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Ontario Rent Control- Are you excited about the new rent control announcement?

Should real estate investors be excited about the new Ontario Rent Control Announcement?

On November 15, 2018, an announcement was made by the Progressive Conservative government scrapping rent control. So for anything billed after November 15th, there is no more rent control.

Let’s talk about some history. In the past, we had rent control on units that are built prior to 1991. Then there was no rent control on anything else built after 1991. In 2017, the Liberal government came in and said that with the Fair Housing Plan, there will be rent control across the board. So it doesn’t really matter. After ‘91 or before ‘91, rent control is across the board and that was, you know, the end of the day.

Now this new government came in and they said "Okay, no more rent control on anything that’s built after November 15, 2018.”

This is why I think this is bad.

Number One. It’s not going to encourage more supply.

Number Two. They are throwing a bone to the big pension funds, you know, the REITs, to the big developers and quite frankly, if I was a developer or if I was a REIT or a pension fund, I I look at this, I just think this is sustainable, and here’s why.

The last government came in and they said rent control across the board, you know, capped at 2.5%, which I don’t think worked. This government came in and said no rent control, so it’s too extreme. There has to be, I believe, there needs to be a middle solution where it’s sustainable for real estate investors, whether they are small investors or whether they are big, you know, pension funds, and it has to be workable for the tenants.

So having no rent control where a landlord can come in and say, “I’m going to bump your rent by $500.” I don’t think that’s fair.

On the flip side, having rent control capped at 2.5%, it just doesn’t work either because the reality is property taxes go up. You know, heat, hydro, insurance, mortgage rates, way above 2.5%, and it’s not fair for landlords to eat that cost.

There has to be a middle solution where it’s sustainable.

The other thing to consider is when this government is voted out, and we do change governments from left to right and back and forth in the province. In the future, when this government gets voted out and a more left-leaning government comes in, will they come back in and say, “You know what, no. We’re going to have rent control across the board and forget about whatever this current government announced.”

So it’s uncertainty for developers, for pension funds, or companies that are looking to do purpose-built rentals. At the end of the day, I don’t think it’s a big deal. I think it sounds exciting, but it’s not really sustainable, and it’s really a half solution to the problem.

How to Buy an Investment Property In Toronto When Prices Are So High!

How to Buy an Investment Property In Toronto When Prices Are So High!

Toronto’s real estate market is one of the most expensive markets to invest in across the country, so is it time to bail out and invest in other cities? 

US Government Shutdown & Variable Mortgages

Another self inflicted US crisis is underway; the US Government has shutdown as of October 1, 2013 and overnight 800,000 Americans have lost their jobs.  To put this in perspective, imagine the whole population of Mississauga and Oakville being unemployed overnight!

Canada's Prime Rate Impact

How does this chaos affect Canada's mortgage rates?

  • US Federal Reserve is committed to its bond buying stimulus program till unemployment is at 6.5%.  Currently, unemployment in the US is at 7.3% and with 800,000 Americans losing their jobs and the ripple effect of small businesses that do business with the US Government, the unemployment rate will increase if the shutdown is prolonged hence would force the US Federal Reserve to maintain its stimulus program and ultra low benchmark rate (prime rate)
  • Bank of Canada's second in command, Tiff Macklem, said this week the Bank of Canada is lowering its outlook for Canadian GDP for this year and 2014
  • August's core inflation was at 1.3%, well below Bank of Canada's target of 2%
  • Bank of Canada's benchmark rate cannot deviate far off US Federal Reserve benchmark rate since it would result in a higher Canadian dollar which negatively affects exports, i.e, bad for the economy

With the prospect of the benchmark rate (prime rate) holding steady for one to two years, the case for variable mortgages is stronger today.  There are two catches however:

  1. Applicant has to qualify based on the posted 5 year rate, which is at 5.34% today.
  2. If US Government defaults mid October, we all remember what happened in 2008 when the financial market seized and costs of borrowing spiked since no one was willing to lend money (supply of money disappeared overnight), cost of borrowing would increase.

If you are looking for professional mortgage advice based on facts, numbers and detailed analysis, please contact Nawar.

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2014 Ontario Rent Increase...The Good, The Bad & The Ugly

Quietly during the dog days of summer, the Ministry of Municipal Affairs and Housing released its allowable rent increase for the period between January 1, 2014 to December 31, 2014.  The rent increase for 2014 is capped at a maximum of 0.8%, yes zero point 8 of a percentage point. Click here for the Ministry of Municipal Affairs and Housing news release.

2014 Ontario Rent Increase: The Good

There are a few exemptions to rent control if one of the following conditions is met:

  1. If you are real estate investor who owns a condo that was built after June 17, 1998, then it is not subject to rent control which means the real estate investor/landlord can increase rent to an amount the market can bare without the tenant moving out.
  2. If the rental unit has not been rented since July 29, 1975. A good example if one decides to convert their basement into a separate rental apartment. Again in this case, the rental unit is exempt from rent control.

2014 Ontario Rent Increase: The Bad

When was the last time property taxes, hydro rates, heating prices, water & sewers and insurance costs all went up by a total of 0.8%? It is important as a real estate investor to have utility costs (heat, hydro, water & sewers) paid for by the tenant.  Having the tenants pay for utilities puts the responsibility on the tenants' shoulders to conserve energy and pay for what they use.

Controlling rental increase at 0.8% reduces the real estate investor's cash flow as expenses rise. No business owner (real estate investor) would be happy with less cash flow from their business venture.

2014 Ontario Rent Increase: The Ugly

One phrase caught my attention in the news release: "This year’s rate will be the second lowest in history". Is this something to be proud of? I will leave that for you to decide.

Keep in mind, if your tenant moves out, you are allowed to increase the rent to what the market can bare. However, if the tenant is staying, an N1 or N2 must be provided with 90 days notice of the rental increase per the Ministry's guidelines.

If you are looking to start investing  in real estate and not sure where to start or an existing real estate investor looking to grow your positive cash flow portfolio, please contact Nawar.

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Will You Qualify For A Mortgage?

For the last 2 months, 5 year fixed mortgage rates have increased from 2.89% to 3.69% and 10 year fixed mortgages from 3.69% to 4.19%.  Historically, a rapid increase in this short period is not typical.  On the other hand, the prime rate which is set by Bank of Canada's benchmark rate has been steady at 3% for 3 years now.  How will these rate movements affect one's ability to qualify for a mortgage?

Fixed Mortgages

The bond market (bond yields) drive fixed mortgage rates.  With better economic news and the US Federal reserve hinting towards slowing down the bond buying program, bond yields have spiked resulting in higher fixed mortgage rates.  Here is an example to show the impact of rising rates on mortgage qualification:

  • Household Income: $100,000
  • Property Tax: $4,000
  • Mortgage Amortization: 30 years*
  • At 2.89%: maximum mortgage $539,653, purchase price $674,566
  • At 3.69%: maximum mortgage is $488,576, purchase price $610,720
  • Reduction of $63,846 in purchase price

*Assume 20% downpayment is available in order to qualify mortgage at 30 year amortization

Variable Mortgages

Although prime rate has not moved in 3 years, the Minister of Finance changed the rules to require all variable mortgages and fixed mortgages of 4 year term or less to qualify using the posted 5 year rate (which has increased to 5.34%).  As fixed mortgage rates increase, the posted 5 year fixed rate increases which makes qualifying for variable mortgages difficult.

Using the same figures as the above example, here are the qualification results:

  • Household Income: $100,000
  • Property Tax: $4,000
  • Mortgage Amortization: 30 years*
  • Variable mortgage at Prime-0.4% qualified at 5.34%: maximum mortgage $403,915, purchase price $504,894

*Assume 20% downpayment is available in order to qualify mortgage at 30 year amortization

Based on the above, one can understand why more Canadians are choosing fixed mortgages over variable mortgages. I don't see how homeowners will qualify for variable mortgages when 5 year posted rate normalizes at 6%-6.5% level.

Real Estate Sales Numbers

As the latest real estate numbers show, Toronto house prices continue to appreciate with strong sales numbers.  This is good and bad for the following reasons:

  1. Consumers feel more confident as their home prices appreciate which leads to further spending and economic stimulus
  2. As consumer spending increases, debt levels increase which is one indicator the government of Canada is focused on slowing down
  3. As home prices continue to increase, it is more difficult to afford homes in Toronto without larger downpayments and/or gifted downpayments
  4. As home prices continue to rise, the government of Canada through OSFI (banks regulator) might introduce additional mortgage rules to slow down the real estate market and consumer debt levels. I would not be surprised to see conventional mortgages maximum amortization reduced to 25 years from 30 years and possibly increasing downpayment requirements to 25% from 20% for conventional mortgages.

Overwhelmed?  Don't worry, work with a knowledgeable mortgage professional to help guide you through the various mortgage qualification land mines.  If you are looking for a trustworthy, knowledgeable and experienced mortgage professional, please contact Nawar.

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How To Qualify For Investment Property Mortgage

The mortgage lending landscape has changed considerably in the last few years and investment properties qualification is more stringent nowadays.  A few years ago, one can qualify for an investment property mortgage with less than 20% downpayment. Nowadays, 20% is the minimum downpayment not to mention the amortization has been reduced to 30 years (Note 35 years amortization is available but at a rate premium).Understanding how investment properties are qualified with various lenders can sometimes be complex, however here is an explanation to help the first time real estate investor what they are up against.  The examples below are based on the following:

  • Purchase price: $625,000 (duplex)
  • Mortgage: $500,000 (80% LTV)
  • Monthly mortgage payment: $2,127 (based on 3.09% amortized over 30 years)
  • Monthly rental income: $3800
  • Monthly property tax: $275

50% Rule

This is the most penalizing rule used by lenders where it only accounts for 50% of the rental income. Based on the above numbers, the net monthly result is a shortfall of $502 (50% * $3800 - $2127 - $275 = -$502). This figure is added to the liability section of the mortgage application hence reducing applicant's qualification amount.

70% Rule

This is more favourable method, where 70% of the rental income is accounted for.  The above example would net in a surplus of $258 which is added to the applicant's income which strengths the mortgage application. At the time of writing this blog post, this method will be scrapped in a few days.

T1 General Line 126

Some lenders allow the applicant to use line 126 in the T1 general for existing investment properties when qualifying for a new property.  Typically, real estate investors maximize capital cost allowance (CCA) depreciation and expense deduction to show a loss.  This might be advantageous from a taxation perspective, however the negative figure on line 126 would be added to the liability section of the mortgage application. Having a positive line 126 figure would strengthen the application since it is added as income (Disclaimer: Please consult a professional accountant to provide tax advice as I am licensed a mortgage broker only).

Rental Surplus/Shortfall

A calculator is used with set figures for vacancy, repairs & maintenance, insurance and management. This is the most favourable method as it nets $638 monthly which is added to the applicant's income.

If a real estate investor is buying a home to for personal occupancy, the above methods are used by lenders in assessing the the applicant's qualification. Qualifying for a mortgage when one owns an investment property can be a daunting task and stressful.  It is important to work with a mortgage professional who is well versed in investment property qualification guidelines to avoid future disappointments. How would one feel if they can't buy their dream family home because they own one or two investment properties?

To avoid disappointment in buying your family home or investment property, please contact Nawar.

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