Evaluation of real estate cashflow opportunities in Canada?

After 2-3 month research, I found no real estate opportunity worth investing in in a cashflow perspective in Canada. All opportunities are minimum 30% overvalued. I used the method describe in this post: "How to evaluate a real estate opportunity?"

the herd will tell you:

• Its the market value
• Value will continue to increase...you will make a capital gain
• Canada population will grow (yes->Supply and demand biggest factors for real estate investments)
• Lot of studies are showing that real estate isn't overvalued (please do the math)
• Interest rates will stay low

Stop following the herd!
Capital gain is risky because you have to play the flipper buy low/sale high and most people can't do it and will be stuck to sale low to someone who has cashflow. 

To make an finance analogy, overvalued stocks are overvalued because they consider potential growth:

• Population growth
• Employment increase due to aging population & decrease canadian $ (canadian workforce is cheaper)

 
Canadian real-estate is overvalued because it is already considering lot of potential growth and future is risky because:

• Canadian $ depend too much on oil and everyone is trying to move away from it (canadian dollars will keep decreasing)...you should invest elwhere
• Interest rate won't stay low forever....which means your overvalued will become super overvalued
• Banks apply more then 20% cash down rule (don't recognize market value, remember Banks don't take risk, you take it all)

Bottom line: buying overvalued real estate force you to stay in the capital gain game to make your investment worth-full.
Recommendation: buy in the US because real estate value is more reasonable + US will most likely gain value against CAN dollar due to oil.

remainder:

There are FOUR profit centers in real estate:

• Income
• Appreciation
• Mortgage Pay-down
• Tax Benefits

Price are way less overvalued in the states but you have to consider the overhead of US tax. You need a Tax Payer ID (no need for an social assurance number) + you can use software such as taxact to fill your taxes.

How to evaluate a real estate opportunity?

The evaluation of a real estate property is simple:

1. Verify property income -> actual income
2. Verify property expenses -> adjust saler numbers + include vacancy
3. Determine net operating income (NOI) = income - expenses
4. Calculate the loan payment and your profit

1) Verify the property income

There is 3 types of income:

1. Actual income: what the property has generated in the last 3 months
2. Actual potential income: total income that could have been generated if 100% occupied
3. Future potential income: total income at today market rents. 

Don't forget to consider vacancy (missing income due to vacancy). 

2) Verify the property expenses

Concerning the expenses:

• Repairs and maintenance: it always increase (old = start higher)
• Insurance is a fast moving business and rates can vary widely 
• Replacement reserve: suspicious if 0 (usually under-estimated)

3) Determine the NOI

• The larger is better but don't forget to include your loan payment ;)
• profit = NOI-loan payments

4) Find the capitalization rate and valuation

Capitalisation Rate = NOI / Purchase price

OR

Offer price = NOI / capitalization rate 

capitalization rate = [7-12]

5) Calculate the loan payment and your profit cash on cash

profit = NOI - loan payments

cash on cash = profits / down payment

example:

http://www.remax-quebec.com/fr/multiplex-a-vendre-2255-226-rue-sheppard-ville-marie-central/12922399.rmx?fromsearch=formSearch_plex

saler price = 989K 

income estimate = 3K*4 -> 12K

expenses estimate = 7.2K (just taxes)

NOI = 5K

Offer price = 5K/.08 = 62.5K

saler capitalisation rate = 62.5K/989K=0.06 -> not 0.08

What should be the income to justify this valuation = 0.8*989k=79K

This property is definitely not a good investment. 

Supply and demand biggest factors for real estate investments

First, the market is more important than the property.

Second, value is drived by supply and demand.
Third, you should invest when supply = high and demand = low
 Forth,  The 3 drivers of supply and demand are:

1. Location (visibility, rare qty,...)
2. Employment 
3. Population

Recap:

When you are in a context of  supply = high and demand = low in a region, buy real estate at great location if population and employment should grow.

Rich strategy = Do the opposite of the poor Majority

The rich are the minority which means the mainstream media a guiding the majority. Their is a simple rule to follow to be rich. Do the opposite of what the majority is doing smartly.
You can use this simple trick, when your hairdresser think of buying a condo, sell your condo.
Since the beginning of 2005, the late majority of Canadian are jumping into the house market when the rich where starting to move out. Now, the majority is starting to freak because they start realizing the market was overpriced which means it will soon be the right timing to buy, not sell.

the main indicator the bubble will burst is:

• Slow down of sale speed (seller obstinacy)
• Increase bank down payment

You might say: increase bank down payment??? Yes.
As an example, in Canada, the down payment is 20% for a second building.
Most of the banks now ask 25-30% down payment. The math is simple, even if you pay the market price the bank takes no risk. If the bank ask more then 20%, it means you are paying more then the real value which means you have to put more down payment to reduce the bank risk.

Example:
- Triplex = 500K
- standard down payment = 20% (100k)
- Bank evaluation = 400K
- Risk = 100K no warranty
- Bank new down payment = 100K + 25%*100K  = 125K (25% of 500K)

Why it is over valued: simple economics. Value is drive by increase of population & salary.
Quebec province has the worst number is both.

What is another big difference between the rich an poor:



Poor are optimizing capital gain first. Rich are optimizing cash-flow. If your real-estate investment is base only on capital gain, yes you are fucked and you think like a poor. Smart rich people are optimizing cashflow then capital gain.
For patient people, they will be lot of opportunity ahead, why?

• Most real-estate investor will start selling
• Buyer majority will stay out of real-estate (decrease demand)
• Majority will go back to stocks (think it is less risky; decrease demand further)
• Seller will run out of money ;) due to bad economic condition
• Canadian dollar is going down....natural resource value is going doing (US oil dependency is down  & Why Iran Nuclear threat is no more an issue?

Its the same as the idea to buy when everyone is selling and sell when everyone buys ;)