Now

Yes now

If you read part one, that probably sounds familiar. The more I read about current goings on, the more convinced I become that we are in the trough of the current economic downturn. The trough is the time to buy.

Okay, but first some explanation, and some caveats (there's always caveats, aren't there?).

First, the explanations. What is it that makes me so sure we are in the trough? And what is the "trough"?

The trough is the "bottom" of  business or economic cycle - and the best time to buy. I think we're here. Why?

The Good News

Well good news has been on the increase and bad news seems to be levelling off somewhat. About a month or so ago, Wall Street went on a huge real estate buying binge once Florida (I think it was Florida) changed a controversial law regarding real estate liabilities. If anyone is in tune with the economy it has to be Wall Street. More than the US government, more than anyone. These people eat, breathe and live money. If they're on a buying spree I'm listening.

Now, more and more REITs are going on buying sprees, including Canadian REITs buying US and Canadian properties.

Just this last week or two, Target bought the Canadian Zellers chain outright.

Statistics Canada just reported that non-residential construction spending increased 2.5% in Canada in the last quarter of 2010.

New York City's commercial real estate market rebounded significantly in 2010 with the 25 largest deals adding up to almost $10 billion in value.

What's the bottom line here? The big boys are buying. And they continue to buy. I think we are at the bottom.

Add to this some rays of light on the European financial meltdown, and it appears the world is not ending.

The Bad News

Our troubles are a long ways from over.

There is not going to be any super recovery and we will not be dancing in the rain singing Good Times Are Here Again.

While I do believe we are likely at the bottom, it is likely to be  long flat trough. Oh and the road is gravel, not paved. Not only is there an elephant in the room, but he brought a few cousins with him.

The US national debt is at incredible levels and the budget deficit continues to rise significantly. Quantitative Easing (read print money) has really only had a band-aid effect and the government's maneuvering room diminishes with each round of QE.

Bank bailouts in both the US and Canada are really debatable programs. The argument for the bailouts was the need for stable financial markets, but it is very arguable that bailing out the banks simply rewards their egregious profit chasing behaviour over the last few years. Who really knows? Probably the only thing that is known for sure is that a lot of money has been flowing and not much has substantially changed for the average person.

As if the foreclosure crisis wasn't bad enough in 2010, forecasts are for an even higher number of foreclosures in 2011. As well, buying is now cheaper than renting in many of the depressed US markets. Now one can draw a lot of conclusions from this, but one conclusion that I am drawing is that rents are headed lower. Lower rents equals more trouble for those investors hanging on by the seat of their pants, which means more foreclosures.

As well, the legal fallout from the banks' irresponsible assembly line approach to foreclosures can only add more fuel to the fire.

Even though there have been some rays of hope in Europe, there is still a lot of debt and instability there also, and it just isn't going to go away overnight. Germany has just about had it with being the big brother bailing out their irresponsible little brothers and while this is good in the long term (teaching fiscal responsibility), in the short term it can only mean more trouble.

So Why Buy Now?

I remember hearing once that there was an old oriental saying that "you have to go into the Tiger's den if you want to get the kittens" (mind you, and this is disconcerting, none of my oriental friends have heard of that one), and the same holds true for any business endeavour. If you want the profits, you have to take the risks.

Now, the risks are still pretty great. There are so many huge factors at play that any predictions of a major or long term nature are likely to be subject to error. So how does one invest in such a climate? Oh boy, isn't that the $1,000,000 question? I don't know. Who knows? If one holds off, and the market improves quicker than expected, one misses out on a great opportunity. If the much predicted double dip happens, one could take a bit of a licking if one invests now.

I think a three-pronged strategy is called for. First, be very choosy. Do your due diligence and check out every potential investment carefully. Use professional inspectors to mitigate property risk. Look for multi-unit properties with mixed lease expiry dates to mitgate vacancy risk.

Secondly, if you can afford it, don't put all your eggs in one basket and buy a few properties spread out over a year or two. If the market rises, you didn't entirely miss it. If the market drops, you didn't lose too much.

And finally, really watch your leverage. Keep your debt to a manageable level. Do some worst case scenarios and ensure you don't purchase something that you can't cash flow if the market turns out worse than expected.

There you have it. Current economic conditions are quite a dog's breakfast and I don't profess to be an expert. But I do think that if we are to get the kittens in today's environment, we are going to have to go into the tiger's den. Happy hunting.