Downpayment Requirement For Investment Properties

Depending on owner's intentions, there are 2 downpayment requirements for investment properties depending on whether the owner intends to live int the investment property (duplex, triplex, fourplex) or not:

1. 5% downpayment if owner is planning to live in one of the units in the duplex, triplex or fourplex with maximum amortization of 25 years
2. 20% dowpayment if the investment property will not be occupied by the owner and maximum amortization of 30 years

However, it is important to review one's goals over 5-7 years and understand the downpayment requirement if planning to buy additional properties.  The number one challenge for real estate investors is running out of capital (downpayment). It is important to plan ahead and divide the monies accordingly to achieve the long term goals. I have met with too many investors who had the need to restructure their mortgages since the focus was on the next deal and not the long term plan.

To discuss your investment property plans, contact me.

Apple, RIM And Your Mortgage Freedom

June 29th is a special day for the following reasons:

• 5 years ago, Apple's iPhone was launched. It was the birth of Blackberry's nemesis
• Today is the first day after RIM announced major losses, delays in launching Blackberry 10 operating system and 5000 additional layoffs
• It is also the busiest day for lenders in Canada as the highest number of mortgages close today

You might be wondering what's the connection between the above 3 points.  Last year, I was meeting with a few investment banker friends who, at that time, said RIM's stock was a buy since it's price of $16 was undervalued and the company had lots of cash.  Fast forward 9 months, RIM's stock is at $7.4 (June 29, 2012 stock price). It has lost half of its value.  It is important when buying a stock, mutual fund or investment property to buy based on economics: how much revenue is generated (sales of company, rental income a property demands), profits (net profit, cash flow after all expenses are taken into account) and potential appreciation (R&D and innovation for a company, solid area that will experience growth due to jobs, infrastructure or immigration).  Buying (stock or investment property) because someone said it is good to buy is speculation and could result in disaster. Do your own due diligence.

As for the Apple connection, emulating their drive to innovate and improve by continuously reviewing the mortgage, adjusting it and understanding the opportunities leads to financial freedom. Being complacent by getting a mortgage, setting a payment and forgetting about it would be following RIM's path.  There is more to mortgage than rates.

Having a vision (building a portfolio of positive cash flow properties or being mortgage free) and executing a plan would result in financial freedom and not arranging a mortgage on the busiest day for lenders.

To discuss how to achieve mortgage freedom or build your real estate investment portfolio, please contact me.

How To Get Your Renovations On Budget And On Time

Recently I completed a renovation job of a duplex investment property in the upper beach area.  Yes, I was on time and on budget! I have been approached by a few people who wanted to know how did I get a 3 month, $100k renovation job right on budget and on time.  The answer is simple: plan, communicate and trust. Plan As a retired Engineer who spent 10 years as a project manager, I gained valuable skills in managing projects. Initially, when I viewed the property of interest, I brought in my contractor to show him the scope of work I intended to do and my vision for the property once completed.  We sat down and created a timeline with contingency factored in over the 3 month period.  Based on the timeline and required manpower, he was able to complete his quotation.  During the renovation period, I had weekly reviews with my contractor to see where we were per the timeline and if there were any issues that we didn't plan for. An important factor I was always 2-3 weeks ahead in having materials ready to avoid a situation where work would stop since they didn't have tiles or vanities or kitchen....

Communicate I stopped by the property 3-4 times a week in the first month, 2-3 times in the second month and 1-2 time in the last month to communicate with the contractor and subcontractors (HVAC, electrician, plumber...). I also clearly stated to the team what I wanted and how I wanted certain things to save them the time/money of redoing the work.

Trust You might be wondering what does trust have to do with renovations.  In my opinion, it's very important since I trusted my contractors' skills to do an excellent job and I trusted the professionals that were referred to me.  By trusting the contractor and subcontractors, I gave them the space and confidence to do the job without micromanaging and being overbearing.  Imagine you being at work and your boss pops in every half an hour to see what you are doing. I'm sure it would drive you crazy! I choose to treat my team the way I like to be treated.

We did have problems and challenges, we dealt with them and got the job done on time and on budget.

I hope you find this blog post helpful and if you ever need to connect with my trusted team (contractor, electrician, realtor....) or to discuss financing your home/investment property renovations, please contact me.

How To Use A 40 Year Mortgage To Payoff A Mortgage In 20 Years

You might be thinking can I really use a 40 year mortgage to payoff a mortgage in 20 years.  The answer is yes. Here is a real example of a recent client case that I helped structure:  Client has one rental property which he was paying down aggressively by taking all the net cash flow ($400 monthly) and putting it down on the principal.  This might sound like a good idea, however it is inefficient.  Here is why:

• Paying down an investment property aggressively reduces interest portion of mortgage payment which is tax deductible, therefore resulting in higher taxable income
• Net positive cash flow can be used to pay down non tax efficient debt (home mortgage)

The solution for the client was the following:

• Leave the investment property mortgage at its original 40 year amortization (which is still available for conventional mortgages)
• Use the net positive cash flow ($400 per month) to paydown principal residence ($300,000 mortgage amortized over 30 years at 3.29% is reduced to 20 years of amortization saving $62,461 of interest payments)

The cash repositioning helped the client paydown their principal residence, save thousands of interest dollars and be tax efficient.  It is important when choosing a mortgage for your investment property, the right product is selected that will fit into your long term goal.  Please consult with your accountant regarding your taxes.

In conclusion, there is more to mortgages than rates.  If a mortgage product is used properly, mortgage freedom can achieved faster which is the goal of many homeowners.

To discuss your personal mortgage situation, please contact me.

How To Increase Cash Flow In An Investment Property

In a hot Toronto real estate market where sellers are getting what they want (and sometime more), finding investment property opportunities requires a skill and having good team members.  In my search for a duplex or triplex, I focused on the Beach / Upper Beach area where the tenant profile is strong and potential for long term appreciation is in place.  We found a duplex that generated $2,500 monthly income, however it had potential for higher rents once the property was updated. Here is a video shot by my realtor, Andrei Angelkovski (www.BeachInvesting.com), who specializes in investment properties in the Beach area, walking through the property and explaining the work to be done.  I'll be posting updates over time showing the progress and explaining why certain things were done. http://youtu.be/1QUw_tvVwNc

Happy Investing!

To discuss your personal investment property goals and opportunities, please contact me.

Don't Get Hung Up On The Dollars When Investing In Real Estate!

I recently met with a client who wants to invest in real estate. In the initial meeting where I find out about the client's long term goals, desired mortgage freedom date, why they want to invest in real estate and how many properties they plan to acquire, the client stated their criteria is to have $400 or more in cash flow on a monthly basis.Cash flow is key in investing in real estate, however I was perplexed since they only wanted to invest $50k.  Based on my quick calculations (downpayment is 20% therefore total purchase price is $250k and using 8% gross rental income rule, the property would generate $20k annually or $1,667 monthly), it would be very difficult for a property to cash flow 20+% of gross rental income (in this case it's $400/$1,6667 = 23%).

Real estate investors want to maximize cash flow which is a great goal, however, it's important to consider ratios since an investor with $100k capital will generate more cash flow than someone with $50k capital, and an investor with $150k capital will generate more cash flow than someone with $100k capital.

Click here to see a comparison between 2 properties ($240k vs $500k) based on 2 actual investment property listings that I have recently come across illustrating the ratios (CAP rate, DCR, cash on cash...) are very similar to each other although the cash flow is double for $500k property.

Investing in real estate is about cash flow and ratios as well.

To discuss your real estate investment goals, please contact me.

Not Another Referendum!

The word "referendum" was used again this week!

2 Factors That Can Affect Your Home Value

Toronto and GTA's real estate values have increased significantly over the last 10 years.  The prices continue to increase as the global economy struggles to emerge out of the slowdown since late 2008.  There are 2 factors that can negatively affect the housing market in Toronto, GTA as well as Canada: Interest rate and/or unemployment spike.

1/ Interest Rate Spike

For the last 3 years, Canadian homeownerns and real estate investors have enjoyed historically low interest rates which have resulted in record sales and prices.  Interest rates have remained low to stimulate consumer spending and promote GDP growth.  As Canadians reach record debt levels (approximately $1.50 of debt to $1 earned), Canadians are running out of steam for further debt accumulation. Many Canadians have fixed mortgages in the 3.3%-3.8% and variable mortgages at the prime minus level.

In order to save the global economy from a depression, governments around the world took on aggressive stimulus (printing money) since late 2008 which will result in high inflation sometime in the future.  As inflation becomes the primary objective of governments, interest rates will have to rise to control and moderate inflation.  Canada is already experiencing high inflation numbers, however the Bank of Canada is choosing to keep its benchmark rate low due to the uncertainty originating out of Europe.

A spike in interest rates would effect Canadians since mortgages will renew at higher interest rates and unsecured loans would cost more.  Based on August 2011 data, the affordability index in Toronto for 2 storey homes and bungalows is at 61.4% and 51.9% respectively (http://goo.gl/8rK5B). If one assumes that an income earner is taxed at 40%, it means that in order to buy a 2 storey or bungalow in Toronto, 2 incomes are required. Condos are a more affordable option in Toronto at 34.2%.

A spike in interest rates which diminish the ability of many to qualify for a mortgage especially insured since qualification is based on posted rates.  Demand would therefore be reduced since less buyers can qualify for a mortgage.

The main point to take away from this post is to have a plan regarding mortgage/debt paydown and plan to renew ones mortgage at a 6% level.  For more information, click here.

My next post will discuss unemployment spike.

It Feels Like The 2008 Credit Crisis!

Are Mortgage Interest Rates Dropping?

My Commentary On What The Bank Of Canada Said Today

Where Is Prime Rate Going?

Why Fixed Rates Move So Much?

Is That The Best Rate You Have?

In today's competitive mortgage market, there is lots of "lowest interest rate" and "best mortgage rates" advertising in the media. I even saw a jeweler offering mortgages!!  Is the best rate really what's best for one's situation?

Asking for and making a decision strictly on lowest rate is similar to someone walking into a financial planner's office and asking for the lowest MER mutual fund.  Mortgages are investments and need to be chosen based on where the economy is currently, what's expected to happen with interest rates over the next few years (inflation, job creation and global factors), personal and financial situation and borrower's risk tolerance. The fine print of the mortgage such as compounding, prepayment priviliges, increased payments, portability, assumability and how the penalty is calculated are important features to be understood upfront prior to commiting to a mortgage product.  It's unfortunate that homeonwers have been programmed to get the lowest rate, set the payment and not look at the mortgage till renewal time. There are significant opportunities in optimizing the mortgage to reduce the amortization and build significant equity in a shorter period of time if the mortgage is managed properly by a professional.

The next time you are in the market for a mortgage whether you are buying a home or an investment property, renewing, or refinancing, please email me to send you a checklist of factors to consider in choosing what's right for you and your family.

Please contact me should you have any questions regarding your mortgage.

What Drives Variable Rate Mortgages?

My previous blog post discussed factors driving fixed rate mortgages.  What about variable rate mortgages? Variable mortgages are driven by prime rate (which is based on Bank of Canada's benchmark rate) and the discount a lender would provide. For example, 5 year variable mortgage at prime less 0.75%.

The benchmark rate, is set by the Bank of Canada on eight set dates annually.  Bank of Canada targets inflation around the 2% level, if inflation is higher then the benchmark rate is increased to control inflation and in cases where there is low inflation (or deflation), the benchmark rate is lowered to stimulate consumer spending and business investments due to the low cost of borrowing.

What does the dollar have to do with prime rate?

Canada's benchmark rate cannot be at a much higher level than the US benchmark rate since a substantial difference between the two would drive foreign investors to buy the Canadian dollar and appreciate its value.  A stronger Canadian dollar would reduce Canada's competitiveness by making Canadian products more expensive therefore reducing exports and slowing economic growth.  The US economy has and will continue to experience tough and slow economic recovery. The US Federal Reserve will keep its benchmark rate low to stimulate the economy, create jobs, promote consumer spending and increase housing demand through low interest rate environment.  With the upcoming US elections in 2012, the US will keep rates low to aid re-electing the current president (historic data shows in re-election years US interest rates are kept low).  This low US interest rate environment will exert more pressure on the Bank of Canada not to increase the Canadian benchmark rate aggressively till the end of 2012 which makes variable interest rates favourable. Having said that, the Bank of Canada will have to increase the benchmark rate to control inflation and high consumer debt levels, however it will be gradual. My prediction is 0.5% increase for this year.

For your personal mortgage review, please contact me.

What Drives Fixed Rate Mortgages?

Since January of this year, fixed rate mortgages have been volatile (see chart below) with many increases followed by decreases whereas prime rate (which affects variable mortgages) has been stable over the same period of time. What drives fixed interest rates to be this volatile?

Fixed rates are driven by the bond market.  Bond yields decrease with bad news such as the recent Japanese natural disaster and the Libyan crisis. These events which occured in mid March resulted in lower fixed rates for a short period of time. On the other hand, news such as higher inflation and positive job creation drive up bond yields since investors move their money into the stock market and for bonds to be attractive for investors, they would have to provide a higher yield (ie. fixed rates would increase).

Good economic news with respect to job creation, lower number of Canadians filing for unemployment insurance, US economoy creating jobs and trimming its deficit, result in increased bond yields and therefore higher fixed rates.

In my opinion, the number one risk over the next few years as the global economy recovers is inflation. Governments spent billions of dollars to stimulate the economy by providing liquidity into the market which has to be paid for by the taxpayers eventually.  High inflation would drive up fixed rates accordingly.

To review your personal mortgage situation, please contact me.

Cash flow Or Capital Appreciation?

When buying an investment/rental property, sometimes the question is: Should I buy the property to generate cash flow on a monthly basis or do I sacrifice cash flow (break even) and hope for capital appreciation over the long term?

In today's downtown Toronto condo market, it is difficult to generate positive cash flow without a significant downpayment.  Buying an investment/rental property is a buying a business. If you were presented with an opportunity to buy a business which requires 30-40% capital investment that breaks even, would you buy it?  Being profitable on a monthly basis and having time on your side for capital appreciation is a win-win investment strategy. The stronger the cash flow of the property, the easier it is to sell the property in future when you decide to do so.

Here is an idea: Having 2 rental properties that generate $400 each on a monthly basis will net $800.  If you were to put the $800 on your personal mortgage (which is not tax deductible), your mortgage amortization will significantly be reduced paying it off faster thus providing access to your home equity for further investments.

In conclusion, it is important to surround yourself with a team of professionals who are investment savy (mortgage broker, real estate agent, accountant and insurance broker) who understand your long term goals and can help you be on the right track.

For detailed cash flow, cash on cash return, return on investment, cap rate and capital appreciation analysis for your rental properties portfolio, please contact me.