Kevin O'Leary shares his thoughts on the market

You're listening to the real estate talk show with Simon Janini and Erin McCoy on Talk Radio AM 640. Welcome back to the real estate talk show, your source for all things real estate.

Now Simon, we know that for some, real estate is single-handedly the most important investment in people's lives, while for others it can mean big business. To talk about all sides of real estate investing with us today, and to learn more about all of his endeavors, is Kevin O'Leary.

So Kevin, thank you for joining us via phone.

"Thank you very much. You must remember what was your first investment, the one that stands out that you remember."

"My very first investment was actually a home on Shaw Street in Toronto as my first real estate purchase: 110,000. I had no money, and I was able to wrangle a mortgage. I think I probably put 20,000 down on it. And of course, as this story is consistent with many people, others just like it, it ended up being one of the best investments I ever made. It was a time when real estate every year was going up five to seven percent. Of course, I don't think we have that anymore, but that's a wonderful experience and a great memory."

Now maybe you can tell us about your take on the real estate market today.

"I have multiple views on it. Real estate's always 20% of my portfolio. The way I vary the risk is the quality and the cap rates that I'm buying and selling. So today, I probably have my lowest exposure to real estate I've had in probably 20 years. In Canada, I have been divesting, and my thesis is cap rates are going to go up. We have close to historic lows on premium office, for example. My storage facilities? I've sold all of them. You know, those were things I was buying in 11 cap and was able to sell them at just under six. I just don't see a scenario where cap rates go down anymore, because rates, in my opinion, between 2014 and 2017, are going to go up at least 200 basis points. So when that happens, you get a lot of headwind going right into real estate, whether it's commercial, whether it's residential, whether it's industrial. No matter what class it is, it's fighting an uphill battle for capital appreciation."

We get the question all the time: how's the market? How's the market? Don't you also want to differentiate when you're talking about different locations in Canada or residential versus commercial? How do you see that playing out?

"I agree with you. There are so many sub-segments in this market in real estate investment asset class, but I'm trying to address the overall theme for the last 20 years. This includes every asset class of real estate in Canada. We have had a decline in baseline interest rates, and what has fueled this long, fantastic bull market in real estate has been exactly that. Rates have gone down from the 40-year average of 6.2 percent to, for a while, under 2. And that's such a massive percentage decrease. But of course, you're going to get this fantastic run-up in hard assets like real estate. And my point now is it's the reverse: we're now going to go back up to the mean over the next X number of years, back up to 6 on the 10-year government bond. I don't think real estate's going to appreciate materially in the next seven years. I don't think it's going to be the best place to deploy capital. I don't care what sector, I don't care if it's offices in Vancouver, condos in Calgary, or residential homes in Toronto."

And I want to sound like a bear.

"You sound a little doomsday."

"Just a little."

"Kevin, I'm just saying it's going to be flat. I think you can buy other assets that appreciate more with the same risk or less risk profile. That's all. I mean, you know, I've got to call it like it is, and as a result, I have divested dramatically in my real estate holdings in the last two years."

Yeah, I know you're practicing what you're preaching. But let's go south of the border. I mean, we talked a little bit about Canada here but what is your thoughts in terms of south of the border?

"Whole different ball game. Okay, whole different ball game. You see, what we didn't get in Canada was a massive correction in both land itself— we're all land. Yeah, we avoided that, didn't we?"

"We did. And as a result, the opportunity now has moved south of the border. I think you're going to get over the next five years probably on average somewhere between five and seven percent appreciation, and pretty well every asset class in real estate in the US market, it has been so depressed for so long. You know, we're down to five months of inventory and new homes being built. Land values in places like Phoenix that were decimated have flattened and started to turn up. I'm not talking dramatic increases, but it's definitely having gone through a massive correction a much better place to deploy money. If I were a Canadian looking to maintain a 20% allocation to real estate in my portfolio, I would do it all in the U.S. I wouldn't do it in Canada."

You're listening to the real estate talk show right here on AM 640, and we're talking to none other than Kevin O'Leary.

Now, Kevin, we talked about Florida and you know some of the stats we're getting. Now we talk about the US in general. We look at the hottest locations like Florida or Phoenix. We're now seeing 30-day inventories, you know, value increases of 10-15.

"And I agree. I mean, I and it's just a result of the higher volatility in those markets. Miami is a remarkable situation from a really bad low in 2000-2008. In some cases, you've doubled your money already. But these are premium locations, particularly on coastal properties. The inland lot on a golf course has not had that kind of appreciation. I was just looking at some prices in Palm Beach recently; they're up sort of 15% from the bottom. But you can find condos in Miami that have doubled. So, I mean, it's very regional and it depends very much on the property, but the trend there is up; it's not like Canada where the trend is flat to down. The trend there is up."

And I'm also concerned here in our Canadian markets. When we talk condos, there's 86,000 units coming on the market just in the Toronto region the next 30 months. That's a lot of inventory, and I'm not saying that these prices will decline dramatically. It's just that that's another headwind in terms of capital appreciation.

Yeah, you've got to brace for everything that's coming. You're right, you cannot stick your head in the sand and just hope for the best. But you can also analyze different micro markets.

Yeah, any final tips or tactics for our listeners that are considering maybe buying their first investment? What would your recommendation be?

"What they used to do and what they should do now are going to be two different things. And here's my advice: mostly when you, you know, let's say a decade ago when you were buying your first home, you'd go right to the max in terms of what you could afford, and you might buy something that you have to carry, you know, and probably spend 40% of your income supporting the mortgage. I would not do that. I would say look, if I wanted to live in 2,000 square feet, be happy in 1,500. Underbuy is a safer thing to do now, so you're not levering yourself up dramatically. Secondly, I would never buy a floating rate mortgage today; that would be very, very foolish. Definitely fixed rate. You can still get great pricing, sort of around, depending on your credit, three to four percent five-year fixed. That is a phenomenal price given historic rates. You gotta live somewhere, so I understand exactly what you're saying, but I would have a more tempered and conservative approach going into it. I just don't think in Canada we're gonna get material increases in the next five to seven years in terms of the value of these homes."

As you said, everybody needs to have a roof over their head, but I'm going to flip it a little bit because I just left cottage country and you're there right now in the comfort of your home. So let's talk a little bit about cottage country real estate. It's not a necessity; it's certainly not a need; it's a want. So what's your thought on that?

"I don't think cottages are a good investment, to be honest with you. I mean, I love my cottage, don't get me wrong, but it is a negative cash flow cost to me. And so it's almost an expense every year to maintain it. Cottages in Muskoka and around the region have not had any capital appreciation since, you know, the highs of 2007. So what lots of people I know are doing, because they know this is an asset you're only going to use for 60 to 90 days, they're finding the nicest cars on the market to buy and offer to rent it. And so if you do the math, you're better off renting than you are buying. And this is from a guy that owns one. I look at the cottages that are for sale around where I am, and some of them are, you know, breathtaking prices: five, six, seven, eight million dollars. There's been no trades at all in that. No range to very liquid asset class you're asking, as a fiduciary now as an investor. And it is not a good thing to buy. The taxes are crazy in cottage country in Ontario for the services you get. But this is only putting my hat on as an investor now, as someone who loves to sit on the dock with my feet in the water, no better place. But I'm just having this discussion with my wife that she plans even more renovations. I'm saying to myself this is insane; this is an asset that I live in for six weeks that cost me more than my home in Boston or in Toronto. So, and I'm speaking to you as a rational investor."

Yeah, no, absolutely. And we take pride, Simon, in telling it like it is, and certainly we know that that's how you function. But I want to go into your book here. I actually finished reading your "Kevin O'Leary: Cold Hard Truth on Men, Women, and Money." Your book covers a lot of just great tips and a lot of what you've already said, but maybe you can touch more about your book.

"I was very surprised about what happened with men, women, and money, because I was not anticipating a book that sort of examined financial responsibility to be popular. It just shows you how many people are concerned about their futures when it comes to money. We talk about health; we teach our kids about geography and math, and we don't teach them anything about money. So this has become one of my sort of causes now, and I'm working on my third book in exactly the same area. Financial literacy is so important because bad habits regarding money happen at a very young age. It doesn't matter whether you're dealing with someone who's from a wealthy family or middle class or poor. The same attributes are things that should be taught to children because each individual has to fend for themselves in the long run. And that's really what this book is about, is to prepare everybody from a seven-year-old right up to when you're 60 retiring on how to deal with it."

Well hats off to you because it's a great read. So again, for all of our listeners out there, it's Kevin O'Leary's "Cold Hard Truth on Men, Women, and Money." And you know what? You have so much else going on, but we're going to have you back on the show so we can talk about all the other ventures. Does that sound okay?

"I love you guys, I'm happy to do it anytime."

And we love how you tell it like it is. Thank you! Great to have you on the show. We'll have to have you live in studio maybe when the weather changes— wintertime, you know, when it's snowing.

"I'll come to your warm studio."

Very good! Take care! Bye-bye.

Bye!

Well, we do need to take a short break, but when we come back, Erin and I will be answering some audience questions about real estate in the GTA, as well as cottage country. We have time, so you'll want to stick around for that.

And later on in the show, we have Peter Politis, Principal from Graybrook Capital, who'll be joining us here in the studio to discuss investing in real estate developments.

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