Speculate At Your Peril
The world is filled with news articles that don’t make sense. I get bent out of shape when I read an article that is downright ignorant. When I say ignorant, I mean lacking in basic education. The worst part is that these articles are getting wide circulation and feeding mis-information on a large scale.
On today’s show we’re talking about one such article about the condo market published earlier this week in the Huffington Post. There have been numerous articles that are similar speaking about the fall in rents in New York, San Francisco, and other expensive coastal markets.
The article is entitled,
“Canada’s Condo Markets Face Perfect Storm As Rental Rates Tank, Costs Jump”
The story goes on to say,
“Add yet another to the many imbalances in Canada’s pandemic economy: Renters are catching big breaks as rental rates drop, while condo owners ― particularly investors ― are looking at potentially rough times ahead.
In fact, for condo owners, just about everything that could go wrong ― from bad construction and rising insurance costs, to rental rates that can’t cover mortgage payments ― is going wrong.”
Stories like this are just so ridiculous. They imply that the pandemic is to blame for the plight of these condo investors. The implication is that these were good investments to begin with, and the pandemic turned them into bad investments.
The fact is, these investments would have never met my criteria. Let’s look at some specific examples. In Toronto right now there are about 30,000 condo’s for rent in the core of the city. That’s a lot of inventory. No surprise that rental rates have fallen.
The city of Toronto attracts about 125,000 new residents a year and in a traditional year, there are about 35,000 units of new construction. The imbalance between demand and supply is one of the main reasons that prices have been continually rising. But immigration is down this year because of the pandemic. So fewer people are moving into the city and a lot of that new supply coming into the market is competing with existing inventory.
For those of you on this podcast, nobody is going to be shocked to hear that $1,600 a month in rent on a $500,000 investment is not going to pencil. You don’t need to pull your calculator out to know that those ratios don’t work. But here’s the crazy thing. Realtors all over are selling these types of properties to unsuspecting amateur investors. They won’t cash flow, but appreciation has meant that all you needed to do was sit on them and time would take care of everything. The memory of down years is a distant memory.
When you invest in shares of Tesla, you look at the last few years and the stock has consistently gone up. Maybe you decide to buy shares of General Electric. You tell yourself that General Electric is now a bargain after having fallen 75% from it’s highs a few years ago.
All of these plays are pure speculation of the same type that wall street investors use every day. These investments are not professional investments. They’re speculations, and are not based on fundamentals.
When I make an investment in a property or a new construction project, I’m very clear on where the profit is going to be generated. That doesn’t mean that you won’t encounter surprises or changes in market conditions. But at least I’m clear on the day to day cash flow. I’m not speculating that prices will go up, simply because they’ve always gone up.
When I underwrite projects, there is no speculation on the value going up. The investment has to make sense today, in today’s dollars with today’s market conditions.