The following article is from Canadian Real Estate Wealth Magazine.
With signs of uncertainty in the market, it has never been more important to analyze your next real estate investment. Jumping into the unknown and hoping for the best is risky business. While this tactic may have worked over the past three years during Canada’s lucrative real estate market, it is no longer the case. Real estate has never been a fool’s game’ and now is the time to switch strategies and become diligent for a greater chance of success.
It is also unwise to sit on the sidelines in cash. Downward market shifts are healthy for a number of reasons because it amplifies the good, the bad, and weeds out the average.
Tactical investing is the act of leveraging a strategy behind every decision. All too often, real estate investors make decisions based on past performance or success – the same type of mistakes are found in capital markets. As an investor, it is important to treat every decision independently, and perform the proper due diligence with the right set of tools.
Just because Uncle Joe bought on speculation and got lucky, doesn’t mean that you have a sure bet. The only certainty in real estate is that the market can take it away as fast as it can give it. By taking a few simple steps, you will put yourself in a better position for success and maximize your working capital. Below, we examine some very relevant tools for performing your own due diligence, common traps in the market, some issues that are often overlooked, and some warning signs that the development will fail.
None of these tools are meant to make you invincible, but they will definitely help to put you in a position to take advantage of potential market changes. If you’re an expert already, they are likely to reinforce your current investment strategies.
Five critical test of a good condo investment
These five core filters are the bread and butter of investing in real estate. If your next purchase does not pass at least four of the five filters below, it is likely a good time to reconsider the investment.
The old proverb remains true: you make money in real estate by what you pay for it, not what you sell it for. Pricing is the easiest way to ensure that you are on the right track. If you are buying in a heated market or in a ‘hot’ neighbourhood, it is likely that you’re buying at the fifty two-week high (or three year high in Toronto’s case). Stay away from inflated prices.
2. Developer experience
The problem with heated markets is that it attracts amateurs that want to get in on the action. But, more often than not, these products lack quality and design. They may look good on paper, but the underlying issues will make you want out faster than the ink can dry. Try to buy from a local developer that has a portfolio of successful products in the neighbourhood.
3. Development logistics
Even if the price is right and the developer is great, you will still need to examine the size of the project, layouts, designer, amenities, etc. If the project is reaching for the stars, you can bet that it will feel less like a community and more like a transient bus station.
4. Location and neighbourhood
Condo investments, resale or new, hinge on their location and the neighbourhood that surrounds them. The neighbourhood makes the condo and not the other way around. This doesn’t mean that the neighbourhood has to be completely gentrified; it just means that it has to have the foundation for resale and rental capacity.
5. Running the numbers
Even if you are purely a growth player, the rental numbers still have to make sense for resale value. Long-term value investors will focus directly on the cap rate of the property. Future rental capacity is critical to a strong investment and building a passive portfolio.
Traps to avoid when buying condos