29 Mar

Why buying a home is not an investment. Well, not that type of investment…

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I spent part of yesterday listening to the rebroadcast of a radio interview with a real estate investor – Lets just call him Mr. OT – who claimed, mid last year, that he was sure that the Vancouver Real Estate market was in a huge bubble and that when the bubble burst, housing values would drop 50% – 80%. He also indicated that he was “short selling” his positions in a specific mortgage lender, in order to gain from market losses. The market losses he suggested, would have been not just bad, but cataclysmic, not just for BC but potentially for the whole country, if he had been correct.

On the opposite side of the studio, taking a much more moderate position, was a fellow Mortgage Professional;  one of the local leaders of our trade and board member for our association. Let’s call him by his superhero name, Derwood Henhouse. I made that name up a while ago and it still amuses me. It’s a combination of a character’s nickname from an ancient TV show and the name of one of my favourite albums.

Anyway, what struck me about Derwood’s opening statements was the passion he has for his client’s best interests. He stated that he had merely come on the show to hopefully stop the one person that might heed Mr. OT’s advice and sell up, waiting on the sidelines for prices to drop and then come back into the market. He wanted to remind listeners that unlike Mr. OT, most of them should consider that it’s their home, not an investment, that they were potentially playing with.

Yes, yes, I know. You have an investment in your home – but have you considered what type of investment it really is? Brokers and Realtors commonly say that people search with their heads but buy with their hearts.

By necessity, we all have a financial stake in our homes, but I think the emotional investment is much more significant.

After all, most of us;

Buy our home with a partner – It becomes a life event just because of that.
Invite a dog or cat to come live with us.
Raise a family there.
Have one special place in the home, that’s ours, the place we think of when we’re away from, and thinking about home.
Hide out there, in times when we are grieving.

Over time, the fabric we weave with all those events becomes the blanket we pull over ourselves when we sleep at night, when we go to the kitchen on a cold morning to make that first cup of coffee or when we’re not feeling well.

During times when we hear people like Mr. Oxygen Thief speak, it can feel like that emotionally invested comfort is being pulled from our shoulders. In those times of doubt, it’s best to remember that the value of your home never changes as long as you are invested in it.

If that doesn’t help, well – Keep calm and call your Mortgage Broker. Helping is our superpower.

JB

 

Want to understand bubbles better, so you can decide for yourself? Go here.

24 Mar

Why Cash Flow Matters In The World of Rental Properties.

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In the world of Commercial Rental Properties, there’s a saying; “Cash flow is king”.

Because the Business that owns the property is errr, in business, it follows that things need to be run at a profit. That means that appreciation in value of the property (the asset) doesn’t factor in to the profitability of the business.

The method of calculating profitability is simple really; deduct real and projected expenses from revenue ( i.e. the rent) and the business is left with positive cash flow ( or profit ). If the cash flow is negative, then the business will try to better manage its costs, increase its revenue or dispose of the asset and try again somewhere else.

Because its a business, decisions are largely made based on the numbers – there’s little emotion involved in the decisions because the business owners realize the risks they are taking on and what their tolerance level is for that risk.

For a long time – because stand alone rental properties could be default insured – lenders who gave you and I mortgages on rental properties, considered all your cash flow personal and rental as part of the ‘business’ and made allowances for the individual owner. This was tacitly approving the idea that asset appreciation ( i.e. increase in property value) was part of the goal.

With the rule changes announced late last year, the government indicated it is no longer prepared to insure stand alone investment properties for individuals. The rationale being, I think, that anything but a self supporting rental was too high a level of risk.

Note that I said “Stand Alone”, the government actually enhanced and clarified their support for insuring properties that you occupy that contain additional rental suites.

Financing for Rental or rather “Investment” Properties is certainly still available though lenders providing uninsured (default insurance) Conventional Mortgage financing but, because the financing is deemed riskier to the lender, rates are higher.

More importantly, rental properties are now subject to similar testing to what is completed in the commercial market. In essence, the property needs at least be self sustaining as a stand alone business. Your broker will likely need to complete a Rental Worksheet similar to the one below in order to assess the viability of your rental financing.

Here’s an example scenario with three different down payments:

 

A couple of things to note from this scenario; a) I used a $400,000 value for the property – a not unreasonable amount for the lower mainland and b) the gross rents have been calculated using an amount of $1900 per month, which is perhaps higher than could be expected for all but a downtown rental suite. Both the rental amount and the property purchase price are perhaps, optimistic.

As you can see from this model, rental properties now require more of an equity commitment from you to make them viable. If you want to play around with your own worksheet, one is available here.

So in the current world, if you’re interested in owning and financing a rental property, there are a couple of challenges that also turn out to be opportunities. In the Japanese business world, challenges or complaints like these are known as Golden Nuggets.

Golden Nugget #1 – The rate is higher, BUT you can offset this cost against your tax obligations.

Golden Nugget #2 – Your own investment is higher BUT the property is immediately profitable or at least self sustaining.

 

As always, if you have any questions or need any help please give me a call.

 

JB

15 Mar

Why They’re Not Really In The Mortgage Business

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Mortgage financing

My other job…

Often, when we talk to you about mortgages, Mortgage Professionals will provide you a set of choices involving banks, credit unions and single service mortgage providers called a “Monoline” and a recommendation.

Many times, if its a good fit, we recommend a Monoline, as your first option.

Its important to recognize the differences between the two, Monoline and Bank, because they are very different businesses and how they approach mortgages can have a very significant impact on you.

Monoline mortgage companies are in the business of providing nothing but competitive mortgages to you, your family and friends. It’s important to stress that they offer competitive mortgage product. As a group, they provide great rates and more importantly, flexible mortgage repayment terms, all in an effort to be competitive.
They want your mortgage business because its their sole business line and they want to do well, both for you and for their investors.

The big banks are not in the mortgage business. They are in the financial services business. Its very important to understand that their focus is not about being competitive in the mortgage business.

“Huh?” I know, it doesn’t seem to make a lot of sense, but let me explain…

When you work at a bank, you hear all the time that the bank doesn’t make any money on its mortgage portfolio. You come to see how true this is when you see the incredible focus that a bank has on minimizing costs, how it’s almost impossible for you to step out of the normal process to help clients with special circumstances.

Because maximizing profit is the true goal of minimizing costs, every bank follows the “Golden Mean”.

In art, the Golden Mean is a strict proportional guideline for creating great art.

For a bank, the Golden Mean of profit is the strict proportion of average products and services per client. Their golden number is that each client has an average of more than of 2.75 products and services. For example, if you have a chequing account, a mortgage and a Visa, you’re profitable for the bank. Move any one of those and you’re not profitable anymore.

The intense focus on profit and managing costs means you pay more for mortgage financing. Not on something as obvious as interest rate, but on the options. Say for example you’re in a fixed rate mortgage and you need to pay out your $350000 mortgage out before the five year term expires. Its not that uncommon, probably two in five of you reading this will do it.

If you were to pay out two years into a five year term, depending on who your dealing with, the penalty can be a little as $1500 or as much as $13000 depending on the lender you choose. Banks typically charge higher penalties because they’re not in the mortgage business – they don’t need to be competitive and also as a way to closely manage costs.

This post and some of the recent articles you’ve seen floating around may lead you to think that your average Canadian Bank is a manifestation of Mr. Robot’s Evil Corp. They’re not; managing costs is what drives profit for them – saving 10 cents means 3 dollars more profit – so even phone to phone contact for them is considered an extra cost.

The most important thing for you to remember is that they’re not really in the mortgage business, that’s why you need to connect with one of us – to understand all your options.

If you want more information on this or mortgage financing in general, please give me a call today.

2 Mar

We work for you and only you.

mortgage finance

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Five best reasons to work with a mortgage broker. Part 2

A Comforting blanket.

We work for you and only you.

Every time you seek credit or investment advice from a financial institution, the person you speak to is in a conflict of interest.

The conflict of interest exists because they are paid by the financial institution to sell you that institution’s products. They’ll take the time to try and find the appropriate product but if it doesn’t quite fit your needs, then you will be the one to compromise, not them.

If you’re shopping for mortgage financing with your bank, you may never be made aware of the conflict because the bank and its mortgage representative are not required to disclose the conflicts to you.

When you engage a mortgage broker, we work for you and only you. Our aim is to provide solid advice, a repayment strategy and ultimately the right mortgage financing. The ‘right’ mortgage financing might mean a five year fixed term mortgage, or it may mean a combination of a variable rate first mortgage and a smaller second mortgage. Its all about what’s right for only you.

Most of us access about 40 to 60 different lenders offering a wide range of mortgage products, one of which will be ideally suited to you.

Because we’re compensated by the lender you choose, we’ll be up front about the nature of that compensation to you.

Really, the service we provide comes down to choice; choosing the right mortgage financing from a range of lenders and products, or having only one choice. You can learn more about your options, here.

I imagine if you’ve gotten this far, you really want to be in control of your finances and be aware of your choices.

If that is the case and you do need help with or want your choices, please contact me.