ARE Unlocked | Canadian Real Estate Market with Naveen Chopra

Hey everyone, thanks for tuning in. We're back here with Naveen Chopra. Thanks for having me again, Michael.

Great to have you back. I know you wanted to take advantage of an opportunity because a lot of people since our last video have been asking you about preconstruction.

Yeah, so we're going to take this opportunity to unlock the potential of preconstruction in this video. I read over some notes you made. Some things I agree with, some things I don't. We're going to go through it, we're going to challenge each other, and we'll let the viewers decide what they want to use. Then they can call us both and pick both of our brains if they want.

Amazing. Okay, so let's get into it. Preconstruction. So it's November 16th, 2023. To recap the year, interest rate hikes over the last year. In the preconstruction game, we've seen sales drop, pre-construction resale everywhere. Hopefully we're at the end of the hikes, but you know what? I have light at the end of the tunnel.

It's funny that you said that. I have a definition of hope here which we'll get to. I wrote it down while I was waiting for you because I wanted to understand the difference between investing and speculating. They are different, that's why there's two terms. In the market, you're either a speculator or an investor. We'll get into it and see what people define it as. For the last year, interest rates have really hurt closings, influenced appraisals, how flips work. People buying a property years ago and selling them now, we've got so many stories. The speculators get caught, or circumstances change. Someone might have been planning on investing, but to me, investing is long-term. Speculating is short-term, expecting a quick flip or not even planning to close.

Okay, let's get right into that. Let's get into my definitions. I took these off a basic Google definition. An investor is a person or organization that puts money into financial plans, property, etc., with the expectation of achieving a profit. A speculator is a person who invests in stocks, property, or other ventures in the hope of making a profit. So investors have the expectation of achieving a profit, and a speculator is in the hope of making a profit. What's the difference between expectation and hope? Expectation is a strong belief that things will or should be a certain way. Hope is a desire for an outcome, a wish with some uncertainty about what will actually transpire. So a wish and a desire is speculation. The investor puts forth knowledge, wisdom, study, understanding their position. The speculator is more hopes, wishes, dreams, maybe a bit more of a gamble. An investor could end up being a speculator. I always think of investors as long-term in real estate terms: buy a property with the intention to close, hold on to it, rent it out long-term. But you could become a flipper later. If you bought in 2016 and profits were enormous when you closed in 2020, you might say, 'I don't need to close, I already made the profit short-term.' That great investment turned into speculation because the wish came true. You didn't buy on speculation, you bought on investment, but the speculation side turned out great. So call me a speculator now because I made the profit I thought I'd make in 10 years in four years.

100%. And the risk, because we put flipping properties as a speculator form. Investing is to hold, to rent out, to generate an income. Hopefully positive. Investing is you're going to close and hold on to the property long-term and you had the means to do that. Speculating would be the flip. In preconstruction, you're not going to close in four to five years; instead, you're going to assign the property and make a profit, or worse comes to worst, you close and sell it after additional costs. But then I think that takes you into the investor category if you have the capability of closing. If you go in with the capability that if it doesn't all go to plan, I will close and move forward, you're now an investor because you're willing to hold out. The speculator, where I get turned off, is when they can't close if it comes to time. That's a gamble. So I put flexibility in here. The speculator with flexibility becomes the investor. For example, you buy a property with the intention to flip, close, and rent out or live in it. If you have three options and you're flexible, you have hedges against outcomes. I call you a seasoned investor. But if you just speculate, buying today because you think it will be worth more, you wish and desire, and you're not prepared to close or take any steps in that direction, you can get in trouble.

Let's look at what's happened over the last three or four years. I was talking to many colleagues and friends who were buying condos back in 2017, 2018, 2019. I bought one too. I love real estate, so you buy knowing it's a flourishing market, but you have to have that hedge. Now, for example, Charisma condos in Vaughan at Jane and Rutherford by Jaden Development is about to close on its first two towers. Phase one initiated in September 2017. I bought in the first tower, and now they're starting to close. 2017 to 2023 is a lot of years. People bought one or two units thinking they'd make a killing. We went from $650 per square foot to $700, then to almost $1,000 per square foot a year ago on assignment. The price hit that. Some people sold close to those prices. But now we see higher interest rates, triple what it was a year ago or back in 2017. What happens with those speculators in the building? They can't close. They're giving them money for what they paid for, some lower. Not many have gone too low; they still break even. The price from 2017, you're capable of that. But if you bought in 2019, you'll probably have a loss. Those units aren't built yet, so we still have a year. The speculator who wanted prices to go up and make a killing has seen their returns diminish. The market goes up and down, but ends up up. There are dips, and that's why I like the investor better. You don't want to fall in that dip and have to flip, losing even if you sell at what you bought. You invested your deposit of 15% to 20% over those four or five years, paying realtor fees, lawyer fees. Even if you sell at the price you bought, you lost on your deposit and fees. You're looking at about 5% in commissions and other costs, plus interest on that money you could have made elsewhere. To break even on a transaction, you need to get about 7% more, maybe up to 10% depending on the purchase price. So break even is 10% plus. We'll leave out inflation for the short gap, but four years of inflation at 3% to 7% adds up. Those price increases we saw, inflation had a lot to do with it. It's hard to feel until it gets to a certain point. Overall, you're at a loss when you sell for even.

To touch more on speculating versus investing, one thing has become really common in both the history of financial markets and real estate: you can't predict anything. There's no way to study what's going to happen tomorrow, only what's happened before. You can follow trends, but can you predict? No. That's why we like long-term. If you follow the trend of the real estate market over the past 100 years, it's not straight, but it does head up. There are dips, but the value is always headed one direction. Is this video for the investor or the speculator? I would say more for the investor, and maybe to the speculator: stop speculating. You can do it if you get lucky while you're investing, take advantage of it, get your money out quick. But don't put your money in and just speculate because there are dips, and like we're learning today, it's a dangerous way to lose your hard-earned money. Both of us being real estate agents and brokers, we can't say no to someone if they want to buy on a flip. We can advise them, share with them, but we can't make decisions for them. For the last 10 years from 2009 to 2021, if I advised my clients not to speculate, they would have hated me, and I would have been wrong. Am I wrong in warning them? No, your job is to advise. There would have been a couple of times where you're wrong because there were ups and downs. You get hit at the top of the market in 2017, and two years later it came to close, you may have caught up or not. It did end up going higher, but you could have got caught in the middle. That's what I say to people all the time about speculation: you never know if your investment will be higher when you need the money. You invest, you're up 30% or 20% for two years, then you need to sell, interest rates went up, sentiment went down, there's a huge inventory, things aren't selling quickly, and you've lost your gain. If you would have sold last year when you didn't need the money, but you thought it would keep going... Everyone feels the same: it's never going to stop going up. Buy, buy, buy, everyone throws their checkbooks at everything, and then you're in the dip. Now it's the complete opposite. Now is probably the right time to buy, take advantage of preconstruction prices, but everyone is holding on to their checkbooks saying, 'No, I don't want to buy now.' But hey, prices are down, buy now. You're right, but why are you doing the complete opposite? The problem is people will watch this video and say, 'Here are two real estate agents telling people to buy.' That bias exists in people's minds. But the truth is, when I hear people say they're looking for a deal, deals are found in this kind of market where people are fearful, spread thin, less people can afford a spot. There's more opportunity where builders have to meet sales percentages to get financing. They are giving incentives. This is the first time in 15 years that the builder will listen to you, take what you say, and say, 'What incentive will it take to get your client to get it done?' They'll listen. At the highest point of the market, they don't even answer their phone. You're lucky if you can get your client in because they'll say, 'Don't worry, we'll sell it to someone else.' So what is a deal? I started thinking about product innovation. When we see a deal, say Adidas is having a deal, you go in and they don't have your size, they're all sold out. If you wait for the deal to come to you, you might be too late. It's already taken advantage of. Whereas there are properties in current developments in Vaughan, between Highway 7 and Jane and Rutherford, where two-bedroom units that were $950 per square foot are now selling for $780 per square foot because people can't close. That's a deal. If in 2021 it was $1,000 per square foot and now it's $800, that's a 20% deal. But it also has to work out with the cost associated with interest rates depending on closing. Now this is where I'll start speculating again. If closings are in 2025, 2026, 2027, and economists and banks are speculating that interest rates will drop by then, am I worried about that interest rate anymore? I can't answer that because I don't look at the future and guess. I don't know if I can believe them either. Are you willing to take that chance? Are we seeing bond rates go down? I look at it like this: if rates flatline, the people selling at this discounted rate are doing so because they have to liquidate, they have to get out. That doesn't necessarily mean the whole market has come down. That's just a few people who couldn't afford to close. That doesn't really bring prices down. For example, if there's a sale on a resale property on a beautiful street and a house sold for $1.5 million and the next one sold for $1.2 million because things have changed, that doesn't make the next house worth $1.1 million. That person may be in a completely different situation. Someone may have to sell because they already bought something else, but they're not willing to take a low offer. That's where I see the deal. If everybody is coming down and selling for cost, then there's not much of a deal because the market is at equilibrium. But if only one or two people are coming, those are the deals. Some people say, 'Mike, why don't you buy it if it's such a good deal?' I have my own investment strategy. It has to go through rigorous investment principles. Maybe my cash is tied up right now. I have closings coming up, and I would love to have not bought that condo in 2019 and had that money in the bank. I'd go buy one right now. The same condo I bought two years ago, I could buy a detached home right now. So yeah, I would do it if I had that disposable deposit or it was within my principles. We're not going to stray away from our investment ideas just because something looks cheap. We still have to do our due diligence. The whole point is when do you find a deal? You don't find it when you feel comfortable. You don't find it when the market is doing amazing and everyone is perfect. You're throwing offers like everyone else, 20 or 30 offers at one property. A building releases for preconstruction, there's a line of a thousand people. You're lucky if you get into the next phase where they raise the price 10% to 20%. Now is a great time to buy for some people. But the unfortunate part is when things are going up, people keep buying, and when things are going down, everyone is waiting for the bottom. No one knows where the bottom is. So like you said, if you see what seems like a deal, get in if you can. You have to know your principles first before you recognize the deal. Rule number one in investing in real estate is have your principles, know your strategies, know what your minimums are, what your deal looks like, what your overpriced property looks like, where you lose money, where you make money, where you find a steal. If you have those principles and that investment plan, as things come up, you can measure them and say this is great, this is not going to make me money, this thing is guaranteed not to lose me money. You may not have a guarantee on making money, but you may have a guarantee not to lose money, and now you can rent it out, make some income. I've had clients in the past who are closing today but always had the plan on closing and had the means to close. They say, 'I'm going to close and wait this out because long-term it's going to come back. I might lose a couple hundred a month for one or two years as I close my property now, rather than giving it away at a loss.' That's where long-term comes into advantage over speculators. I could close and wait it out. It may be a cliche, but I read a book that really stood out: 'The Intelligent Investor' by Benjamin Graham. I follow a lot of wealthy people, business owners, and I read financial statements of publicly traded companies. Warren Buffett was a student of Benjamin Graham. This book touches on investing principles, investments, but mostly it touches on temperament and expectations. Not a lot of books go into that. They all tell you to get rich quick or how to make as much money as possible. This one is really cool. It touches on other people's emotions, behavior through market swings, the fearful and the excited. When people are excited and everybody's talking about it, it's pretty much too late. When people are afraid, now's the time to start looking at opportunities. You're not taking advantage of people, you're taking advantage of the opportunity. I did a little survey, asking random people, business owners, even a 69-year-old mining investor I met on vacation. I asked them about this book. Not many have read it. It's funny because the get-rich-quick stuff on YouTube gets millions of views. A video on how to get rich in real estate has a million views. But something on human behavior or prediction about the market that doesn't say get rich quick only has thousands of views. If you're young and naive, you see a video that says get rich quick versus one that says get rich in 5 to 10 years, which one are you going to click on? The get rich quick one. But the right one is probably the 5 to 10 years because it gives you a real strategy that's more fail-safe. Investing should be long-term, not speculating and get rich quick. So this book is really good if anybody wants to read it. You'll enjoy it on the basis of investing, protecting yourself, and understanding the psychology and behavior around investing.