Five Essential Tips for Canadian Real Estate Investors

Globe Investor Magazine Online, Nov. 21, 2007
BY HELEN BURNETT

Real estate prices are still breaking records across Canada, although higher interest rates are expected to affect the affordability of the residential sector through the end of this year and in 2008.

The average property is expected to rise in value by more than 10 per cent this year and more than 5 per cent in 2008, says the Canadian Real Estate Association.

Real estate expert Don Campbell, president of the Real Estate Investment Network and author of Real Estate Investing in Canada and 97 Tips for Canadian Real Estate Investors has several do's and don'ts for existing and aspiring real estate investors looking to get involved in this popular asset class.

1. Study the market before you take action.
In spite of the current differences between the property markets in Eastern and Western Canada, Mr. Campbell says that no matter what market you're investing in, there are a number of questions that have to be asked by investors, before they know that they're investing rather than speculating. These questions include whether the area's population is growing faster than the provincial average. Is it an area of renewal or gentrification? Is it attractive to baby boomers?

2. Never speculate, always invest.
With people lining up to buy presale condominiums, as has recently happened with a few properties in downtown Toronto, Mr. Campbell says that if the property doesn't exist, it is speculation rather than an investment. While people may eventually make money this way, he adds that "there's no real investment mentality involved there; investors don't line up to buy something, because they know there's no negotiation opportunity whatsoever, they know they're paying a premium." In contrast, those who are investing have already studied the market, done their due diligence and asked the key questions, which Mr. Campbell says are impossible to answer before a property has been built.

The biggest issue that occurs in the real estate market, he says, is that people take the "hot-tip" mentality, buying a property without doing the due diligence. As a result, Mr. Campbell cautions investors to never invest based on tips.

3. Don't invest in a property just because it seems cheap.
"In the real estate game, its cheap because of a reason," says Mr. Campbell. This reason may be location, or factors resulting from a failure to study the market, he adds; but in the end, it is all about perspective.

4. Follow a long-term system.
Never allow yourself to get too high or too low based on daily announcements, Mr. Campbell cautions. For example, real estate investors shouldn't panic based on the dollar's daily value.

"If the Bank of Canada comes out and says the dollar's at $1.10 (U.S.) today and five days later it's down at $1.01, if you ride that roller coaster, you shouldn't be in real estate."

Part of this strategy is eliminating day-trade mentality, when the investor is responding to every report that comes out, which creates too many highs and lows, he says. "Real estate is a long-term five, seven, 10-, 12-year type of investment. Day trade mentality will kill you in the real estate game," he adds.

5. Focus on cash flow, not equity appreciation.
Negative cash-flow properties can eat into your portfolio, warns Mr. Campbell. "We can all justify and talk ourselves into a negative cash-flow property if we think its going to go up $20,000 or $50,000.over the next two years; however that's speculating, that's not investing," he says.

Special to The Globe and Mail