A few short years ago cult leader Don Campbell was leading his disciples to the Promised Land. Alberta. Specifically, investment rental properties in that province. Campbell’s Real Estate Investment Network was happily taking oodles of money from ‘students’ and others splayed before him, begging to know how they could buy a duplex, triplex or just a lowly condo, with no money down and grow rich, rich.
So he sold them books. And tapes. Exclusive access. Learned speakers. And seminars. Lo, so many seminars.
Of course we now know Alberta real estate was at peak levels, the top of the curve, and would soon be defeated by an oil bust, employment crisis, plus a swarm of socialists. Suddenly buying properties with 100% leverage and negative cash flow didn’t look so cool when values stopped rising and tenants disappeared. Now we have some proof that, incredible as it seems, you can’t create wealth by borrowing.
A leading tenancy management firm in the province has grim news for all of Mr. Campbell’s baby capitalists, flippers, specuvestors and amateur landlords. In the 90 days ended with October, there were 8,102 homes available for lease in Calgary alone, with an average rent of $1,477 (which is going down).
Of these homes, a staggering 37% (or 2,998) were empty. Vacant. No revenue. The loss represented to landlords is $4,430,000 a month, or about $148,000 per day.
Things aren’t much better in Edmonton, considering the population differential. There 5,211 homes were available to rent on any given day during this three-month period, and of those 31% were vacant (1.094 units). The landlord loss was $1.3 million a month, which is being reflected in lower rental rates (the average now is just $1,168).
Says the CEO of the company (Hope Street) behind the stats: “Times are hard for every single Landlord with whom I’ve spoken in the past 8-12 months. Empty rental properties abound and no obvious solution to the province’s empty rental property phenomenon exists. Landlords need to engage a carefully executed plan to weather this storm, and to adjust their expectations on their property ROI.”
But most amateur property investors don’t have a plan, nor any idea of what to do when conditions change – and they’re leveraged to the pits. It’s not just Albertans at risk. The fact 52% of all condos sold in the GTA (about 30,000 of them a year) are going to people with no intention of living there, shows how much rank speculation has infected the marketplace, thanks in part to pumpers & dumpers like REIN. These days, even in the splendidness of Toronto, it’s impossible to buy a condo, pay the monthly fees, financing and property tax and be cash flow positive. Worse, any net gain a landlord does eke out is taxed 100% at his or her marginal rate – compared with 50% on gains flowing from most financial assets.
By the way, what’s Don Campbell doing now that Alberta has tanked and his flock is flocked?
“Victoria an optimal place to invest,” is the new pitch. “Understand Victoria’s key economic indicators and what they mean to safe and secure investment opportunities.” Meanwhile, flooded with refugees from an inhospitable and unaffordable Vancouver, the Victoria area has seen a temporary 24% surge in prices in the past year. In other words, the market has buzz. When values rise, people rush to buy. And where those juices flow strongest, you will find Mr. Campbell’s proboscis.
And just to underscore the fact we live among the over-extended and under-diversified, who are living proof you can own a nice home and still be a financial cripple, here’s another survey to ponder. This one by Manulife. It really sucks.
According to the poll, this is the current state of Canadian homeowners. When asked if they have an emergency fund, a quarter didn’t know, and an equal number have nothing or less than a thousand bucks. So half would probably be screwed if things went south. And the other half? The average amount of savings these days is… (drumroll)… $5,000.
About half (46%) say they’d have trouble making their mortgage payments in less than six months if the primary job in the household was lost. Another 16% say if their mortgage payment went up at all (thanks to higher rates) they’d be in financial difficulty.
Meanwhile (as you know), bond prices are falling, bond yields are rising, the Fed is 13 business days away from hiking and Canadian banks are already increasing their loan rates. In short, kids, rates are rising. And the people living on your street ain’t ready.