Smart real estate investors often ask « How do I know where to invest? »
Following a record breaking real estate market in Canada that saw sales numbers and prices break new record highs between 2000 and 2008, amateur investors and property flippers came out looking like experts. Condo speculation, especially here in Vancouver was the trendy new watercooler topic for quite some time. Greed took control and everyone either did or knew somebody who had made a couple of hundred thousand by buying pre-sale condos and waiting 2 or 3 years for construction and then flipping them to another purchaser. Real estate that once considered an excellent long term hold, was now approach with a price obsessed « day trader » mentality. The lucky ones did well. Others weren’t as fortunate and experienced the ugly side of this game in mid 2008 when local real estate experienced a swift and sharp price correction, leaving speculators with unsellable properties and lawsuits from developers.
Warren Buffet said, « Be fearful when others are greedy, and be greedy when others are fearful. » Some people did take this to heart. During this period I witnessed truly successful real estate investors stay out of the speculation game entirely, yet many continued to quietly buy property in economic fundamentally strong regions, have done well doing so and will continue to.
It’s not difficult to predict that an event like the 2010 Olympics will have an upward effect on real estate prices, but when that will end is anybody’s guess. In the investment game there is no crystal ball. However, the beauty of real estate investing is we have something very close to a crystal ball, it’s called economic fundamentals.
Economic fundamentals are the basis of any truly sound real estate investment, and diligent investors take the time to analyze them before purchasing investment property.
With proper evaluation, this will protect any investment you have and make its viability immune from regular fluctuations in real estate prices. So what are these fundamentals? What data needs to be analyzed in order to ensure your portfolio is standing on solid ground?
1. First of all, understand this is an investment property. Things like location, granite countertops and things that may be of paramount importance to you as a home buyer are virtually irrelevant in the investment market. This is not your home, so stick to the numbers and remove emotion from the equation!
2. Affordability – How affordable is the region? Can a typical middle class family purchase a decent home in the area with a comfortable mortgage? In the City of Vancouver the average price of a single family dwelling is $ 896,000, yet other regions in the country may be $ 250,000. Do people in Vancouver really make 4 times as much? Take this into consideration. However, affordability in itself should not be the deciding factor. Detroit is cheap, but that doesn’t make it a great investment due to other factors.
3. Job Growth – What kinds of jobs are being created in the region? Blue collar, white collar? How many? How will these jobs survive a recession? Although there are some « lifestyle » regions like the Okanagan or Vancouver Island that are driven by retirees, and the job market is less relevant, understand this is the exception. The majority of growth regions are driven by employment options. People move where there are jobs, period. Fort McMurray, Alberta is a great example of this. Also what is the average income in the region? Is it above or below the national average?
4. Net Migration – How many people are moving in every month/year vs. how many are moving out? I think it goes without saying that net migration needs to be a positive number to make it an attractive investment. Again ask, why are they moving there? Jobs, lifestyle, convenience? Where are they coming from, other provinces? Overseas?
5. Political Climate and Taxation – Regardless of your political leanings, there are certain political aspects that need to be considered. What is the tax situation like? How does the sales tax compare to other provinces/states? How about income tax? Business tax? Is there history of private business investing capital in the region and attracting more wealth and jobs? Political stability goes without saying.
After all is said and done, these fundamental should be your starting point when considering any investment opportunities.
Remember, regardless what the market conditions are, investing for fundamentals instead of speculation can earn you a fortune over your lifetime.
Wishing you good luck in all markets,
Blake Wyatt is a real estate investment professional based in Vancouver, BC. He has a passion for showing others how real estate can help them build passive income stream and expand their net worth.