Why Are Housing Starts Down So Much In Windsor - Essex in 2019?

A lot of economists see statistics such as new housing starts (basically building permits to construct new residential housing) as a leading indicator for the economy. CMHC reported in their March 2019 Housing Start Data, that the Windsor-Essex region’s housing starts had fallen 23% year over year. Is that cause for concern?  Today, we are going to discuss some of the factors we think that are leading to this slowdown and what else you need to know.

Reason 1 - Shortage of Building Lots

I know this seems very obvious but this really is an issue. I personally know people who would love to build but can’t find a building lot for sale. A lot of subdivisions are nearing completion and the pipeline to replace them is pretty slim. Basically, not as much supply of building lots compared to last year.

Reason 2 - Bringing on Additional Supply of Building Lots is Difficult

We have so much land in Windsor they say, why don’t you just develop it? While Windsor isn’t the most dense city, getting a piece of land to a serviced, shovel ready project isn’t an easy task.  If you have to go through the municipal rezoning process that can take 6 months easily and can cost tens of thousands of dollars in some cases. There are also significant area of red tape to battle through including: biology studies, archeological studies, utility servicing studies, traffic studies, noise studies, etc. This can take years and lots of capital, with no guarantee of success, or can make a project uneconomical. This all leads to decreased supply long term and is a major issue for municipalities all over the province with Windsor being no exception.

Reason 3 - New Home Prices are Getting Unaffordable

Some of these construction costs are driving the pricing of new homes to price points that are no longer affordable for the average person. It's commonplace to see $700-800k price tags on the average new build. The market has been doing extremely well locally but sticker shock  has to have some effect on demand eventually.

Reason 4 - Labour Shortage Affecting Trades Pricing

Tying into point 3, part of the reason for the large price tags on some of these new builds are the escalating pricing from the trades.  Electricians, plumbers, bricklayers, etc are in high demand and able to command premium pricing in today’s market. This trickles down to the end buyer.  Hard to see this changing anytime soon.

Reason 5 - Its Taking Longer to Build Homes

Essentially the labour shortage also means slower build times.  Back 5 years ago it wasn’t uncommon to build a house in 90 days. Now it's not uncommon to see 180+ days. This statistically is taking units out of the data.

Bonus Point - What Does All This Mean for the Resale Market?

This decrease in new home sales activity is adding demand to the resale market. Taking some of the buyers out of the new home market for the above reasons is directing them to the resale market. And the resale market already has a supply-demand imbalance. This increased demand could explain some of the crazy resale statistics to start 2019.

Thats how we are seeing the new home starts data. What are you seeing out there?

Real Estate Insider: March 2019 News Report

Spring is here! This month we've got loads of tips & tricks as the Real Estate season begins to heat up!


If you’re looking to invest in a vacation rental, make sure you buy where the people are going! Read this list of 2018’s most booked Canadian destinations. >>

----------

ROI isn’t just a formula to use when purchasing a property; it should be used for day-to-day decision making in all of your real estate investments! Read here how ROI can be used in anything from purchasing a home to separately metering the water in a duplex! >>

----------

Read here this Doctors testimonial in favour of real estate investing, and how he came to this conclusion only after trying many other methods of creating financial independence and long term wealth. >>

----------

Buying or Selling a home can take up a lot of time, so why waste your most precious resource reading through long descriptions of tons of pictures when only a few works better? Read here why “short and sweet” is the way to go when listing a home. >>

----------

Here are 10 questions you probably have or have had if you are thinking about buying your first home. These might lead to a number of follow-up questions, but luckily we are always available to help you answer them! >>

----------

If you’re lucky enough to have your grandparents around, be sure to listen to all their stories! They might have advice that could change your life! Read here how this man’s grandmother defied the odds and became wealthy through house hacking, and sparked a passion in him that is responsible for his success today! >>

----------

The debate of Buying vs Renting continues! This time, it is explained in a different way that most people don’t think of! >>

----------

If you’re young and thinking about retirement (which you should be), you are probably thinking whether RRSP’s or buying a home should be your first step to a comfortable retirement. This article can shed some light on that question. >>

----------

When applying for a mortgage, would you rather speak with an expert or go completely digital? Seems Canada is lagging behind other countries in the automation of mortgage applications department. Call me old fashioned, but I don’t think that’s a bad thing! >>

----------

Should you re-new your mortgage early? Not saying drop everything and run to the bank, but here are a few things to consider! >>

----------

Thank you for reading & keep an eye out for more to come from your Lalovich Real Estate team!

Real Estate Insider: February 2019 News Report

Welcome back! This month we compiled a set of topics fit for home owners and investors alike to help you weigh your options before making some of the big decisions in real estate.


If you are thinking of investing in commercial real estate (CRE), this article does a fantastic job of laying out the basics of all aspects of CRE to help point you in the right direction. After reading this, give us a call to learn more! >>

---------------------------------

Don’t be surprised, be prepared! Renting Vs Buying is an age old debate. While this isn't one of those articles (it kind of is), it simply breaks down the hidden costs of home ownership that many people don’t consider when contemplating purchasing a home. >>

---------------------------------

Radon, the silent killer. Make sure you know if you are at risk of harmful radon gas because it is one of the most preventable cause of lung cancer there is! Read here to find out what you need to know. >>

---------------------------------

Your ego might like the big house, but your back and wallet won’t. Here are 6 reasons to avoid buying a large house. >>

---------------------------------

Do you have foreign investments and want to buy a home in Canada? This article can explain some of the hoops you’ll need to jump through and some of the calculations you need to consider before making the leap. >>

---------------------------------

Winter is considered the real estate “off-season” because there are less listings, less buyers, and less motivation to go out and look at houses. Read why these are the perfect reasons to buy during this time! >>

---------------------------------

Thinking of buying an investment property but don’t have the down payment in your bank account? Have you thought about a home equity line of credit (HELOC)? Whether you have, or you have no idea what that is, this article is for you. >>

---------------------------------

Ever thought of what would happen to your mortgage if you pass away? This article walks you through multiple scenarios if this question ever crossed your mind. >>

---------------------------------

5 tips from a lawyer to make sure you are protected in 2019! >>

---------------------------------

What’s going on with mortgage rates? Make sure you do your research before your next renewal so you get the best rate possible. You can start with this video! >>

2019 Real Estate Market Predictions

Happy New Year, readers! Hope you had a great holiday season and that your 2019 is off to a great start. Now that everyone is back to business, who wants to talk some real estate? Today, we are going to offer our real estate market predictions for 2019.

Cap Rates Will Mostly Flatten Out or Even Increase A Bit

Cap rates have seemingly hit bottom. They didn’t really have much further to go, so this isn’t surprising. Now that interest rates have increased a bit, investors appear to be looking for a higher cap rate on their commercial investment properties. We reached a bit of a standstill with some properties in 2018, with sellers' lofty expectations not being achieved in the market. To get these deals done, sellers will need to adjust their expectations.

Multifamily Will Still Be On Fire

While it is our opinion that cap rates commercially will stall out, multifamily still has some positive dynamics that will keep it chugging along. First off, the demand is still very high from across Canada and the supply is very limited. It isn’t economical to build with these new construction prices, so adding new supply wont help the situation. Plus, the rental market is tight and rents are increasing—that doesn’t look like it will be changing anytime soon.

Interest Rates Will Increase, But Not As Much As Expected

Economists and market forecasters are expecting multiple interest rate increases this year, on the back of the three times the Bank of Canada raised last year. While we foresee rates to go a little higher, we don’t think the market in general can withstand an interest rate spike without causing a significant recession. The population is far too indebted and—particularly in expensive cities like Toronto and Vancouver—the cost of increased interest expenses can't be born. For these reasons, we think interest rates will have a lid on them.

The Lending Environment Will Get More Difficult For Borrowers

The government has introduced several measures over the last few years to try and cool the housing market. It finally seemed to have been working, as Toronto and Vancouver didn’t have such great stats in the second half of 2018. Combining these measures with higher interest rates, qualifying for the house you want is getting more difficult. We are also seeing lenders and mortgage insurers pulling back their risk, scrutinizing more deals and generally acting less competitive in the financing market.  We expect this to continue in 2019. This may also lead to more firm deals falling through at closing due to some of these factors.  So we advise sellers and listing agents to be extra diligent in ensuring buyers are qualified and pre-approved for a mortgage in your price range, with a little extra buffer for safety. Also, ask for big deposits!

Rents Will Rise & Vacancy Rate Will Fall Again

Residential rents have really increased in the last few years and the factors driving that don’t seem to be changing anytime soon. In fact, with the housing market continuing its climb and with the tightening lending environment, more people could be driven into the rental market, increasing demand. Adding to this is the start of the Gordie Howe Bridge, bringing with it a large influx of temporary workers coming to the area; the vacancy rate is forecast to continue to trend lower.

2019 should be an interesting year in the real estate market. Those are our predictions. What are yours?

Real Estate Insider: April 2018 News Report

Welcome back, readers! We hope everyone has been enjoying the weather now that spring has finally arrived. We've found some hot topics and informative blogs for you to read in between any yard work this weekend. Grab some coffee as we have a look at the perfect house to raise a family in, the marijuana commercial real estate boom and more in this issue of the Real Estate Insider!

AirBnB has become more and more popular. It could potentially be a good way to earn a little extra cash, but only if you do your homework! Read here for tips and how to calculate your return on your potential AirBnB property. >>

---------------------------------

Whether you are for or against the legalization of marijuana, you can still reap the rewards in ways other than buying it! Read how here. >>

---------------------------------

Do you have mortgage insurance? You may want to think twice! Here are 5 reasons to go a more traditional route. >>

---------------------------------

There is a stigma behind “Capital Gains Tax” that seems to rub everyone the wrong way, but broken down it can be seen it is one of the more fair taxes out there! Read more here. >>

---------------------------------

Everyone is going green, you should too! And if you start with this smart thermostat, there is no cost! >>

---------------------------------

One of the most powerful financial tools to help grow your wealth is leverage. So you should be using leverage whenever possible, even on home renovations! Learn how this couple used their leverage on their home renovation to maximize rewards and stretch their budget further. >>

---------------------------------

The Financial Samurai walks you through their idea of the “Ideal” house to raise a family, everything from layout to bedrooms to which direction to face! Check it out here. >>

---------------------------------

What to do when facing ‘renoviction’. >>

---------------------------------

Are you in the market for a mortgage? Read here why variable rate mortgages are the better deal right now. >>

Real Estate Insider: January 2018 News Report

Will your next home be in a mall? Who pays for what in a domestic relationship? Thinking about doing some renovating this Spring? We cover all that and more in this month's Real Estate Insider, including the latest real estate developments in Canada this month—plus we might even help you save some serious cash.

Thinking of investing in Real Estate? Capitalization Rates can be one of the easiest and most common methods of valuation used in the market today! Learn about Cap Rates and why they are so important for investors! >>

---------------------------------

Whether you are a Buyer or a Seller, you need to know the difference between Patent and Latent Defects. This video covers what they are, and what needs to be disclosed when selling a home. >>

---------------------------------

Don’t get hit with sticker shock when doing your first kitchen renovation! This article will help you understand the costs and how much to budget so you can be safe rather than sorry! >>

---------------------------------

If there’s one thing you should be it’s efficient. Read these simple tips and tricks to stay cozy and be energy efficient this winter! >>

---------------------------------

Moving in with your partner can be an exciting and confusing experience, with one of the most common questions being “Who pays for what?” Read this article for some steps to take when pooling assets together with your significant other. >>

---------------------------------

Watch this video to learn “5 things to know when selling a home occupied by a Tenant”: >>

---------------------------------

With the announcement of another interest rate hike, be sure to keep informed with some of the key takeaways and what this and future rate hikes mean for the Canadian economy. >>

---------------------------------

When one door closes, another opens! With the struggling retail market in Canada leaving large vacancies, Canadian mall owners are seeking to convert these prime spaces into condos in some of the largest most vacant land deficient cities in Canada. >>

---------------------------------

Now that everyone is familiar with the new mortgage “Stress Test”, here are 5 things that will happen in response to this new mortgage policy. >>

---------------------------------

Personal Loan Vs Line of Credit: read this article to learn the pros and cons of each. >>

New Series: Real Estate and Related Terms Explained

Over the next several weeks we will be doing a new series on the blog. In a nutshell, each week we are going to choose a term that we often find that is either confusing or misunderstood in our travels with our clients. We will define the term in verbiage that is easy to understand and expand on the concepts where necessary.

After this series we hope that you will be able to talk confidently about many real estate related topics. Sometimes, there are different terms for different items in different jurisdictions. For example, in Ontario (where we live and sell real estate), we use the term Condo for condominium ownership, whereas in British Columbia, they use the term Strata. So therefore, as experts in Ontario only, we will focus on terms used in our market.

The first post next week will be regarding a term that we get asked about a lot…triple net.

Readers: are there any terms you find confusing that you’d like us to touch on? We’d like to make this series informative so we’d love to hear from you.

THE TENANT PLAYBOOK: Keys to Success

Tenants considering new premises are often overwhelmed by the complexity of the task. In addition, they most often continue to run their operation from their present location, while at the same time planning to move/relocate. Talk about a heavy workload!

As with everything in real estate, DON'T GO IT ALONE! Engage the services of a qualified commercial leasing specialist on Day One. Interview only qualified specialists in your market area and select the one who appears best suited to assist you in finding new premises.

Now that you have engaged your Tenant Representative, what are the key elements of your relocation plan that need to be determined? A typical list would be as follows:

• Lease Commitment Period (5, 10-20 years)
• Locational Parameters (based on your clientele and market priorities)
• Premises Size & Design (sq. ft. range, ground floor/above ground, multi-unit/freestanding)
• Interior Layout (floor plan requirements, staffing size, windows/exterior light)
• Parking Needs (on site, street parking, municipal parking, no parking)
• Signage (facia box, multi-tenant pylon sign, window signage, directory board)
• Accessibility (key in most jurisdictions across North America)
• Networks (fibre cable, high speed internet, satellite)
• Landlord Incentives (rent free period, TI allowance, turn-key/build to suit)
• Availability (to commence both the tenant's work and business operations)
• Options to Expand/First Rights on Adjoining Space

Although not necessarily a conclusive list, this forms a solid basis for the objectives needed to secure new premises. As a tenant, you need to present your requirements in a very clear manner, based on your foreseeable needs. This is a vital part of the Tenant Playbook. It forms the basis of the properties which you consider. It will also ultimately form the basis in your decision making as you create a short list of viable property options and compare them.

Next up from the Tenant Playbook: the most effective approaches in negotiating with the Landlord. As always, we're just a click or call away from discussing the investment opportunities here in Windsor-Essex!

RENT FREE INCENTIVES (RFI) – An Alternative Strategy to TI ALLOWANCES

Landlords will often consider offering a RENT FREE INCENTIVE in order to attract Tenants on vacancies they are looking to lease. An RFI can be offered in addition to a TI ALLOWANCE or in lieu of, depending on the specific deal. However, from a Landlord’s perspective there are certain considerations that you should clearly assess, as you look to build-in a rent free period into any lease deal.

Questions to Consider:

Q: How does the RFI affect your overall cashflow for the property?
A: Cashflow – 2 months not as much a factor, as say a 6 month RFI would be.

Q: How does the RFI affect the net effective rent over the lease term?
A: Net Effective Rent is reduced from the face rate as shown on the lease (do the math).

Q: Does it include the operating cost/ft. of the property or strictly the base rental?
A: If Operating Cost/Ft. forms part of the RFI, it costs the same as if the unit were vacant.

Q: Are the TI costs being invested by the Tenant comparable to the rent free amount?
A: Tenant Investment is an ideal trade-off and helps substantiate the RFI.

Q: Is the Tenant stable and do they offer a Good Covenant?
A: Tenant Stability is a key factor and one which requires a close look.

Q: Does the RFI have to be provided at the front of the lease term?
A: RFI Upfront – not necessarily, and helps reduce the risk if it’s spread out over the term.

Q: Can RFI be conditional upon the Tenant not defaulting and otherwise becoming repayable?
A: RFI Conditional – all terms are negotiable and this ties the RFI to tenant’s performance under the lease agreement.

As with TI allowances, rent free incentives are considered to be a cost of doing business, and when offered in the right circumstances can be an effective inducement. The above Q&A gives you a good basis for assessment and ensures any RFI concessions make good business sense. RFI expectations vary  from the Tenant’s perspective and is really a market call based on your area.

In any real estate deal – a lease in this case – remember you don’t get what you deserve, but what you negotiate. RFI terms are often a key point in any lease negotiation and hopefully this gives you a better perspective as you assess a future deal.

We welcome your comments and stories about RENT FREE INCENTIVES based on your experiences – both Landlord and Broker alike. Just a click/call away from discussing our investment opportunities here in Windsor-Essex!

Property Management Q&A - Necessary? Benefits? Costs? Who Pays?

As you get ready to close on a commercial property, the question of property management needs to be addressed. Assuming you are not looking to manage the property on your own (NOT hands-on), it's time to assess the issue of hiring a property management company.

NECESSARY? - any tenanted property requires some level of active management. Obviously a single tenant would be less involved, than a multi-unit property involving multiple tenants. On a regular basis, matters arise requiring a landlord's response and you must (or someone on your behalf} attend to those issues. Management services can be tailored to suit your and the property's specific needs -- but appropriate oversight is a must.

Benefits? - the major items would include 1) financial management (collection of rent, follow-up on receivables/bill payment. ,monthly statements, operating cost budgets to name a few). Established management companies can provide better rates on insurance and property services, based on bulk purchasing power. They can also be 'on call' after midnight, based on an unforeseen emergency.

Cost? - Will vary market to market and based on property category. It will also most certainly depend on the actual services being provided, and ensure you are making 'apples to apples comparisons' when considering management firms. Typically on commercial properties, it may fall in the range of 3-5% of the property's gross income. But as with everything - 'you get what you pay for' and the cheapest management costs may not be the most appropriate for your needs.

Who Pays? - That all depends on how your lease agreements read. If you are assuming "NET LEASES", ultimately the tenant pays the cost of property management, through the additional rent provided for in the lease. In most cases, this should make the argument for professional management academic. In cases where the leases are "GROSS", any management costs will ultimately be added to the expense side of the property. As a final caveat, make sure you review the lease agreements to understand what the implications are for hiring on a property manager.

As a final note, good management companies can always provide a list of satisfied clients - get in touch with those references and confirm the quality of services being offered. Good property managers generally make for good (happy) tenants, and that generally makes for a GOOD INVESTMENT!

Tell us about your past management experiences. Just a call/click away if you are interested in discussing investment opportunities in Windsor - Essex!

---

Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

Financing The Purchase - "Show Me The Money"

The due diligence is now complete and it's time to make sure your financing arrangements are in place in order to close. Even though you may have had a pre-qualifying meeting at some point along the way, you need to finalize the actual mortgage terms, rate/term/amortization, and costs which will be incurred in arranging the funds.

In considering sources for financing, one size does not fit all, and especially in commercial lending. Some of the better options might include:

• Primary Bank (established relationship and a lender who already knows you)
• Institutional Lenders (specialists in commercial mortgages)
• Mortgage Brokers (able to shop the mortgage market for you)
• Private Lenders (often in restricted situations and generally costlier)
• Seller Financing (Vendor or VTB held & either as a 1st or 2nd mortgage)
• Assuming Existing Financing (based on an approval)

Beyond the actual mortgage terms, make sure you review the costs associated with arranging it. Such costs may include - appraisal fees, application fees, brokerage fees, and associated legal expenses. All of this should be spelled out in a written "Mortgage Commitment" letter by the lender. Best to consult with your lawyer, should you have any question(s) regarding the MC prior to signing it. Any unwillingness to advance funds on the part of the lender, will affect your ability to close the transaction.

A final word on today's mortgage market (as of February 2016). It is highly competitive and with solid investment properties (ie. good cash flow, stable leases, and a solid Buyer Covenant), you should be in a position to actively shop the market. The low interest rate environmental has help expand the number of commercial lenders looking to fund real estate - meaning more sources to select from. By improving the rates/terms, loan to value amounts etc., you only enhance the property itself as an investment.

Tell us about any commercial mortgaging experiences in your market ... and as always we are just a call/click away, if you would like to investigate investment options (OPPORTUNITIES) in Windsor-Essex.

---

Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

Growing Trends for 2016 Real Estate - Crowdfunding

Have you ever wondered what it would be like to own a large commercial property (i.e. retail plaza, office complex, high rise apartment building), but unfortunately don’t have the millions of dollars in the bank to make it a reality? Well the rise of crowdfunding in real estate might just be the opportunity you’ve been looking for.

But first, what exactly is crowdfunding and how does it work?

You might be familiar with fundraising sites such as Go Fund Me or Kickstarter, or US based peer-to-peer lending sites such as Prosper or Lending Club. Crowdfunding for real estate is similar to these platforms and the basic premise is simple. An investor can access individual real estate properties through an online platform and pool money with other investors to invest the required funds for a property. Say for example, the property cost $10 million dollars, it could be split into 10,000 shares of $1,000 each or 0.01% ownership for each share.

Real estate crowdfunding falls into two sub-groups: debt and equity.

In debt crowdfunding the investors act as a lender for, rather than as, the owner of the property. In such circumstances, the investment would be secured by the property and the investor would be entitled to monthly interest and a return of principal, but not to any benefit from property appreciation.

In equity crowdfunding, the investor becomes an indirect owner of the property by obtaining shares, limited partnership units, or other securities in the entity that owns the property/project. This form of investment carries inherently more risk, but also a potential greater return as a result of a direct interest in the property appreciation.

Crowdfunding for real estate is still in its early days in Canada. However, it has been making significant inroads in the US. The Ontario Securities Commission has been reviewing the industry as it matures and tries to regulate to protect investors. So check back often on the regulations as the industry matures in 2016.

Though crowdfunding will allow more people access to the commercial real estate market, for companies being able to solicit investments in projects from the general public online both greatly increases companies’ ability to raise the capital they need, from a greatly expanded pool of potential investors, but may also greatly increase the likelihood of lawsuit, especially if the investment performs poorly.

So there you have it. We are on the precipice of “the democratization of the real estate investment opportunity”. Are you excited?

---

Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620

Property Due Diligence

In considering the acquisition of a property, it's wise to take the time to evaluate the building/site on a top-down basis. Typically this is done during a 'conditional period' within your Agreement of Purchase and Sale, and it facilitates your investigation of the property on a number of fronts.

Some of the more common elements of a due diligence review can include the following:

Physical Condition - which should be undertaken by a qualified building inspector or possibly an engineer/architect. Normally this is centered around issues relating to the structural condition (i.e. roof) of the building, electrical/plumbing systems, heating/cooling equipment, and site improvements (i.e. parking lot). The goal is to do a 'top -down' review of the property to determine any deficiencies which will be assumed PRIOR to firming up your purchase agreement. Keep in mind that any deficiencies which are assumed, become expenses which ultimately get added to the acquisition cost.

Environmental Review - normally handled by an environmental consultant within your jurisdiction. Even though it is generally a requirement for mortgage financing purposies, it is generally a good idea to complete one in order to establish a 'base line' position on the property on a go-forward basis. The details of such reports will vary from property to property, as will the costs to complete them. Environmental problems can be expensive to remediate and correct after the fact, so the reviews are most often well worth the investment.

Title Review - this is an exercise best completed during the due diligence process. It should reveal any easements, property restrictions, and lien/encumbrances which affect the property and ultimately your use of it. The bottom-line here, you want to ensure that there are no title matters affecting the property that you are ultimately UNABLE or UNWILLING to accept. It's a good practice to complete it during the conditional period.

Other reviews might include building code/zoning matters, special designations (i.e. heritage), equipment inspections (i.e. cranes).

Dollars spent in conducting good due diligence, is generally money well spent and well worth the investment. 'Caveat Emptor' lives on in the real estate world ... be an Aware Buyer!

Feel free to comment on any of your recent experiences with property due diligence -- the good, the bad, and the ugly. Look forward to connecting with you on any investment opportunities here in Windsor-Essex -just give us a call or connect through our website.

---

Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

"The Rich Get Richer" Thanks To Real Estate

Recently we came across an article in which it is stated that the rich have been getting richer in the developed world due to owing real estate.  It struck a chord and is something that is hard to argue with.  Given our profession we can relate to these findings.

Through the day-to-day dealings of working in commercial real estate, we are often in contact with many successful entrepreneurs, business owners, professionals and corporate executives.  Luckily we are able to gain great insights into what makes these people successful in their business and financial lives.  Often a large component of their financial success comes from (owning) real estate. 

Whether owning the building their company is in, investing in residential or commercial income properties or simply owning their home,  a significant portion of their net worth is invested in real estate.  Over the long term being an owner of real estate assets has tended to work well.  With real estate prices being at all time highs in many different sectors and markets, this seems a relevant time for this discussion and we will piggyback off of the rich get richer idea, with some reasons why real estate assets have performed well over the long term and why the trend should continue into the future:

Source: Rich & Olivia

1. They are hard, tangible assets.  Compared to buying financial assets - i.e. stocks or bonds, which are essentially paper assets - real estate has tangible value (you can live in it in the example of a house, or farm it in the example of farm land).
2. Over the long term they are an inflation hedge, as rents and construction costs rise.
3. Land is scarse and they aren’t making any more of it!
4. The population is growing and with advances in modern medicine this doesn’t seem to be a trend reversing itself any time soon.
5. You can use leverage to increase your returns or acquire assets that you don’t have the cash to pay for.  Financing options are also robust in developed markets.
6. Historically low and falling interest rates.  Although no one can predict the future, even if interest rates rise substantially, they still would look like a bargain compared to previous cycles (hello 20+% in the early 1980s).
7.  Continued innovation and technology to propel economic growth and therefore peoples' standard of living.
8.  In the example of investment properties, they pay income, as opposed to some other asset classes such as stocks that don’t pay dividends or investing in commodities.  Good for retirees or people who live off of a nest egg and need the income.
9. Easy to understand.  Whether it be residential prices in your neighbourhood, or prices for apartment buildings.  The concepts for valuation (comparables, cap rates) aren’t difficult to understand.  Some other assets such as stocks and bonds are more difficult for novice investors to understand.

What are your thoughts on the effect of real estate assets over time? Leave a comment down below.

Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620