Well, well, well

This just in!!!....same old same old.

http://www.theglobeandmail.com/report-on-business/economy/interest-rates/bank-of-canada-softens-stand-on-rate-hike/article4630682/

This morning, Mark Carney informed us of what we already know.  Canada's hands are tied when it comes to interet rates.

With the US printing money like it is growing on trees (it might as well be)....and the world economic outlook looking more like doom and gloom each day, is anyone surprised?

The Canadian dollar is hovering at - or above - parity.

The US economy is limping along.

The economy is in the tank over seas.

The bottom line is that everyone is trying to trash their currency to boost their economy.

My only wish?....that I could go back in time and change ALL my mortgages to variable. 

Bump up You Mortgage Financing Without Bank Approval!

Many of us would like to purchase a rental property or two, however with the minimum down payment for an investment property now 20%, investors are stuck with having to come up with a large down payment

For example, you would like to make an offer on a property that is listed for $250,000.  If you pay full price, and want to avoid CMHC insurance, you will need a 20% down payment of $50,000….not exactly chump change.

However, your realtor has informed you that the vendor is motivated and will likely take $230,000.  Great news!!  However, with a 20% down payment, you would need $46,000….really not much of a difference!

What if I said there was a way to pay $230,000 and only put up $30,000 (12%) without paying the CMHC insurance fee?....Here is how to do this:

Offer the vendor full price (that’s right…FULL PRICE), however ask for $20,000 cash back at closing.  You are essentially going to pay the vendor the $230,000 that was expected, without having to outlay the full $50,000

Yes, you will need to initially put up the $50,000 down payment for the offer, but after your $20,000 cash back at closing, you will be left with only $30,000 out of your own pocket.   Now you can either take that $20,000 and put it back into the mortgage or you can keep it and treat it as an ‘extra’ loan at the going bank rate….much lower than a line of credit!

For those visual learners, here is a chart for reference:

	$250,000 offer	$230,000 offer	$250,000 offer with $20,000 cash back
down payment	$50,000	$46,000	$50,000 - $20,000 cash back = $30,000
mortgage amount	$200,000	$184,000	$200,000
Loan-to-Value	80%	80%	13%
CMHC fee	0	0	0

 Thoughts?

 

A Little Trick to Getting a Tentant in Place…..BEFORE Closing!

Although, my latest investment property came with an existing tenant, my student rental property did not.  Additionally, the closing date of the property was Jan 1^st…a tough time to be finding students in any town! 

This is a big fear for many investors….finding that “first tenant”.

How long will the property be vacant?

If it is vacant now, how long has it been that way?

How will I fill the property without owning it?

Luckily, there is a simple answer to improving your chances of renting the property BEFORE the sale even closes!

The simple trick is including a provision in the Agreement of Purchase and Sale which allows for access to the property before closing!  For my student rental, I had a 60 day closing.  This meant that I had access to the property for two whole months to show the property to prospective student tenants!   This little detail allowed my free access whenever I needed to set up a showing (conditional on informing the current owner) and I was able to land a group of co-op students looking for a 4 month term.  To top it off, they renewed for another year after the term was up!

The “conditions” of sale is an under-utilized section of the Agreement in my opinion.  You can put just about anything in here you want as long as the vendor agrees to it!

Does anyone else have any sneaky conditions that they have used in the past?

Where Are Interest Rates ACTUALLY going???

Here is an excerpt from today’s Globe and Mail titled “Canadian Dollar on run to $1.05 as Ben Bernake ‘hits the panic button’ “.

“The loonie is now above $1.03 and expected to go higher still as the U.S. dollar weakens in reponse to the Fed's latest moves.

As The Globe and Mail's Kevin Carmichael reports, Fed chairman Ben Bernanke and his colleagues took aggressive steps to bolster the recovery and deal with America's unemployment crisis.

That included a fresh bond-buying scheme - the latest round of quantitative easing, or QE3 - and a pledge to hold the Fed's benchmark rate at an emergency low through to at least mid-2015.

At the same time, officials of the U.S. central bank cut their projections for economic growth this year, though they took a more optimistic view of 2013.

The U.S. is hobbled by unemployment, with more than 12 million Americans out of work.

Markets shot up yesterday, and the rally continues today.

Senior currency strategist Camilla Sutton of Bank of Nova Scotia believes the Canadian dollar could reach $1.05 next week, and then bounce around in a range of $1.01 to $1.05 over the next few weeks.

Of course that "turns up the pressure" on Canada's exporters, who have already been hurt by the strong currency.

Western Canada, however, is enjoying a run-up in oil prices, while gold producers and investors watch bullion continue to climb.

"Not only do we have QE3, but we have the threat of QE4," Ms. Sutton jokes, referring to Mr. Bernanke's promise to go even further if need be.”

 Most investors would interpret this as meaning Canada will likely follow suit with keeping rates low for the next 2 years.    

Why would this be the case?….I can still hear my professor’s booming voice in my economics class at U of G…..

“What happens when interest rates go up in Canada!!?”……

1.       Foreign investment increases as higher interest rates attract foreign capital.
2.       Value of Cdn Dollar increases further as foreign money pours in.
3.       Cdn exporters are hurt by increased dollar value.

However, Mike Moffatt explains in the video below that this means Canada will likely RAISE interest rates sooner than expected.

http://www.theglobeandmail.com/report-on-business/video/video-economy-lab-how-fed-move-could-mean-earlier-rate-raise-for-canada/article4543345/?from=4544546

My question to Mike would be…..How can you assume that QE3 will have a much better effect than QE1 and QE2??

I don’t pretend to be an economics professor and I certainly don’t know what the Fed is thinking, but I do know one thing…..No one can be 100% accurate in their prediction of the future.

Short term, the Canadian economy is still very fragile and the US is in far worse shape.   To me, raising rates in Canada anytime soon seems unlikely….especially with the US “hitting the panic button”.

Does anyone else have thoughts on this?

The $290 Kitchen Makeover

This past weekend, I had new tenants moving into my basement apartment.

I took the chance to paint, clean and add update some things throughout the space.  It took 3 solid days to whip the place into shape, but it was worth it!!

 

 

Here is the shopping list for a ‘minimalist’ basement kitchen reno:

Stove (kijiji) - $100

Rangehood (Home Depot) - $80 plus $30 installation parts

Handles (Canadian Tire….on sale) - $40

Light fixture (Wal-mart) - $20

Backsplash wallpaper tile (Sears) - $20

Total of $290!  I think the best effect came from the light fixture, backsplash and handles which was only $60!

At the same time, I managed to get some great “staged” pics of the space for my internet postings in the future.  You never know when you are going to have vacancy!!

All the items below were free or “borrowed” for the “staged” pic. 

 

If Real Estate is Not Appreciating, is it Still a Good Investment?

Most of us have “heard a story”, or “know a guy”, who bought a house for $100,000 and sold it for $500,000 just a few short years later.   We don’t know all the details and don’t know how he got to this point, but all we know is that he had some huge capital appreciation.

So the question is….if real estate stops appreciating, is it still a good investment????

I won’t pretend to know the exact answer to this because no one can guarantee any investment…especially one that has so many external factors such as owning your own investment property, but I will try to crunch some numbers for you.

Take, for example, a student rental in Barrie, Ontario.  I will make some assumptions here for argument’s sake:

-          Typical homes near the college are selling in the $225,000 range.   

-          If there are 5 bedrooms, 400 + utilities per room is fairly typical.

Using these numbers, I have put together a pro-forma below.

Purchase price 225,000 Mortgage 180,000 Down payment 45,000 Land transfer tax 1,975 Legal fees, etc 2,000 Total investment 48,975 Mortgage pmt (25 year @ 3.2%) 870 Property tax 225 Insurance 150 Misc 200 Utilities 0 Total cost 1,445 Rent 2,000 Monthly cash flow 555 Yearly cash flow 6,660 Cash on cash return 13.6%

***Cash on cash return is calculated by dividing the yearly cashflow by the total initial investment***

The other thing to note here is that each month, a portion of the principal owing on the property will be paid down.  For this particular case, it would be approximately $300 per month ($3600 per year) on the conservative end.

This brings the yearly return to $10,260 per year.   This brings the yearly return to 21%!!!

Remember…..no appreciation!

Housing going under?

All over the news, you hear about the coming market correction….

“10, 20…even 30% drops are coming”…..Thanks Kevin O’Leary

Today on News Talk 1010 there was a guest speaking about the last time there was a significant correction (late 1980s), the apartment building he was living in had 90% vacancy!......not 90% occupancy…90% vacancy!...Must have been lonely in that building!

His argument was that today’s market, while being slightly overvalued, is not being plagued by high vacancy.  In fact, it is quite the opposite.

Another good point (one I have mentioned before) was made regarding the “generalization” made by the media about the “Canadian” housing market.

The truth is that there is no “Canadian market”….real estate markets are so specific, that one could not possibly generalize them, even within a city!

If I am looking for a condo on King Street in downtown Toronto, would that be different than looking near High Park? Absolutely!

Each city has markets.  Each market has submarkets.  Each submarket has several products (condo, townhouse, detached, semi-detached).  Each product has unique features.    Am I making my point here?

Yes I feel like real estate is WAY overheated in some areas….specifically Vancouver and Toronto… and most notably the condo market.

Do I think the market will crash? No

Would a decline in prices affect other areas? Maybe…but I don’t know how much.

The reality is that almost no one can accurately predict what the housing market will do. 

For someone looking to invest in real estate, my humble advice would be the following:

-          stay away from speculation (pre-construction anything)

-          invest in ‘starter’ homes

-          invest for cash flow, not appreciation (more on this in my next post)

Thoughts? :)