Five tips for people eyeing real estate as an investment:
1.) Keep your eyes on interest rates: Historically low borrowing costs have done for the Canadian housing market what steroids did for Ben Johnson. The unhappy ending for housing will come when rising rates start pushing up the cost of financing the astronomical cost of a house in cities like Vancouver and Toronto. An increase in five-year fixed mortgage rates to 4.5% from 3.5% would raise the cost of carrying a $450,000 mortgage by more than $3,300 annually (assumes a 30-year amortization and accelerated bi-weekly payments).
2.) Consider the condo: When was the last time they built a plain old apartment building near you? Nobody builds apartments any more—they build condominiums. Therein lies an argument for buying a condo as a source of investment income. Who’s going to rent all the condo units they’re building a breakneck rate in many Canadian cities? Downsizing baby boomers. Business opportunity: Providing long-term condo rentals to retirees who want the urban lifestyle without the aggravations of home ownership.
3.) Buy Low: Does anybody remember this most basic of investing rules? Years and years of dramatic price increases are an argument not to invest in real estate. The difference between dumb money and smart money is patience. Bargains will emerge eventually.
4.) U.S. real estate is trickier than you think, Part One: Recovery from the epic crash of the U.S. housing market has been much slower than anyone expected. At the end of the third quarter of 2011, prices were down 3.9% on a year over year basis and were sitting at 2003 levels. Blame weak job growth, persistently high foreclosure rates and the fact that many homeowners owe more than their houses are worth. The lesson here is that an investment in U.S. real estate is a long-term project.
5.) U.S. real estate is trickier than you think, Part Two: It’s easy enough to finance the purchase of a U.S. property by using a home equity line of credit tied to your house here in Canada. But picking a property requires massive amounts of research and preparation. A property might seem well-priced, but what’s the local foreclosure rate, how many of your neighbours are renting and what’s the crime rate? Also be sure to get advice on matters like how best to register the title for your new property.