Tuesday, December 22, 2015

Our Real Estate Wish List for Santa

Well this is our last blog post of the year and Santa is coming on Friday. Hopefully you’ve all been good this year and he is bringing you all the presents you have asked for.

 Today we wanted to talk about our wish list for a healthy 2016 real estate market:
  1. Continued low interest rates. With historic low interest rates of 2015, it makes housing payments more affordable and investing cash flows higher. We don’t forsee these going away for a while but why not appreciate how good we have it (talk with those who owned real estate in the early ‘80s with 20%+ interest rates).
  2. Immigration and migration into the Windsor-Essex Market. With the push for retirees and low housing prices, the area has become successful in attracting people from large high priced markets to relocate to Windsor-Essex. We hope to see this trend continuing to increase.
  3. The continued resurgence of the Automotive Industry. The rebound in the last few years has created significant jobs and economic activity for the area which has helped drive the local real estate market.  
  4. No more terrorist attacks! Aside from the human tragedy that we hope to avoid, we hope not to see these terrorist attacks continuing around the world and shaking the confidence of people in the global economy.
  5. A mild winter. Put your hand up if you love brutal winter conditions….anyone? Didn’t think so. Buyer and Sellers in the real estate market don’t love bad weather either and a mild winter should keep this booming real estate market going.
  6. A healthy increase in supply of houses and commercial properties. In 2015 we saw the stats swing highly in the favor of a sellers market and we have many buyers who haven’t been able to find the property they have been looking for. A slight increase in supply to balance the market out would help in 2016.
What are your wishes for Santa?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Friday, December 18, 2015

Self Due Diligence - Which Real Estate Is For You?

Industry professionals love to promote the fact that investing in income properties is a legitimate way to wealth creation. It can not only provide an income stream, but capital appreciation as property values grow over time. The types and categories can include – residential (both single & multi –family), commercial buildings/strip centers (retail & office), mixed use (commercial & residential), industrial buildings (production & warehouse types), and even land that generates income (agricultural & solar farm).

As you consider the various categories, you also need to assess the type that not only best fits your objectives but best SUITS YOU. Investment property markets are littered with acquisitions which have ‘gone bad’, often times because the investor did not do sufficient SELF DUE DILIGENCE.

Some key questions to consider include:
  • Am I more interested in residential or commercial/ industrial properties?
  • Locational / neighbourhood criteria?
  • Do you intend to be ‘hands on’, or will you require a property manager?
  • Can you accept cash flow/return declines in the operation of the property?
  • Are you in a position to re-capitalize a property if circumstances change?
  • What are the risk factors which you cannot accept?
  • How can you best limit any liability?
  • What are the market expectations? The read of the current market?
  • Is liquidity an issue if you need to sell quickly?
  • Type of financing required and initial cash (downpayment) capability?

Any investment comes with its share of risk and income properties are no different. Good preliminary planning - starts with an honest assessment of YOU, your objectives, capabilities, comfort zone and so on. Once that’s figured out, it’s time to move on to the market in a direction that fits best.

Always looking to network with investors and other professionals in the broker community. We’d welcome your comments and feedback. And as always, would be pleased to discuss the opportunities here in Windsor-Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, December 15, 2015

Condo Special Assessments Explained

Today we are going to talk about a topic that is rarely understood by people other than those who own a condo and have experienced the situation first hand – the situation of a special assessment. A special assessment can be an expensive item for condo owners and one that unfortunately happens often. Lets start with a definition:

A special assessment is an additional payment or a levy that a condo board has to impose when unexpected shortfalls or unexpected expenditures occur in the budget, or when an expensive system has to be replaced (i.e., a boiler) and there is not enough money in the reserve fund to cover for it.

Generally this special assessment is in the form of a lump sum payment or spread out over a certain term (i.e. 3-12 months) and added to condo fees. There are no provisions in the Condominium Act, 1998, that talk about special assessments. Therefore implementation and rules regarding the structure of a special assessment are up to the condo board.

Source: CTV News
Unit owners have the same obligation to pay special assessments of common expenses as they have to pay regularly assessed common expenses. A failure or refusal to pay a special assessment as and when required by the board of directors gives rise to a lien against the owner’s unit. Condominium boards do not require unit owner approval for a special assessment, unless the by-laws of the condominium specifically require it.

When a special assessment does occur, depending on the size relative to the pricing of condos in the building, certain owners might not be able to afford to pay them. This can lead to a series of forced sales in the building and an overhang of supply, leading to lower sale prices across the building. A long history of special assessments in a building can be a red flag and indicative of poor management or poor physical construction.

Source: Edmonton Downtown
When looking at purchasing a condo, make sure you ask or put in the schedule of an offer, for the seller to disclose any current or pending special assessments, so you are clear on any liabilities you are inheriting. As discussed in an earlier post, look through the reserve fund study so that a proper assessment can be made, of the finances of the condo corp and the likelihood of a special assessment in the short term.

Have you had any negative experiences with special assessments? We'd love to provide you advice.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Friday, December 11, 2015

Beyond The Cap Rate - "Financial Due Diligence"

Investors typically outline their investment objectives based on a cap rate target. In examining properties on the market that are advertised within the objective range, the next step is to take a detailed look at the legitimacy of the numbers which the CAP RATE is based on.

On the income side, start with a thorough review of the current lease agreements. The rental income needs to reconcile back to the $ amounts presented on the financial statements as provided. Additionally you will want to confirm lease terms, future increases, renewal options, deposits held etc. You also need to note any special provisions – such as early termination clauses, future rental caps, expiration of personal guarantees, and first rights on adjoining space. Best practice here, is to ensure the revenue numbers add up and are supportable based on the terms contained in the lease(s).

On the expense side, annual reports are typically provided and are a good place to start. However, you need to go further – verifying the expense amounts shown, based on actual invoices paid. An additional step, particularly on smaller properties, is to call for the Seller’s tax returns against the corresponding years. Again best practice, is to confirm and legitimize the expense side and make sure they reconcile back as presented.

A proper Due Diligence should confirm the figures as presented – and in doing so legitimizes the CAP RATE. In any type of income property investing, the ‘devil is in the details’. Make sure you verify those details before moving forward on any purchase.

Welcome hearing about any DUE DILIGENCE stories based on your experience – either good or bad. Or any comments you care to share. Look forward to discussing investment opportunities here in Windsor-Essex – feel free to connect with us.

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, December 8, 2015

Ontario Reverses Course - Won't Extend Municipal Land Transfer Tax

Ontario’s provincial government has reversed its course and has decided it will not extend the power to charge a Municipal Land Transfer Tax to municipalities outside of Toronto, where it already exists.

Source: OREA

“This is a huge win for Ontario’s homeowners and those who dream of one day owning a home. It reaffirms that the Municipal Land Transfer Tax is a bad revenue tool, not just outside Toronto but in it as well,” says Patricia Verge, president of the Ontario Real Estate Association (OREA).

OREA led a five-week campaign called Don’t Tax My Dream that saw Realtors and 32,000 members of the public voice their opposition to the spread of the tax province-wide (which we linked to in our previous blogs (here and here) of the last 2 weeks and hopefully contributed in a small way ☺).

“I would like to also acknowledge MPPs on all sides of the legislature who spoke both publicly and privately against the tax,” says Verge. “Your work has helped protect affordable home ownership for future generations.”

This is great news for Ontarians as this potentially saves homebuyers thousands of dollars. Given the weak outlook for the Canadian economy for 2016, with low commodity prices, I think that this is prudent timing for this decision.

Cheers to another strong year in 2016 free of municipal land transfer tax!

Are you relieved at these results? Let us know in the comments.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, December 3, 2015

Cap Rate Compression

This is a commonly used term which very much applies to many markets across Canada – and not just the large metropolitan/urban areas (a.k.a.- Toronto and Vancouver). Smaller urban markets (a.k.a. Windsor, London, & Kitchener/Waterloo), have also seen cap rates trend lower and experienced “cap rate compression” similarly in recent years.

Let’s review the concept of a ‘capitalization rate’, as it is commonly applied in commercial real estate:


$100,000 / $1,200,000 = 8.3% CAP. RATE

Most often the cap rate is used a means to quickly (financially) size up a property, relative to other potential investments available. In any market, you should be able to look at recent sales in a particular property category, and determine what sort of cap rate range the market has experienced in a recent period (say 12-18 months). Specifically if we take the example of the office building market - data should be available to indicate a range of cap rates based on comparable sales during the period you are analyzing.

So what’s the basis of cap rate compression? In short what it’s telling us is properties are yielding less income and values are being bid up. Often if you look back 3-4-5 years, you may determine that the cap rate compression has been significant and values are up considerably as a result. Cap rate data should be readily available through your local brokerage community or commercial appraisers.

When planning for any investments (real estate or otherwise), it’s always best practice to do so with ‘eyes wide open’ and understand the historical backdrop to your market. The concept of cap rate compression is one you should be familiar with and consider as you plan for future investments.

Next up is…BEYOND THE CAP RATE ANALYSIS. What sort of cap rate compression have you seen in your market? Are values being stretched ? How competitive is it on the “Buy Side”?

We’d love to hear from you -- and discuss some excellent investment ideas here in Windsor – Essex.

Please leave us a comment, give us a call, or send us an email!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, December 1, 2015

The Effects of Double Taxation on Ontario

Last week we talked about The Ontario Ministry of Municipal Affairs and Housing indicating that they are extending the power of municipalities across the province to charge a land transfer tax. This potential doubling of land transfer taxes would add thousands to the cost of purchasing a home in the province.

Today, we are going to look at the ramifications of such a policy:

  1. These changes and modifications to housing/financing rules always seem to have the largest impact on younger people and first time home buyers. This is a segment of the market that is most vulnerable to downturns in the market and economy and adding this additional cost makes things even more disproportionately difficult for them.
  2. The first time home buyers land transfer tax credit rebate in Ontario carries a maximum refund of $2000. With an average home price in Ontario of $470,000, this translates into a proposed land transfer tax of over $11,000. This rebate clearly doesn’t go far enough in relation to house prices at all time highs. Municipalities should also consider matching this rebate with their share of the land transfer tax.
  3. For the home buyer with the minimum 5% down payment (and insured mortgage), the added cost of this land transfer nearly amounts to 50% of the down payment. Add in legal closing costs and other soft costs such as appraisals and inspections and this 5% down homebuyer needs more like 10% down on closing.
  4. This increased cost will take some buyers out of the market or delay their purchases. This should also lead to increased rental demand as these buyers are forced to save longer for their downpayment. This should put downward pressure on vacancy rates and upward pressure on rents.
  5. The conservative government estimates this move would cost the province $2.3 billion dollars in lost economic activity and 15,000 jobs.
  6. This is just one more indirect tax on citizens. With proposed increased income taxes, revamped CPP or an Ontario Pension Plan, increased hydro/water costs way outside of other jurisdictions, the burdens on Ontarians continues to rise. When does it end?
Are there any other effects that you can think of? Let us know in the comments.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Friday, November 27, 2015

When Maximum Leverage = Negative Leverage

In a world of low interest rates and plenty of commercial mortgage options, how could we ever experience “NEGATIVE LEVERAGE?"

Surprisingly, it happens and when it does - the fall out becomes a cash flow problem and an investment property - which becomes best described as a “POOR INVESTMENT”.

Firstly, here’s how it occurs (mathematically). Consider the following illustration:

Property Purchase 1

I - Price - $100,000 (no mortgage) 
w/ Annual ROI on Cash Invested of 6% (Yields $6,000 /yr.)

II - Price - $100,000 (mortgage of $80,000 @ Int. Rate of 7%) w/ Annual ROI on Cash Invested -1.23% (Yields -$1385.40/yr).

In the above example, NEGATIVE LEVERAGE is created by the fact that the mortgage rate is above the overall return component as shown in ‘I’ (no mortgage). If for whatever reason, the mortgage interest rate exceeds the basic return component for the property, you will find yourself in a NEGATIVE LEVERAGE situation.

Market opportunities where maximum leverage is often promoted, may well lower your initial investment requirements, only to create cash flow problems once mortgaging costs are factored in. Best practice here - is investigate mortgage options available on any prospective investment and compare it back to the basic return component which the cash flow provides.

The concept of LEVERAGE is widely accepted strategy in the real estate industry – keep the focus on “POSITIVE LEVERAGE”!

How does your market area look as we close out 2015.? Has it been a good year to add to your portfolio, or to sell investment properties? 

Ready – Willing - & Able to be of service in Windsor-Essex - give us a call!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, November 24, 2015

Double Taxation - Ontario to Allow Municipalities to Charge Land Transfer Tax

The Ontario Ministry of Municipal Affairs and Housing has indicated they are extending the power of municipalities across the province to charge a land transfer tax according to the Ontario Real Estate Association.

Source: Orea Blog

This additional cost of buying a home, already in place in Toronto, would double the effective tax and could add thousands of dollars to the cost of buying a home in the province.

“Ontario home buyers are already charged a provincial land transfer tax, so by adding a municipal tax, they’re essentially doubling the tax burden on Ontario families,” said Patricia Verge, president of OREA. “If the Ontario Liberals follow through with this plan, home buyers will be forced to pay $10,000 in total land transfer taxes on the average priced home in Ontario, starting as early as next year.”

Here is the breakdown of existing land transfer tax rates in Ontario:
  • 0.5% up to and including $55,000
  • 1% above $55,000 up to and including $250,000
  • 1.5% above $250,000
  • 2% above $400,000 where the land contains one or two single family residences.
So with an Ontario average sale price around $470,000, you are talking about $5875 for land transfer tax and an effective rate rate of approx 1.24%. With this doubling to include municipal land transfer tax we are talking about $11,750 or an almost 2.5% tax rate. This is not an inconsequential amount and will add a significant burden to homebuyers and the housing sector which is a large segement of our economy.

Next week we are going to be talking about the ramification of this potential tax.

In the meantime, we encourage all Ontarians to visit www.donttaxmydream.ca to learn more about the negative impact of the MLTT and stop this tax from spreading province-wide.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, November 19, 2015

Property Appreciation - Boosting The Return!

Historically, real estate markets have risen over time – be it 10-20-30+ year periods. Although there have been negative years or periods over time (consider 2008-2010) across many North American markets - but generally the overall trend is up when you look at the big picture. This is a basic ‘principle of investing’ for investors as they consider commercial property alternatives.

In recent blogs we’ve highlighted the importance of ‘ CASH FLOW ‘, but when you factor in ‘FUTURE APPRECIATION’ – the result is an unbelievable money-making & return-boosting combo. Consider the following simple illustration –

See Blog from 11/5/15 – same illustration

2000’ Building – Price - $180,000 (acquired in 2014)
Net Rental Income - $16,000
Cash on cash return - 13.4% - 5 yr return
Projected Sale Price (2019) - $230,000
Capital Gain at time of Sale - $50,000 (+ annualized return of $10,000/yr over the ownership period)

Source: Vancouver Sun


$10,000/$54,000 (original cash investment) adds an additional 19% return at time of sale

Lots of assumptions made here - biggest of which is a 5% per year growth expectation on the real estate value itself. But this is made based on an assessment of the local market / economy, current stability of the leases /cash flow, and any anticipated capital needs for the property. Can this projection be off – sure, appreciation may be restricted to 2-3% per year or unexpected capital improvements on the property may arise , which can curb or impact our projected boost. But the bottom – line is , we believe in the investment property on a ‘forward thinking basis’ and fully expect it to appreciate over this 5 year period.

Based on our experience, property investors come to us with various criteria, investing models, and expectations. But the one common denominator is consistently the expectation of “PROPERTY APPRECIATION” – meaning it will be worth more down the road and they pursue property investments according.

An expectation of APPRECIATION over time is fundamental to property investing – and real estate markets historically have delivered for the most part. Again, our illustration is actual and we will continue to report on it in future posts.

How are things ‘forward thinking’ in your market?

Again, always ON CALL to respond to your interest in the Windsor – Essex market.

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, November 17, 2015

6 Things You Should Look For In A Stable Condo

When you own a condo, you own your individual unit, but you are also entitled to use the common areas of the building. Compared to a single family home, when decision making regarding the property is generally your own, in condos most decisions are made by the condo corporation.

This brings with it an element of partnership among your common condo owners. Considering this ownership structure, it is important to feel comfortable with the future stability of the property and the condo corporation.

Source: Ottawa Citizen

6 Factors To Look For:
  1. Professional management by a management company with experience managing condos. This is important because they run the financials of the building, reserve fund studies, board meetings, implementing of operational changes, etc.
  2. An engaged board of directors of the condo corp (who live in the building) and who will act in the best interests of the condo owners.
  3. A low to moderate amount of sale turnover. Generally it is positive for a building to have a limited amount of annual sales in the building and have a building with a majority of long term owners. This is indicative of happy owners and with long time horizons of ownership. Buildings that always have several units for sale is sometimes a red flag of problems and there is always a steady supply of people looking to sell.
  4. Low to moderate amount of units that are tenanted. Having a large supply of owner occupants is usually indicative of pride of ownership in the building and lesser ‘wear and tear’ of the building. Tenants also usually will not be long term, which from #3 above, hurts stability of the building. Having a large supply of tenanted units in the building can also be a red flag that there is an overhang of units for sale that sellers are unable to unload.
  5. Generally stable condo fees. Stable condo fees are indicative of good financial management of the costs and liabilities of the condo corp. If they are changing, make sure they are for a good reason (like increasing hydro and water costs in Ontario, which are out of control of management).
  6. Limited history of special assessments. A special assessment usually comes down when an item or items needs to be replaced or repaired in the building and aren’t budgeted for as part of the reserve fund. We will do an in depth post of special assessments in an upcoming post. Having a limited history of this is generally positive and ties in with #5 of good financial management and maintenance of the building. Having a long history of special assessments can be a major red flag as the building may have serious physical/structural issues.

This is far from an exhaustive list but give you a few general things to look for in a stable condo building. Always make sure to do your due diligence!

Is there something you look for in a stable condo that's not on this list? We'd love to know - leave us a comment!

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, November 12, 2015

Positive Cash Flow = Positive Debt Coverage Ratio (DCR)

After you determine an income property yields a POSITIVE CASH FLOW, the next step is to calculate the property’s ability to service mortgage financing costs out of this cash flow.

The standard measurement within the investing world is referred to as the DEBT COVERAGE RATIO (DCR). DCR is simply comparing the property’s net operating income (NOI) to the projected mortgage financing costs – typically on both a monthly and annual basis.

Banks/Lenders typically look at DCR closely, wanting to confirm that the cash flow is sufficient to cover the related debt cost (aka monthly mortgage payment). In fact, most often they are looking to see a positive margin, which exceeds the mortgage servicing costs.

Source: Politico

Using a ‘break –even’ analogy, if the cash flow just meets the debt service costs - this would be a simple ‘break even’ outcome.

Consider the following illustration:

Property 1 
Net Operating Income - $75000
Mortgage Costs (Debt) - $50,000
DCR – 1.5

Property 2
Net Operating Income - $45,000
Mortgage Costs - $50,000
DCR - .9

*All $ amounts are annual

In the case of property 1, the cash flow exceeds the funds required to cover the mortgage requirement. In the case of property 2, a deficit is created ($5,000) which is not only an annual loss, but creates a negative return on actual cash invested.

In layman’s terms, a DCR of (1) is a ‘break-even’ - a DCR of (1.5) is ‘positive’ - a DCR of (.9) is ‘negative’. For investment purposes, this is how you should approach your analysis.

Just a final word on the bankers/lenders, you’re ability to negotiate favourable mortgage terms are clearly impacted by the property’s DCR. This gives you some insight as to how they evaluate risk in underwriting mortgages and how it ultimately impacts your proposed purchase.

How are lenders approaching DCR in your area? How does it affect rates offered and other terms proposed? 

Feel free to reach out to us, should you have interest in the Windsor-Essex market. As always, appreciate any feedback in the comments!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, November 10, 2015

Breaking News - Vacancy Rates in Windsor Drop Below 4%!

CMHC (Canada Mortgage and Housing Corporation) released its latest rental market survey last week and Windsor’s vacancy rate has declined again.

Last year’s vacancy rate of 4.3% is now down to 3.9%.

Source: Urbanite News
This marks the 7th straight year that vacancy rates in the area are down in the area. Average rents also edged up by 2.8% year over year. The final report will be released in December.

How can we interpret this news? Here are some of the takeaways:
  1. This is good news for the multifamily sector as they have lower vacancy and therefore higher net incomes. This is also good for property values as this translates into higher valuations based on the income approach.
  2. The population must be growing again as more and more units are being occupied.
  3. This moves the Windsor market further inline with the Ontario average of 3.1%.
  4. The vacancy rate has continued its decline since 2008, toping out north of 14%. This is a remarkable turnaround.
  5. This puts Windsor vacancy rate below those of large markets such as Calgary (5.3%) and Edmonton (4.2%).
  6. This could put further demand pressure on the housing market as more and more renters decide to leave a tight rental market and buy a home.
  7. Landlords could begin looking to build rental units as the economics improve with these lower vacancy rates. We have already seen one starting in the suburb of Lasalle this year.
  8. Tenants will have a harder time finding units to rent and will be looking at paying higher rents than they have been.
Overall this is very positive news for Windsor, its economy and investors in the community.

Readers, what do you make of this news?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Friday, November 6, 2015

Property Investing - CASH FLOW IS KING

Better yet -- “POSITIVE” CASH FLOW is king.

In any financial analysis of a potential investment, this should be at the top of the list as you review the opportunity it presents. In fact, as markets and prices continue to march higher, cash flow margins continue to feel the squeeze which only increases the overall investment risk.

Source: Polus Capital

Look at the following simple illustration to better understand what we refer to as CASH FLOW –

2000’ – 2 unit building
Purchase Price - $180,000
Net Rental Income - $16,000 (*)
(* NRI after all property operating costs – ie. taxes, mgmt., ins. are recovered from the Tenants)

This $16,000 represents an 8.9% return ($16,000 divided by $180,000), if we are looking at a straight cash purchase. However, when we consider arranging financing on the property, this cash flow becomes the source of dollars to make the monthly mortgage payment. If we assume a 3.5% mortgage rate on 70% of the purchase price ($126,000 - 5 year term & 20 year amortization) – the monthly payment is $729.12. After covering the monthly mortgage payment, the net annual income (after debt) is approximately $7250. Based on the cash flow in this example and the mortgage assumptions , the cash-on-cash return increases to 13.4%. This again highlights LEVERAGE, but it is only made possible based on the strength of the CASH FLOW.

Seasoned investment pros focus almost exclusively on properties that are cash-flow positive and make any assumptions based only on realistic projections. What assumptions are we referring to:

• Lease rate projections on upcoming renewals
• Leasing current vacancies and based on what rates
• Improvement allowances/incentives required to keep or attract tenants
• Impact of overall property upgrades (ie. roof , parking lot replacements) on cash flow
• Cash flow requirements to service the financing on the investment (aka DEBT SERVICE)
• Market trending up/down/sideways and its effect on your “EXIT STRATEGY”

Be a KING - a POSITIVE CASH FLOW KING, and wear your crown as you pursue every property investment! And for the record, the above example is an actual deal from 2014 and the investors are very pleased with this particular investment.

Let us know how you see things from your market area, and of course, we are always ON CALL to respond to your interest in the Windsor-Essex market.

Mark Lalovich
Office: 519-966-0444
Cell: 519-259-5434

Tuesday, November 3, 2015

Condo Living - What Is A Reserve Fund?

For many people, THE MOST CONFUSING aspect of condo living comes from the reserve fund.

When looking at purchasing a condo in a specific building, it is general practice to review the latest reserve fund study. But what exactly is a reserve fund? And what should one look for when reviewing a reserve fund study?

‘Reserve Fund’ - An account set aside by an individual or business to meet any unexpected costs that may arise in the future as well as the future costs of upkeep.

“Reserve Fund Study” - A reserve study is a long-term capital budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset ongoing deterioration, resulting in sufficient funds when those anticipated major common area expenditures actually occur. The reserve study consists of two parts: the physical analysis and the financial analysis. This document is often prepared by an outside independent consultant for the benefit of administrators (Board of Directors or Strata Council Members) of a property with multiple owners, such as a condominium association or homeowners' association (HOA), strata, containing an assessment of the state of the commonly owned property components as determined by the particular association's CC&Rs and bylaws.

Source: Houzz

Reserve studies are in essence planning tools designed to help the board anticipate, and prepare for, the property's major repair and replacement projects. For example, such projects would include: replacement of the roof on the building(s), replacement of the boiler, retrofit of the fire alarm devices, and resurfacing of the roadways.

The reserve fund, as we know from last week’s post, is funded through the monthly condo fees of the residents. This reserve fund essentially smoothes out the costs of the major repairs and replacement projects.

Proper planning and financial management is essential in making sure funds are accessible as the need for these projects arise.

Subsection 94 (1) of the Condominium Act, 1998, requires the corporation to conduct periodic studies to determine whether the amount of money in the reserve fund and the amount of contributions collected by the corporation are adequate to provide for the expected costs of major repair and replacement of the common elements and assets of the corporation.

Source: Malvern

These periodic reviews, are important to ensure the existing reserve fund and planned reserve fund contributions (assets of the corporation), meet the expected costs of major repairs and replacement (liabiliities of the corporation).

Otherwise, the corporation could be surprised one day and not be able to meet its obligations, and be required to levy special assessments on the residents, who may have problems in paying.

Make sure when you are looking to purchase a condo in a specific building, that you review the reserve fund and latest reserve fund study, to make sure the condo corporation “has their financial house in order”. Otherwise you could be looking at unexpected future costs.

It is also a good idea to have your lawyer review these documents to ensure there are no irregularities. Better safe than sorry.

Next up we look at what factors to look for in a stable condo building.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, October 29, 2015

4 Caveats to A Leverage Strategy

If applied on the right property investments and in the right market conditions, leverage is an excellent strategy. Check out this article from “DON CAMPBELL” a foremost Canadian authority on real estate investing. The numbers do not lie - if you pay particular attention to the investment illustration outlined.

But to guard against the ‘downside’, as you look to employ a LEVERAGE strategy, consider the following four “caveats”:

Source: Instphil
  1. Cash Flow is KING – ensure the tenant/revenue base is stable and secure. This includes the covenant of the tenants, lease terms, current occupancy levels, and debt service coverage on current income/expenses.
  2. Low Down Payment means HIGHER MONTHLY PAYMENTS – completing a deal with a low down payment, often becomes problematic if the monthly mortgage payment is beyond a comfortable level. If the market conditions deteriorate and vacancies rise, this problem often will only get worse and the monthly payment harder to meet.
  3. Projecting for APPRECIATION – markets do not always go up, despite recent trends, and you must be realistic in assessing this variable, both with respect to your own market and the specific properties being targeted. In a stalled or declining market, properties which have stable cash flows thrive and are insulated from a negative market.
  4. Maximum Leverage vs. POOR INVESTMENT – no money or low down payment deals on a poor investment property, typically leads to negative results. Do not let attractive leverage opportunities, compromise your ability to stay the course on targeting good property investments.
Leverage is a great strategy, but it requires sound discipline in its application.

Tells us about your use of leverage in your market. Again, we love to tell you about our own backyard here in Windsor-Essex, so feel to reach out to us!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Monday, October 26, 2015

The Truth About Condo Fees

Often we hear people say, “I’m not interested in buying a condo because I don’t want to pay condo fees.” Or sometimes condo owners tell us, “I pay these condo fees every month but don’t know where the money goes.”

Well, today we are going to discuss condos and where those monthly condo fees go!

First a technical definition of a condo:

A condominium, frequently shortened to condo, is the form of housing tenure and other real property where a specified part of a piece of real estate (usually of an apartment house) is individually owned. Use of land access to common facilities in the piece such as hallways, heating system, elevators, and exterior areas are executed under legal rights associated with the individual ownership. These rights are controlled by the association of owners that jointly represent ownership of the whole piece.

Put simply, when you own a condo, you own the square footage inside your unit, and are entitled to use the common areas of the building. This common element is managed by a condo corporation within the building. This condo corporation basically runs the operation and the finances of the building. Every unit owner is obligated to pay their share of the operating costs of these common elements of the building and condo fees are how that is administered.

Source: See Windsor Real Estate

Typical Expenses Incurred By Condo Corporations & Funded By Condo Fees:

  • Utilities of common areas
  • Maintenance of common areas
  • Management of the corporation and building
  • Safety/Security (Cameras/concierge in some buildings)
  • Garbage/Recycling
  • Landscaping/Snow Removal
  • Insurance
  • Allocation to the Reserve Fund (which is a topic we will discuss in depth in an upcoming post)
In other words, you are paying for the convenience of walking into your unit at the end of a long day, and having no worries outside of keeping up the interior of your unit. You also don’t need to budget for upcoming capital items the way you would in a house (like a roof) as that is built into your reserve fund allocation (unless the reserve fund is underfunded and a special assessment comes in, which we will also discuss in another post).

This works well for certain people, namely younger and older people, because it allows them to budget consistent costs for housing and not have to worry about maintenance.

To summarize, you aren’t throwing money out the window when you pay condo fees. You are paying your proportionate share of the operating (and future) costs of the property.

Were you part of the percentage of people who already knew this about condo fees? Leave a comment to let us know.

Next up we will be talking about reserve funds – a topic that confuses lots of buyers.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, October 22, 2015

The World Of Leverage

No matter what market you are investing in across Canada, the principal of leverage (WHEN APPLIED TO THE RIGHT INVESTMENT PROPERTIES), has worked extremely well in recent years. Although there are many benefits, the primary ones remain –

  • Can significantly enhance the ROI of the property
  • Allows you to acquire additional properties & build a portfolio faster

Our definition for LEVERAGE remains the same – ‘the use of borrowed money to increase the return on an investment property’. It is considered a legitimate investment strategy, and one that is best suited for properties with both good cash flows and those having a good probability of future appreciation.

Source: Resi
A simple illustration highlights the concept in a growth market:


Purchase Price $200,000 (all cash investment)
Market Growth Projection – 3% per year
After Year 2 - $212,000
ROI – 6% (on cash invested)

2. 70% FINANCING – 1ST MORTGAGE OF $140,000

Purchase Price $200,000
Cash Investment $60,000
After Year 2 - $212,000
ROI – 20% (on cash invested)

Again, this is an illustration which is based on strictly price appreciation. There is no analysis of the property’s monthly/annual cash flow, which would typically come first. If in fact the property was actually sold after year 2, the total ROI would be even more in favour of Scenario 2, and the % difference greater.

On the matter of building a portfolio of properties faster, you can see by allocating $60,000 by property, you should be able to acquire ‘3 properties’ by leveraging your cash investment. The key is to work this strategy on the RIGHT INVESTMENT PROPERTIES.

Does leverage still work in a flat market (no growth)? Or a declining market (negative growth)? Tell us your stories, we’d love to hear them - both positive and negative. Call us anytime regarding our home turf here in Windsor –Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, October 20, 2015

5 Ways Housing Market Affected By Canadian Federal Election

With the Federal Election in Canada that happened recently on Monday, October 19th, there have been many headlines regarding Party promises. One of the hot button issues seems to be the housing market.

Today we will review some of the policies that have been put forth by the different parties and offer a few thoughts on each.

Source: CBC
1) The incumbent Conservative party has been the most vocal on the subject of home ownership, and on September 29th, Harper announced that his party is setting a target of creating 700,000 new homeowners by 2020. This increases the segment of the population that owns a home to 72.5% from 70%.

This has repercussions for the housing market dynamics. Obviously this would increase demand for purchases and decrease demand for rentals. All other things equal this would increase pressure on home prices and increase vacancy rates on apartments. Another item of note is relating this to the experience of the US in the 2000s as home ownership peaked at just under 70% and that lead to the eventual housing crash and has seen home ownership decrease to around 63%.

2) Increasing the Home Buyers’ Plan (HBP) from $25,000 to $35,000: This is the program that allows you to withdraw money from your RRSP, tax-free, if you’re buying your first home. The Conservatives have promised to increase the amount you can withdraw by $10,000, giving you more room to save for a down payment.

This makes a lot of sense considering many markets in Canada have seen rapid price appreciation and the $25,000 doesn’t go as far as it used to in helping for down payments. On the downside, it takes funds away (temporarily) from retirement savings.

3) Introducing a permanent home renovation tax credit: A temporary credit was introduced in 2009 to help boost the economy, and the Conservatives have now promised to make it permanent. The proposal would give homeowners a tax credit on home renovations costing between $1,000–$5,000.

This will encourage people to reinvest in their homes and boost the construction industry. People always seem to have home improvement projects they are wanting to do and this incentive might push them to pull the trigger. On the flipside, the timing of this might be wrong with home prices at all times highs.

4) Collecting data on foreign investment: As foreign investors continue to take the blame for Vancouver’s skyrocketing house prices, the Tories promise to get to the bottom of it. They’ve pledged federal money to pay for research that probably should have been done years ago anyway.

This is a complex issue but it is no doubt playing a role in the market. We are seeing this not just in the housing market but also in commercial real estate as international investors have rolled in. You don’t want to discourage investment in Canada but don’t want to price citizens out of their own markets either.

5) Creating $125 million per year in tax incentives for landlords: Part of the Liberals’ “social infrastructure” plan is a substantial tax break for developers and landlords to build and renovate rental housing. The plan includes a GST rebate and government-backed financing for purpose-built rental developments.

The apartment building stock has been aging in Canada for years as new construction hasn’t been economical. This could help change some of that, leading to increased rental supply as developers consider building apartments instead of condos.

Depending on how the election plays out, it is possible most or none of these policies see the light of day. But healthy policy debate is always good for our country.

What do you think of these policies and the federal election? Let us know in the comments!

To catch up on the election, click here.

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, October 15, 2015

2 Things You Must Know When Investing For A Return

Investing for a return is a simple concept when it comes to real estate.  

1) In the case of income generating rental properties, a basic evaluation metric is to look at the property’s overall RETURN ON INVESTMENT (ROI). If we are considering the purchase of a ‘fully occupied 3 unit plaza’-  at a purchase price of $300,000  and a net operating annual income of $30,000  - the RETURN on the property is projected to be 10%. 

In other words, an investment of $300,000 will bring an annual ROI of 10%. Pretty impressive in today’s low rate environment.

2) But what happens to the return, when we look to arrange financing (a.k.a. mortgage) to buy this property? Using the same example –  say we arrange a new first mortgage at $200,000 @ a rate of 4% on a 20 year amortization.  Monthly mortgage payments are projected at $1208.50 per month ($14,502 per year). The Net Income (after Debt Service) is now reduced to $15,498, but so is our upfront cash investment (a.k.a downpayment) , to $100,000.  The ROI calculation now looks like this - $15,498 / $100,000 = 15.49%. 

Welcome to the world of LEVERAGE!

Source: 16:10 Financial
When analyzing the return potential of a property, these are the first two metrics to review.  In considering the financing options, it’s important do your homework on what is realistic and obtainable in your market. Key factors to consider include -  downpayment requirements, interest rates, amortization periods, commitment periods, preferred property types, open vs. closed mortgages, and upfront costs to arrange a new mortgage. 

Ensure you are dealing with qualified COMMERCIAL MORTGAGE SPECIALISTS, as you assess all factors relating to financing the property. 

In Windsor-Essex over the past 4-5 years, rates of return (aka Cap Rates) have compressed significantly – in some cases +2%. But the market has responded by accepting lower rates of return and the lenders have adjusted accordingly.  The key element for both investors and their lenders, remains the quality and sustainability of the cash flow.  

What’s happening in your market? Are quality INCOME properties hard to find? How are the lenders in your market?  Would love to hear from you on any comments/questions.

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, October 13, 2015

"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
Office: (519) 966-0444
Cell: (519) 995-5620

    Thursday, October 8, 2015

    Windsor's Moving Up Against The Big Boys - New Series

    Source: National Post

    Great way to kick off our new series, COMMERCIAL PROPERTIES  – WINDSOR FOCUS.  

    Real Estate was hit hard during the 2007-2010 period, but since 2010 we have seen major moves across all sectors of our real estate market. 

    via National Post
    Just to highlight a few key areas –

    * Multi family vacancy rates are down below 4% (from 12% back in 2010)
    * Industrial lease rates on a per ft. basis (have increased 70-80 % since 2010)
    * Industrial building sales on a per ft. basis  (have increased similarly)
    * Residential sales activity (both new and resale) are turning over at unprecedented rates
    * Commercial Property interest and sales are in a significant growth phase given strong demand
    * Out-of-town investment into the Windsor market is at record levels

    What is the take away? 

    Windsor’s market offers a great upside for investors / developers / landlords and owner-occupants looking to acquire good (aka sound) real estate value.  Cap. rates are more attractive than other major Canadian markets, competitive financing terms are available, a good mix of products exist, and many new developments are either under way or on the horizon. The population is once again growing and the economic issues of 5-6 years ago are now in the rear view mirror.

    The Windsor Market is still in the ‘early innings’ and it is really just starting to make its move. Whether you are local or from outside of the area, give us a call and let us put our commercial expertise to work for you in Windsor – Essex.

    We love feedback so don't be shy about letting us know your thoughts and where we agree/disagree! Intellectual discussion is always welcome. 

    We are rolling out a new BLOG series, COMMERCIAL PROPERTIES – WINDSOR FOCUS, and we look forward to all your comments as we move through the last quarter of 2015. 

    Mark Lalovich
    Office: (519) 966-0444
    Cell: (519) 259-5434

    Tuesday, October 6, 2015

    How A Sold Windsor Multi-Family Portfolio Affects You

    For those of you that either own rental properties, or just generally follow the real estate industry in your region, you have surely noticed the froth of the market over the last several years.  

    With the continuation of historically low interest rates, investors of all sorts have been searching for returns in different asset classes and that has resulted in a hard charge into multifamily real estate.  

    With this increased demand, prices have been rising and cap rates (click here to learn more about a similar concept) have been compressing. 

    This seems to have come to a head this summer as Boardwalk REIT (Real Estate Investment Trust) has agreed to sell their Windsor multifamily portfolio to Skyline Apartment REIT.  This transaction turns Skyline into the dominant Landlord in the region with close to 2000 units.  Of note to market observers is the reported cap rate of 5.43% or $80,800 per unit.

    Illustration By Chloe Cushman/National Post

    Takeaways to Note From This Deal:

    1. Cap rate compression.  This is a new benchmark for the multifamily sector in Windsor as cap rates have never been this low.  This has major repercussions for the market as Sellers will try to adjust sale prices to reflect this favorable comparable.  Back in 2010, it was common place to see cap rates in the range of 10%.  Now those came with higher vacancy rates and a more difficult financing environment, but is telling in how far things have come in the last 5 years.
    2. Low interest rates continue to drive asset prices up as investors can still make money at these cap rates when they can borrow at less than 3% interest rates.
    3. Multifamily is considered a safe haven asset class, and as such, commands a premium relative to comparable properties in other sectors of Commercial real estate.
    4. Ability to finance multifamily properties remains robust, even as cap rates have compressed.
    5. Skyline is making a large bet on Windsor and must be bullish on the region long term, with regard to employment, populations growth, etc.
    6. Finding large multifamily properties for individual investors will become more and more difficult as the market is increasingly controlled by REITs such as Skyline and Timbercreek (to name a few in the Windsor market).
    7. There could be a pushback from Buyers at these cap rates as they view the market as priced for perfection and therefore higher risk.
    What do you think readers? What are your views regarding this transaction and how it pertains to the Windsor multifamily market?

    Russel Lalovich
    Office: (519) 966-0444
    Cell: (519) 995-5620