Bob Truman, First Place Realty

Well to answer your question Bob. It looks like it's not going to sell. That is why you have to devote a complete blog post to draw attention to your own listing. That's pretty sad if I must say so.

It looks like its working! - Bob

Why don't you buy it?

I read this on Garth Turner's blog today:
A few idiots have been deleted here. Wish to join them?
- Bob

We need more information. What's the income? Who pays the utilities?

Monthly income is $3915. That might sound high, but there are basement suites on each side as well. Tenants pay the utilities. - Bob

Hi Bob,

Personally, I wouldnt buy this side by side duplex for over 400,000 - and that is being generous.  But, that is just a personal opinion.

Depending on how motivated the sellers are and how well you advertise this property, my guess is that it could sell quickly for somewhere in the $550,000 area.

Newt

At a selling price of $670,000

25% down

Mortgage of $502,500

5% interest rate over 25 years

The monthly payment with taxes would be about $3183.

This property will be gone in a week. Probably close to list price.

J. Murphy

Your analysis is based on $170K initial investment, mortgage payment only is $3183/month, add taxes and maintenance and unrented times (3%-4% vacancy), that can easily cost $3600/month.

With the $3915 income now (rents are going down because of the 3%-4% vacancy), the net is about $315 (taxable), or about $3700/year.

That's 2% return on investment annualy. Factor in the imminent risk of a Calgary RE market correction, you may end up losing money!

For your $170K, you can easily get a low risk GIC with a 3% annual return. Plus GIC's require less  maintenance, no replacing of washers and fridges, no landscaping or snow removal, no closing costs, and no administrative effort.

Can you actually get 5% mortgage these days. Low interest rates are deceivingly deceptive. With the limited supply of liquidity, the whole supply and demand of money would and should put pressure on interest rates to climb. UK was 8 months ahead of us. The pundits would have told you that interest rates will be kept low to keep the economy afloat etc etc. But common sense says eitherwise. Besides, the risk reward scenario for a 600K+ investment in my opinion works best in an up market. In a down market, the margin of safety needs to be larger and therefore the price of the offer must come down to make the investment sensible. Build in the 1920's, it looks like the other half requires some work so one could guess the motivation behind the seller. As for the buyer, the 600K investment won't stop there. So I am skeptical on the positive cash flow.

It was actually built in 1969. - Bob

Hello Bob.

Even that I always disagree with you and the realtor profession... I have noticed that you and Sheldon always offer advice to posters in order to calm them but... it is not realistic. The federal finance minister himself (Flaherty) doesn't know himself what he talks about. He changes his market assessment everyday. even leading economists do not know OR agree on what will happen next. Uncertainty rules.

garth Turner has this today to say:

http://www.garth.ca/weblog/2008/10/27/painfully-obvious/

I like Garth Turner. He's avant-garde, controversial and makes people think. He has an agenda, however, and that is to sell books. For example, in his blog today, one of the bloggers said "This fellow Garth makes money by selling books apparently, and needs a subject. real estate fear for people who have been fearful for the last ten years to buy is a good selling subject to the fearful." - Bob

Why would you, a realtor that works at commission, not an economist, not a market analyst but bob Truman the salesman knows better than all the pros?

You and Sheldon all seem to know what will happen. If I were to listen to you I would buy a condo today. If i listen to Sheldon, I would buy a house today. Tomorrow i will lose big.

If you were to listen to me, you would be armed with all the information required to make a decision. What you decide is up to you. My predictions for prices have turned out to be very accurate. I'll post a new topic with the details. - Bob

This is not 2006 anymore. The oil sands are not making money...

Folks... $700K? calgary?

Give yourselves a slap if you think of buying that crap...

Even the banks would be smart to say no. Not worth more than $350K. Max.

proof?

http://brantsrealtors.com/10899070

Texas has oil. It's not crap oily sand. No snow either.

No brainer.

If you buy that crap listed above you are insane. Prices must crash.

Squiddly77 said "Texas has oil."

You could have also mentioned "hurricanes."

I think skier Bob would find the "no snow" to be an unattractive feature of Texas, too.

Bob, thanks for the additional info. It's an attractive property in the inner city at a good price. What it boils down to is whether you think the Calgary market will appreciate. In the mean time, you have someone else paying your mortgage.  

A place with no snow? Why would anybody want to live there? - Bob

I think this is a good value investment and this is my reasons why:

-  Capitalization rate is healthy at ~6%, which is significantly better than the current safe investment benchmark of a long term bond yields at 4.12%.  The capitalization rate is (income - expenses)/cost, assuming income of $3915/month, taxes of $3659/year and maintenance of $2400/year.

-  The capitalization rate will grow and increase over time as rent continues to inflate on an annual basis, whereas a bond does not increase the payment (or coupon rate)

-  Appreciation over the long term should be another 3%/year

-  A buy and hold strategy over the long term (25 years) should deliver 9% returns annually due to capitalization and appreciation rate. This is comparable to what could be achieved in the stock market. Not only that, but the rough estimate of 9% total return rate does not include the effect that rent will go up over time.

As a comparison, since 1926, the average annual total return (taking into account both capital appreciation and dividends) on common stocks has been 10.3%.  The stock market is riskier and has higher volatility, and therefore it is a good sign of a healthy real estate market that capitalization rates are healthy for the long term value investor.

I'd rate this as a "BUY!"

I just heard from Kendall, and he says the interest has been enthusiastic. At least fifteen parties have asked to view the property. - Bob

It all depends on how the market evolves, but given current conditions I don't see a place like this selling for as much as 680k any time soon. It will be an interesting test to find out what happens to this property. My guess, having not seen the property, is it will sell for about 580k.

Radley77,

" The capitalization rate is (income - expenses)/cost, assuming income of $3915/month, taxes of $3659/year and maintenance of $2400/year."

I seriously doubt that $2400/year comes close to covering maintenance + repair/replacement of capital items over the long term + other incidentals (such as insurance). I suspect the real cost is at least double your figure, and perhaps as much as triple (4 suites means 4 baths, 4 sets of appliances, etc). You've also assumed 100% occupancy, which is unrealistic over the long term - 90-95% is a more reasonable figure. Finally, you've omitted management expenses (eg retaining a management company or the opportunity cost of the time spent self-managing).

rj: Most mutual funds carry about a 1% management fee.  So if you are going to compare to the stock market, or other assets for that matter like the total return of the stock market you have to deduct the management fees for mutual funds just so it's a fair comparison as well.

Secondly, even under your assumptions of a 90% occupancy rate and 3-fold my estimate on maintenance or $600 per month maintenance fee, the capitalization rate of 4.9% still beats long term bond yields at 4.1%.  Plus that capitalization rate is going to grow as rents over the horizon of a long term investor are going to continue to march up steadily.  Plus there is still asset appreciation that will occur as well over the long term.

That's reason enough that this is good to fair market value.  My point simply being, that over the long haul this will do better than a bond, and slightly underperform the stock market, but would have less volatility in price.  Your additional points you make do NOTHING to change the overall premise of the argument I made.

" Most mutual funds carry about a 1% management fee."

There are a number of ways (low MER funds, like TD eFunds; or ETFs, like iShares) that allow you to track the performance of the north american markets for 0.35% or lower.

"So if you are going to compare to the stock market, or other assets for that matter like the total return of the stock market you have to deduct the management fees for mutual funds just so it's a fair comparison as well."

You were making the comparison, not me. I was simply pointing out that your initial assumptions were not very realistic.

"That's reason enough that this is good to fair market value.  My point simply being, that over the long haul this will do better than a bond,"

I would certainly hope so, as it involves considerably more risk and effort.

"and slightly underperform the stock market,"

Maybe, but you're handwaving to make up the gap between the capitalization rate of 4.9% and the historical market performance of ~10%. Assuming your 3% appreciation estimate, there's still ~2% gap to be accounted for - and it will take a lot of rent increases to make that up (keep in mind that expenses also increase at roughly the same rate as rent).

Now, if you're borrowing to buy, then I suspect there might be some good returns over the long run - but that is of course another level of risk.

"but would have less volatility in price.  Your additional points you make do NOTHING to change the overall premise of the argument I made."

No need to shout. My point was that your assumptions were flawed. Make of it what you will.

Radley77,

Let me guess you've never actually been involved in a real estate transaction. You are assuming away so many things. Who's to say rent is going to keep going up - could it not go down? The oversupply in market right now not to mention the all the projects coming down the pipe could certainly soften rents. You're also assuming a low interest rate over the 25 years. What happens if rates go up? We can't predict what rates will do over time just that they will go up and down.

Have you ever tried handling tenants? Do you know the time commitments?

I'm not sure why everyone thinks they need to own/leverage the physical asset to get involved in real estate. I've done very well over the years with geographically diverse first and second commercial mortgages. And if I wanted to increase my risk and put all my eggs in one basket (as you say you should do by getting this rental), I could pick one second commercial mortgage and get close 18%. Is this property going to return that? Also I see there are quite a few long-term corporates yielding 8%+. I'd sleep a hell of a lot better at night holding those than wondering what my tenants are doing and if the rent will be on time to cover my lofty monthly payments.

1)  Who's to say rents keep going up?

There are few things in life that are certain, death taxes, and may I add to that list inflation.  Even in the United States, where house prices are declining, rent is still increasing modestly.

2)  What happens if rates go up?

The comparison was made based on what current safe investment benchmark bonds are yielding.  If you had bought a long bond, then the same risk would apply if yields go up.  As a sidebar, the last time bond yields were at 10%, ("the so-called historical performance"), was in 1991, almost 17 years ago.  The federal reserve is likely to lower the interest rate to 1% again.  The implication being that bond yields, at least in the short term horizon are unlikely to go down, not up.

3)  One can manage their own property company, so that fee comparison can be $0 if one is a real scrooge investor.

4)  Regarding the commercial mortgage of 20%.  I'm guessing that is highly risky.  If I knew of a risk free investment that made 20%/year, I don't know who in that right mind would turn down an offer like that.  Please let me know what it is so I can pour my savings in it.

Radley, if you so rate this as a buy and every bull on here perceives this as such a great "cash flow" positive investment why is the complete unit being thrust on the open market?

If the property is truly cash flow at the posted income of ~$4000/month, for it to be on the open market is perplexing.

Would it have a better chance of selling if the rental income was $2000/month? Maybe the owner is retiring, and was smart enough to buy property instead of stocks? Maybe he wants his money to give to his grandchildren. Maybe his marriage ended and he needs it for a settlement. Maybe he's decided to give it away to charity. There are dozens of reasons why someone could be selling, and luckily they don't need your approval. - Bob

Here's a thought. If you're not going to live in it (just a rental), why not take your money and buy a couple properties in another city.  There are lots of other smaller cities where rents are comparably high (ie. university towns) to the cost of real estate, unlike Calgary where rents are in many cases cheaper (if you compare what you would pay to rent something vs buy it).

You could have two or more properties appreciating, and have more rental units.  Plus chances are the maintenance costs for plumbers, electricians, painters, etc would be considerably lower than what they are in Calgary.

bob,

that's a bit of a generalization "smart enough to buy property instead of stocks".  If you pick certain points in time to make these arguments you can always say something is better than something else depending when you pick.  In fact, some people who buy stocks are still better off now than they would have been with property.  In the long run stocks are proven to outperform....anyways that's another argument already beaten to death.

If this was a stock broker's blog, I'm sure there would have been a different perspective. - Bob

Anyways, the property looks good on paper. There are obvious risks with cash flow and liquidity as it doesn't take long to wipe out income with vacancy but that is the lower side of the risk as there are basically 4 units.  If interest rates go back up you will be cash flow negative in a hurry.  However, I think someone out there will buy this in under a month and probably pay only slightly under ask price.  I have some friends who wanted to be landlords so bad they bought bought at the peak (july 2007 and 2008) two years in a row.  Both times they paid ask and not a dime under.  The one they bought in 2008 they are already down 50k.

I think FreeSpeech is worried that it's going to sell(see first comment on this thread)

As a current manager of a four plex I have one suggestion for anyone interested in this property that has not managed anything before.  Get good tenants.  The money you make from filling a empty suite fast is nothing compared to the money you spend on bad tenants.  I'm currently in the process of evicting a tenant and could see the cost of evicting reaching the $3000 range or 3 to 4 months rent.

Don't underestimate the head ache of managing property.

True current market value of the property in question is 572K.

It eventually will sell close to that price.

Bob,

1929 was the sq footage. My misreading.

As for the year - 1969, didn't they have aluminium wiring? I wonder whether one could get insurance on the property if it is disclosed. But I am skeptical about such a high price - not because of the carrying costs, tenancy, or even cash flow. From an opportunity view and liquidity, it is an awful sum of money to be in debt for and not knowing the probable state of the economy at this point.

I liked some of the assessment of the opportunities discussed. If I have 170K to investment, there are definitely some options besides this particular investment. However, it would change the risk/reward concept if the offer price for this asset goes down a tad bit more. It might have to take a bit of bad news like jobs and time on the market to make it happen.

Wow, now it takes 600+K for any kind of reward. The bets are too high in my books.

I had a listing(built in 1974) earlier in the year which had aluminum wiring. The necessary(and inexpensive) rerofitting had been done and the buyer was able to obtain insurance. It's not the wiring which is the issue, it's the connections. Here's a good article on it http://www.housedetective.com/category/aluminum-wiring/ - Bob

Did it sell yet?

Any offers?

what offer(s) were refused?

This is very, very risky on your part, Bob to have a listing here and letting it hang for the hell of it...

What will it prove if it sells quick? Luck? hot market? LOL.

What if it does not sell? It'll prove that it is very overpriced piece of junk that needs tons of renos. i know it and everybody else. I wouldn't pay more than $450K for that thing...But again, no average SFh in calgary/edmonton should not sell for more than $300K and that is exactly why prices are falling.

You're not the most patient chap, are you now? - Bob

And now Shell following the steps of EnCana, Nexen, Suncor and others.

Wonder how many jobs are gone so far!!

http://www.canada.com/calgaryherald/story.html?id=70e854b8-d3f6-4fcd-affe-33432602f3e9

I have to say that Radley's comments have become decidedly more bullish/optimistic on housing since he bought a house!  I remember reading his blog a year ago and he was as bearish on the market as Squidly.  Now that he is an owner, it seems to me that he feels the real-estate picture just got a lot rosier! This isn't an attack on Radley, as I respect his viewpoints....but it is an example of how our opinions on the bigger picture suffer from inherent biases based on whether or not we stand to gain or lose.  It's an interesting psychology.

Bob, for his part, does a pretty good job letting the numbers speak for themselves although being a realtor it's pretty obvious he prefers to highlight statistics that minimize the fact that real-estate is collapsing all across the globe.  Sales of SFH in Calgary this month have fallen faster than a rock. It's uncertain what the effect of no more 0/40 mortgages will be on home sales in the Canadian market, but if Calgary is any indication, things are about to get much worse. Regardless, I respect Bob and admire all the work he does trying to inform his potential clients with the data they need to make their own decision.  What more could you ask for?

My opinion on the rental above is that it's far too risky and requires way too much of a principle investment (not to mention personal time investment) given the uncertainty in current market conditions. There just isn't enough reward to make the risk worthwhile, but that is just MHO.  I am the type who would prefer to have "my investments work for me", not vice versa.

Cheers

Thanks for the compliments. How well are your stocks working for you? - Bob

My investments are doing great Bob, thanks for asking.  I've only had enough to start "money managing" seriously for about two years, and everything I have is in in 4.0% to 4.25% GIC's and has been since June 2007.  My ROI since then is about +5% which, all things considered, is pretty decent.

I started to follow the housingbubbleblog about 3 years ago.  the bloggers on that site were so dead on with their predictions on the US market and the economy in general that I was able to heed their warnings.  Ben Jones is the US version of Garth.

You're one of the few lucky ones. Stocks in general are down much more than real estate. Now I can expect to hear from Vinny. - Bob

What 670k for this duplex?I hope the owner does think that we are coming back to March 2006 era.Based on current market he would be lucky to get an offer at 600k

With these kind of prices, R/E investor would look in other areas to buy 2 single houses with better rental income and potential appreciation.

Can you give us an example of two houses you can buy right now for $340,000 each that will generate $4000/mo revenue? - Bob

Since you're asking Bob, I cashed out of my equities in April.  They continued to rise for another month and I began questioning my move but they they dropped.  Had I still been in those I'd be down about 30% right now but I got lucky.  I don't really know what my true overall gain is as I began investing about 10 years ago and didn't really keep track of how much I put in but I cashed out (still in my rrsp account but not in equities) at fairly close to the peak so I did ok.  Now I am slowly buying back in.  While it's true most people who have bought in the last 4 years are losing money the majority of the people who invested 10 years ago are way ahead now even with the big drops recently.

Something I have been learning though is that it does matter what you invest in when it comes to stocks.  I guess it does come with risk vs reward.  With housing , if you bought any house 10 years ago that house would have doubled if not trippled by now.  With stocks it may have increased 10 fold or only tripled so you really have to do your homeowork or get lucky in stocks.  However times have definitely changed with real estate too.  With the cost of buying so high, it isn't that easy anymore with real estate either.

Wise and insightful words. Most people aren't quite so thoughtful and are more impulsive.

It looks like you might have to go back to Vinny, not Vinnie.- Bob

Bob, the big difference between investing in stocks and real estate is the leverage.

You invest your money in stocks and if you lose half of it you don't owe nobody.

You invest in real estate, putting 5% down, house prices go down 10% like last year, and you owe the bank 5% (20K for average house).

Do you see the difference?

I haven't been paying attention to how far prices have fallen but with Rm4 property in Killarney I should be.  Is land value falling as well?  Is there anyone out there that is still developing more condo or rental properties on Rm4 land? Or do you think that will take time to start up again?

A 50' RM-4 lot was sold back in June for $540,000. They were selling for around $600,000 - $700,000 in 2006 and 2007. Not much is happening as far as new developments. I expect the economic climate will have to change before you see any new activity.  - Bob

Did it sell yet?

Or what were the offers?

$200K?

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