Flipping houses

[Shazam]

Originally Posted by Mike Oxlong

Holy ****!!

How many times have I said there will be peaks and Valleys in the Real Estate market? For anyone not clear on what I am writing "VALLEYS" mean downturns in the market. Yes I understand prices will drop at some points, but what I am trying to say is that they will recover and continue to rise.

There is a small downturn in the market right now in Calgary and my very first post said this is a good time to buy.

YES I agree there will be ups and down in the market. However in the LONG term real estate prices always go up.

Yes, I am agreeing with you on this completely.

Our main disagreement is that I don't think there is going to be a price decrease in Alberta for a long time. I say 10 years you seem to disagree.

Yes, that's where we disagree. I simpy believe there's going to be a downturn much sooner, and that that downturn will affect house prices a lot more than what you think, because again, I don't think the intrinsic value of real estate in Calgary is reflected in current market prices.

Not that our opinions mean anything at all

[Shazam]

Originally Posted by Wookie

Really? Neat, never knew that, but common sense to me assuemd they wouldn't... Although my common sense has let me down plenty of times.. assuming I actually applied it... hmmm...

When interest rates were ballooning in the 80's, no one at the BoC was thinking "Gee, I wonder how those Albertans are going to cope with this?" Sucks for us.

[Wookie]

Originally Posted by Shazam

When interest rates were ballooning in the 80's, no one at the BoC was thinking "Gee, I wonder how those Albertans are going to cope with this?" Sucks for us.

But who were they targeting? And why?

[Lurch]

Just thought I'd throw in a few stats from some work I did a while back.

Average house in NW Calgary, 1974: 42,000
Average house in NW Calgary, 1980: 97,500
Avg house in NW Cal, 2005: 264,500

Avg return, 1974 to 2005: 6.1%
Avg inflation, 1974 to 2005: 4.6%
Real return: 1.5%

Avg return, 1980 to 1990: 3.6%
Avg inflation, 1980 to 1990: 5.75%
Real return: -2.15%

If you include the recent explosion (use 2006 price of $420,000), you get about a 8% return since 1974 and about 3.5% in real dollars.

Anyway, my point is that a)expecting anything approaching 10% per year for the next decade is EXTREMELY optimistic given long-run Calgary history and

b)there is a very real chance you could end up with a negative return after inflation when you buy at the tail end of a boom, ie 1980 or today (at least IMO). I have personally sold out of all my properties in the last 6 months, at least in Calgary, so I should make it clear that I have a bit of a vested interest in that anyone likes to be proven right. I think it is a large portion of wishful thinking to imagine anything much over 6% long-term, and quite likely you will do less than that if you buy today after the boom.

[Shazam]

Originally Posted by Wookie

But who were they targeting? And why?

I'll have to see if I can find some articles in the good ol' interweb.

Actually, I'll give you the present interest rate situation right now as a good example. Over the past few months, the Canadian Dollar has risen as the US Dollar has fallen. The BoC has therefore changed their stance on interest rates from neutral-increase to neutral-decrease. This is strictly done to help the Canadian export industry, in a bid to make the Canadian Dollar less attractive to investors and thus lower its value. This benefits regions such as Ontario more than regions such as Alberta, where it simply exacerbates inflationary problems here because capital is very cheap.

[Lurch]

I'll have to see if I can find some articles in the good ol' interweb.

Actually, I'll give you the present interest rate situation right now as a good example. Over the past few months, the Canadian Dollar has risen as the US Dollar has fallen. The BoC has therefore changed their stance on interest rates from neutral-increase to neutral-decrease. This is strictly done to help the Canadian export industry, in a bid to make the Canadian Dollar less attractive to investors and thus lower its value. This benefits regions such as Ontario more than regions such as Alberta, where it simply exacerbates inflationary problems here because capital is very cheap.

You fundamentally misstate the BOC's mandate with this paragraph. The only thing the BOC is mandated to care about is core inflation, which it targets at 2%. If inflation is higher nationally, it raises interest rates. Vice versa if lower. To the extent that Alberta impacts national inflation, we influence interest rates. The BOC is specifically not using exchange rate targets as it is a fundamental economic principle that you can influence inflation OR exchange rates with monetary policy, but not both.

[Shazam]

Originally Posted by Lurch

You fundamentally misstate the BOC's mandate with this paragraph. The only thing the BOC is mandated to care about is core inflation, which it targets at 2%. If inflation is higher nationally, it raises interest rates. Vice versa if lower. To the extent that Alberta impacts national inflation, we influence interest rates. The BOC is specifically not using exchange rate targets as it is a fundamental economic principle that you can influence inflation OR exchange rates with monetary policy, but not both.

You are correct. However, so am I. The BoC is simply allowing Alberta to inflate past their acceptable targets in order to influence exchange rates to stimulate other regions.

I don't really consider it good policy per se, but the BoC has done worse things before, so it's not really all that surprising.

[Sylvanfan]

Originally Posted by Shazam

When interest rates were ballooning in the 80's, no one at the BoC was thinking "Gee, I wonder how those Albertans are going to cope with this?" Sucks for us.

First of all the Bank of Canada has only had fixed montetary policy for about 15 years in which they try to control inflation. Right now from what I read and hear the ideal thing would be to raise the rates in the West and lower them out East. But that can't be done because the BOC is not regionalized, at least not yet. Back in 1980 we were much more succeptable to the economic circumstances happening outside of our country than we are now. Also the demographic makeup of Canada at that time was at a very unique stage. A huge percentage of the population was baby boomers heading out into the world to work. As a result there were a lot of people wanting to borrow, and not enough to lend. The birth rate in Canada between 1947 and 1966 was about 4 kids per family. Simply put you had 4 kids paying to borrow money off their two parents. Now days the birth rate is 1.9 per woman or so there no longer is the imbalance between borrowers and lenders. IMO interest rates can go up and down like they always have and always will, but they won't spike up an down anywhere near as drastically as they did 25 years ago.

Look at what happened in Japan in the early to late 90's. Very similar demographic makeup at that time to what North America is about to enter.

[V]

Originally Posted by Lurch

Just thought I'd throw in a few stats from some work I did a while back.

Average house in NW Calgary, 1974: 42,000
Average house in NW Calgary, 1980: 97,500
Avg house in NW Cal, 2005: 264,500

Avg return, 1974 to 2005: 6.1%
Avg inflation, 1974 to 2005: 4.6%
Real return: 1.5%

Keep in mind, based on 25% downpayment, you only spent $10,500 to purchase that $42,000 house. If you had held that property for 31 years you would have had the mortgage paid off in 25 years, and then been making an average of, what, 800 bucks a month from rent once the mortgage is paid off?

So the initial investment is $10,500. Final amount of money you're walking away with is $264,500 plus $57,600 ($800x12x6), or $322,100.

Avg return: 11.68%
Real return: 7.08%

That's pretty damn good for an average return over 31 years, is it not? Pretty crude math, and done off the cuff, so I know there are a lot of things that have not been accounted for, but I think there are conditions on both the good and bad sides of the coin that might even this return out.

[Lurch]

Sorry, I just wanted to add to my earlier post about historical Calgary housing prices. The last boom, which I have data from 1974 to 1980, had prices rise about 13% annually. If you bought 1978 or earlier, you did well. However, if you bought in 1980, you would not have made a positive real return until 2006. In other words, for 25 years, your investment was a money loser after inflation. Basically, buying after a run-up puts you at a lot of risk that a lot of people seem to be unaware of with their comments here.

[Shazam]

Originally Posted by Sylvanfan

First of all the Bank of Canada has only had fixed montetary policy for about 15 years in which they try to control inflation.

The BoC wanted to control inflation back then but those pesky Liberals wanted full employment instead. Unless the BoC was/is run by complete morons, they know full well the devastating impact inflation has.

Right now from what I read and hear the ideal thing would be to raise the rates in the West and lower them out East. But that can't be done because the BOC is not regionalized, at least not yet.

Exactly, which is why my statement that the BoC takes actions to benefit a particular region is true.

Back in 1980 we were much more succeptable to the economic circumstances happening outside of our country than we are now.

I seriously doubt that.

Also the demographic makeup of Canada at that time was at a very unique stage. A huge percentage of the population was baby boomers heading out into the world to work. As a result there were a lot of people wanting to borrow, and not enough to lend. The birth rate in Canada between 1947 and 1966 was about 4 kids per family. Simply put you had 4 kids paying to borrow money off their two parents. Now days the birth rate is 1.9 per woman or so there no longer is the imbalance between borrowers and lenders. IMO interest rates can go up and down like they always have and always will, but they won't spike up an down anywhere near as drastically as they did 25 years ago.

No they won't, but that doesn't mean that even a 2% rise in rates wouldn't cause havoc, what with the ludicrous consumer debt ratios these days.

Look at what happened in Japan in the early to late 90's. Very similar demographic makeup at that time to what North America is about to enter.

Japan is a whole other can of worms. Their corrupt financial system was their downfall that they still haven't recovered from.

[Lurch]

Keep in mind, based on 25% downpayment, you only spent $10,500 to purchase that $42,000 house. If you had held that property for 31 years you would have had the mortgage paid off in 25 years, and then been making an average of, what, 800 bucks a month from rent once the mortgage is paid off?

Leverage is good when things are good, but you should not count on leverage to make an investment case, IMO. Currently, you cannot rent a property in Calgary at a price that "pays off" the mortgage. You can rent a standard bungalow for maybe $1500 in a nice neighborhood, and the mortgage is probably over $2000 with 25% down.

As the investor, you would have cash out of pocket every month, not to mention property tax, repairs, insurance, interest rate exposure, empty months, etc. Again, just my opinion, but buying today for rentals in Calgary will turn out to be a poor long-term investment. Two years ago, great, but this is akin to leveraging up in 2000 to buy the S&P index. Six years later, and you'd finally be back to even, ignoring inflation.

[Lurch]

You are correct. However, so am I. The BoC is simply allowing Alberta to inflate past their acceptable targets in order to influence exchange rates to stimulate other regions.

This may be an unintended but unavoidable consequence, but the BoC targets national inflation, not regional inflation. As such, Alberta inflation is only a component and the BoC really has no option. The BoC only cares about exchange rates to the extent they influence inflation via the import/export complex, again at the national overall level.

[Sylvanfan]

Originally Posted by Shazam

Exactly, which is why my statement that the BoC takes actions to benefit a particular region is true.

??? Please explain that one for me as I'm not quite getting where you're going. Even with the boom in Alberta and BC, most of the country's population is in Ontario and East. A big chunk of the country's population lives within about a 1000 miles of Toronto. As a result most of the BoC's actions will likley mimic the economic cycles of that particular region would it not? Unless Alberta swells to a point where it represents a significant portion of the population wouldn't the bank either have to regionalize (extremely unlikely), or continue to set it's patterns as per the trends in Ontario.

[V]

It's really not that hard to get positive cash flow right now, with the way the rental market has gone. I just started up another house recently. The house sold for just under 350k, and I get 1900 per month in rent. Mortgage payment is about 1500 per month. I've got another one in a similar situation. Rent isn't where it was even one year ago.

But I understand your points on this. It isn't the be all and end all of investing. But houses and housing prices make some sense to me, while the stock market makes none. Mutual funds seem to be a waste of money to me.

All I know is that I had nothing at the start of this year, and just by borrowing money I'm in a position where I could sell my houses and walk away with over 100 grand. I might have been able to do that with stocks, but I'd have no idea how.

[Red]

Originally Posted by Dominicwasalreadytaken

It's really not that hard to get positive cash flow right now, with the way the rental market has gone. I just started up another house recently. The house sold for just under 350k, and I get 1900 per month in rent. Mortgage payment is about 1500 per month. I've got another one in a similar situation. Rent isn't where it was even one year ago.

But I understand your points on this. It isn't the be all and end all of investing. But houses and housing prices make some sense to me, while the stock market makes none. Mutual funds seem to be a waste of money to me.

All I know is that I had nothing at the start of this year, and just by borrowing money I'm in a position where I could sell my houses and walk away with over 100 grand. I might have been able to do that with stocks, but I'd have no idea how.

Having a 100K positive balance today does not mean that it will be there tomorrow. Unless you sell NOW you have made nothing.

You've been in this for lass than a year and that's during the craziest RE market times ever. I wouldn't use that as a standard. But that's just me :-)

[V]

Of course, and if the markets take a hit over the next 2 years that decreases that 100k to 60k I'll still be thrilled. It's 60k I wouldn't have had without doing it. I'll be even happier if that 100k turns into 150k in two years. Either way, I'll be thrilled with what I've done just by buying a couple of houses.

[Wookie]

[Red]

Originally Posted by Dominicwasalreadytaken

Of course, and if the markets take a hit over the next 2 years that decreases that 100k to 60k I'll still be thrilled. It's 60k I wouldn't have had without doing it. I'll be even happier if that 100k turns into 150k in two years. Either way, I'll be thrilled with what I've done just by buying a couple of houses.

Or they can go down to where they were 2 years ago and you'll be 100K in a hole.

[DementedReality]

Originally Posted by Red

Or they can go down to where they were 2 years ago and you'll be 100K in a hole.

well, as long as he has the cash flow, who says he has to sell it at a loss? just hang on until the value returns.

all investment has a risk, i think the upside and value in RE is worth it, provided you have the resources to maintain the inevitable cash crunch that will come from time to time.

oh and a stomach for debt.