One way to diversify income at retirement is by going into real estate. Owning a rental property is a great way to achieve some extra income. But a more stable and passive way to invest in property is to own REITs, which are companies that hold many different properties and typically pay monthly distributions to their unit holders. One of these companies is called Smart REIT. And last week I contributed $3,000 to my RRSP and purchased 111 units of SmartREIT at $29 each + $9.99 for commission. 😀 It currently pays a fetching 5.5% annual dividend, and I plan to hold this name indefinitely for my retirement income needs.
SmartREIT (SRU.UN) used to be called Calloway REIT, but earlier this year it acquired SmartCentres in a $1.16 billion deal and changed its name. The take-over was to acquire 24 shopping centres, mainly in Ontario and Quebec, making the new company one of the largest REITs in the country with 149 properties under management and $8.3 billion of total assets.
A large part of a successful real estate business is finding high quality tenants. A quick look at the top 10 tenants for this company, based on gross rental revenues, shows that Smart REIT is working with some excellent renters with very traditional business models and high profitability.
Sometimes when I run out of topics to write about for the blog I would visit the fabric store to find new material. 😀 But other times, I am inspired by visitors like you! A while ago a reader requested I do a profit and loss statement for my farmland. Great idea! So today’s post is a financial update about my farm’s earnings.
As you might recall when I first bought my farmland I was losing money on it. Well, after a few years I am finally in the black! 2015 represents the first year my farmland is profitable. Yay!
Revenue from my farmland comes in the form of rental income. Both farms are leased to the same farmer who grows crops on it every year. Expenses include interest on bank loans and property tax. There are not a lot of costs associated with owning farmland. It’s only land so there’re no buildings or lawns to maintain. Let’s take a closer look at 2015’s numbers.
Revenue is down about $1,500 from the previous year because crop prices are lower. Since the prices of soft commodities like wheat and canola have fallen I’ve agreed to lower the rent for this year. If crop prices rise in the future I will be paid more.
As for expenses, it is dramatically down this year thanks to the lower cost of borrowing. Many were hesitant to borrow money last year because they thought when interest rates go up they will have a harder time servicing their debts.
That’s not wrong, but I don’t personally adopt that kind of mindset because timing rate hikes is a fool’s game. The central bank actually lowered rates this year, twice. So now investors like myself, who have already borrowed money, are paying less interest than before. And our investments continue to perform well. Here’s a look at my current farmland loan situation. I only have about $200,000 left to pay off.
Prior to now I was paying 3.89% interest rate on my loans. But now it is only 3.43%. Both my loans share the same interest rate. The reason I have two loans is because I bought my farms separately – one in late 2012, and the other in 2013.
With my current $200,000 balance, I would only pay $6,860 a year for interest. The total property tax this year is about $1,600. However, I can save about $80 if I pay my property tax before the end of this month, which I plan to do.
So after a few years I am finally making a $100 profit! I can’t wait to spend all that money. But as I wrote back in 2012, most of the gains from farmland investing is from capital appreciation. According to Statistics Canada, from 1981 to 2014, farm asset values have increased by more than 300% to over half a trillion dollars today. Last year Saskatchewan farmland prices experienced the highest average increase at 19%. This represented about 150% return on my investment due to my 8x leverage strategy.
Finding Value in Farmland
Compared to other types of investments farmland is still an attractive long-term hold. To analyse stocks investors often use the price to earnings ratio. The lower the P/E ratio is, the more return on investment the stock should generate over time. This is a useful way to find the best-valued stocks. With farmland, we can evaluate similar metrics by using the price of land relative to its income-earning potential. So instead of using price per share, we can use price per acre of farmland. And instead of using adjusted earnings we can use cash receipts. Farm cash receipts are not the same as net income, but it does a better job at tracking the patterns in farmland values. Below is a chart showing the average P/E ratio in different provinces over time.
Though the housing market has been in recovery, it’s still a tough time to try to sell a house. If you are considering putting your house on the market or you are in the midst of it, it pays to know a few things about what it takes to successfully sell and move out of your house. To really make your house competitive on the market, make sure you are doing all of the following things.
A Realistic Picture
When you bought your house, you may have done so under the pretense that its value would increase and that you would end up making money on the sale of your house. However, as many people experienced during the housing bubble, you can’t rely on early predictions as a definite measure of the future value of your house. You may not end up getting as much for your house as you might have at one point hoped, but that doesn’t mean you should be prepared to take a low offer. Before putting your house on the market, talk with at least three real estate agents about the value of your house to make sure you are getting a fair and realistic evaluation.
Finding the Right Realtor
In order to sell your house, you will of course need someone who is going to do a good job representing and selling your house. Consider using an accredited and professional real estate agency. Here are a few guidelines on making sure you pick the right realtor:
Talk to several before you settle. Get a good feel for their histories and qualifications. You will probably want to choose a realtor who gives you a middle-ground number on your home, not too high or low.
Read up on their qualifications. Recognize that, just like doctors, realtors have specialties. For example, some are accredited to work with seniors in particular. You should also look into their history of sales and see how long they’ve been doing business. See what other listings they currently have on the market and see if those are similar to your own. Pay attention to any awards they have received from their company for most sales or best service.
Talk to other sellers currently working with that realtor to see if they recommend them or can give any other insight.
Do not work with a friend or relative. You want an objective experience when trying to get an expectation on the value of your home. You should also avoid anyone who has not been in business long, is a part-time realtor, or who has never sold homes in your area.
Making Your House Attractive
Once you’ve started to work with a realtor on selling your home, it’s time to start thinking about making your house attractive. You may want to hire a professional to take photos and video or ask the realtor to help you. Make sure your home is clean and organized. If you are anticipating moving soon, regardless of the sale of your home, you may want to start moving clutter out of your house. This will make it easier for prospective buyers to start to imagine your space as their future home.
Make sure you also attend to any inspections and repairs right away. Have the results of these inspections available on hand should prospective buyers want to see them, and keep a record of recent repairs performed.
Your realtor will probably help you organize an open house, but you can help expedite the process by keeping your home clean and organized and making your areas especially presentable. Set up a table by the front door with a sign-in book for prospective buyers and a book of photos or a video. Make their experience as pleasant and welcoming as possible.
And don’t forget to market your home! Place a sign on your lawn, separate from the one your realtor may put up, to advertise that your home is for sale. And while your realtor will likely take care of most of the online and print marketing, it does not hurt to advertise among friends and coworkers who may know people looking to move.
Preparing to Move
It’s the last step of the house selling process! Actually completing the move! While the process of moving could easily take up its own article, here are a few brief things to keep in mind about moving. Make sure you work out a schedule in advance with the realtor and buyer to make sure you aren’t without a place to stay for a period of time. Make sure to settle quickly and efficiently to avoid losing a sale. But don’t forget to take your time to do what you need to do in your home! Take photos or videos to help you remember your home. Leave a little house warming present for your buyers. Hire professional cleaners to clean up when you’re done moving out. Make sure you have all your paperwork organized for tax season. And finally, enjoy your new home!
I recently read an article about a lower mainland couple who doesn’t like how a neighbouring $2 million house sits empty all the time. The yard is unkempt, there are no cars in the driveway and the lack of human presence is “driving [the couple] slightly bananas.”
Sacré bleu! You mean to tell me that there are people who buy property only for investment purposes? How dare they offer above market price to purchase a house here, so that Canadians can unlock the full value of their real estate. What can we do with cash anyway? Buy a diversified portfolio of liquid assets like stocks and bonds to provide passive income for retirement? No thanks. I’d much rather put all my nest eggs into a single illiquid asset that produces no income, and lies on a major fault zone. 😛 Those pesky foreign investors who don’t even live here think they can just not contribute any waste to our sewage system, and not use the city’s garbage services, but somehow think they still have the right to pay the full brunt of utility tax and property tax. Some nerve! How dare those foreigners help fund our police, fire, and public education system when they don’t even have kids here to overcrowd our classrooms. It’s also unfortunate how quiet their house is all the time. Who would want to live beside quiet neighbours anyway? Not me.
Sarcasm aside, foreign ownership of real estate is a hot button issue around here. Should non-residents or non-citizens be allowed to purchase Canadian residential property?
There’s actually a petition to restrict foreign investment in Canada’s most expensive real estate market, which I’ve signed and shared on social media. To be frank I don’t believe this petition will bring about any meaningful change, but I think it’s an important discussion for fellow Vancouverites to have.
click on image to sign the petition
There will also be a rally outside the Vancouver Art Gallery on May 24th, to focus on the problem of affordable housing for young people in a city where the average house costs more than $1 million. Feel free to attend and take a stand if you believe in the cause.
Foreign Real Estate Ownership
Some believe foreign ownership drives up the cost of housing which makes it less affordable to live in the city. But I think that’s largely a myth. The amount of foreign owned property is just a fraction of the overall market. Foreign investment laws haven’t changed much in Canada over the last decade. However mortgage interest rates have been cut in half over the same period. Raise the interest rate and watch as prices correct overnight.
According to a Financial Post report the average price of detached homes in Toronto passed the $1 million mark for the first time last month. The GTA has experienced a housing bull market for almost 2 decades and there is no sign of it stopping.
I want to congratulate Torontonians for reaching the $1 million milestone. Welcome to the club. Meanwhile the average detached home in Vancouver now stands at about $1.4 million. But hey, it’s not a competition. 😉 And extreme cases like the Point Grey mansion that was sold a few months ago for nearly $52 million will skew the average results. Can you imagine the commission real estate agents make around here?
We often hear complaints about how unaffordable housing is in Canada. But there are two sides to each coin. My friend’s parents bought a home for $70,000 over 40 years ago. They have since paid off their mortgage, and their home is now worth over $1 million. 😀 They plan to sell their house soon in order to downsize and will become liquid millionaires. That sounds great to me. The majority of Americans and Canadians are home owners. So financially speaking rising home prices should benefit most of us.
Recently a Vancouver house sold for $567,000 over the asking price. It was listed for $1,600,000, but sold at $2,167,000. People are even making jokes about how insane the housing market is. Below is a short video I found of a Vancouver real estate agent talking about his inexperienced clients. It captures the ridiculous nature of the current market around here. 😆