On the Michael Campbell show on February 6, Lance Roberts said: “Cash is a pretty good thing – when we look at previous 2 bull markets (2000 and 2008) we see the same price action now that we saw then. In fact the similarities are striking … we could see a 27% to 37% decline. Sit in cash till later … till you see that great opportunity … opportunities come one day, but today is not that day. Your job is to buy low and sell high … but Wall Street never tells you when to sell high. If you do not sell high, how will you have cash to buy things with when they are low?” He is leading a chorus of forecasters and advisors (Kevin O’Leary, Michael Campbell, yours truly) that think at this time … it is a good thing to have some powder dry.
IN THIS WEEK’S FACTS BY EMAIL:
- TAXES ON YOUR CURRENCY EXCHANGE – REVISITED
- MODULAR HOME PARKS: PLENTY ON THE MARKET
- HERE IS WHY AND WHAT TO BUY AND SOME CAUTIONS
- OOPS: SHELL COOLS TO LNG PLANT PLAN
- LANDLORDS: TWO SMALLER CITIES WORTH A LOOK
- PRICE MADNESS SPREADS TO MARPOLE
- WHERE TO FIND INVESTMENT PROPERTIES
- NEGATIVE INTEREST RATES
Happy Chinese New Year
2016 IS THE CHINESE NEW YEAR OF THE MONKEY – the Red Monkey.
The Chinese people have Five Elements (Metal, Water, Wood, Fire and Earth) in the Chinese calendar. 2016 is in the Fire group. The color of Fire is connected to Red. Interestingly enough (talk about history!) 2016 is the 4,713th Chinese Year.
Chinese New Year Day of Red Monkey Year is on February 8, 2016.
Monkey is the 9th animal in the 12 zodiac signs. According to the Chinese calendar there are Five Elements. Monkey contains Metal and Water. Metal is connected to gold. Water is connected to wisdom and danger. Therefore, we will deal with more financial events in the year of the Monkey. Monkey is a smart, naughty, wily and vigilant animal. If you want to have good returns for your money investment, then you need to outsmart the Monkey. Metal is also connected to the Wind. That implies the status of events will be changing very quickly. Think twice before you leap when making changes for your finance, career, business relationship and people relationship.
Years of the Monkey: 1920, 1932, 1944, 1956, 1968, 1980, 1992, 2004, 2016
Famous Monkeys: Julius Caesar, Leonardo da Vinci, Charles Dickens, Lord Byron, Elizabeth Taylor, Diana Ross, Michael Douglas, Alice Walker, Celine Dion, Tom Hanks, Will Smith, Halle Berry, Christina Aguilera, Owen Wilson, Daniel Craig, Mick Jagger, Bette Davis, Annie Oakley, Eleanor Roosevelt, Cuba Gooding Jr., Gisele Bundchen, Kim Cattrall, Nick Carter, Patricia Arquette, Alyson Stoner, Christina Ricci, Demi Lovato, Miley Cyrus, Nick Jonas, Selena Gomez.
So wish all your Chinese friends a happy New Year this week … give money (in red envelopes – RED!) to staff, friends, children and eat lots of delicious Dim Sum. I know our clan will!
Negative Interest Rates And Then Some…
WE HAVE BEEN GETTING A TON OF INQUIRIES ON NEGATIVE INTEREST RATES. What does it mean? They are doing it in Europe! The Bank of Japan did it last week. One of the more interesting treatises on the subject I read was in the ECONOMIST this week … see excerpt below…
Taxes On Your Currency – Revisited
Countless subscribers have invested in Real Estate in the US since 2011 and some of them in a big way. Most know that one has to file US taxes AND Canadian taxes. We also know that most taxes we pay in the US can be offset against what we have to pay in Canada (provided we invest in instruments that CRA recognizes).
BUT a lot of investors forget that on the $100,000 or so they invested in 2011 at a C$1.02 is now worth C$1,400,000 or so (once converted) and that this 35% – 40% percent gain is taxable!
So note:
- It is taxable if you sell your US property and you convert the cash.
- If you keep the money in US and invest in another property it is also taxable (!)
You would have to report the capital gain on your CDN T1 return by converting it based on the US-CDN $ spot rate on the date the property was sold. Of course, any US/State taxes paid will be credited against any CDN tax payable.
What to do?
See your expert accountant … you could possibly elect an annual exchange rate … or not.
Keep the property – refinance and use that money to buy another property.
Open some champagne and pay the capital gain tax.
DO YOU HAVE A GOOD US/CANADA ACCOUNTANT? IF NOT – ASK ME AND I WILL SEND YOU SOME CONTACT INFORMATION OF ACCOUNTANTS WE NOW RECOMMEND. Write to oz@jurock.com
Modular Home Parks: Plenty On The Market
HERE IS WHY AND WHAT TO BUY AND SOME CAUTIONS.
There are a lot of modular home parks coming onto the market, higher listings than usual this early in the year. We counted nearly a dozen listings in B.C. alone and 15 more in Alberta and Saskatchewan this week. B.C.’s Manufactured Home Park Owners Alliance (MHPOA) has four listings on its web page (www.mhpo.com) to give investors an idea of what is available in B.C.
Prices are all over the place, based on the location, the number of pads and the quality of the park. Now, we like modular home parks. In some ways they are recession proof: the owners are responsible for their units; occupancy levels are generally high; long-term tenancies are common; they are popular with seniors; and parks are fairly easy to maintain. And when the economy turns down, demand for these affordable homes heats up.
A spokesman for the MHPOA suggested two reasons listings are high right now, at least in B.C.:
- BC Assessment have raised the assessment values dramatically based on the park’s land values (in some cases, up 40% from a year ago – a number of owners have appealed, without success);
- Many of the parks for sale are due to the park owners retiring, often after decades of ownership.
Capitalization rates for modular home parks vary, but figure on the 5% to 6% range near larger centres in the Fraser Valley, Vancouver Island and the Okanagan. Northern B.C. still provides some of the best return opportunities in the 7.5% to 8% ranges. Smaller markets and select mobile home parks that require “value adds” can see capitalization rates of 9% and greater (but are also riskier).
If you plan on buying a modular home park, here are some tips and cautions:
Buy close to an urban market: While prices in small markets are attractive, it is best to be close to a big population centre, such as in the Fraser Valley, the Capital Region or near Kelowna or Calgary, for example. You need the population to fill vacant lots and push rental values. (There is also a better chance of the land appreciating in value if it can be rezoned for multi-family development.) Also, you need local two-bedroom apartment rents to be higher than $750 per month or so because this makes modular home living more affordable. The market for even low-cost rentals can collapse in small towns if one major employer shuts down.
City sewer and city water: If possible, steer away from parks that are on septic or wells or other private utilities. Flooded septic tanks or dry wells can spell big money in repairs.
Only count on pad rental income: This is the only income flow most lenders will count, because it is the core business.
Don’t buy a park with a swimming pool: A pool is expensive to maintain and takes up valuable pad rental space.
Raise rents by the maximum whenever possible. In B.C., rental increases are restricted to 2.9%, but can be raised to perceived market level for a new pad rental. Alberta has no rent controls. Every dollar that you increase rents falls directly to the bottom line. At a 6% cap rate, every dollar of rent you increase equals 6 times more in value. It costs about $4,000 to move a modular home (most of them aren’t really mobile) so there is an incentive for tenants to pay the higher rent and stay put.
Major Point: B.C. seems particularly attractive for modular park investors: it has among the fastest-growing seniors population in Canada; competitive housing options are much higher; and the chance for land appreciation is high, especially near Victoria or in the Lower Mainland.
Oops: Shell Cools To LNG Plant Plan
More waiting for patient Kitimat and Prince Rupert real estate investors: Royal Dutch Shell has postponed its final investment decision on a proposed multibillion-dollar LNG megaproject in northwest BC.
Not really a big surprise: Shell reported a 44% loss in earnings in the 4Q of 2015 and has already cut spending by $12.5 billion.
Malaysia-based Petronas, the expected next in line for a big LNG project near Prince Rupert, saw income fall 54% in the first half of last year, so we don’t expect its FID for a B.C. LNG to start on time either.
Another signal: not a single new apartment or townhouse unit, either rental or strata, has been completed in Prince Rupert in the last two years. (Homebuilders are often the canary in the coal mine.)
As of December 2015, the average price of a Prince Rupert detached house is now $260,604, up from $217,651 a year earlier, but sales in December were down 25% from the same month in 2014.
The official Shell Canada statement reads: “The LNG Canada joint venture partners have agreed that, due to market conditions, it makes sense to shift the final investment decision to late 2016. In the meantime, the joint venture will continue to work on the competitiveness of the project.”
Major Point: We believe the LNG plants will eventually proceed, but we are not holding our breath for 2016.
Landlords: These Two Small Cities Worth A Look
Landlords priced out of the white-hot Metro Vancouver apartment building market (as prices average at $205,000 per door) could start looking at secondary B.C. markets that, we believe, offer a good chance of positive returns and appreciation potential. We have two in mind, both with stable economies, high population growth and relatively affordable prices.
These are Vernon, the second-largest city in the Okanagan; and Nanaimo, second-largest city on Vancouver Island.
VERNON: Last year, the Vernon area posted a record $86 million in construction permits, up 36% from 2014. This included 113 detached houses, 18 multi-family buildings and 22 commercial permits.
The average new house sells for $700,378, on par with Kelowna but half the price of Metro Vancouver.
Vernon has major and long-term private employers including Kal-Tire, Tolko Forest Products and the Silver Star ski resort. It is also a prime destination for seniors, and major hospital and retirement residence projects are underway. Facing two lakes, Vernon is also a year-round recreation area and one of the fastest-growing towns in B.C.
Apartment building prices are rising. Last week Vernon realtor Tim Down sold a 49-unit Vernon apartment building for $4.15 million, or about $90,000 per door. The Vernon vacancy rate is around 3.4% and the average rent for a two-bedroom is in the $820 range.
We picked out three smaller rental properties (active listings) in Vernon that may be of interest to landlords who want to step carefully into this market:
6 units for: $529,900 MLS Listing ID: 10110902
Renovated 6-Plex that includes 5 – 1 bedrooms and 1 bachelor. Fully rented with $4,150 of rental income monthly. Coin-operated laundry.
12 units for $595,000, MLS Listing ID: 10102358
This two-storey building is aimed at fixed-income tenants. Suites have been updated and all units are rented from $525 per month.
11-units for $899,000 Listing ID: 10110822
This is a potential land development play with income in downtown Vernon. Site is just under an acre with potential for 43 units. Currently generating $99,600/year gross income from 11 residential units in 2 buildings that date to 1950. Cap rate of 7.1% (based on NOI of $74K at full listing price).
NANAIMO: The Nanaimo region is the fastest growing on Vancouver Island, with a 1.7% population growth in the past year, to 154,572 (city itself has about 70,000 people). It is drawing a lot of retirees, but has enough of a business beat and population to attract young families and singles. The Nanaimo Airport has started a $45 million upgrade, a new Hilton hotel is to proceed on the waterfront and a new high-speed passenger ferry to Vancouver starts this summer. There were 850 housing starts (half were strata) in Nanaimo during 2015, up 27% from 2014, which is more starts than Abbotsford and second only to Kelowna outside of the Lower Mainland.
The overall rental vacancy rate is 2.9% (down from 5.4% in 2014) and trending lower, according to Colliers International’s Nanaimo office, which estimates it is near 0% for 2 bedroom apartments. The average rent for a 2 bedroom is around $825. The average cap rate on apartment building is 5%, also trending down. Average price per-door for apartment buildings is $89,100, based on 6 sales through the first half of last year. Most apartment buildings are sold off-market by agents to privately-listed clients.
There is a shortage of smaller, multi-family units for sale. There are dozen multi-family properties on the market (including a 35-unit complex on 2.2 acres) and some non-conforming duplexes with 4 units in each, said Steve Padozdy of Royal LePage Nanaimo (250-616-8987). The average MLS detached house price is $403,000, up from $386,300 a year ago.
We found one active multi-family listing: MLS 394551, but it fairly unique. This is a 12-unit strata townhouse complex with all units rented to a hotel under a 3-year agreement with an option to renew. Bigger 2 and 3 bedroom units (more than 1,000 square feet). Posting a 6% return. Price is $2.97 million (or $247,500 per door).
We also found a handful of legal duplexes: Example is MLS 397214, side-by-side, each with 3 bedrooms that rent for $950 per month. Price: $409,000.
Major Point: There are other promising markets in B.C. – many of which have been identified in our annual report … but Vernon and Nanaimo also represent the type of secondary cities landlords should seek out.
Price Madness Spreads To Marpole
The spiraling this-is-so-not-normal land prices in Vancouver have spread into the Marpole area (a neighbourhood we have been recommending for a decade). Recently a half-acre, tear-down commercial site (planned for multi-family) on Granville Street in Marpole sold for just under $20 million. Marpole prices are partly being fueled by the decision to build another Canada Line station at Cambie and 57th (there is already one at Cambie and SW Marine Drive) as part of Onni Group’s redevelopment of a Coast Health site.
The benchmark price for a Marpole detached house is now $1.8 million. This is high, of course, but it is $1.1 million less than the West Side average and the lowest price of any Vancouver neighbourhood west of Cambie St. Marpole detached prices are up 5.4% from just three months ago (an average lift of about $55,000). The average Marpole condo apartment sold last month for $550,000, a whopping 42% increase from December and a 45% increase from three months ago, by far the biggest increase on all of the West Side (if not the entire world).
Major Point: A 44% increase in a month? Folks, this is not a normal market. But for those of you with deep pockets and the moxy, Marpole could still be a buy-and-flip play over the next few months.
Where To Find Investment Properties
People often think that we have some secret source to find investment properties, maybe birddogs continually sniffing out potential deals and secreting them to us via dead drops. Well, actually, while we do sometimes … we find other deals like everyone else. The trick is to know what you are looking for.
Here are our top places to look for investment property:
Western Investor. You have to subscribe or pick up the paper at a newsstand but it is worth it. It is a monthly publication that covers all of Western Canada with an emphasis on B.C. and Alberta and often has unique, one-off listings that never make it to MLS.
We also troll through Craigslist (craigslist.com) and Kijiji (Kijiji.ca). Not only do both sites have FBO listing (along with some from agents and developers) but it can also show what the real rents are in areas you may be interested in.
Lesser known Backpage.com is also a good site to search: it breaks metro areas into neighbourhoods and often has FYOB deals you won’t find on MLS.
Of course, realtor.ca (the official real estate board site – plus the app realtor .com for the US) is also helpful.
All Real Estate Boards have computer programs you can sign in on and they will shoot you listings that you have identified in a given area.
So, no mystery: finding investment property is just knowing where to look and what you are looking for and being ready when you find it.
Hot Property
Phoenix: 18 Condos in a newly renovated, gated community in Phoenix, for just $1,495,000 ($83,000 per condo). 18 Individual Titled Condominiums, Private Balconies, New Roof in 2015, Granite Kitchen Countertops, Stainless Appliances (Fridge, Dishwasher, Oven, Garbage Disposal, Hood Fan), Washer & Dryer in the units, Individually Metered Electricity for each unit, Gated Community, Pool / Hot Tub. There could be a huge upside as these units were selling for up to $142,000 per unit in 2007 and a proposed new development next door (projected sell price $180,000+ per unit according to developer); Actual CAP is 7%.
Remember, anyone can be here. Look up disclaimer and contact at your password protected website.
THE ECONOMIST MAGAZINE
IMAGINE a world in which tax offices harry people who file their returns promptly; where big supermarket chains pay their suppliers before the goods fly off the shelves and not months afterwards; and where a pre-paid annual gym membership is more costly than paying month by month. It sounds fanciful, absurd even. Yet such a world came a step closer on January 29th, when Japan’s central bank cut the interest rate on bank reserves to -0.1% (see article).
Like its peers in Denmark, the euro area, Sweden and Switzerland, the Bank of Japan will charge commercial banks for holding deposits with it. Almost a quarter of the world’s GDP now comes from countries with negative rates. Though they defy convention, they have proved a useful addition to the central-banking toolkit. The lowest deposit rate set by the central bank acts as a floor for short-term interest rates in money markets and for borrowing rates generally. Borrowing costs across Europe have tumbled, helping the fight against deflation and driving down exchange rates.
Emboldened, Haruhiko Kuroda, the governor of Japan’s central bank, this week claimed there is no limit to measures to ease monetary policy. On interest rates, at least, that is wrong. The limit may no longer be zero but it does still exist.
Tiers are not enough
Not so long ago it was widely thought that, if interest rates went below zero, banks and their depositors would simply switch to cash, which pays no interest but doesn’t charge any either. Yet deposits in Europe, where rates have been negative for well over a year, have been stable. For commercial banks, a small interest charge on electronic deposits has proved to be bearable compared with the costs of safely storing stacks of cash—and not yet onerous enough to try to pass on to individual depositors.
That has resulted in an unavoidable squeeze on profits of banks, particularly in the euro area, where an interest rate of -0.3% applies to almost all commercial-bank reserves. (As in Switzerland and Denmark, Japan’s central bank has shielded banks from the full effect by setting up a system of tiered interest rates, in which the negative rate applies only to new reserves.) If interest rates go deeper into negative territory, profit margins will be squeezed harder—even in places where central banks have tried to protect banks. And if banks are not profitable, they are less able to add to the capital buffers that let them operate safely.
That would put pressure on banks to charge their own customers for deposits. Such pressure is already starting to tell. Banks in Europe have started to pass on some of the cost of negative rates to big corporate depositors. Their only ready alternative to stashing large pots of cash is safe and liquid government bonds, whose yields have also turned negative, for terms of up to ten years in Switzerland. Rich personal-account holders are next. The boss of Julius Baer, a Swiss private bank, said this week that if interest rates in Europe go further into the red, it might have to charge depositors.
Retail customers are more resistant to charges, because small stashes can easily be stored in a mattress or a home safe. Savers might stomach a modest fee for making bank deposits, but as rates go deeper into negative territory, they will find ways to avoid charges. Switching to cash is the obvious solution, which is why some have suggested getting rid of banknotes altogether, but it is not the only one. Small savers would use any available form of prepayment—gift vouchers, long-term subscriptions, urban-transport cards or mobile-phone SIM cards—to avoid the cost of having money in the bank.
That would be only the start of the topsy-turviness. Were interest rates negative enough for long enough, specialist security firms would emerge that would build vaults to store cash on behalf of big depositors and clear transfers between their customers’ accounts. Firms would seek to make payments quickly and receive them slowly. Tax offices would discourage prompt settlement or overpayment of accounts: one Swiss canton has already stopped discounts for early tax payment and said it wants to receive money as late as possible. Far from being incentivised to lend more, banks worried about shrinking deposits would be warier of extending credit.
Major Point: THE ECONOMIST concludes: As avenues to avoid negative rates are closed off, human ingenuity will ensure that others open up. It may not be zero, but there is still a lower bound to interest rates.
JREI adds: These are mad times. Mad … some cash may be a good thing … out of the bank. As banks become less profitable there WILL be bankruptcies … and your money is only guaranteed up to $100,000. Credit Unions have unlimited amount of banking from the Governments!
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