Is a Market Correction such a Bad Thing?
With spring already in the air, it’s nice to think about spending more time outdoors and with family & friends rather than what could be a looming housing correction. Last week was my niece’s 19th Birthday, this could be a scary time for parents (and Uncles), but also a time when we start seeing the next generation start to grow up. The attached picture was from a bar, which is how she wanted to celebrate…with her friends and a few “older” people (I was lucky to get an invite!). When my niece let me know she would likely be moving to Hamilton for School starting in September, I immediately started to think of how I can help, and also if there was an opportunity to give her some hands on experience in looking at having money work for her as another stream of income. We hope to look for some new properties together in the coming months!
There has been a lot of media attention on the housing market lately, mainly with the words “bubble” and “crash” being at the forefront. With the possibility of a housing correction, this is a great time to take a step back to look at one of the largest fears for new (and current) investors, and also why a housing correction could be a great thing! Below is an article I wrote last year on the expected correction, but is just as relevant today as it was then.
For most investors, and those thinking about investing in real estate, one of the largest fears they face is that of a market correction. This is one of the top questions I face from new clients & investors, and frankly all of us have asked or wondered about a correction at one time or another. The fear of a correction was likely the largest factor for me not getting into real estate investment sooner.
As a new investor starting out over 14 years ago, I clearly remember my financial advisor telling me not to invest in real estate as the market will turn and the bubble will burst. Back then I was curious about real estate investing, but had very little knowledge, and hearing that from my advisor scared me! It did not stop me from purchasing a principle residence, but it was years later that I actually purchased an investment property. As I purchased my first few properties over the years (not really understanding the ins and outs of investing) I started slowing gaining knowledge, and also saw wealth start to build. I then took to educating myself on real estate investment wherever I could get it. Although I have been fortunate to have had a strong housing market for most of my investing time, as investors we need to plan for the downturns.
So let’s chat briefly about a market correction. I have no idea if one is coming, but with the crazy market we have been experiencing, I w however if one does come, then for the most part I will likely embrace it. I see 4 key traits in a correction that will be a benefit to us as investors.
- You win or lose when you sell: If the market drops, (even a significant drop) the banks will likely not come calling as long as you are making your mortgage payments. If there is a significant drop, the bank must invest time and money in appraisal and administration before they can call for funds. If you are holding that asset through the correction you can simply carry on having the property rented and pay down your mortgage as well as collect your cash flow, its business as usual. Real Estate does come in cycles, if you simple continue past the cycle, then the correction really did not impact your investment much.
- Everything is on sale: This is pretty self-explanatory as we all know home prices may be more attractive. However, the saying is very true in that “it’s not timing the market, it’s time in the market”. If you have equity or funds during a correction, it becomes a great time to buy. Buying is a great time for a new investor as they are buying low (and hopefully selling high), but those that have been investors for years with average appreciation and mortgage pay down, will likely have the equity built up in their existing properties to be able to go out and purchase.
- The rental market improves: This is a positive sign for those that already own investment properties, and allows them to benefit during correction times with higher rents. In a market downturn, the confidence of the population to buy homes has decreased. Given population is still increasing, the demand for a place to live is still there. Simply by supply and demand, with people not buying, the demand for rentals increases. There is already a large demand in Ontario for affordable housing with vacancy rates at all-time lows (some cities less than 2%), with home buying slowing down in a correction, the natural economic result will be higher rents. If you are in a situation of transitioning tenants, the opportunity is there to increase your rents and drive up your cash flow.
- Future Opportunity: At current levels, Appreciation increases at a much faster rate than the rental market, if this continues, then over time, rents will not be able to cover all of the costs of running a property. In a correction, appreciation slows down and rental rates increase, this allows the investor to continue to purchase properties that cash flow. Take Toronto as an example, most investment properties do not have rent covering all costs to run the property, hence these purchases are based on the hope of appreciation. In years past, Toronto and the GTA was a market that you could find cash flowing properties, unfortunately, this is not the case anymore.
I have no idea if a correction will come for the Ontario market, but if it does…It’s not such a bad thing!
Visit us at www.mkproperties.ca and our page MK Investment Group on facebook or LinkedIn to learn more about how we invest in real estate to profit in both an increasing or decreasing housing market. Or contact us if you would like to learn how we are providing double digit returns for our partner’s and clients year over year.
Until Next Time,
Build Wealth-Live Life.
Vaughan Real Estate Investment Club
If you live in the GTA, we have started the Vaughan Real Estate Investors Club – a meet up run by investors for investors. If you are just starting out, or a seasoned pro, come out to Learn and Network with others like you. Click the link above to go to our site on meetup.com or visit our page on facebook. We look forward to connecting in person. Our next meetup will take place on Wednesday May 24th where we will have guest CPA Cherry Chan discuss tax planning and corporations for your real estate investments. Please RSVP at www.meetup.com/VaughanREIC or our group on facebook to join us.
Martin Kuev is a full time Real Estate Investor, Realtor and Investment Coach. He has worked for some of the most respected and well-known global organizations including Coca-Cola, Kraft and Nestle. With a multi-million-dollar real estate portfolio and team he built over the past decade, he left the corporate world to have the flexibility to spend time with his family, continue with his real estate investments and help others build their long-term wealth.