Alberta's growth unprecedented

[nfotiu]

Its not the actual value of the houses that would scare me as an investor, it is how quickly they went up. When prices rise that fast, it really looks like a bubble.

You invest that same 500/month plus the 2-3000/year in expenses keeping the house maintained and rented, at a 10% return you'd have about a million dollars in 25 years. Granted the house would probably be worth at least that much anyway. Over the long term it likely makes a lot of sense.

It might be tough though for the short term on some families to keep your existing house as a rental property. A combination of modestly rising interest rates, softening of the rental market and a correction in the housing market could easily happen at the same time. All of a sudden that $500/month you thought you had to pay to keep your old house could turn into $1000. And if house price even receded a bit, you may not be able to get out of that house, because you ended up so heavily leveraged. By taking on 2 houses you allow yourself to double the return if things continued to go well, but you also open yourself up for double the risk. And it might be more of a risk than some people can afford to take.

[photon]

That's why you have to be very careful about the properties you buy. As you say the more properties you have the more exposed you are to movements in the market (just like the more stocks you have or the more gold you have).

But you can really minimize your risks. Traditionally investing in real estate isn't as much about the increase in property values as it is about having someone else pay off your mortgage. If you keep that frame of mind when looking for properties then you can protect yourself against some things.

For example if you buy a rental property that has positive cashflow from the rents, and property values go down, it's not exactly like investing on margin because the banks aren't going to call your margin with a property (they'd have to forclose on you and everyone else). So as long as you make your payments it's ok.

And if you do your homework and get a rental property that will always be rentable (location, quality, there's lots of info on how to make sure your properties are always better than everyone elses and rented), that can reduce the risk that the property sits empty.

50% increase per year isn't sustainable, and I would never invest such that I have negative cashflow every month so that I'm betting on a big positive value increase. I'm going to rent out so I have positive cash flow so if values go down I still have the benifit of someone paying of my mortgage for me.

VERY hard to find those kinds of places in Calgary right now though.

[Sylvanfan]

Well I'm not suggesting that people invest into negative cash flow. I'm simply trying to demonstrate that with real estate you can invest, and not have the asset increase at all, but still make money. If you put that money into stocks and they don't go up in value you only have the amount you invested left.

My example is very primitive and pretty poor in all reality too. Lets face it over a 25 year period the odds of you charging the same amount of rent monthly are pretty slim. It's much more likely that if you put an extra $500 a month into a revenue property that you'd have it paid for in 15 years and be in postitive cash flow for an extra 10 years. Of course smarter investers would take a capital loss and find a way to invest that money somewhere else.

Personally I'd prefer to buy a place somewhere that I felt the market had better upside and break even or even lose on my monthly cash flow initially. In a market like that I have the ability to have the property value increase, plus as values increase, I can up rent and improve the cash flow. As my revenue increases I have losses from previous years to go against the gains. I'm not saying I'd expect a 50% annual gain, but you look for a place where you feel you can make a gain. My brothers boss sold his house in Timmons Ontario 15 years ago for $130k and bought a place in Kamloops for that much. Today his place in Timmons is still worth 130k, and the one in Kamloops is 350k.

I suppose a way to look at it is that right now if you own a house your house is worth say $375k, and you have 175k of equity in it. Right now you have the chance to take that extra $100k and diversify it. If you take it out and put it in stocks you have to pay for that 100k yourself with the increase in your own mortgage. But if you reinvest it in real estate that you rent out you buy the privelege to borrow money that someone else pays off for you. Say the market dives and your house goes down $50k next year. That would mean you now have say 130k of equity and that you now only have around $55k to go out and buy that privelege. Yes you'd be buying in at a high time, but if you're a homeowner you're sitting on more capital than you may ever have yourself. So if are confident and committed enough to take on the risk and to think beyond 1, 5 or even 10 years than I think real estate in Calgary is still a decent investment.

[photon]

Agreed, I only meant to say that you can take a very conservative approach and mitigate your risks if you want.

And I also agree, market is VERY important, and you have to keep an eye on all the ecomonomic indicators for where you are investing. Eventually things will turn in Alberta and at some point I'll be getting out and looking to invest somewhere else.

Heh, I know one guy that is negative $3000 cash flow per month with his properties.. he's making a killing right now of course but personally I don't think I could handle that kind of thing.

[Sylvanfan]

^^
Well I would even go as far as to segregate parts of Alberta. I think Calgary, Sylvan Lake or even Edmonton and area is probably relatively safe for the next 10-25 years. Fort McMurray.....not so much. I'm a bit scared of those one horse towns.