Real Estate Market Downturn Not a Big Deal

photo by Jason Floyd

photo by Jason Floyd

I’m behind on my reading these days – we’ve been busy putting together a real estate investing course for beginner real estate investors. With Julie away in Austin for a few days though, I’ve finally been able to catch up on some of the articles I had flagged for review! And I was delighted to find this one in the Vancouver Sun:

Real estate downturn no big deal for homeowners

Sales dropped 35 per cent last year to the lowest level since 2000, and the price of a typical home in Metro Vancouver fell by 15 per cent from its peak.

But before you pull out your calculator to figure out how much equity you’ve lost, reflect on the reasons you bought your home. Did you buy it to flip it and make a big profit in a hot market?

Or did you buy it because it had a fenced yard for the kids, a deck for summer entertaining, large windows that let the sunshine in, beautiful hardwood floors, a gourmet kitchen, the right number of bedrooms for your growing family, a playroom in the basement and a fireplace in the living room?

Finally, someone is making some sense in the media!

When our friends and family ask us how we’re doing with our investments, concerned that we’ve lost everything in the downturn, we shrug it off.

We don’t try and figure out what our property is worth everyday (like some people do with their stocks). The thing that’s important to us is that we have renters in each unit that are paying their rent and covering our costs. If the property drops in value this year, it means we aren’t growing our equity that can potentially be used to buy other properties, but otherwise it’s not a big deal. We’re certainly not going to panic.

As long as the reasons we bought the property still exist, we’re happy.

That is, as long as the area the property is in hasn’t changed fundamentally from when we bought there  and we’re still achieving our goals on the property (which is usually just as simple as having neutral or positive cashflow from the property), then we are happy. We will keep holding that property and wait until the day arrives where the market is doing better, and we want to cash out (by either selling or refinancing to pull equity out).

I cheered when the article went on to say this:

In Richmond, prices are down 4.8 per cent over a year, but up nearly 58 per cent over five; in Port Coquitlam the one-year decline is 4.8 per cent and the five-year gain is 64 per cent; in Maple Ridge the year-over-year drop is 9.7 per cent, the five-year advance is 31 per cent; in Burnaby prices are down 14 per cent for the year, but up 47.5 per cent over five; and in New West the one-year drop is 10.4 per cent, while the five-year gain is 59 per cent.

It is clear that real estate has held up far better than stocks, which have seen price declines of 40 per cent from the peak on average. To be sure, real estate sales are down, listings are up and prices are falling. But the market will recover — yes, it will — so owning your own home continues to be a sensible financial goal.

I sometimes sound like I’m anti-stock investing – and I know I am about to again. But, I just don’t get why real estate investing scares so many people more than stock investing does.  Do you ever really know what is happening inside of a company? Not really. But, with your property, if you are doing a good job of being an investor, you always have a good idea of what is happening. And, you have the control to improve things that aren’t quite going as well as you’d like them to.

I’m not anti-stocks, but I haven’t done that well with the investments I’ve made.  I know I just never took the time to properly research and select the stocks I purchased. I spend a lot more time researching my real estate. So, for me, it’s good to see it stated that real estate values have held up so much better than stock prices in the last 12 months.

Real estate investing is not an easy way to get rich quick, but it is a wonderful way to create massive wealth over time. I think that some people forgot that in the craziness of the last few years, and started to believe that real estate will always go up. When, in fact, it won’t.

So make sure you buy properties that are in solid areas that WILL recover from downturns, and buy investments that will bring in enough revenue to cover the costs, and then hold on to them! Don’t panic when the rest of the world is… remember why you bought the property in the first place, just like the Vancouver Sun article says!

5 Comments

Filed under real estate

5 responses to “Real Estate Market Downturn Not a Big Deal

  1. Scariest reason to buy real estate, in my opinion, is the lag time required in the transaction process. Not to mention, the mountain of paperwork does possess a substantial anxiety factor for the novice to average investor.

    With a stock, it takes 2 mouse clicks and 3 seconds to execute the transaction. With real estate, it can take a few weeks maybe even months.

  2. Dave

    Thanks Matt. Good to hear from you. Yes, it’s true there is often a considerable lag time between purchasing (getting an accepted offer) a property and actually closing on it. We are just about to close – Finally – on some pre construction condos in Toronto that we bought almost 5 years ago!!! How’s THAT for lag time??? But, the good part is that they have been appreciating over that time, the area we bought them in is getting better every year and we even got a bit of interest paid from the developer on our 20% down payment deposit money over those years.

    With regular resale buys, of course, the lag time is usually 30-60 days between subject removal and officially obtaining title on the property. That being said, I am curious why you feel that is the scariest reason to buy real estate? Having that much lag allows you time to prepare to move, find tenants, get to know the area even better, etc.

    And while you make a valid point about buying stocks being very very quick to obtain, in my view, it makes it that much easier to not complete your due diligence when researching a company and an industry. I know I have succumbed to that “easiness” factor when buying stocks. I spent all of about 1 hour researching a company and then jumped in! When purchasing real estate, you have to be pretty crazy to buy a $200,000 or $300,000 property without spending considerable time running the numbers and studying the property.

    That’s my two cents anyways!

    Cheers,

    Dave

  3. Hey Dave,

    Good to hear from you and thanks for the advice you and Julie have provided. It’s been very helpful.

    My initial comment was based on what I felt “other people” would characterize as their primary reason for avoiding real estate as investments.

    I’ve spoken with numerous people over the years, and the ease of liquidation factor is generally their biggest hold up. Closely followed by a “It’s too risky – what if I can’t find a renter?” and “I don’t want to be a landlord” viewpoints. Most of these conversations go as far back as 5 years ago, so I can’t imagine how bad their opinion would be today. However, I’m reasonably sure these statements are made from novice investors or people who only own their primary residence.

    Here in the US, there really isn’t a huge incentive to buy anything unless you’re flush with cash. I can only describe it as a reluctance to borrow money during uncertain times. Perhaps we’re feeling jaded considering the magnitude of the bailout packages. There is also a belief that the Federal Reserve will artificially set the borrowing rate around 4.5%, so I think bargain hunters are waiting around for rates to get better deal. They’re around 5.0% now.

  4. Great article, I think the media is way too gloomy about the economy and only makes it worse. Sure, they shouldnt sugar coat it but whenever there is good news they dont report it. I think the real estate market will return to its better days sooner rather than later. many companies are coming up with creative ways to get people back into buying homes such as using facebook or offering contests like this company here: http://snurl.com/9ht46

  5. Dave

    Very true John. In most cases, the media print the negative stories. For some reason, the masses seem to prefer reading and watching bad news?? Not sure why that is the case, but negative news always seems to sell better than positive news. Regardless, I am hopeful we see a turnaround to a balanced market in the not too distant future, but we’ll see. There is a lot of trouble out there and only time will tell how well we, the masses, respond to it. Maybe with Obama stepping in that will start the healing?

    Thanks for stopping by!

    Dave

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