of is called a Mortgage Syndication which is the pooling of investor capital to fund part of a development project. Investors are registered on title for security and part of the return (usually 8%) is fixed for the term. Another example can be a joint venture opportunity. This is designed for someone that has some capital but doesn’t know what to do or how to find a project. They essentially team up with an expert that will locate the investment and manage it on a day-to-day basis. This is a great way to learn the ropes and leverage off of someone that has the experience.
The Economist, quite prominently, predicted a Canadian housing bubble; what are your thoughts?
People that are waiting for real estate to “crash” or “pop” for the last decade have missed out on some great investment opportunities. As mentioned above, Canada is a huge country with many different markets so while there may be some cities that won’t perform as well as others, there will always be great areas if an investor looks around.
Potential investors that are concerned about a bubble should implement a long-term strategy on anything they place their capital into. This way, even if there is a dip in the market, they have a plan in place to weather a few years of negative growth until the market catches up.
How do investors avoid trouble similar to what’s happening at Toronto’s Trump Tower?
Buying a pre-construction condo and praying it will increase in value is not investing; it’s speculating. There’s no monthly rental income and no profit tied to the actual construction of the building. Buyers are strictly hoping that the market goes up from the time they buy until the time they sell; most likely before the building registers.
The Trump is a perfect example of this. The developer, Talon Group is relatively new and inexperienced in Toronto and basically just bought the Trump name. Any investor that expects their unit in a hotel pool to immediately turn a profit either didn’t do their homework or naively bought because of the glossy papers they were handed at the sales centre. Virtually every hotel takes time to stabilize rates and bring occupancy up to a level where it’s generating positive cash flow. The taxation issue is a major hurdle which the investors and developers will have to figure out. At the end of the day, it’s unfortunate for everyone that purchased units and will have to pay lawyers to sort it out.
If an investor does want pre-construction, they should buy from an experienced developer and have a viable plan to hold and rent the unit out. This means being able to come up with the full deposit and be financially able to support the property until a tenant moves in. Condos can be a great investment for someone that doesn’t want to worry about fixing windows, the roof, or leaky foundations. There just has to be a solid strategy behind the purchase involving proper due diligence and a better plan than buy and pray.
Vancouver and Toronto seem to dominate the real estate news; what other markets ought Canadians look?
In the future, it’s really going to be the western provinces that will experience major growth. Cities like Edmonton and Saskatoon have high immigration, above average wages, and a lower cost of living compared to Toronto and Vancouver. On the east coast, look out for Halifax which is poised to grow from the billion dollar ship building contract. If someone wants to invest in Ontario, cities within an hour of Toronto will grow above the national average as people are forced to commute due to high prices. Specific cities to watch are Hamilton, Barrie / Orillia, and Cambridge.
Buying your own island: good idea or great idea?
If you don’t like people it’s a great idea but if being social is your thing you may want to stick to the shores.
The answer depends on whether you’re looking for investment or personal property. I recently heard that by the year 2050, 70% of the world’s population will live in a large city. If your island is close to a city that will eventually need your land to build on, I think it’s a good idea. If it’s for personal use and you’re looking for a place to get away from it all, then an island can be a pretty sweet place to do it.