Real estate boom

The key to investing in Canadian real estate, or any real estate for that matter, is never to buy what you can't afford to support in the long run. One the most significant dangers in a rising real estate market is that many people jump in and buy properties based on the anticipation that they will be worth a lot more in a year or two. So the buyers don't worry about cash flow too much, or at all.

The reality of real estate investing is that if cash flow isn't KING it should be. And although the value of real estate tends to increase over time, there is no rule that says it will always go up in the short run. It may even go down, which is what has happened in the US markets, leaving a whole bunch of folks with properties worth less than the amount they borrowed against them.

Ouch, that's gotta hurt!

Unfortunately, this isn't new news. If you buy something you can't afford, on the basis that it will be worth radically more in the near future, you are doomed to crash and burn, if not in the near future, then today.

Because, according the Canadian Real Estate Association, the Canadian marketplace has crashed or at least has stopped going up significantly. Hmmm..... I'm not sure that I buy what they are trying to sell.

But the point is.... buy what you can afford to pay for... either from rental income or from income from your estate or work or ???? If you can afford to hold on to your purchased property for the long term, it will probably work out ok, even if you have to hold it until the mortgage is paid off someday. If you can afford to hang in there.... eventually the mortgages will be paid off, eventually rents will rise and make the place worth more .... eventually prices will go up, and allow you to recover your investment or make the returns you hope to make.

My son and I purchased property in the Lower Mainland of British Columbia in the early 1990's. A decade later it was still worth basically what we paid for it, and not in inflation adjusted dollars but in real dollars, so it actually went down in value between 1992 and 2003. During that period it was always rented out, and although there was small shortfall in our costs over and above the amount we collected, it was affordable.

If we had sold prior to the end of 2003 we would have potentially lost money on the property. And yet, in the next four years the property increased by more than 50% in value, at which my son and I sold and took our profits.

Brilliant! Well, maybe not. It was ok, but we could have done better if we had bought slightly differently, but we still did fine. But we only did fine because we could afford to ride out the lousy real estate market in BC from the early 1990'2 to 2002.

Market timing is no easier in the real estate market than it is in the stock market, but the real estate market does tend to be more forgiving to those with patience and time on their side.