Calgary Real Estate predictions?

[Slava]

^ Well the collateral are the securities that you are investing in. You can't sell the securities and take the money out; the banks get their money first. Also if you do lose the money in the market you're still on the hook for it. Its no different than if your home is now worth $200k with a $350k mortgage on it really.

[Bertuzzied]

Originally Posted by Mike Oxlong

So a bank will lend you $100,000 just to go play the stock market?

What type of collateral do you have to put up? Where is the banks security if you invest in Enron and lose it all?

Actually I think more people have a margin account then a cash account. No collateral at all but they will do a credit check on you. They will give you 70% loan to value on stocks over $5 and option eligible. So if you want to buy $100k worth of Rimm you only need to have $30k and the brokerage lends you $70k.

Hehe. Otherwise there is no way i could hold 700 shares of Apple.

It's too bad you can't really short sell houses in Canada.

[Finner]

Originally Posted by Mike Oxlong

So a bank will lend you $100,000 just to go play the stock market?

What type of collateral do you have to put up? Where is the banks security if you invest in Enron and lose it all?

You could buy options...you could easily leverage hundreds of thousands of dollars by buying / and or writing options. I'm actually an options/equity trader for my day job.

[PowerPlayoffs06]

How can a person keep track of upcoming new communities and condo developments? The wife and I are saving up and wanting to buy something within 2 or 3 years, and would like to be able to buy early and get a good unit before all the good ones are gone, but we never seem to hear about these new buildings until they're selling phase 2 or 3 and all the good picks are gone by then.

[pepper24]

Originally Posted by Mike Oxlong

The thing you have to consider though is that when you buy a stock you are paying for it 100% with your own money. When you buy Real Estate your are generally using mainly the banks money. Any appreciation you gain from Real Estate is all yours even though the bank is providing you the money to purchase the home.

I agree it is important to diversify. However there are certain benefits to real estate that can make it more attractive.

Leverage is definitely an advantage of real estate but you can also do the same with stocks/bonds. The difference is many mortgages you can put down only min 5% down (some places even zero down) while stocks/bonds I believe are higher. I'll have to check into this.

[ken0042]

Originally Posted by Red

In 18 months you pay almost nothing on your principal and the interest on a ~250K mortgage is pretty hefty

I hear people say that a lot, and I have to disagree.

Let's take your 250K mortgage at 5.5% interest; 25 year amortization. Your monthly payment would be $1535 per month. However the interest would be $1146; meaning $389 goes towards the principal the first month, and then slightly more each month after that.

Yes, the last few years of a mortgage a lot more goes towards principal, but I wouldn't call 1/4 of your payment "almost nothing."

Of course; having a crystal ball there may have been a better time to sell. All I was saying was for him not to look at just the selling price; but to consider all the costs and any money he would have saved. And I left condo fees out because those would be the same no matter if he owned or rented; or at least a landlord would be foolish not to consider them when figuring out how much rent to charge.

[photon]

Originally Posted by Slava

^ Well the collateral are the securities that you are investing in. You can't sell the securities and take the money out; the banks get their money first. Also if you do lose the money in the market you're still on the hook for it. Its no different than if your home is now worth $200k with a $350k mortgage on it really.

Except they usually won't margin call your house. The bank really doesn't want to end up owning a ton of houses to deal with. As long as you make your mortgage payments.

Not sure how a margin call works for trading though.

[Bertuzzied]

Originally Posted by photon

Except they usually won't margin call your house. The bank really doesn't want to end up owning a ton of houses to deal with. As long as you make your mortgage payments.

Not sure how a margin call works for trading though.

If your stock falls below a certain price you will be in a margin call.

Like the RIMM example. 70% loan value. You buy $100k worth of stock at $100/share with $30k. Well in real life you wouldn't really do that because you will be at your margin max. So if your Rimm shares falls a penny below $100 you will be in a margin call.

If your share price goes up though your margin balance will increase too.

Also the $70k you are borrowing is charged interest. Usually prime or prime +1, but you can write it off.

[Finner]

Originally Posted by photon

Except they usually won't margin call your house. The bank really doesn't want to end up owning a ton of houses to deal with. As long as you make your mortgage payments.

Not sure how a margin call works for trading though.

Banks are extremely smart in how they offer margin...even if you fall into a margin call you always have enough securities in order to pay it off.

Margin = Cash +Loan Value of the securities you hold

So if you are using margin (ie. negative cash balance) you go into a margin call by the price of your securities falling. But for you to actually not be able to cover the margin it would have to fall more then 30%, (the margin requirement of most blue chip Canadian Equities). And most blue chip canadian equitites don't fall 30% short term.

And you have WAY more leverage with options/margin, then you do with a house. Assuming you know how.


NM Bertuzzied beat me to it.

[Bertuzzied]

Originally Posted by Finner

But for you to actually not be able to cover the margin it would have to fall more then 30%, (the margin requirement of most blue chip Canadian Equities). And most blue chip canadian equitites don't fall 30% short term.

That isn't true though. You can be in a margin call in my above example. Which by the way was a real life example. hehe.

Getting called everyday by Etrade is not fun.

Actually you'd think i would have learnt my lesson with RIMM. Back in 97 I was shorting it and the stupid stock went from $92 to $140 in 3 trading sessions. I was in a $55k margin call. I was getting ready to sell my condo to cover the loss but it did a big tank job in the next 2-3 days and I was safe.

[Finner]

Originally Posted by Bertuzzied

That isn't true though. You can be in a margin call in my above example. Which by the way was a real life example. hehe.

Getting called everyday by Etrade is not fun.

Sorry if i wrote it wrong. Of course you can fall into a margin call if the price drops. I was just trying to say you always "should" have enough equity in your account to cover any margin call unless of course your securities fall by more then 30%.

[pepper24]

Originally Posted by Finner

Sorry if i wrote it wrong. Of course you can fall into a margin call if the price drops. I was just trying to say you always "should" have enough equity in your account to cover any margin call unless of course your securities fall by more then 30%.

Exactly, any investment whether stocks or real estate you should have a proportionate amount of cash available in a savings account/money market fund for emergencies or if you foresee a good time to buy/sell.

As much as it protects you in a downturn, it's just as bad seeing a buying opportunity and having all your money tied in other investments. Stocks are liquid which is not as bad but real estate can take days/months to sell to free up cash.

[photon]

Originally Posted by Finner

And you have WAY more leverage with options/margin, then you do with a house. Assuming you know how.

What kind of leverage are you talking about, and what would you have to know?

Plus it's a bit easier to get external investors to invest in real estate than it is to have someone invest in paper assets, at least at my level.

[Red]

Originally Posted by ken0042

I hear people say that a lot, and I have to disagree.

Let's take your 250K mortgage at 5.5% interest; 25 year amortization. Your monthly payment would be $1535 per month. However the interest would be $1146; meaning $389 goes towards the principal the first month, and then slightly more each month after that.

Yes, the last few years of a mortgage a lot more goes towards principal, but I wouldn't call 1/4 of your payment "almost nothing."

Of course; having a crystal ball there may have been a better time to sell. All I was saying was for him not to look at just the selling price; but to consider all the costs and any money he would have saved. And I left condo fees out because those would be the same no matter if he owned or rented; or at least a landlord would be foolish not to consider them when figuring out how much rent to charge.

1535+100 (tax) +200 (condo fees) = 1835. I don't believe landlords charge condo fees.
You can probably rent a small apartment for a 1000. And you wouldn't have to see your own property lose 40K in 18 months on top of that.

[ken0042]

Originally Posted by Red

1535+100 (tax) +200 (condo fees) = 1835. I don't believe landlords charge condo fees.
You can probably rent a small apartment for a 1000. And you wouldn't have to see your own property lose 40K in 18 months on top of that.

Why wouldn't a landlord work condo fees into the rent they charge? It makes no sense to pay something that you would charge to a tenant.

But getting back to the original subject, he said he bought before the boom, so let's say he paid $150K. That makes his mortgage $921. Plus tax and condo fees that is $1221. So out of that $987 is going out the window on interest, condo fees, tax. But 18 months ago a condo that would sell today for $250K would have rented for $1500 per month; I've seen rents on units like that closer to $1800. But using the $1500 example, he would have spent an extra $9200 on renting vs owning. So while he "lost" $40K, he really only lost $31K.

My original point still stands; there are more costs to look at besides the final selling price.

[Finner]

Originally Posted by photon

What kind of leverage are you talking about, and what would you have to know?

Plus it's a bit easier to get external investors to invest in real estate than it is to have someone invest in paper assets, at least at my level.

One good example would be writing long term, in/at the money covered calls.

20k of your own cash will allow you to buy about $66000 of 70% loan value stock using margin.

So lets say you take 60k of that margin and buy 3000 shares of a highly volatile stock, for example SOLF @ $20. Then you sell 30 calls of January 2010 $20 calls at $7, gaining you $21000 of cash. So you take that $21000 and with the 30% margin rule you have an additional $70000 of margin which you use to buy another 3500 shares....you write more calls...and so on.

Lots of firms are starting to block these there because they are known as highly leveraged writes. You basically use the sale of the option to cover the margin requirement for the stock, allowing you to buy unlimited shares with basically no money.

However you can use it to a smaller extent of course. Substitute the option premium you receive in the above example from $7 and instead use $3 (Further out of the money/out of the money strike)...you still gain $27000 in margin when all is said and done.

Lots of different strategies on top of this one that you could use.

I use them to a lesser extent. Buy the stock at $20, sell the $20 strike price call at the money for say $1.80. Make $180/100 shares, so providing the stock stays above 18.20/share i make money, and if it stays higher then that i earn money.

Sorry if this is kinda confusing...feel free to ask questions!

[pepper24]

Originally Posted by photon

Plus it's a bit easier to get external investors to invest in real estate than it is to have someone invest in paper assets, at least at my level.

Anyone can head to their local bank and invest in a mutual fund. Low cost, diversifcation, transperency, little effort and liquidity all in one.

[Cowboy89]

Originally Posted by Mike Oxlong

True. I do know that is an option but I don't know the details on it. I bet you 98% of people don't have a clue how to do that either. Pretty much everyone understands how a mortgage on a property works. Mortgages are far easier to obtain for people than they strategies you are suggesting as well.

That's ultimately the problem with real estate. Since buying a house is an experience that pretty much everyone experiences it makes it perceptively easy to do yet the financial IQ required to understand leverage and the best means to employ it remains elusive for the common man. Therefore people can easily make boneheaded financial decisions while still feeling like they understand the process. Also worse yet, because it's perceptively easier to go down the street and buy a new place than to research and consult with financial advisors about buying a real estate derived investments these "investment" decisions are done at $250,000 or more a pop instead of in much more manageable denominations that other instruments offer. In other words the higher price points pushes people to lever up more (Possibly more than is reasonably affordable).

I've seen tonnes of people the past few years who I'd consider financially illeterate get into the multiple houses, multiple mortgages game. These are the people who have amplified prices into bubble territory, and ultimately why it got much higher than economic activity alone would have taken prices. Thankfully these are the same people that will pay the price for being ill-informed speculators. It's one thing to take real estate and make it a buy and hold strategy for the long term and quite another to be overly opportunistic and buy because others have made quick and easy money doing it.

[photon]

Originally Posted by Finner

Sorry if this is kinda confusing...feel free to ask questions!

Nope, I see what you are getting at. I would have to be a pretty confident in the stock performance to do that kind of thing though.

Originally Posted by pepper24

Anyone can head to their local bank and invest in a mutual fund. Low cost, diversifcation, transperency, little effort and liquidity all in one.

No I meant I can talk to people to invest in real estate with me; i.e. it's a joint venture between them and me where they fund the purchase and I do the management and stuff, and at the end we both walk away with something. I know a lot of people who used this method to get their # of properties up past a few dozen into the hundreds.

To do that with stocks would be much more difficult I think.

[Claeren]

Well Japan has only gone 19 years waiting for their real etate "investments" to pay out!

Still at 1980 prices! (If you bought 29 YEARS ago you have not made any money.)

(Although interestingly probably ready to boom pretty soon....)

The USA is now at about where 1994 is on this chart (some acceptance but still thinking the bottom is close), Canada is at about 1992 (denial, 'never a better time to buy' talk from realtors).

"Never a better time to SELL" other than yesterday of course....








Claeren.