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.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
MONTREAL – The Quebec Professional Association of Real Estate Brokers says Montreal-area home sales rose 9.3 per cent in August compared with the same month last year, with levels slightly higher than the historical average for this time of year.
The association says home sales in the region totalled 2,991 for the month, up from 2,737 in August 2023.
The median price for all housing types was up year-over-year, led by a six per cent increase for the price of a plex at $763,000 last month.
The median price for a single-family home rose 5.2 per cent to $590,000 and the median price for a condominium rose 4.4 per cent to $407,100.
QPAREB market analysis director Charles Brant says the strength of the Montreal resale market contrasts with declines in many other Canadian cities struggling with higher levels of household debt, lower savings and diminishing purchasing power.
Active listings for August jumped 18 per cent compared with a year earlier to 17,200, while new listings rose 1.7 per cent to 4,840.
This report by The Canadian Press was first published Sept. 6, 2024.
In the quest to find cities where renters can enjoy the best of all worlds, a recent study analyzed 24 metrics across three key categories—Housing & Economy, Quality of Life, and Community. The study ranked the 100 largest cities in Canada to determine which ones offer the most to their renters.
Here are the top 10 cities that emerged as the best for renters in 2024:
St. John’s, NL
St. John’s, Newfoundland and Labrador, stand out as the top city for renters in Canada for 2024. Known for its vibrant cultural scene, stunning natural beauty, and welcoming community, St. John’s offers an exceptional quality of life. The city boasts affordable housing, a robust economy, and low unemployment rates, making it an attractive option for those seeking a balanced and enriching living experience. Its rich history, picturesque harbour, and dynamic arts scene further enhance its appeal, ensuring that renters can enjoy both comfort and excitement in this charming coastal city.
Sherbrooke, QC
Sherbrooke, Quebec, emerges as a leading city for renters in Canada for 2024, offering a blend of affordability and quality of life. Nestled in the heart of the Eastern Townships, Sherbrooke is known for its picturesque landscapes, vibrant cultural scene, and strong community spirit. The city provides affordable rental options, low living costs, and a thriving local economy, making it an ideal destination for those seeking both comfort and economic stability. With its rich history, numerous parks, and dynamic arts and education sectors, Sherbrooke presents an inviting environment for renters looking for a well-rounded lifestyle.
Québec City, QC
Québec City, the capital of Quebec, stands out as a premier destination for renters in Canada for 2024. Known for its rich history, stunning architecture, and vibrant cultural heritage, this city offers an exceptional quality of life. Renters benefit from affordable housing, excellent public services, and a robust economy. The city’s charming streets, historic sites, and diverse culinary scene provide a unique living experience. With top-notch education institutions, numerous parks, and a strong sense of community, Québec City is an ideal choice for those seeking a dynamic and fulfilling lifestyle.
Trois-Rivières, QC
Trois-Rivières, nestled between Montreal and Quebec City, emerges as a top choice for renters in Canada. This historic city, known for its picturesque riverside views and rich cultural scene, offers an appealing blend of affordability and quality of life. Renters in Trois-Rivières enjoy reasonable housing costs, a low unemployment rate, and a vibrant community atmosphere. The city’s well-preserved historic sites, bustling arts community, and excellent educational institutions make it an attractive destination for those seeking a balanced and enriching lifestyle.
Saguenay, QC
Saguenay, located in the stunning Saguenay–Lac-Saint-Jean region of Quebec, is a prime destination for renters seeking affordable living amidst breathtaking natural beauty. Known for its picturesque fjords and vibrant cultural scene, Saguenay offers residents a high quality of life with lower housing costs compared to major urban centers. The city boasts a strong sense of community, excellent recreational opportunities, and a growing economy. For those looking to combine affordability with a rich cultural and natural environment, Saguenay stands out as an ideal choice.
Granby, QC
Granby, nestled in the heart of Quebec’s Eastern Townships, offers renters a delightful blend of small-town charm and ample opportunities. Known for its beautiful parks, vibrant cultural scene, and family-friendly environment, Granby provides an exceptional quality of life. The city’s affordable housing market and strong sense of community make it an attractive option for those seeking a peaceful yet dynamic place to live. With its renowned zoo, bustling downtown, and numerous outdoor activities, Granby is a hidden gem that caters to a diverse range of lifestyles.
Fredericton, NB
Fredericton, the capital city of New Brunswick, offers renters a harmonious blend of historical charm and modern amenities. Known for its vibrant arts scene, beautiful riverfront, and welcoming community, Fredericton provides an excellent quality of life. The city boasts affordable housing options, scenic parks, and a strong educational presence with institutions like the University of New Brunswick. Its rich cultural heritage, coupled with a thriving local economy, makes Fredericton an attractive destination for those seeking a balanced and fulfilling lifestyle.
Saint John, NB
Saint John, New Brunswick’s largest city, is a coastal gem known for its stunning waterfront and rich heritage. Nestled on the Bay of Fundy, it offers renters an affordable cost of living with a unique blend of historic architecture and modern conveniences. The city’s vibrant uptown area is bustling with shops, restaurants, and cultural attractions, while its scenic parks and outdoor spaces provide ample opportunities for recreation. Saint John’s strong sense of community and economic growth make it an inviting place for those looking to enjoy both urban and natural beauty.
Saint-Hyacinthe, QC
Saint-Hyacinthe, located in the Montérégie region of Quebec, is a vibrant city known for its strong agricultural roots and innovative spirit. Often referred to as the “Agricultural Technopolis,” it is home to numerous research centers and educational institutions. Renters in Saint-Hyacinthe benefit from a high quality of life with access to excellent local amenities, including parks, cultural events, and a thriving local food scene. The city’s affordable housing and close-knit community atmosphere make it an attractive option for those seeking a balanced and enriching lifestyle.
Lévis, QC
Lévis, located on the southern shore of the St. Lawrence River across from Quebec City, offers a unique blend of historical charm and modern conveniences. Known for its picturesque views and well-preserved heritage sites, Lévis is a city where history meets contemporary living. Residents enjoy a high quality of life with excellent public services, green spaces, and cultural activities. The city’s affordable housing options and strong sense of community make it a desirable place for renters looking for both tranquility and easy access to urban amenities.
This category looked at factors such as average rent, housing costs, rental availability, and unemployment rates. Québec stood out with 10 cities ranking at the top, demonstrating strong economic stability and affordable housing options, which are critical for renters looking for cost-effective living conditions.
Québec again led the pack in this category, with five cities in the top 10. Ontario followed closely with three cities. British Columbia excelled in walkability, with four cities achieving the highest walk scores, while Caledon topped the list for its extensive green spaces. These factors contribute significantly to the overall quality of life, making these cities attractive for renters.
Victoria, BC, emerged as the leader in this category due to its rich array of restaurants, museums, and educational institutions, offering a vibrant community life. St. John’s, NL, and Vancouver, BC, also ranked highly. Québec City, QC, and Lévis, QC, scored the highest in life satisfaction, reflecting a strong sense of community and well-being. Additionally, Saskatoon, SK, and Oshawa, ON, were noted for having residents with lower stress levels.
For a comprehensive view of the rankings and detailed interactive visuals, you can visit the full study by Point2Homes.
While no city can provide a perfect living experience for every renter, the cities highlighted in this study come remarkably close by excelling in key areas such as housing affordability, quality of life, and community engagement. These findings offer valuable insights for renters seeking the best places to live in Canada in 2024.
