Real Estate Investor’s Biggest Enemy

We often travel outside our hometown to hear the ‘experts’ speak about what’s going on in real estate, provide updates on the Canadian market and to stay on top of our business. Last Monday evening, the expert came to us. Don Campbell spoke at the monthly meeting at OREIO (Ottawa Real Estate Investing Organization), and gave us some insight into the seemingly turmoil world of real estate.

Don Campbell - REIN

Don Campbell – REIN

 

What do you think is the Real Estate Investor’s Biggest Enemy? Is it the tenant that is late on payments again? Is it finding the down payment for your next property?

Don’s answer is: “It’s our obsession with the wrong statistics!” Let me explain.

So why should we as real estate investors listen to Don Campbell anyways? Well, he’s been buying real estate since 1985; 170 properties and 7 books later, he has a bit of experience to share with us. Don is the president of the Real Estate Investing Network (R.E.I.N.) of Canada, and is the “Go To” Real Estate expert in the media. Don regularly travels across Canada giving talks and teaching about Canadian real estate. It seems like economics and statistics is one of his favorite topics as he keeps reminding us to do our homework and study the markets we plan to buy in.

 

It’s easy to get caught up in the daily headlines of the major media outlets. But if I actually believe every headline I read, I would probably be too afraid to even leave my house – since the world and all our systems are collapsing anyways, right?

 

Media frenzy - real estate headlines

Media frenzy – real estate headlines

 

But we have to be smarter than that. We have to realize that the Media is mostly an entertainment industry not a ‘reality’ industry. We have to separate ourselves from the general population and aim to be above average. We have to read between the lines, and pay attention to the headlines that truly affect our business and investments.

First of all, there’s no such thing as national averages. There’s no such thing as a Canadian Market. Real Estate is local. What does it mean when the national house price increased by 2% anyway? That a few more homes sold in Vancouver this year compared to last? That more downtown Toronto condos sold? Will that affect your market? So if you are going to invest in real estate, and if real estate is local, you should probably pay attention to the statistics in your market, in your city or town that you are investing in.

Second of all, statistics about house prices and number of new starts paint a picture of the past. Those are yesterday’s numbers. Yesterday’s average price is based on yesterday’s sales, which is based on yesterday’s population trends, etc, etc.

Sophisticated investors place themselves in the path of growth. Sophisticated investors buy where there are jobs, where people are moving to, where the transportation and infrastructure is expanding.

For example, did you hear of the major $25Billion ship-building contract in Halifax? The city of only 400,000 people is expecting a major influx of migrant workers joining the existing labour force. Only a few months after the announcement, realtors claim to have already felt the real estate market react. Read more here.

 

So how do we examine if we should invest in a certain market? We need to look at the city’s economic foundations and understand the interplay between the following factors.

  1. Economic Development – are companies moving there? Are current companies hiring and winning major contracts? Is the GDP growing?
  2. People – are people moving there? What are the demographics?
  3. Infrastructure – are there roads and rail being build/expanded?
  4. Sustainable momentum – are these jobs sustainable? Is there a long-term horizon?

 

The following Sustainable Momentum Graph shows the impact of economic activity on a real estate market.

Sustainable Momentum Graph by REIN

Sustainable Momentum Graph by REIN, source: http://www.reincanada.com

 

In a nutshell, according to Don, GDP growth = Job growth = Population growth = Job Growth = Population Growth = Increased rental demand (12 months later) = Increased rents = Property purchase demand (18 months later) which eventually leads to property price increases.

Note that the wild card here is Supply. If there’s an over supply of available units, even with a steady demand, there is going to be an impact on real estate values.

 

For more on Don’s take on this topic:

2012: The Year Of Confusion, Concern and Consternation – The Perfect Environment For A Sophisticated Investor

No Matter What The Headlines Say, The Economics Will Hold True – 2012 Is No Exception

 

The take home message

We are not making any predictions about the future of the real estate market in Canada, but pay attention to who does. Think twice before relying on the media headlines for your investment decisions, and study the markets. As smart as we think we are, we will never out smart the long-term market.

One response to “Real Estate Investor’s Biggest Enemy

  1. Hi

    I am very into real estate & like this field very much , but as of now I had a opportunity to open a business of building material , supplying contractors, do you have a coach were I could study my field ?! I am very happy with your coach & will be very happy if you could help me with construction or building material.

    Thanks & best regards Sydney Friedman

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