I kind of drone on a bit in this video(it was late) but the content is good so you will want to check it out.
Investing in single industry towns is risky, no matter what the potential upside.
I’ve spoken with numerous investors in recent months who are looking for a good return on investment(ROI) of their money using real estate. There have been new build projects in Alberta and Northern BC that had booths at many Real Estate events I frequent, all looking for investment dollars from people like you and me.
After growing up in a boom-bust town, I know how the volatility of the market can catch people off guard. Put a $10k down payment, or worse purchase a pre-build for cash, the market turns and your money can be tied up forever.
A recent example is the huge drop in oil prices this week and what this means to real estate investors.
Here is what is happening:
1. OPEC is not reducing oil supply(they are profitable with oil at $40/barrel range) in an effort to squeeze out the newer more expensive oil projects(Canada’s Oil Sands start to lose profitability at $60/barrel).
2. Cheap oil means there is less demand for alternative fuel like LNG. As result, the final investment decision of the proposed $36B LNG plant in the Fort St John/Dawson Creek area and the Northern Gateway Pipeline have been postponed indefinitely because the costs of these projects are not attractive enough when oil is under $70/barrel. We could see oil under $70 until late 2017.
3. Alberta’s Real Estate Prices are vulnerable to oil, shown yet again in this Dec 2 article . “When growth is on par, or lags the rest of the country, workers don’t flood in. […] Builders, Kavcic says, haven’t been able to put homes up fast enough to meet the recent demand. And if migration does plunge, there’ll be a lot of homes coming to market out of the current building cycle.”
What this means for you.
Look carefully at the projections offered by the salesman of new construction projects. For companies to make money on the build, projects frequently sell at market value(or slightly above).
You may find an inflated projection of appreciation to make ROI look better than realistic forecasts.(I heard one salesman point to 4% appreciation – aggressive in my view – and say “this could be 10%”) An inflated appreciation can make a dramatic difference on your ROI.
Try the numbers with a realistic 2% appreciation(on par with inflation) and see if it is still an attractive investment.
I use 2% appreciation in my calculations, and highlight the Cash-on-Cash ROI – meaning how much cashflow(money is left after expenses each year) is there / total money invested in the deal.
Because rents in Kamloops are so high compared to prices, it is not unusual to receive $10k/yr cashflow for an investment of $100k or less!
For an example of a detailed and conservative proforma, subscribe to my deal of the week!
Until next time,