Let’s face it. It’s getting harder these days to defend the notion that it’s purely “fundamentals” driving this market. It's become quite challenging to argue against the idea that we’re in some form of a bubble, when year-over-year increases in property values are at 33% in the GTA, and even 40-50% in some areas.(1)
This type of market at the end of the day is really not good for anyone, even if you hold property. We’re getting into “hockey stick” exponential territory now, and it’s simply not sustainable.
What The Heck Is Going On? What’s Causing This?
Is it because of our strong resource based economy?
Is it because of an incredible appetite from foreign investors?
Is it because of our continued high levels of immigration?
Is it because of policies limiting development of new housing, thereby constraining supply?
Or is because of extreme debt levels at every level (individuals, businesses, government), forcing the central bank to “print more money” in order to purchase bonds and suppress interest rates at a level that is serviceable for all of these debt holders? This in turn, creating much greater credit (debt) in the market for asset purchases (such as real estate), pushing prices up even further?
I don’t know.
My best guess is YES – all of those things. Typical media articles like to point to a single factor while discounting all the rest, when the reality is probably that all of these things combined are the fuel that’s causing this property bonfire to spiral uncontrollably upward.
So What Should We Do?
There are 2 things.
1. Stop investing, pay off all debts, buy lots of canned food, and wait for the collapse.
2. Invest smartly, don’t be overleveraged, and ALWAYS ADD VALUE to any investment you make.
I prefer Option 2, for the simple reason that it’s IMPOSSIBLE TO TIME THE MARKET (and you can still grab some canned food if you like - I recommend Costco).
This is why the only thing I can do for myself and recommend to people, is to physically force appreciation and add value to any property that you own. It’s very possible this market could continue on for a while, and you would have missed out on some sizable gains if you held back.
And even if things pull back, the typical response from governments to prop up the market might just bring prices even further up (as history as shown).
So if you’re confident that you should strategically move forward, there are many things to consider. From an investor’s standpoint, there are 3 things that generally give you a return on your investment:
1. Cash flow (the gold standard of a solid investment)
2. Mortgage paydown
3. Market appreciation (we’ve enjoyed this for a long time but shouldn’t rely on it)
The 4th item that we don’t often pay attention to is: Forced Appreciation
This is where you make physical alterations to instantly increase the value of the property, and is often overlooked in a lot of instances.
3 Levels Of Forced Appreciation
I categorize forced appreciation into 3 levels:
Level 1 - Lipstick improvements
Level 2 - Functional and spatial improvements
Level 3 - Developmental changes
Level 1 - Lipstick improvements – This includes the usual things you see in the fix ‘n flip shows. Kitchens, baths, flooring, paint and trim, landscaping, etc. Not changing the use of the space in any way, but rather improving aesthetics and updating styles.
Level 2 – Functional and spatial improvements – This is sure to give your property a boost in value by way of adding functional space. These can include the creation of extra bedrooms and baths without compromising the space. It may be turning the attic space into a master loft with its own ensuite bath. It may be putting on an addition at the rear of the home.
Level 3 – Developmental changes – This is the big kahuna when it comes to moving the needle of property values. At the low end, it may include adding in a legal second suite or converting a single family home into a triplex. More ambitiously, it may be tearing down a home, and building another multi-unit building. More creatively, it may be taking a single property, and legally severing the lots into multiple lots and building multiple properties.
The last two types of forced appreciation measures are typically only things that can be done to houses containing clearly defined property lines. There is always more value that can be added to them.
Conversely, purchasing a pretty condo unit only allows to you do the first type of forced appreciation (which is lipstick improvements), and if it’s a new condo, there’s nothing left to do. “Finished product” investments such as new condos are probably the worst investments if the market should turn, since there is nothing that you can do to improve its value. You’re totally at the whim of the market.
With houses, you have options. Even if the unthinkable happens (a market crash), by applying some of the forced appreciation methods discussed, it helps to mitigate the risk associated with investing and helps insulate you from loss.
And if you happen to get cash flow, mortgage payout, AND market appreciation, your forced appreciation strategy is simply the gravy!
Be careful out there – invest smartly, do your proper due diligence of various options with the house, and don’t let emotion get in the way!
Unfortunately we don't own a money printing machine like the central banks.
So what's your take on all this? Please share your thoughts in the comments section below.