How to make money in real estate in a long-term bear market

What is a bear market?   Used in stockbroker bullpens on a daily basis this term refers to a general downward trend of prices, which means in economic terms generally more supply than demand for product.

The traditional view of owning real estate is you bought it for appreciation of the price of the property, or so I had been told. So how does one buy now in a market that is reversing in value? Firstly, to say that with a brush stroke over the whole market is not really true as there are weaker markets than others. For example in Toronto December 2008 sales dropped 45% from the same month last year (http://www.torontorealestateboard.com/consumer_info/market_news/index.htm) and the average sales price in December 2008 was $387,482 compared to $425,842 December 2007 and $350,139 in December 2006.

Is this drop in value in Toronto just temporary? Well considering that we are in a world-wide recession and Toronto’s affordability has eroded according to Royal Bank’s report

(http://www.rbc.com/economics/market/pdf/house.pdf) I am going to safely say that I would not be hoping for appreciation beyond 1 percent per annum for the next few years.

So how do I make money in this long-term bear market? I think if you meet the old timers who have been in real estate investing for 20+ years you’ll hear something like this: Buy real estate that is net cashflow positive after all expenses having an efficient management system and it will pay itself off. What if the value drops during the time I own it? Who cares, it carries doesn’t it?! This investment strategy is completely independent of property value and can prove to be a profitable one.

What if rents drop? When buyers cool off they rent and this long-term bear will prevent first-time buyers from buying and cause them to rent as written in National Post (http://www.nationalpost.com/todays_paper/story.html?id=1161571).

What is interest rates rise? Worldwide demand is softening from the BRIC nations (Brazil, Russia, India and China) which are the fasting growing and consuming middle-income nations in the world. With that comes a lessening desire for goods and services which slows down the economy. Well interests are low and expected to stay low as a result of this long-term bear as indicated by all bank economists in this article. (http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2009/01/rate-cuts-coming-january-20-say-economists.html)

Consider this example, Joe adheres to his strategy as he starts his real estate investing at age 35 and buys one $100,000 property per year for ten years. Assuming that the property mortgages have been amortized over 25 years, have minimal cashflow, require minimal management, and don’t experience any appreciation over the next 25 years, here is the result. At the age of 60 Joe has one property fully paid off worth at least $100,000 (this example assumes that there is no inflation so $1 today is worth $1 in 25 years from now), and every subsequent year from then on Joe has another property completely paid off for.   Beyond the almost $1 Million dollar portfolio of assets, the properties are generating rental income that subsidies Joe’s lifestyle. Additionally, Joe can give these assets to his family or sell them for a really nice trip around the world.

Can real estate investing really be that simple? Yes it can. While any professional can complicate the example give above, I am firm believer of it. I am putting my money where my mouth is because my portfolio has a substantial number of these long-term holds. I own condominiums that are tenanted and professionally managed. I spend no more than one hour a month driving to the bank to deposit my rent cheques and reviewing the statements prepared by my property manager. Because I am the President of the condominium board of one of the condominiums I own in I spend an additional one hour per quarter review property management issues with the property manager and I spend another few hours once a year at our annual general board meeting. I consider this one of my nest eggs for my family’s first $1Million dollars.

 

Randy Ramadhin

Randy Ramadhin

Broker
CENTURY 21 People's Choice Realty Inc., Brokerage*
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