Frustration and Chaos in Real Estate Investing
Frustration and Chaos in Real Estate Investing

Frustration & Chaos in

Real Estate Investing…

The Inevitable Waves of Life

Frustration, chaos, fear, disappointment, fear (yes, I said fear twice). This is the emotional roller coaster that many investors have been riding on for the past 18 months as markets collapsed, jobs were lost, deficits were created. Now, but a few months later, we see talk of ‘real estate bubbles’ and dramatic interest rate increases. Bring out the same emotions, now because the market is, some say, too hot.

These emotions and economic roller coasters, when acknowledged and harnessed, can become a source of great success for the informed investor as opportunities are hidden within the highs and lows. In 2009, many people allowed themselves to be defeated. They gave up on their investing strategy, they put their financial dreams aside, all because they did not understand the source of these emotions and that source is unmanaged expectations. Expectations based on wishes, not realities.

Our world is run on waves with peaks and troughs. We all are subject to waves in our relationships, in our businesses, in the economies that surround us, interest rates, vacancy rates, stock markets, property prices. The ups and downs are inevitable. Yet whenever a shift occurs, you’ll still witness investors becoming frustrated with the change. They are not managing their expectations, they are fighting reality.

Real estate investing is not a passive investment. Once you own one piece of property, you now own a business. It takes management, awareness and adjustment in order to safely and profitably ride the inevitable waves. The first stage is identifying the waves as they come. This month, let’s look at a few of the most obvious ones:

What Happened To The Free Money?

Interest Rates Will Rise.

The next interest rate wave will hit and investors must be realistic, mortgage rates have to eventually go up. No question about it. We are currently enjoying what the Bank of Canada has called ‘emergency low rates.’ No one should be fooled when we start to climb out of these historically low rates… but when they do start to move up, it will create frustration and chaos for those who aren’t prepared.

That being said, what is all the fuss about? The Bank of Canada has made it very clear it is only going to use interest rate adjustments to control long term inflation: not the dollar, not job creation, not the real estate market. Its job is to manage the cost of living and let the economy adjust accordingly and it is not going to over react if we get one month of high inflation. It will adjust when trends form. You can see by the graph on the right that for the last 20 years, even during the strongest economic boom most of us have ever witnessed, the central bank has been very consistent in managing the inflation rate. This trend is poised to continue. Yes we will have to see inflation start to rise in our larger markets due to economic stimulus and recovery; however, the central bank will not be caught off-guard. They know that too high or too fast of interest rates increases will drive our dollar above par which will decrease the demand for our exports which will lead to job losses.

That means we can expect a relatively slow rise in interest rates off of these historic lows. So, if you know this, plan for it. Start factoring in an increase in the cost of your variable rate mortgages (and the cheap mortgages that are coming due in the next 2 years).

Review your current portfolio and start planning ahead. You will discover that many sophisticated investors have already started making monthly mortgage payments based on 1% above their current rate. This serves 2 purposes.

The first is the immediate reduction of frustration or fear. They’ve managed their expectations around the inevitable up-tick by already paying a higher amount – there will be no frustration, surprises or even decrease in cash flow when the rates rise. The second bonus is the extra money you pay monthly now, before rates increase, is applied directly to the pay down of your mortgage balance. As the rates begin to rise your payments remain the same, just less goes to principal pay down. Super simple strategy, yet a very powerful way to manage your portfolio with a future view.

I recommend this strategy as long as you stay in positive cash flow territory. If you can’t, then start planning on how you are going to make it cash flow with increased mortgage costs. Don’t allow yourself to be surprised by the inevitable. It is also important to remember, if inflation increases, interest rates go up but so do real estate values and the rents we receive.

ACTION STEP Check With Your Bank, You May Find That Even as Variable Rates Went Down, Your Payments Remained The Same. This Would Also Work Inversely, As Rates Increase Back Up Your Payments Won’t Increase Until They Hit The Rate That Was Prevalent When You First Got The Mortgage. You May Be Pleasantly Surprised At How Much You Have Paid Down The Principal Without Even Knowing It.

Bubble, Bubble, Toil & Trouble…

Real Estate Market Will Rebound in Certain Regions

If you are investing between 2010 and 2013, it is critical that you virtually ignore national real estate statistics. Sure they make a great story around the water-cooler, but these numbers will mis-direct many uninformed investors.

During this period of economic recovery, we will witness large regional disparities in real estate market strength. In fact, real estate will become a more regional story than ever before. For instance, right now the national real estate numbers show large average gains, with all the pundits talking of a ‘bubble’ forming. However, if you drill down into these numbers you see they are being skewed upwards by the strength of two large markets – Toronto and Vancouver. Those two markets alone make up the statistical weight of 49.5% in the national number. Conversely, Edmonton and Calgary combined make up a total of only 15.96%. This means if you are investing outside of Vancouver and Toronto, and you are basing your decisions on national trends and statistics, you are setting yourself with unrealistic expectations which will inevitably lead to increased frustration and poor investment decisions.

As of today, Toronto and Vancouver markets have over-shot their underlying economic fundamentals and therefore will need to move closer to the fundamentals of the market in the next 12 months as new supply comes on and buyers begin to be more strategic. When that occurs, the national number will also adjust, bringing fear into the market once again. This fear will affect uninformed investors even in regions just beginning to hit long term growth patterns. When these two major markets start performing closer to where they should be, national ‘bubble talk’ will disappear and unsophisticated investors will inevitably start fretting about some other wave they didn’t see coming.

Just 2 of the Inevitable Waves

These are just two of the many waves that are coming our way. Awareness of these inevitable waves, and the facts behind them, will assist you in becoming a calm and sophisticated investor who takes advantage of the peaks and troughs versus being frustrated by them. If you let the markets dictate your emotions, you will have a lot of difficulty building a long-term positive cash flow portfolio. However if you focus on reality you stand to take advantage of the ebbs and flows and make them work to your advantage. Become a geographic specialist – know your target region better than anyone else so you can quietly get on with managing your investment properties so they work for you… not the other way around.

Stay on top of the inevitable waves; follow my regular regional Canadian real estate market updates on Twitter @DonRCampbell

Don R. Campbell is Canada’s number one real estate author with 3 best-sellers and his new book

81 Financial and Tax Tips for the Canadian Real Estate Investor has just been released.

Order Here

Make sure you are registered for the upcoming ACRE program, to read all the details of this exclusive event Click Here and see how members of the Real Estate Investment Network™ have been able to transact over $3.0 Billion Dollars of Real Estate.

Frustration and Chaos in Real Estate Investing was last modified: April 8th, 2010 by admin
 
 
 

Recent Comments

Powered by Disqus

Additional Resources
 
Recent Posts
 

Stay Ahead of the Market Trends

Sign Up For FREE Newsletter

 
First Name :
Last Name :
Email :
Province :

Live Events
View All Events