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.

Reverse Mortgages

I have just completed a CAAMP (Canadian Association of Accredited Mortgage Professionals) online presentation on Reverse Mortgages and their role in providing access to their home asset for seniors in Canada who own their own homes.

This is not the first time I've looked at Reverse Mortgages, but I dare say it is the first time I've really examined them from a number of perspectives, and while I like some of what I see, there is a lot that really disturbs me, particularly since one of the specific objectives of the Reverse Mortgage Companies is to make reverse mortgages "mainstream."

Seniors Money, one of the newest players in this arena, is promoting its product through the training seminar to Accedited Mortgage Professionals "AMP's" and seeking to increase its distribution by selling their product through mortgage brokers, financial planners and directly through their own sales force and web page.

First Promise - "At Seniors Money, we promise that that you won't have to pay that part of the amount you owe to us that exceeds the net sale proceeds of the mortgaged property as long as you are not in default on your mortgage and as long as you sell the mortgaged property for at least its fair market value on the date of the sale, based on an appraisal we may get. "

WHAT?! The implications of their first promise is that perhaps ALL of the equity in a property will be consumed by accumulating interest once a senior has borrowed between 15% and 45% of the appraised value of their property and stayed in the property for a period of time after the loan. If the amount you owe is more than the property sells for you won't have to pay the outstanding balance?

Excuse me. If this is their first promise, I'm getting worried about their second promise. Which is that you can set a minimum percentage of equity to retain in the property upon disposal by sale or death. 10% 20% or even, gasp! 50%

Talk about under promising and over delivering! Canadian real estate has been a strong hedge against inflation for a very long time. For a reverse mortgage to eat up more than the increased value of a property, with a loan advance of only 15-45%, the effective interest rate would have to be quite high.... oh, it is.

No don't get me wrong. There are lots of things I like about Seniors Money, in certain situations I think it is a very viable option for some seniors, but it is not for everyone and there are alternatives to accessing the equity in your property without risking the loss of that equity at all.

Instead - Borrow cheaply against your good name and equity, and lend the money through a mortgage or a mortgage investment company to someone with less good name and still good equity. You never use up the equity, but you gain a consistent source of income. What's wrong with that?