Where Are Interest Rates ACTUALLY going???

Here is an excerpt from today’s Globe and Mail titled “Canadian Dollar on run to $1.05 as Ben Bernake ‘hits the panic button’ “.

“The loonie is now above $1.03 and expected to go higher still as the U.S. dollar weakens in reponse to the Fed's latest moves.

As The Globe and Mail's Kevin Carmichael reports, Fed chairman Ben Bernanke and his colleagues took aggressive steps to bolster the recovery and deal with America's unemployment crisis.

That included a fresh bond-buying scheme - the latest round of quantitative easing, or QE3 - and a pledge to hold the Fed's benchmark rate at an emergency low through to at least mid-2015.

At the same time, officials of the U.S. central bank cut their projections for economic growth this year, though they took a more optimistic view of 2013.

The U.S. is hobbled by unemployment, with more than 12 million Americans out of work.

Markets shot up yesterday, and the rally continues today.

Senior currency strategist Camilla Sutton of Bank of Nova Scotia believes the Canadian dollar could reach $1.05 next week, and then bounce around in a range of $1.01 to $1.05 over the next few weeks.

Of course that "turns up the pressure" on Canada's exporters, who have already been hurt by the strong currency.

Western Canada, however, is enjoying a run-up in oil prices, while gold producers and investors watch bullion continue to climb.

"Not only do we have QE3, but we have the threat of QE4," Ms. Sutton jokes, referring to Mr. Bernanke's promise to go even further if need be.”

 Most investors would interpret this as meaning Canada will likely follow suit with keeping rates low for the next 2 years.    

Why would this be the case?….I can still hear my professor’s booming voice in my economics class at U of G…..

“What happens when interest rates go up in Canada!!?”……

1.       Foreign investment increases as higher interest rates attract foreign capital.
2.       Value of Cdn Dollar increases further as foreign money pours in.
3.       Cdn exporters are hurt by increased dollar value.

However, Mike Moffatt explains in the video below that this means Canada will likely RAISE interest rates sooner than expected.

http://www.theglobeandmail.com/report-on-business/video/video-economy-lab-how-fed-move-could-mean-earlier-rate-raise-for-canada/article4543345/?from=4544546

My question to Mike would be…..How can you assume that QE3 will have a much better effect than QE1 and QE2??

I don’t pretend to be an economics professor and I certainly don’t know what the Fed is thinking, but I do know one thing…..No one can be 100% accurate in their prediction of the future.

Short term, the Canadian economy is still very fragile and the US is in far worse shape.   To me, raising rates in Canada anytime soon seems unlikely….especially with the US “hitting the panic button”.

Does anyone else have thoughts on this?

The $290 Kitchen Makeover

This past weekend, I had new tenants moving into my basement apartment.

I took the chance to paint, clean and add update some things throughout the space.  It took 3 solid days to whip the place into shape, but it was worth it!!

 

 

Here is the shopping list for a ‘minimalist’ basement kitchen reno:

Stove (kijiji) - $100

Rangehood (Home Depot) - $80 plus $30 installation parts

Handles (Canadian Tire….on sale) - $40

Light fixture (Wal-mart) - $20

Backsplash wallpaper tile (Sears) - $20

Total of $290!  I think the best effect came from the light fixture, backsplash and handles which was only $60!

At the same time, I managed to get some great “staged” pics of the space for my internet postings in the future.  You never know when you are going to have vacancy!!

All the items below were free or “borrowed” for the “staged” pic. 

 

If Real Estate is Not Appreciating, is it Still a Good Investment?

Most of us have “heard a story”, or “know a guy”, who bought a house for $100,000 and sold it for $500,000 just a few short years later.   We don’t know all the details and don’t know how he got to this point, but all we know is that he had some huge capital appreciation.

So the question is….if real estate stops appreciating, is it still a good investment????

I won’t pretend to know the exact answer to this because no one can guarantee any investment…especially one that has so many external factors such as owning your own investment property, but I will try to crunch some numbers for you.

Take, for example, a student rental in Barrie, Ontario.  I will make some assumptions here for argument’s sake:

-          Typical homes near the college are selling in the $225,000 range.   

-          If there are 5 bedrooms, 400 + utilities per room is fairly typical.

Using these numbers, I have put together a pro-forma below.

Purchase price 225,000 Mortgage 180,000 Down payment 45,000 Land transfer tax 1,975 Legal fees, etc 2,000 Total investment 48,975 Mortgage pmt (25 year @ 3.2%) 870 Property tax 225 Insurance 150 Misc 200 Utilities 0 Total cost 1,445 Rent 2,000 Monthly cash flow 555 Yearly cash flow 6,660 Cash on cash return 13.6%

***Cash on cash return is calculated by dividing the yearly cashflow by the total initial investment***

The other thing to note here is that each month, a portion of the principal owing on the property will be paid down.  For this particular case, it would be approximately $300 per month ($3600 per year) on the conservative end.

This brings the yearly return to $10,260 per year.   This brings the yearly return to 21%!!!

Remember…..no appreciation!

Housing going under?

All over the news, you hear about the coming market correction….

“10, 20…even 30% drops are coming”…..Thanks Kevin O’Leary

Today on News Talk 1010 there was a guest speaking about the last time there was a significant correction (late 1980s), the apartment building he was living in had 90% vacancy!......not 90% occupancy…90% vacancy!...Must have been lonely in that building!

His argument was that today’s market, while being slightly overvalued, is not being plagued by high vacancy.  In fact, it is quite the opposite.

Another good point (one I have mentioned before) was made regarding the “generalization” made by the media about the “Canadian” housing market.

The truth is that there is no “Canadian market”….real estate markets are so specific, that one could not possibly generalize them, even within a city!

If I am looking for a condo on King Street in downtown Toronto, would that be different than looking near High Park? Absolutely!

Each city has markets.  Each market has submarkets.  Each submarket has several products (condo, townhouse, detached, semi-detached).  Each product has unique features.    Am I making my point here?

Yes I feel like real estate is WAY overheated in some areas….specifically Vancouver and Toronto… and most notably the condo market.

Do I think the market will crash? No

Would a decline in prices affect other areas? Maybe…but I don’t know how much.

The reality is that almost no one can accurately predict what the housing market will do. 

For someone looking to invest in real estate, my humble advice would be the following:

-          stay away from speculation (pre-construction anything)

-          invest in ‘starter’ homes

-          invest for cash flow, not appreciation (more on this in my next post)

Thoughts? :)

Basement Suites - Do Your Homework!

A few days ago, there was a great article on basement suites in the Globe and Mail.
See the full article “HERE”.

Funny enough, I had planned on writing a blog post on basement suites, but they beat me too it!....so I’ll use their article (with great thanks)….and put my own spin on it!

If you are looking to buy a house with a basement suite (see also: inlaw suite, granny flat, accessory apartment, etc), you need to weigh some pros and cons as mentioned in the Globe article:

1. Consider your privacy.
Can you live with seeing a stranger around your house or using your property outside? Is the extra money worth it?

2. Try to avoid renting to family.
It is best not to rent to family, as it completely changes the relationship and is difficult to use “eviction” or “collection” rules against a non-paying family member without destroying the relationship and having the repercussions ripple out into the rest of the family.

3. Sign a proper written lease.
Always – even with family members – have a properly written lease between you and the tenant that clearly outlines the rules, late rent penalties, expectations, and length of term. It must be signed by every adult who is to reside in the suite.

4. Don’t set your rent too low.
Never be the lowest rent in the market – you will attract the type of renter whose focus is solely on dollars. It will also lead to more rapid turnover as they leave to the next “lowest rent” spot. To set the proper rent for your suite, go online and search for available units in your area. Make sure to look at a number of different sites and be location-specific in your comparisons. Look at the amenities and picture them through the eyes of a potential renter. Then place your price in the middle or higher end of the average comparable.

5. Do your research.
Each province and territory has its own landlord-tenant legislation so make sure to read up on the rules that apply where you live. In addition, make sure to research your local municipal bylaws, which include things like guidelines and standards for fire and building safety. Municipal bylaws also cover issues like zoning and permits. For example, some cities are now looking to shut down secondary suites in specific neighbourhoods. Not conforming to these rules means you could be shut down at a moment’s notice, so check with the city to make sure that your suite is legal. The Canada Housing Mortgage and Housing Corp. has a useful website with many good links.

6. Tell your home insurance company.
When you rent out a unit in your home, you are obliged to inform your home insurance company – something that the vast majority of people fail to do. If anything were to happen, for instance if a fire starts in the rental suite, the insurance company could say they were not informed of the tenant and that the policy is voided.

7. Research the tax repercussions.
Once you have a rental suite in your home, you have to claim that rental income on your tax return. In addition, once you start using the property for revenue, a portion of the capital gain when selling the property could be deemed taxable.

8. Learn from other landlords.
Knowing the tricks of the trade is important and who better to learn from than other landlords? Talk to as many as you can about the pros and cons of basement suites.  If you don’t know any, ask a realtor!

My advice for either developing or purchasing a home with a basement suite?  Do your homework….and then when you are done your homework, do some more.

This past spring, I was almost caught with my pants down when the city inspectors came knocking.  Even though I had done research into basement suites, I had overlooked a few key points….Several months later and some serious stress, I now have a legal two unit dwelling, but I feel like I aged about 10 years during the process!  Don’t let this happen to you!  More on this in a future post!

Something has Gone Wrong With Every Home I Have Purchased….and Have an Exit Strategy!!

Yes, you read that title correctly.  Something has gone wrong with everyone investment that I have made and funny enough, there were warning signs for every problem.  Does this mean I panicked and sold the property?  No, but sometimes I do think about that.  Actually, not a month goes by when I don’t consider selling all of my assets, but I have committed myself to the long haul here and I need to stick with it.

What does this mean for my future investments?  Heed the signs, but don’t think that every investment is going to be perfect.

As always, make sure you are doing due diligence.  It is important to know what you are getting into and have a plan for some of the ‘foreseeable’ issues that are typical of the type of investment you are looking at.

For real estate, I am a firm believer that it is important to have an exit strategy BEFORE making a purchase.  This strategy can change from time to time, but having something in place is very important.

My student rental is one example.  I purchased this property in 2009 and since then, the investment landscape in Kitchener/Waterloo has gone through several changes and fluctuations.  The recent implementation of licensing fees and new regulations for lodging houses has affected me somewhat, but not to the point that I cannot deal with it.  Luckily, 5 bedroom lodging houses were grandfathered into the rental system (going forward, 3 bedrooms is the maximum) so I’m thinking that my property will actually increase in value….once the storm cloud raises around this licensing debacle.  To read more on what changes took place, click HERE.

I personally think it will take a year or two for this licensing issue to ‘blow over’ and KW will start looking like a positive place to invest again, but I digress….back to my exit strategy!

I have 3 separate exit strategies in place for this property.

1.       Keep it as a student rental and sell it as a student rental - My plan here would be to rent it out and sell it several months before the lease is up.  For example, I would sell it in November or December with a lease that runs until April 30^th.  That way, I am offering a “turn-key” investment with tenants already in place that will cash flow for 5 or 6 months before the new owner will have to think about getting new tenants.  No worries about vacancy = simple investment!!

2.       Sell it as a single family home – This house is in a great area and is near schools, shopping, churches and other amenities.  I could always put a little money into renovations and flip it to a family.

3.       Rent to own – As I have mentioned, I do have a couple of rent-to-own properties and this is one way I could keep good cash flow and have a predetermined selling price 2 or 3 years in the future.   Again, I would have to put in some money towards renovations, but this would just be cosmetic.

All of these are options and who knows…I might just keep it forever! J But the most important thing here is to have options.  Life throws curve balls constantly and if the need arose to sell this property, at least I have done some planning ahead of time!

What do you think?  Keep, sell as a rental, sell to a family, RTO?

Another Bathroom Reno

Last August, I went through a bathroom reno to the upstairs unit at my house in Guelph

You can see the before and after pictures of that reno HERE

I swore this would be my last bathroom reno for a long time!  Things seemed to take much longer than expected and It was a very stressful time trying to do it while I had tenants upstairs.

Well fast forward about 6 months….I spoke too soon!

It was mid-March and I was having a bit of trouble re-renting my downstairs unit for the September semester.   I know, I was a bit early, but I wanted to make sure I was planning well in advance…something I would recommend for everyone.

During the showings, I could tell that no one was particularly fond of the bathroom.  It was dated, needed paint and trim, had a pretty scuzzy vanity and smelled a bit “musty”.

The initial plan was to slap on a fresh coat of paint and change the baseboards.  After I popped off the baseboards, I realized I had a small problem.  There was some mould on the drywall behind the baseboard heater and a little bit more near the shower.

No big deal I thought.  It was likely original materials and when you have hot (baseboard heater) meeting cold (drywall) this is usually a recipe for mould.  I wasn’t worried about the mould by the shower either as it was likely just water that had splashed behind the baseboards over several years.

My plan was to cut out the bottom 2 feet of drywall in the area and replace it with mould-resistant “blue board” drywall.  Easy fix right?........

About half way through the project I decided that the caulking around the shower would have to be replaced as it was old and discoloured.  As I ripped up the caulking around the edges, I began to smell the familiar musty aroma…of mould. 

My heart sank as I put my screwdriver in the crack around the shower, which had been previously caulked…..the board that the shower had been sitting on, was completely rotten.  Water must have been leaking around the shower for years!!

I felt a little bit of panic coming over me and decided I needed some advice.  I called a friend in the area who is a contractor and asked his opinion.  He suspected what I did…that the base plywood was rotten.

After taking most of the next day to rip out the shower, our suspicions were confirmed and we would need to replace the entire shower and baseplate.  Doing this would be no easy task as the floor would also need to be ripped up, which was ceramic tile.

I decided that this bathroom needed an overhaul anyway and I decided to replace the vanity as well. 

Luckily I had tiles left over from the previous bathroom reno and Home Depot was having a huge sale on shower stalls and bathroom vanities!!!

I will save you the details of the reno this time, but 5 days later, I had a completely new bathroom just in time for another showing to a prospective tenant.

Funny enough, the first group that saw the place with the new bathroom ended up taking it for September!  Maybe in the long run it was worth it?

Take a look at the pics below!  Comments welcome!