In ordinary times real estate investors don’t worry much about where to invest. Every local market has opportunities, every one has rental properties you can buy, every one has homes you can develop to produce income. Growth markets provide the chance to get higher returns but even stagnant markets need housing that can provide better returns than stocks or bonds.
Right now we’re not in ordinary times. The covid pandemic still threatens economic recovery, work and living patterns may be permanently altered, and a surge in home prices has disrupted our notions of what a home could be worth or what an investment property should cost.
Despite these difficulties – or rather, because of them – here is our guide using data from Local Market Monitor, Inc. for where and how investors can achieve the best returns with the lowest risk in the coming year. We will identify markets where demand for rentals should be strong but also – because most investors want to stay local – will show how to maximize your return in any local market.
Let’s start with the basics, will there be more or less demand for rentals in the coming years, and what kinds of rentals? The pandemic has soured a lot of people on living in apartments in crowded cities, the recent jump in prices means a lot of them are trying to buy a home. On the other hand, there are still fewer jobs than before the pandemic, and fewer people who can afford a home. Last year household income fell in all income brackets but most for people with modest incomes.
The job situation tells a similar tale. Most of the jobs lost during the pandemic were in low-pay fields such as retail, restaurants, tourism, nursing homes and temporary work. Many of those jobs will never return, yet the people who held them still have to live somewhere, and many of the new jobs created (in Amazon warehouses for example) have similarly low pay.
These developments point to an increase in renting over the next years, and especially in lower-cost rentals like apartments. In some places single-family homes are cheap enough to be part of that rent level but in many markets you’ll have to split homes into rental units.
Every local market has a rent profile – how many people pay how much rent – and a “best” rent range where you find the largest concentration of renters. At this time of greater demand, investors should aim for rents in the “best” rent range, which will usually mean apartments or row houses.
While this guidance applies in any market, it’s even more important in markets where home prices have recently risen sharply; you can’t just raise rents to match home prices.
The table “Big Price Increase” shows 24 markets where home prices rose dramatically in the past year, also the average home price, average monthly rent, and the ratio of home price to annual rent.
Quite aside from the strong possibility that some of these markets are in a price bubble that will burst in the next few years, the ‘home price/annual rent’ ratio points to the best way to invest in these markets.
Where the ratio is 22 or less, as in Las Vegas, Fort Worth, Camden and Atlanta, it’s possible – even with the recent jump in home prices – to buy a house and rent it out as is. (Often this happens in markets with low home prices, but not always; Knoxville and Fayetteville have the lowest home prices in the list, but even lower rents.)
Once you reach a ratio near 30, as in Boise, Austin, Spokane, Salt Lake City, and Portland, it’s almost impossible to find tenants who can afford to rent an entire house. You might be able to find a tenant now, in the middle of a boom when housing is scarce, but it will be much more difficult in two years, when the average renter moves on.
In high-ratio markets it’s best to stick with apartments or to buy a house that can be sub-divided into rental units.
For markets with a ratio in between, it can be possible to buy a straight rental but you must pay close attention to the local rent profile, which is usually different in different zip codes. With prices higher for investment properties you may be tempted to just aim for a richer renter, but if the rent you want is much higher than the “best” rent range you’ll have a lot of trouble finding one; remember that this will be a problem every two years, not just now, and especially if more renters are moving lower in the rent profile, not higher.
The big price increase isn’t the only problem for investors in 2022, there’s still the pandemic. It’s still here, it still depresses growth, and it has different effects in local markets. We don’t yet know if the job losses in some markets will be permanent or when they might return. In this situation of uncertainty, the lowest-risk investment is a single-family home that can be rented out with minimal upgrade; if your returns don’t work out as planned you can just re-sell, maybe even at a profit.
The table “Single-Family Rental” shows 24 markets where the ‘home price/annual rent’ ratio is low enough to allow straight single-family rentals. All of them had double-digit price increases in 2021 but the price/rent ratio is still favorable. We also show the current level of jobs compared to the level before the pandemic.
In a few markets, like Des Moines and Kansas City, the number of jobs is now higher, a strong sign of better growth as the recession recedes, in others like Greensboro and Virginia Beach it is still three percent lower. The difference is significant because markets where jobs lag behind may be on a slow growth track for years; we just don’t know if and when the laggards will ever catch up and that means future demand for housing in those markets is much less certain.
Any of these markets are good candidates for single-family investment, but in those with job losses still around three percent you need to be more careful about the price you pay and what rents you charge. Investments with rents in the middle of the “best” rent range can most easily be resold if it turns out in a few years that economic growth has not returned. The middle of the pack is a good strategy anytime but even more so in 2022, when future economic developments are still so uncertain.
Canada’s main stock index fell on Friday as weaker crude oil prices weighed on energy stocks, putting the benchmark index on course for its biggest weekly drop since early December.
At 9:35 a.m. ET (14:35 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was down 141.11 points, or 0.67%, at 20,917.07. It hit a more than two-week low in the previous session.
The index has lost 2.4% so far this week, hurt by higher bond yields as expectations build that central banks will hike interest rates over the coming months to tame unruly inflation.
The healthcare and technology sectors have dominated the weekly losses, dropping 7.4% and 4.5%, respectively.
On Friday, the energy sector led the declines with a fall of 1.9% as an unexpected rise in U.S. crude and fuel inventories profit-booking pressured crude oil prices.[O/R]
The financials sector slipped 0.8%, while the industrials sector fell 0.5%.
The materials sector, which includes precious and base metals miners and fertilizer companies, lost 0.4% on weaker copper prices. [MET/L]
On the economic front, data showed Canadian retail sales rose 0.7% to C$58.08 billion ($46.40 billion) in November on higher sales at gasoline stations, and building materials and gardening equipment and supplies dealers.
“Canadian retail sales for November grew less than expected, while new house price inflation plateaued at a high level, another sign of stagflation in the North American economy,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.
The TSX posted one new 52-week highs and 10 new lows.
Across all Canadian issues there were two new 52-week highs and 55 new lows, with total volume of 32.05 million shares.
(Reporting by Amal S in Bengaluru; Editing by Aditya Soni)
But CAPP president Tim McMillan pointed out that in spite of the fact that oil prices are at seven-year highs and companies are recording record cash flows, capital investment remains well below what it was during the industry’s boom years. In 2014, for example, capital investment in the Canadian oilpatch hit an all-time record high of $81 billion, capturing 10 per cent of total global upstream natural gas and oil investment.
“Today we’re at $32 billion, and we’re only capturing about six per cent of global investment,” McMillan said. “We’ve lost ground to other oil and gas producers, which I think is problematic for a lot of reasons . . . and it leaves billions of dollars of investment that is going somewhere else, and not to Canada.”
Investment in conventional oil and natural gas is forecast at $21.2 billion in 2022, according to CAPP, while growth in oilsands investment is expected to increase 33 per cent to $11.6 billion this year.
Alberta is expected to lead all provinces in overall oil and gas capital spending, with upstream investment expected to increase 24 per cent to $24.5 billion in 2022. Over 80 per cent of the industry’s new capital spending this year will be focused in Alberta, representing an additional $4.8 billion of investment into the province compared with 2021, according to CAPP.
While the 2022 forecast numbers are good news for the Canadian economy, McMillan said, it’s a problem that companies aren’t willing to invest in this country’s industry at the level they once did.
He said investors have been put off by Canada’s record of cancelled pipeline projects, regulatory hurdles and negative government policy signals, and many now see Canada as a “difficult place to invest.”
However, Rory Johnston, managing director and market economist at Toronto-based Price Street Inc., said laying the decline in the industry’s capital spending at the feet of the federal government is overly simplistic.
He added while current “rip-roaring, amazing” cash flows and a period of sustained high oil prices will certainly give some producers the appetite to invest this year, Johnston said, it will likely be on a project-by-project basis and certainly on a smaller scale than the major oilsands expansions of a decade ago.
“You have global macro trends across the entire industry that have begun to favour smaller, fast-cycle investment projects — and most oilsands projects are literally the polar opposite of that,” he said.
One reason capital spending isn’t likely to return to boom time levels is because companies have become much more cost-efficient after surviving a string of lean years. And that’s not a bad thing, Johnston said.
“The decade of capex boom out west was tremendously beneficial for Canada and Albertans, but it also caused tremendous cost inflation,” he said.
“While what we’re seeing right now is not as construction-heavy and not as employment-heavy —and those are two very, very large downsides — the upside is that you’re much more competitive in a much more competitive oil market,” Johnston said.
In a report released this week, the International Energy Agency (IEA) hiked its oil demand growth forecast for the coming year by 200,000 barrels a day, to 3.3 million barrels a day.
According to the IEA, global oil demand will exceed pre-pandemic levels this year due to growing COVID-19 immunization rates and the fact that the new Omicron variant hasn’t proved severe enough to force a return to strict lockdown measures.
This report by The Canadian Press was first published Jan. 20, 2022.
Cash-flow investing is increasingly attractive during times of increased market volatility
The outlook on the Omnicron variant of COVID-19 on global markets is changing by the minute, but I am reminded of a tried-and-true approach that can provide investors with some peace of mind during uncertain market conditions: focusing on the value quality that cash flow adds as opposed to movements in the asset price.
Cash-flow investing, in basic terms, means purchasing an asset that provides income at regular intervals versus one solely based on price appreciation. Whether it is monthly, quarterly, semi-annual, etc., you will receive regular cash distributions that can be reinvested or used to finance your lifestyle.
Considered a relatively conservative approach to investing, acquiring cash-flow-producing assets can be attractive for a number of reasons.
First, the asset will provide value on a regular basis regardless of its current market price. A temporary drop in value can be viewed as positive for cash-flow investors because they can now use the distribution amount to buy more of the asset at a distressed price, hence increasing their future cash-flow amount.
Secondly, dividends or proceeds from cash-flow investments can be used to fund lifestyle expenses in retirement without eating into your overall pot of capital.
This shift in focus from market price to value can help diversify investment portfolios and mitigate the impact of public market uncertainty. Ultimately, cash-flow investments provide flexibility to rebalance, protection against market volatility, and peace of mind that you’re earning sustainable income with less concern about the economic impact of current events.
For example, in February 2020, we switched our monthly cash-flow-producing assets from reinvest to pay out for many clients when public equity markets sharply reacted to COVID-19 uncertainty. This free cash flow allowed us to purchase dividend-paying equities at a large discount for the ensuing six months until they reached their pre-pandemic valuations.
Dividend-paying equities are just one of several types of cash-flow investments.
Real estate : Cash flow is the result of proceeds from rent collected. The value of the property will likely appreciate over the long term, but the cash flow produced monthly or annually is relatively consistent. The goal here is for the income from the property to cover all your costs on the property and provide a steady profit.
Investing in a real estate fund can be an excellent source of passive income and provide steady long-term returns. Real estate funds can have a similar return to individual property ownership without the added stress of personally maintaining the property.
Mortgage funds : Cash flow comes from regular loan interest repayments over the term of the loan. Loans are often secured by real property with a varying loan-to-value ratio.
Private assets : Assets such as private debt offer higher-yielding returns with significantly lower volatility than publicly traded securities. By their nature, private assets are not subject to the same whims of the crowd that the public markets are.
Dividend-paying stocks : Arguably the most volatile cash-flow-producing investment available to the average retail investor. The income from dividend-paying stocks can be less consistent than other cash-flow-generating assets. Also, your investment value can fluctuate depending on market events and the company’s performance. One strategy for mitigating some of the volatility is to invest in a fund focusing on long-term growth in a large number of dividend-paying stocks.
Bonds or bond funds : Bonds, essentially the debt of companies or governments, can provide relatively low returns, but are generally viewed as safe investments depending on their rating. Again, a way to protect your bond investment and still see regular cash flow is to invest in a bond fund that provides diversification across the bond market.
As a whole, cash-flow investing helps protect investors in volatile markets while also taking advantage of temporary market troughs. This is one strategy I would recommend to all investors regardless of portfolio size. If there’s one thing I’ve learned over the past number of years, there’s never a wrong time to start.
James McCarthy, CIM, is a senior wealth associate/client relationship manager at Nicola Wealth. This article should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Nicola Wealth is registered as a portfolio manager, exempt market dealer and investment fund manager with the required provincial securities commissions.
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