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How to make a solid real estate investment these days

09 April 2017 by National Bank
real estate investing

Here’s some expert advice to help you better understand the fine art of real estate investing.

“Investing in brick and mortar makes concrete financial sense” says Patrick Juanéda, President of the Québec Federation of Real Estate Boards (FCIQ). But the real estate market — as is true of any financial market— is not immune to speculative bubbles. Here’s some expert advice to help you better understand the fine art of real estate investing. “It’s still governed by supply and demand,” claims Paul Cardinal, an economist with FCIQ. “And the hotter the property, the scarcer the listings, the greater its market value will be.”

“Don’t lose sight of the resale,” adds Patrick Juanéda. “It’s all very well to fall in love with a little family pied-a-terre, but you must also bear in mind the pool of buyers who might one day want to purchase it.” In a buyer’s market, a two-bedroom basement condo might, for example, take some time to sell. “Exactly who will be interested in it?” asks Mr. Juanéda.

Look at comparable sales to avoid real estate bubbles

To make a solid investment, you have to pay a fair price. “Every property has its highest and lowest price, and you must know what it is,” continues the FCIQ President.

And the best way to avoid overpaying is to study comparable sales and select an agent with experience in the desired sector. Patrick Juanéda suggests analyzing sales from the three previous months, and being wary of any frenetic price growth: “Is this a truly rare listing, or an unjustified overvaluation?”

Paul Cardinal, for his part, cautions investors to avoid making extreme comparisons. “Every market has its own distinct conditions,” he explains.

“We can’t, for example, look at the Vancouver market and assume that the same situation will repeat itself in Montreal. The local economy, immigration, property listings, it’s a different ball game.”

From a micro-economic viewpoint, each neighbourhood is a separate market; demand will vary according to the type of property. “It’s like trying to compare two drops of water,” explains Patrick Juanéda.

Determine your income ratio

The inaccessibility of Canadian property, resulting from strong price growth, regularly makes the headlines. To deal with this situation, you must, first and foremost, analyse the income ratio, namely the monthly mortgage payment (which includes the interest rate) compared with gross income.

According to Mr. Juanéda, we should all begin shopping for a property with a pre-approved mortgage, whose amount has been determined through in-depth financial analysis.

“A solid investment decision should be based on your financial capacity.”

A long-term investment

A long-term horizon is also the key to solid investing, and real estate is no exception. “Anyone who sold in Toronto in 1991, when the market suffered its greatest decline (-8%) probably didn’t do very well…but if we look at the average annual variation in the price of property in Toronto for 25 years, growth stood at 7%1,” cites Paul Cardinal as an example.

That positive investment phenomenon repeats itself in all the major Canadian urban markets, including Calgary (5%)2, a more vulnerable market due to its oil dependency.

Furthermore, reselling within a year or two is rarely profitable, unless it’s in a record year. Even in such cases, the costs of purchasing a new residence (transfer rights, taxes, renovations, etc.), allocated over such a short period, greatly influence potential profit.

If you want to make a sound investment, it’s wiser to purchase with a view to keeping the property for at least five or 10 years, or more.

Walk around the neighbourhood

Before investing, it’s important to get a feel for the area. The type of neighbourhood has a huge impact on property value, including the price ceiling.

“Buying the most expensive house on the block limits the final market value, which won’t absorb all those little extras,” explains Patrick Juanéda.

Economist Paul Cardinal agrees: We can’t make informed decisions sitting in an office poring over statistics. Figures won’t reveal the next up and coming areas: it’s really a question of instinct and guesswork.”

Want to learn more about real estate? For more information or to make an appointment with a Mortgage Development Manager, please visit the Mortgage Financing Advisors section of our website.

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FCIQ by the Centris system and ACI, FCIQ calculations

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