We’ve been seeing a lot of this in overheated markets like Vancouver and Toronto, but when you start seeing it in small Ontario communities, you know the markets are really stupid.
What is the greater fool theory?
Here’s my definition:
THERE IS ALWAYS SOME GREATER FOOL WHO WILL BUY MY STUPID PROPERTIES FOR MORE THAN I OVERPAID FOR THEM THIS YEAR NEXT YEAR…
It’s a game of musical chairs–the problem? When the music stops, there are a lot of people without chairs to sit on; ie, they’ll lose a ton of money and time if they’re forced to liquidate in a down market because they’re over-extended.
You should NEVER buy property that doesn’t cashflow from day 1 or at least in year 1.
Even break-even is a bad idea. MAKING MONEY is always a good financial strategy. Always.
If your properties cashflow and the market turns down, you can ignore it like Warren Buffett does.
If you are investing in rural or smaller markets look for cap rates of at least 9% and preferably 10% to 12% pa.
Even in big cities, look for 6% to 8%. Anything less can spell trouble if vacancies climb or property values fall.