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I am considring investing my own 200 k cad in buying a studio spartment and renting it for 10 years before selling it. I anticipate monthly rent of 1200 cad and monthly expenses of 500 cad leaving 700 cad/month (8400 cad/year) which is about 4 per cent yield on investment. I anticipate the property will apreciate considerably in 10 years.
I am new in Calgary and to investment and will apreciate comments and if my plan makes sense noting that I am retired at 66 old and seek safe investment.

Imark
 

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Ok, I'll bite, but soon I'll have to lay off or I'll get a reputation as that housing bear guy :)

So, the first question is, do you have any experience with landlording? I ask because it's important to know before you jump in if your numbers are accurate -- is $1200/mo an accurate number for the rent for the unit you're considering, and is $500/mo an accurate number for the expenses? Does this include a vacancy allowance? If you have to pay utilities such as heat, hydro, or water, have you factored that in? ($500/mo looks like it's probably just maintenance, taxes, and vacancy).

The next question is, how much appreciation do you expect in 10 years. Why? And, will that appreciation even cover the transaction fees?

Personally, I don't expect any appreciation in Canadian urban real estate, because of those rental yields. If you had a mortgage at anything but our current emergency stimulus rates, you couldn't make money with a 4% yield. If an investor can't leverage up and make money now, then who's going to buy it at a 3% yield?

If you're retired, do you want to be a landlord? It's not nearly as passive as buying a GIC or mutual fund.

As for safety, you have zero diversification, so if you're wrong and Calgary real estate does go down (or if something particular happens to your single unit, such as mould, broken foundation, or a bad tenant) then you're hosed. By buying with cash you won't have to worry about mortgage approvals or interest rate risk, but you'll still have a very illiquid investment -- something that will be fairly difficult to sell if you had to, and that you can't sell in partial lots; it's all or nothing if you need the money back. (Ok, that's not strictly true since you can borrow against it with a HELOC).

The risk-free rate of return right now is about 3% for 5-year GICs/government bonds. IMHO, the risks here don't seem to justify the slight increase in return, unless you truly are convinced that appreciation will make up a significant portion of the return.

For alternatives that include more risk than government bonds/GICs, but don't require a lot of effort or investment knowledge, check out various passive portfolios such as Canadian Capitalist's sleepy portfolio:

http://www.canadiancapitalist.com/introducing-the-sleepy-portfolio/

For your age, you'll probably want to tweak it to have a larger fixed income proportion (maybe as high as 80% bonds/cash if you have a strong risk aversion).
 

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the above post is not a bear report from a housing bear guy.

it is actually an extremely valuable & well-thought-out suggestion workup, complete with a referral to a passive or "sleepy" investment approach that is highly appropriate for new investors.

the way i see it, older persons with comfortable but not sumptuous means and a prudent aversion to risk have no choice in these low-interest times but to batten down the hatches & cut costs. If you have 2 cars, for example, you probably should only have one, and so on.

potato has outlined the major risks of sinking nearly half your portfolio into one studio rental apartment. All most other posters could add is to say Please Go Back and Re-Read Potato's Post.

ok there is one thing i could add. About the only worse idea you could have is to buy 7 foreclosed rental apartments in phoeniz arizona ...
 

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NO I am not a housing bear guy but I am actually pro housing and work in rental real estate all the time in Toronto.

Renting is a risky business, people leave in the middle of their lease, wreck the property, don't pay their rent. 4% will never cover these other expenses.

You make money in real estate in 4 different ways.

1- Add value by doing repairs. A caveat to this is that you must have inexpensive but good reliable trades

2 - Pick the up and coming area so not good now but good when you sell

3 - Rental cash flow and increasing it

4 - Inflation and passage of time.

Look up the thread I started about why I hate condo's as investments.

I like to feel like as soon as I buy the property it is worth more than I paid for it. 4% return on a condo will soon turn to 0 or negative return. And betting on the capital appreciation on a condo is just speculation. Too many things can happen to destroy the value of your condo.
 

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I am considring investing my own 200 k cad in buying a studio spartment and renting it for 10 years before selling it. I anticipate monthly rent of 1200 cad and monthly expenses of 500 cad leaving 700 cad/month (8400 cad/year) which is about 4 per cent yield on investment. I anticipate the property will apreciate considerably in 10 years.
I am new in Calgary and to investment and will apreciate comments and if my plan makes sense noting that I am retired at 66 old and seek safe investment.

Imark
This is a bad idea.
 

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If I were 66 and retired , and wanted real estate exposure , I would invest my 200,000 in XRE , right now it will get you better than 4% , with less risk than Calgary RE. in my opinion.

No RE fees , taxes , upkeep , bad renters , maintenance fees , etc.

It is very liquid and you can get out whenever you want or need to.

But that's just me , I've had some bad experiences with renters and RE in general.
 

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Discussion Starter #7
thank you all so much but

But I must be dim as not to agree with all of you !
I looked into GIC and the best deal is 2 per cent interest. Property apreciation over 5 to 10 years is typically 5% annually. This is much higher than any secure investment in the market.
I will be exempted from taxes because I have no other income and 500 $ per month condo expenses seems reasonable including the rent company management fees.
I appreciate your advice but presently I don’t see a better option. I will love to read your responses
Imark
 

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Imark,

Property apreciation over 5 to 10 years is typically 5% annually.

Yes but are you aware that we are in a bubble? And if you buy now you will be at the high peak of that bubble? This is why the government of Canada is currently talking about raising requirements/downpayments to buy homes.

http://www.vancouversun.com/business/fp/Record+house+sales+revive+bubble+fears/2448393/story.html

This is much higher than any secure investment in the market.

Right you are comparing an insecure investment in real estate with a secure one in GIC's. Real estate is not secure. What would lead you to believe that real estate investment is comparable to a GIC? If your real estate agent wants to guarantee you that house prices will go up forever make sure you get his/her signature on the dotted line saying that if you lose they will pay you back the difference.

Also you should expect a much much higher return than 5% capital appreciation for your risk. In Toronto as I write I am currently working with investors on a building with a vacancy rate of 38% in decent condition with a current net income of $104,000 for a purchase price of 1,300,000 or 1,400,000. Potential income is $181,000. So whoever wants you to buy an investment condo kick them in the balls and run away as fast as you can.
 

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In Toronto as I write I am currently working with investors on a building with a vacancy rate of 38% in decent condition with a current net income of $104,000 for a purchase price of 1,300,000 or 1,400,000. Potential income is $181,000. So whoever wants you to buy an investment condo kick them in the balls and run away as fast as you can.
That building would be too expensive for my blood - even if the vacancy rate was 0%, but that's just me.
 

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But I must be dim as not to agree with all of you !
I looked into GIC and the best deal is 2 per cent interest. Property apreciation over 5 to 10 years is typically 5% annually. This is much higher than any secure investment in the market.

First off, what are you looking at for GICs? The posted rate at PC Financial & ING is 3% for a 5-year, and you might be able to negotiate better with your large deposit. Ally is 3.6%. Plus that will probably improve over the years as interest rates return to something more normal. If you're looking to lock your money up for 10 years, you can get a provincial bond at ~4%.

Next, challenge your assumptions: why do you think housing will continue to go up 5% annually? Why do you think it will have such great returns and also be secure?

Finally, remember the fine print: past performance is no guarantee of future returns. Just because Calgary real estate has had a massive bull run in the last decade doesn't mean it will again in the next.
 

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Vacancy rate is 5% in Toronto. Full this building has a cap rate of 13.9% and it has a commercial component which means easy evictions. It's not good enough for you it all comes down to what you said on your website about how people can't see opportunity even when it beats them in the face with a stupid stick.

In Toronto right now buildings are selling for 5% cap rate So you buy this one for $1,300,000 and rent it out and sell it for a cap rate of 7% and make $1,000,000 because income properties are sold by income.

So go and buy your condos they may even double in value in 5 years. The cap rate for your condos is 12 % after factoring in a 20% vacancy rate. $430/month X 12 x 80% /$35,000)

But you can buy this one with $350,000 and triple your initial investment in one year tops or make 13% when it's full. But that's not good enough for you.

You don't even know what you are talking about.
 

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You don't even know what you are talking about.
I do know what I'm talking about because I'm talking about myself. And for myself, this building is too expensive. I'm sorry that you need my approval to feel good about yourself.

It's amusing that being a so-called expert in real estate that you're applying a 20% city-wide vacancy rate to my properties that have 0% vacancy and then comparing it to this building which actually has a vacancy rate of 38%.

Anyway, I'm going to go back and calculate the value of my stock investments by taking the sector average profit margin growth and apply them to the discounted cash flow calculations of my holdings because that's relevant.
 

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If your real estate agent wants to guarantee you that house prices will go up forever make sure you get his/her signature on the dotted line saying that if you lose they will pay you back the difference.
I had an REA trying to sell me a commercial space almost 2 years ago for what I thought was a crazy price and he made a comment about the value going up and up, on average 4% a year. 'It is just the way real estate works', he said.

I asked him if he would give it to me in writing and he quickly shut up. ;) BTW, the place is still for sale.

Maybe if you are buying to hold for 20+ years then it 'might' be true, but again, why not invest it in another way and save yourself a lot of hassles and not be locked into what could be a very non-liquid investment.
 

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I do know what I'm talking about because I'm talking about myself.
.....
It's amusing that being a so-called expert in real estate that you're applying a 20% city-wide vacancy rate to my properties that have 0% vacancy.....
It was I who raised the 20% vacancy rate issue in AZ:

Lets 'try' not to turn this into another R9 crap fest. I learned from my earlier experience. In this case I do not think it really matters if the example specifics he gave are true or not or a mix.

It is true that there are tons of cheap properties in the area in question so it is tempting to jump on the 'buy and rent it' wagon for some people.

Since no one is addressing my Q about vacancy rates in the location, I started googling and found a few quickly. I search "phoenix az rental property vacancy rates"

http://www.cnbc.com/id/29350086?slide=7

states that:

"
#5 worst vacancy rate in US: Phoenix, AZ: 19.0%

(Source: U.S. Census Bureau * Based on Rental Vacancy Rates for the 75 Largest Metropolitan Statistical Areas for the Fourth Quarter of 2008)

Metro area includes: Phoenix, Mesa and Scottsdale
"

I would bet this has gotten worse, not better, given prices have dropped even more than Q4 2008, so likely more buyers and less renters of these cheap units.

The following article seems to agree, data from Q3 2009 (download the PDF). It paints a pretty dire downward rental price situation and increased vacancy rate % in the area, predicting further declines in 2010.

http://www.azama.org/news.asp?NewsID=1236

I was looking for articles / claims about vacancy rates that were NOT from management companies or real-estate agents, who of course would likely want a foreigner to think everything is great and you should buy to rent.
......
My conclusion is that buying in this area for rental is not a silver bullet or ' close to free money' as original poster suggested. Maybe it will work for some, but the road will likely be bumpy for a while.
The azama.org article is very interesting read and is very sobering, no matter who you are. I would suggest that you may have 0% vacancy rate now, but what will it be in a year, and how much will your rents drop, when your current leases expire?

Furthermore, based on the article, if you do want to spend lots of cash on buying in AZ, wait another 6 - 12 months and things will be even cheaper. ;)

You are you for sure, and I wish you the best of success. I just like to try to help people see both sides of a coin instead of just 1 when only 1 is presented.

I also agree that real-estate prices in Canada are in general way too high (TO is probably near the worst) given rental rates and the likelihood of housing price drops when rates go up (I don't think it is a matter of if, but a matter of when).
 

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Like humble pie said - go back and reread pototoes post.

imark - your low income leading to reduced taxes is a tempting wrinkle and demands further investigation. Do a few spreadsheets.

But 5% / year appreciation? Real estate is only worth what someone else will pay. Will someone buy it for $325k in 10 years? That's what 5% compounded is.

I've been a landlord and it's not for everybody. If you're serious, take a hard look at the rest of the real estate market in Calgary. I think you could get that property for a lot less than 200k. You might even be able to get two units!
 
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