There’s nary a real estate investor who hasn’t made mistakes, some costlier than others, along the way, but it’s those early pitfalls that mould them into grizzled veterans who see everything coming from miles away.
However, mentorship and guidance are the difference between longevity as an investor and making decisions so ruinous that you’re out of the game before you ever really start.
That’s where Calgary-based Mark Verzyl, a realtor and investment expert at eXp Realty, which is part of the Greater YYC Group, comes in. With over 20 years of experience as an investor, he cautions that investors make common mistakes, chief among them being poor strategists.
Investors often assume that existing home equity can be equivalently leveraged towards an investment property, however, lenders are inherently conservative and fastidious to bet all their chips. For example, lenders might make only 80% of $100,000 in equity available for an income-producing property, and while that could be enough to scuttle to poorly laid plans, the investor should still be able to ask themselves, “How do I manoeuvre?”
Verzyl says this is where due diligence is paramount.
Years ago, as a high-producing local broker, Verzyl began working with Mattamy Homes, which suggested he focus on Airdrie, located just outside of Calgary, and though initially circumspect, Airdrie is where he began heavily investing. He recounts how Airdrie was, in fact, bolstered by desirable school catchments, accessible parks, and some of the best walkability scores in the region outside of downtown Calgary, and thanks to easy airport access, which a local rental pool largely comprised of out-of-province workers relied upon, there was strong rental demand. The result was Verzyl flipping those properties in as early as four years for 30-40% above what he’d paid to buy them.
“I bought these at the height of the market before the oil and gas crash of 2014, but they still cash flowed, and while the market was down I was still able to find good renters,” Verzyl said, adding that robust rental demand insulated his investments from economic headwinds and helped him sell high when the market eventually started picking up.
A lot of investors, unfortunately, hadn’t done their due diligence and purchased rental properties in areas that couldn’t withstand those same headwinds. Verzyl says that highlights the importance of investing in can’t-miss properties, which brings Verzyl to his next piece of advice for investors: don’t make emotional decisions.
This one, he says, includes investing too heavily in condominium features and finishes that can ultimately cut into profits by spending too much money upfront.
Verzyl explains that many novice investors, having already purchased, or even built, a home for themselves, often make the mistake of buying rental properties as if they themselves would in them, but those extra features eat into their short- and long-term profits.
However, a short-term rental accommodation downtown could attract higher-end tenants, Verzyl noted.
“From an investment standpoint, they choose luxury finishes—or finishes that are a notch or two below luxury—and that eats into their overall investment,” Verzyl said. “If the rental property is going to be an Airbnb, that’s another story because, if it’s in the right area, it can attract executives who are willing to pay more for their accommodation. But if it’s a long-term rental play, obviously you don’t want to the place to look too cheap, but if it’s not too expensive by loading it with features, it’s easier to flip when the time comes to cash out.”
If investors are purchasing condos for long-term tenancy, they should pay attention to developers’ price schemes because there are usually major variances.
“If they decide they’re going to buy in a 20-storey mid-rise and they buy on the 18th floor rather than the 12th, in most cases the developer sets it up where there’s a big price difference between floors,” Verzyl said. “Earning $100 more in monthly rent for a unit that costs $50,000 more to buy doesn’t make sense.”
Verzyl’s next morsel of advice is especially pertinent today because, while central bank policy at the beginning of the COVID-19 crisis resulted in money being essentially borrowed for free, the Bank of Canada has hiked its overnight lending rate quite dramatically in recent months. Consequently, investors who haven’t been in the game for very long have demonstrated a propensity to panic and hastily offload their investment properties.
Verzyl reminds us that investors’ average horizons are 10 to 15 years, during which time markets have high chances of falling, sure, but also rebounding. This is also where locking in the investment at a lower rate early on hedges against said vagaries.
“If somebody is looking at it right now and they have other upcoming debts to consolidate and the variable rate is high on their investment property, right now the bond market is dropping, therefore, fixed rates are too, and the horizon looks like fixed will drop a little bit more, so that’s something they should remember. High-interest rates are probably going to persist for the next two or three years, but we’ll see them drop again, so is there a perfect solution? No, but if you can ride it out a little longer and see where rates go, get something in the 4% range and lock it in for four or five years, and then lock in a lower rate after that.”
Market downturns are also when investors can find better deals because they have less competition—a trick deployed by savvy investors.
“Buy in a market where the masses aren’t buying, like now, because interest rates are going up and there’s an expected drop in home prices, so if you buy pre-construction today, by the time you the building is registered and you pay your closing costs in four or five years, interest rates will have dropped,” Verzyl explained of buying and closing at below-market prices.
“Right now, all you have to do is put your deposit down. That’s why seasoned investors love the strategy of buying something three, four, five years out, and that’s why downtowns are so popular.”