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