Calgary Real Estate predictions?

[rd_aaron]

Originally Posted by Cowboy89

I laugh at that advertisement he's got as the picture.


On the annual cash flow part:

• completely ignores how much it will cost to find tenants and to maintain the condo (Over the 10 year holding period I imagine that alone would probably eat up the positive monthly CFs).
• Ignored is the concept that you would have to re-fi your mortgage in 5 years at rates most likely well north of the 3.5% rate used to come up with the mortgage calc which will most likely offset any increases in rent earned.

On the Capital Gain part:

• Selling costs are completely ignored
• Overall return on equity is misleading because it's a 10-year return as opposed to an annual return. Once you realize that the CF is probably negative for 10 years, your illiquid investment is essentially depending on abnormal price appreciation to beat the returns on a well-diversified portfolio and even then might not compensate for the lack of liquidity

Agreed with everything you said. I will also point out that $230k is almost certainly their smallest unit on the lowest floor. Their smallest floorplan is 449 sq ft. I can't see it renting for $1450 a month. I lived in a brand new downtown highrise on the 19th floor last year and I paid that much, but I also had an extra 200 sq ft.

Also I'm not sure how he considers paying off the mortgage principal as cash flow.

[chemgear]

There was some discussion about how Mike F. used to show historical home sales prices - that roughly 50% of people selling their home right now were losing money after realtor fees. I don't think he links the spreadsheets now but he did have a post about condos recently:

http://calgaryrealestatereview.com/2...t-during-peak/

[chemgear]

^ You are talking about the Garth guy and they are talking about the ad? I've seen Garth's website here and there. He maybe points out some good trends but certainly sensationalistic though.

[blankall]

Originally Posted by chemgear

The National had an interesting segment last night, silly people in Vancouver and Toronto.

http://www.cbc.ca/video/#/Shows/The_.../ID=2229183570

Canada is really spoilt. People in the rest of the world do not live on huge pieces of property with lots of space. As cities get bigger, obviously there is going to be less space for everyone. Everyone wants their cake and to eat it too. They want to live in a city with lots of big and exciting things going on, but they want a house with a back yard for an affordable price. You simply cannot have both.

[ranchlandsselling]

Originally Posted by fotze

Actually you can in Calgary in lots of places. I think you meant to add a disclaimer like "in the long term at low prices and op cost".

Was about to say the same thing. "Sure you can, in Calgary"

[Cowboy89]

Originally Posted by fotze

The part I didn't understand is where he says,

just sticking the down payment money in bank preferred shares paying only 5% and claiming the dividend tax credit would give a better after-tax return. And no risk.

Is 'bank preferred' stock locked in? I actually went to buy some of this 5% no risk stuff. What is he talking about? BMO has a 4.8% dividend but has gone down by that or more. Thats not 'no risk'.

The below in no way constitutes investment advice and should only be used for discussion purposes. I am not a Financial adivisor.

He's talking about Preferred Shares that are issued by the Banks, not the common stock. They trade daily on exhanges and are fairly liquid so not 'locked in'. They pay dividends at a prescribed rate (different rate reset mechanisms apply to different series of shares and by banks that issue them) and get priority over common shares. As such these preferred shares tend not to move up and down too much and just quietly pay dividends.

They aren't of course 'no-risk' as they are instruments of the banks that issued them (IE RBC, BMO, CIBC, TD, Scotia) and thus if the bank were to go under (or a scenario where the bank had to suspend common and preferred share dividends but somehow avoided default) you would get stiffed. (You can diversify some of this risk away by investing in an ETF of preferred shares in a variety of companies in North America - ishares sells one of these products - XPF)

The 'no-risk' comment was really reflecting that your risk is essentially the risk that the bank goes bankrupt (Which pretty much never happens in Canada). The point was that an investment in preferred shares is an order of magnitude less risky than buying that condo in Calgary and yet likely would still yeild a greater after-tax return. This is the crux of the real estate problem in Canada right now, people are taking on enourmous risk in large dollar amounts in real estate and not necessarily getting compensated for taking them.

[Slava]

Originally Posted by Cowboy89

The below in no way constitutes investment advice and should only be used for discussion purposes. I am not a Financial adivisor.

He's talking about Preferred Shares that are issued by the Banks, not the common stock. They trade daily on exhanges and are fairly liquid so not 'locked in'. They pay dividends at a prescribed rate (different rate reset mechanisms apply to different series of shares and by banks that issue them) and get priority over common shares. As such these preferred shares tend not to move up and down too much and just quietly pay dividends.

They aren't of course 'no-risk' as they are instruments of the banks that issued them (IE RBC, BMO, CIBC, TD, Scotia) and thus if the bank were to go under (or a scenario where the bank had to suspend common and preferred share dividends but somehow avoided default) you would get stiffed. (You can diversify some of this risk away by investing in an ETF of preferred shares in a variety of companies in North America - ishares sells one of these products - XPF)

The 'no-risk' comment was really reflecting that your risk is essentially the risk that the bank goes bankrupt (Which pretty much never happens in Canada). The point was that an investment in preferred shares is an order of magnitude less risky than buying that condo in Calgary and yet likely would still yeild a greater after-tax return. This is the crux of the real estate problem in Canada right now, people are taking on enourmous risk in large dollar amounts in real estate and not necessarily getting compensated for taking them.

That and it should be noted that there are all kinds of preferred shares that are for sale. It depends on the credit risk of the company, but there are some higher/lower interest rates as a result.

[GP_Matt]

This may be a dumb question but why would a bank loan me money at 2.25% and then turn around and pay 5% interest on a preferred share?

[blankall]

Originally Posted by GP_Matt

This may be a dumb question but why would a bank loan me money at 2.25% and then turn around and pay 5% interest on a preferred share?

The bank has more than one revenue stream. Some (ex. your mortgage) pay 2.25%. Others will pay much more than 5% (ex. BS fees they charge for everything). The shares represent ownership in the bank. A small portion of the profits are being paid to the shareholders as dividends.

[GP_Matt]

Maybe it is just the terminology, but I always thought of preferred shares as being closer to debt than standard shares in the company. They pay a fixed rate of return and generally don't change in value like a stock does. They also have no voting rights like a traditional stock.

It makes sense for the standard shares to pay more than the profit on their least profitable product as they are paying out the profits of the company as a whole. But if preferred shares are similar to bonds then it seems odd.

[Slava]

Well they are basically right between stocks and bonds. They are above the common shares in the hierarchy of getting dividends so they get dividends before common shares and have a bigger guarantee in that sense. They don't come with voting rights though, so there is a bit of give and take there.

[calgaryrocks]

Originally Posted by Cowboy89

The below in no way constitutes investment advice and should only be used for discussion purposes. I am not a Financial adivisor.

He's talking about Preferred Shares that are issued by the Banks, not the common stock. They trade daily on exhanges and are fairly liquid so not 'locked in'. They pay dividends at a prescribed rate (different rate reset mechanisms apply to different series of shares and by banks that issue them) and get priority over common shares. As such these preferred shares tend not to move up and down too much and just quietly pay dividends.

They aren't of course 'no-risk' as they are instruments of the banks that issued them (IE RBC, BMO, CIBC, TD, Scotia) and thus if the bank were to go under (or a scenario where the bank had to suspend common and preferred share dividends but somehow avoided default) you would get stiffed. (You can diversify some of this risk away by investing in an ETF of preferred shares in a variety of companies in North America - ishares sells one of these products - XPF)

The 'no-risk' comment was really reflecting that your risk is essentially the risk that the bank goes bankrupt (Which pretty much never happens in Canada). The point was that an investment in preferred shares is an order of magnitude less risky than buying that condo in Calgary and yet likely would still yeild a greater after-tax return. This is the crux of the real estate problem in Canada right now, people are taking on enourmous risk in large dollar amounts in real estate and not necessarily getting compensated for taking them.

good insight. what is xpf's dividend rate?

[Cowboy89]

Originally Posted by calgaryrocks

good insight. what is xpf's dividend rate?

Right now it's dividend yield is 4.92%. Read the ishares prospectus and then go onto S&P's website and examine the North American Preferred stock Index to get a better insight on what XPF is and it's holdings.

[Tron_fdc]

In case anyone wants the laymans explanation of preferred vs common shares.

http://www.milliondollarjourney.com/...d-stocks-i.htm

This is a good Investment risk diagram showing where bonds, etc fall



I'd get more into this, but I'm doing a capex project for school and CP is supposed to represent a break from Corporate Finance.

[Tron_fdc]

Originally Posted by fotze

Where do preferred shares fit on that pyramid?

Depends.

Preferred shares from a bank would be at (or near) the bottom as the risk of insolvency is low. This is also why the dividend rate is 5%.

Preferred shares from my start up company selling real estate in Detroit would be at the top, because I might get shot when I repo my next house project. My dividend rate is 80% though!

Higher risk=higher return.

[Slava]

Originally Posted by Tron_fdc

Depends.

Preferred shares from a bank would be at (or near) the bottom as the risk of insolvency is low. This is also why the dividend rate is 5%.

Preferred shares from my start up company selling real estate in Detroit would be at the top, because I might get shot when I repo my next house project. My dividend rate is 80% though!

Higher risk=higher return.

Well this is the wrong thread for this discussion, and I'm not taking a shot at you in any way here Tron, but I hate that high risk= high return idea. Its such utter BS, and yet its propagated constantly.

I would say in general fotze, that preferreds are right between bonds and common shares on that pyramid though.

[chemgear]

Surprising Vancouver numbers given the continued record low interest rates these days (2.99% current - lowest it's ever been?) Even Calgary had a slight sales number bump compared the crap sales numbers from the 2010/2011 years - basically the two lowest sales years over the recent decade.


http://business.financialpost.com/20...me-sales-fall/

Vancouver home sales fall to lowest in April since 2001, real estate board says.

[Tron_fdc]

Originally Posted by Slava

Well this is the wrong thread for this discussion, and I'm not taking a shot at you in any way here Tron, but I hate that high risk= high return idea. Its such utter BS, and yet its propagated constantly.

I would say in general fotze, that preferreds are right between bonds and common shares on that pyramid though.

How so? I guess there are always exceptions to the rule, but if it was total BS everyone would be getting great returns on high risk investments, which isn't the case.

I'm curious though because you're right; all my finance courses are hammering away at the high risk, high return correlation, unless you can identify an undervalued stock based on some factor (present or future) that is going to impact its worth. I'd be interested to hear how it would be evaluated differently.

[Slava]

Originally Posted by Tron_fdc

How so? I guess there are always exceptions to the rule, but if it was total BS everyone would be getting great returns on high risk investments, which isn't the case.

I'm curious though because you're right; all my finance courses are hammering away at the high risk, high return correlation, unless you can identify an undervalued stock based on some factor (present or future) that is going to impact its worth. I'd be interested to hear how it would be evaluated differently.

It's not that I don't want to post this publicly, but this is a real estate thread and has been going for a couple years...so I hate to take it way off topic. I'll post something in the stock thread later tonight though, or I could PM you? I just think we should leave this thread intact for chemgears doom and gloom. Eventually there will be another recession and then he can finally post his "I told you so" that he has been building towards!

[chemgear]

Originally Posted by Slava

I just think we should leave this thread intact for chemgears doom and gloom.

Heh!