Sometimes The Best Investment Approach Is Sitting on the Sidelines
If you have had the chance to read our October Market Recap you will be well aware that the momentum that has propelled the Nanaimo market to record highs appears to be losing steam. Most of the metrics we look at to evaluate the strength of the market have deteriorated and we are heading into the typically slow winter months, which won’t be much help in keeping this juggernaut propelling forward.
You may be surprised to hear this as you may have been talking recently with work colleagues, neighbours, friends, or family, who have boasted about making a killing in the real estate market. Given the upward trajectory of the market over the last few years, investor confidence is at an all-time high. With so many success stories and year-over-year gains in the double digits, it seems like it would be nearly impossible to not make money in this market. From an investment perspective, markets move based on 2 factors – fear and greed. Right now the greed factor is at an all-time high. Wannabe developers and investors are jumping in with reckless abandon, which to me is concerning. It is this greed, this demand-driven exuberance that has been putting upward pressure on pricing. The reality is, it is unsustainable, and the market statistics are supporting this notion. The smart money is investing when markets are fearful and the underlying statistics, economic indicators, and projections support acquiring real estate. They are not waiting until their hairdresser, cab driver, and mechanic are all singing the praises of their most recent real estate gains.
What is interesting is that you have leading realtors in our local market releasing reports stating there is no sign this market is slowing down and making claims to clients that we are just a few years into the seven-year cycle. Let me ask you this…If I were to tell you the average price of a home in Nanaimo declined by 2% from the previous month, the median price declined more than 4%, the number of listings was near a two year high, the sell/list ratio was down, and the average days on market was as high as it has been since last Winter, on those points alone, what would you think about jumping into the market? If you are not convinced, check out this article detailing CMHC’s recent report that Canadian housing markets are “highly vulnerable”.
In recent installments of Investor Insights, we have talked about whether you should be focused on investing in your local market and key considerations when evaluating markets for investment. These topics have arisen primarily because we see headwinds when looking at our local residential market from an investment perspective. However, I know many real estate investors are biased towards investing in your local market, a market you know and trust, and a market where you can drive by your properties at your discretion and have a level of comfort that all is well.
If you’re looking at a flip, or primarily investing for capital appreciation, I would suggest the risk/reward profile is slanted too far towards the risk for me to sleep at night. So what about cash flow, isn’t real estate investing supposed to be a long-term proposition? Right now a $500,000 investment in the Nanaimo market will produce rental income in the range of $2,000 to $2,500. Factoring in mortgage payments, property taxes, insurance, property management, and maintenance costs, not losing money on a monthly basis is going to be challenging without a significant down payment, which is limiting the effects of leverage, one of the most powerful tools that can be used to increase your wealth through real estate. Now if you can’t cash flow and the prospects for continued capital appreciation are relatively bleak, at least over the short term, what should you do if you are set on investing in your local market?
Sometimes, the best investment approach is sitting on the sidelines. If you have a portfolio of properties and you’ve ridden this market to the top, maybe looking at liquidating a few to free up some cash wouldn’t be the worst idea. Of course, this depends on your long-term investment plan, and your individual circumstances.
For investors, it is important to remember that when managing your assets, protecting your downside is every bit as important, if not more important than chasing your gains on the upside. Remember, a decline of 50% requires an increase of 100% just to break even. Selling near the top, or at least at a level that you are comfortable with positions you to “go shopping” when the market is “on sale.” This is how real acceleration is possible when building a portfolio. While this market could still have some room to run, we are seeing signs of demand cooling. It always does, markets are cyclical, it is not different this time… make sure you are protected.
Remember, as real estate professionals, what puts food on our table is facilitating real estate transactions in our local market. Realtors and other related professions have a vested interest in their local market and make no mistake when your household income is reliant on a market, sometimes the market outlook can be presented through rose coloured glasses. Be careful where you get your information on the real estate market. Make sure your Realtor is playing the long game with your best interest at heart, not the transaction driven, short game. What I can assure you is we have no interest in delivering anything but our unbiased, fact-based analysis and insight. We are looking to build long-term client relationships, serving as trusted real estate advisors for our clients for years to come.
If you are considering an investment in real estate, put our full-service advisory team to work for you. Contact us anytime for your complimentary consultation at 250-751-0804 or firstname.lastname@example.org.