When is the Best Time to Buy?

February 1, 2012 4:39 pm Published by

Two of Guelph’s largest owners of apartment buildings got their start in Real Estate with my father, at Herb Neumann Real Estate.  Clark McDaniel and the lateDenzil Williams started acquiring properties at Herb Neumann Real Estate in the mid 70’s and acquired over a 1000 units through the Bob Rae era, which they still hold asWilliams and McDaniel.  Skyline Property Management principals Jason and Martin Castellan got their start in the early 90’s with us, ironically by buying up all the Cole Road semis they could from none other than Clark McDaniel.  I have a vivid recollection of a builder friend of mine telling me bluntly, “those two won’t make it.” For my part, I wisely cautioned them that they ought not give up their real estate license, something I still joke with them about.  Today, Skyline owns a portfolio of $683 million. Although the business models of these two entities are starkly different, they have something in common (other than their starting point) – people universally thought they were crazy.  One bought during a recession in an environment hostile toward landlords, the other paid astronomical prices for real estate picking up the Cole Road semis for $120,000 a piece – idiots!

A substantial benefit of having bought when they did, is that they bought when they did. They did not wait for prices to come down, they did not wait for interest rates to come down – they bought and let the wonder of time and exponential growth look after the rest. I was the listing agent for those semis, and I can tell you that at $120,000 there was no line up to buy them.  They bring to mind a favourite Warren Buffet quote of mine, “When others are afraid, I get greedy; when others get greedy, I get afraid.” For what it’s worth, Warren is greedy at the moment.

There is another side to the business that I think many people do not always consider.  When buying properties, you are buying a cash return.  The price you are capable of paying is directly proportional to the interest rate you can secure from a lender.  Properties purchased offering a CAP rate of 10% when interest rates were 8%, now offer those owners massive gains in value when refinanced at today’s prevailing CMHC insured rate of less than 3% (our office closed one this month at a rate of 2.59% for 5 years). Unlike the market for single family homes, in which we can measure the increase in value in the thousands, or even a couple hundred thousand, the increase in value in multi-unit apartment buildings is measured in the multi-millions, fuelled by the rates a CMHC-insured mortgage can get for a buyer – a tremendous advantage over other commercial investments such as plazas,  for which buyers will pay a substantially higher interest rate.

The converse to the win fall outlined above, is that if or when (depending upon your opinion), interest rates rise, the value of those same investments will fall – or perhaps more accurately fail to sell at all.  So long as the owner is capable of meeting their debt obligations, however, they are still far better owning than not. In the fullness of time a real estate investor’s regrets will invariably revolve around what they did not purchase, not what they did. The best time to buy real estate remains the same – now.

Thanks for reading.

Jeff Neumann

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