Some people are born gamblers, always willing to invest their money on the long shot. Yet we seldom see real estate investments as a gamble.
Technology startups fail often and we know about them. We are less likely to hear about investment in real estate that failed, however, and one reason for that is survivorship bias.
In the book Mistakes Were Made, But Not by Me, Carol Tavris and Elliot Aronson discuss a “benevolent dolphin” problem. Every now and then there is a story about a shipwreck and a person being pushed toward the shore by a dolphin which saves their life.
The authors explain: “It is tempting to conclude that dolphins must really like human beings, enough to save us from drowning. But wait — are dolphins aware that humans don’t swim as well as they do? Are they actually intending to be helpful?
“To answer that question, we would need to know how many shipwrecked sailors have been gently nudged further out to sea by dolphins, there to drown and never be heard from again. We don’t know about those cases because the swimmers don’t live to tell us about their evil-dolphin experiences.
“If we had that information, we might conclude that dolphins are neither benevolent nor evil; they are just being playful.”
Not everyone shares their stories
Those who do well in real estate (and other businesses) share their stories with their friends and the media. Yet investment in real estate is risky, especially during a pandemic where economic recovery is slow and there is still a major recession.
Books on real estate success are written by the survivors in this field.
If you read a book written in the 1990s, you are likely to hear stories about the 1980s, sky-high interest rates and how being creative and hard-working made it possible to not just survive, but to thrive. Similarly, every decade new books talk about careful asset selection, diligent underwriting, etc.
The survivors write the story, not someone whose gone bankrupt!
Before the pandemic, we chose to focus on two asset classes that emerged as clear winners in real estate over the past six months – industrial and multifamily rental. It would be easy to say that we (Denciti Development Corp.) made good decisions because we had a “secret.”
Unfortunately, it is just not so. There is no secret and we are not immune to bad decisions.
That said, there are things we do that I would like to share, and it is this disciplined approach that brings better results than a simple gamble. “Ignorance is bliss?” No. Not in our business.
Gains and losses are non-symmetrical
If you start with a portfolio worth $100 and lose 50 per cent, you now need to earn 100 per cent to break even. Gains and losses are not symmetrical.
Over the past decade, real estate values have been seen going up across all asset classes. In cities like Vancouver, real estate appears to go down very little even during economic recessions. It is no wonder real estate attracts investors.
One benefit to real estate investors is that the ability to finance hard assets often allows for better leverage. Fixed-income assets can be financed on a Debt Service Ratio (DSR) and are subject to how much income is generated by the property.
Developers of real estate usually try to leverage construction loans to the maximum available amount of credit. This is because the profit margins on development are usually between 10 per cent and 20 per cent.
When you think about 20 per cent, you may say that is plenty. The reality is that, unlike other businesses which produce and sell their products quickly, real estate takes years to build and a 20 per cent return over a five-year period is not very much.
This is where leverage can help. By choosing an appropriate capital stack (debt and equity), the profits on equity can become lucrative.
Leverage is an amplifier
Leverage is an amplifier of the gains and losses asymmetry.
Say you have $100 and borrow $400 to purchase an asset for $500. If the asset goes up by 20 per cent and you sell it, you get back $200, great news – you doubled your money.
Unfortunately, the reverse is true too. If a developer who invested $100 and borrowed $400 to develop an asset with projected valuation of $575 (15 per cent profit) were to see a drop of 20 per cent, the value drops to $460. After repaying the lender $400, that leaves only $60.
This example shows that a 20 per cent drop on a 15 per cent profit margin led to a developer losing 40 per cent of their initial equity! Leverage is an amplifier of gain/loss asymmetry.
Return on equity vs. return of equity
It’s been said that compounding is the greatest wealth generator. That is true, as long as you do not lose money.
This is why we think the top priority is not the return on equity, but the return of equity. We work as hard on analyzing downside as on upside, if not harder.
For example, we often see higher projected returns for a condo development than for a purpose-built rental. Choosing to build rental property (when not required by the municipality) can be a hard decision for a developer and seeing less profit on pro-forma is not easy.
Yet, we think that people need more rental product and the risk associated with developing rental in the current environment seems lower than condo. With the increase in population, people need to find a home and many cannot afford condo prices.
There is also benefit in knowing that in some small way, we help people find a place to call home.
Unlike sailors who were pushed out to sea by the “benevolent dolphin,” we can find stories and lessons from mistakes made in real estate.
Asking questions, challenging assumptions and studying empirical evidence leads to creative solutions and better results. Using this approach, our advice would be to use more than one financial metric (such as IRR, NPV, RoC etc.) and only take on leverage appropriate to tolerate market fluctuations.
A disciplined approach brings better results than a simple gamble.
Real estate expert Benjamin Tal on the winter market, the vaccine, and the massive recovery to come – Post City
How has the real estate market outperformed your expectations as of late?
Yes, we have seen the mother of all V-shaped recoveries. The fact that the market recovered was not a big surprise. The speed at which it recovered was a surprise. I think that the number one fact though, of course, when people try to figure this out, will point to pent up demand and extremely low interest rates, which is true. However, there is much more to it. I think that if you look at qualification rates, at 4.79%, for variable and fixed-term rates, they are in fact higher from a qualification perspective when they were in 2008. And back then, this activity went down. In fact, this has been the most housing-market-friendly recession ever. Okay, so it’s not just about the industry. It’s about the composition of the damage in the labour market.
Explain how the labour market activity has impacted the market.
The vast majority, almost 100%, of all jobs lost during this recession were low wage occupations. Many of them are renters and are not players in the resale market. Second, is that it means that a very large segment of households was untouched by this crisis, financially speaking, their job is there, their income is there. In fact, many of them are sitting on extremely high levels of excess cash. And the interest rates are in the basement. That’s the opportunity that they were looking for. So the asymmetrical distribution of development in the labour market is the secret behind the success of the housing market today.
The downtown condo market is that big outlier here. What do you see happening there right now?
I think most of the most of the improvement was, of course, in the low-rise segment of the market. It makes sense because the nature of the crisis means that a lot of people want to move to detached houses. We are seeing a situation in which there is a positive correlation between the inflation rate in housing and the price of housing. The fact that detached prices are rising is a real nightmare, if you wish, for mover-uppers, because the price of the house that you want is rising faster than their own house. The gap is widening. So this is a reflection of people wanting to live in bigger houses and therefore they also move to outside the 416.
And do you see this trend continuing for the long-term?
I believe that that will continue to be the case for the next six months or so especially during the winter. The housing market in general, during the winter, will weaken alongside the economy as a whole as we have a second wave combined with the flu season confidence will go down. So that’s clearly something that we expect, and that will impact the housing market. I think that the 416 condo space will feel most of the pain because of the fact that we have a lot of supply coming in and demand is slowing. Having said that, I think that as we reach the other side of this crisis, the later the second half of 2021 we’re going to see a situation in which people start realizing the rental space in downtown Toronto is a bargain and you will see demand returning In between I see some adjustment in supply and some developers that basically front load and that activity will not be there during the winter. So the net result of some reduced supply in the second half of 2021 and marginal improvements in demand, we see some improvement in this market as well. But in between, we have to go through the winter.
And do you see the exodus to the suburbs trend continuing?
That trend started way before the crisis, as we all know, this is not new. Every crisis is a trend accelerator. And this crisis is no different in the sense that it accelerated this trend. Will we continue this trend? Absolutely not. When we are on the other side of this crisis, people will rethink this approach, it will continue, but not at the current rate. So again, when you’re in a situation, you have a tendency to exaggerate the long-term implications of that situation and we are in a situation. So people look at the people fleeing from downtown as a sign of a long-term trend. That’s not the case. I think that people will go back to downtown and the trend will continue but at a much slower pace than we’re seeing now.
What is your advice in terms of navigating this volatile market? Is it better to wait it out?
Well, I think that if you are in the market for a quick investment, then you can wait. For the long term, I think that the winter will provide some good entry positions given the relatively soft nature of the market. I think that the spring will be relatively strong.
And when the vaccine rolls out the timing, what will that do in terms of the market and the economy in general?
That’s one of the reasons why I believe that the economy will be very strong in the second half of the year, especially in the summer and into October, November when the vaccine will be widely available. That’s one of the reasons why I’m so optimistic about the second half of the year, when the economy I believe will rise by four, five, six percent including some nice improvement in the housing market.
Is now actually the best time in terms of buying a condo downtown?
I think that the market is soft and will probably get softer. The next few months will be actually if you have a long term horizon, the next few months will be a good opportunity absolutely.
Vancouver real estate: Kitsilano property purchased for $138000 in 1986 sold in 2020 at $3.5 million – Straight.com
Here’s an example of how real estate creates wealth.
On November 9 this year, a Vancouver property in Kitsilano sold for $3.5 million.
The transaction was tracked by real-estate site fisherly.com.
Realtor and market observer David Hutchinson shared the sales history of this property at 3472 West 12th Avenue to illustrate what the market does.
Some people make money and, of course, some lose. Others break even, Hutchinson told the Georgia Straight.
The property was sold on December 22, 1986, for $138,000, based on information from the real-estate site Redfin.ca.
Years later, it again sold on April 20, 2012, for $1,510,000.
In 2013, a new house was built on the property.
The house features four bedrooms and six baths.
On June 2, 2014, the property sold again, this time for $2,475,000.
B.C. Assessment placed the 2020 value of 3472 West 12th Avenue as of July 1, 2019, at 2,810,000.
After more than six years, the Kitsilano property was back on the market.
Sutton Group-West Coast Realty listed the property on October 28, 2020, for $3,688,888.
The realty agency described the “stunning Kitsilano family home” as one of “highest quality with lavish, elegant finishes”.
Plus, it has “nanny or in-law accommodation with roughed in laundry & separate entrance”.
It sold after 12 days on November 9 at $3.5 million.
“This one is a big money maker,” said Hutchinson, who watches the market closely.
According to Hutchinson, the market is “fickle”, and results are “unpredictable”.
University Dropout Manny Brar Becomes Canada's Real Estate Wunderkind – GlobeNewswire
Toronto, CA, Nov. 24, 2020 (GLOBE NEWSWIRE) — Many people consider dropping out of university to be a failure, but not Manny Brar. He’s not embarrassed to say he’s a dropout. In fact, he leads with it and wants people to know that there are many paths to success — and not just for tech creators like Steve Jobs and Mark Zuckerberg.
Brar entered York University in Toronto, Ontario, Canada in 2014 to study finance. He was an above-average student and had all good intentions of graduating with his peers in the class of 2018. But by his junior year, he was miserable in his non-elective courses. “I couldn’t force myself to pay attention, and my marks would suffer,” said Brar. “I began rethinking my entire post-secondary journey — if I don’t like this, how will I survive a career? I have been interested in commerce and investing since I was young, but this wasn’t the stuff I was learning as a finance student.”
University isn’t for everyone.
Brar left York University and began selling real estate for RE/MAX at the age of 20. He was an assiduous saver, and after a year, he accrued enough capital to purchase his first property, a condo in Etobicoke, Ontario. Condos appealed to him in a big way, and he began to envision an elite business. In 2019, Brar and longtime friend and fellow realtor/investor, Jad Sandhu, founded their own real estate company, Platinum Condo Broker, which allows buyers and investors to get in on the ground floor of premier condos before they are even built.
“We founded the company to bring only the best development projects to our clients,” said Brar. “We want to show people how we have been able to build wealth through investing in real estate. A lot of people think home ownership is a goal that they will never attain, PlatinumCondoBroker.com is here to change that.”
Brar continues to be fascinated by the rise of Toronto, the home of many of his properties, although he is branching out to other Canadian provinces. “Eventually, I would love to expand into working internationally,” he said. “I love real estate and know there are great investment opportunities across the world. We just have to find them.”
At the age of 23, he has accumulated a portfolio of several properties and consistently achieves a high value of sales, making him one of the youngest realtors/investors in Canada to do so.
At the heart of Brar’s professional ethic is his desire to create opportunities for his clients. “My business is unique because I focus on helping investors find the best properties — whether they are first-time or experienced investors,” he said. “My job is to make sure my clients get the best property at the best price.”
The properties we purchase are the same ones we sell to our investors. “I think this is a reason why our clients trust us, because they know we won’t bring anything to the table that we wouldn’t invest in ourselves. We have a responsibility to our investors,” he said.
Despite his youthful age, Brar is always thinking of the future.
“My business philosophy is to always think for the long term. Whether that’s an investment, hiring someone to work with me, or taking on a new development. I don’t care to make a quick buck in the short term if my relationship or business will suffer in the grand scheme of things,” he said.
“The long term is where all the value is, I am a student of Warren Buffett and compound interest. I believe that if we take care of things properly in the short-term and look out for our client’s best interests, we will succeed tenfold in the future. Good business compounds into great business in the future.”
For more information, go to Manny Brar’s website, www.platinumcondobroker.com, or follow him on Instagram : Torontocondobrokers.
Media Contact: 416-505-8108
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