- Joined
- Sep 1, 2010
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Hello investors
On Tuesday, the wizards over at Statistics Canada announced Canada's annual inflation rate rose to 3.3% in July, up from 2.8% in June. CIBC senior economist Katherine Judge indicated that the Bank of Canada will raise it's key lending rate by 25 bps in September, the 11th increase in a row, and a stunning 5% in 18 months.
I agree, and predict that rates will rise another 0.75% over the next 24 months, despite nearly everyone I know predicting a recession and a drop in interest rates to 'normal levels' of around 2%.. What do you think?
It has also been widely talked about that any impact on rates in real estate will not be felt for 18 months from the interest rate bump. Hence, we will only feel the true effects of the first rate bump this fall..
So how will this affect real estate investors in the next 24 months? For multifamily in particular, it's going to be a very rough ride. The flight to CMHC, in particular the MLI select program, has largely displaced conventional lenders in the marketplace. CMHC has now made changes under the guise of stopping reno-victions by restricting equity takeouts, and refusing to fund at all unless your debt is with a CMHC 'approved' lender.
This means if you are in the middle of a BRRRR using a bridge loan, a vendor take back, or a private mortgage, you do not have the ability to refinance your debt with CMHC.. period! Even Harbour Mortage, the largest interim bridge lender in Canada, is not on the 'approved' list!
Even worse, CMHC is so backed up with applications you likely won't even fund for 6 to 9 months after application! Investors in multifamily apartment buildings today will either have to pay in cash, or borrow from conventional lenders on a 1, 2, or 5 year term before going to CMHC. So how does this affect deals today?
If you are buying. At the current GOC bond rate of 4.1%, conventional financing will cost around 6.5% to 7% interest, on a 5 year term, 25 year amortization and a 1.3 debt service coverage ratio (net income/payments). This means 5% capitalization rates on apartment buildings are history. You will be able to borrow at a maximum of 75% loan to value, and this most likely means you will need a CAP rate of 8% or so in order for the deal to make sense. Sellers will, however, want last year's prices and will tell you why a 4% CAP on their building makes sense.
If you are selling. Since price is your net operating income divided by CAP rate, you have seen a substantial 'loss' in the short term value of your building. The best strategy (and what I am doing) is to renew short-term (1 to 2 year) mortgages to buy time for a) rents to catch up, and/or b) a better interest-rate environment. Either way, I will achieve my target return on investment in time.
You see, the assets in my portfolio have been stress tested, and I'm currently enjoying raising my rents aggressively across my prairie apartment buildings, and there is likely another $400/unit rent to come in the next 24 months. Selling now would be foolish, hence I'm holding on until things change.
For heavily leveraged single family real estate investors, the situation is even more dire. Many have variable rates with HELOC components that have thrust borderline deals into extreme negative cash flow alligators. In a market trending down where selling may not be an option, what true options do these investors have?
This is the driving force behind the Real Estate Resilience Summit, where myself and 15 other experts will be presenting, and debating, the state of our country and solutions for real estate investors who are putting their asses on the line to provide housing for Canadians. We are like you, facing the same set of challenges and are leveraging all we know and then some for this one of a kind event.
If you haven't already punched your ticket to the virtual event of the year, don't delay as we have LIMITED $25 off tickets available and selling fast!
Punch my ticket to the Real Estate Resilience Summit and be a part of this epic shift.
Cory Sperle
On Tuesday, the wizards over at Statistics Canada announced Canada's annual inflation rate rose to 3.3% in July, up from 2.8% in June. CIBC senior economist Katherine Judge indicated that the Bank of Canada will raise it's key lending rate by 25 bps in September, the 11th increase in a row, and a stunning 5% in 18 months.
I agree, and predict that rates will rise another 0.75% over the next 24 months, despite nearly everyone I know predicting a recession and a drop in interest rates to 'normal levels' of around 2%.. What do you think?
It has also been widely talked about that any impact on rates in real estate will not be felt for 18 months from the interest rate bump. Hence, we will only feel the true effects of the first rate bump this fall..
So how will this affect real estate investors in the next 24 months? For multifamily in particular, it's going to be a very rough ride. The flight to CMHC, in particular the MLI select program, has largely displaced conventional lenders in the marketplace. CMHC has now made changes under the guise of stopping reno-victions by restricting equity takeouts, and refusing to fund at all unless your debt is with a CMHC 'approved' lender.
This means if you are in the middle of a BRRRR using a bridge loan, a vendor take back, or a private mortgage, you do not have the ability to refinance your debt with CMHC.. period! Even Harbour Mortage, the largest interim bridge lender in Canada, is not on the 'approved' list!
Even worse, CMHC is so backed up with applications you likely won't even fund for 6 to 9 months after application! Investors in multifamily apartment buildings today will either have to pay in cash, or borrow from conventional lenders on a 1, 2, or 5 year term before going to CMHC. So how does this affect deals today?
If you are buying. At the current GOC bond rate of 4.1%, conventional financing will cost around 6.5% to 7% interest, on a 5 year term, 25 year amortization and a 1.3 debt service coverage ratio (net income/payments). This means 5% capitalization rates on apartment buildings are history. You will be able to borrow at a maximum of 75% loan to value, and this most likely means you will need a CAP rate of 8% or so in order for the deal to make sense. Sellers will, however, want last year's prices and will tell you why a 4% CAP on their building makes sense.
If you are selling. Since price is your net operating income divided by CAP rate, you have seen a substantial 'loss' in the short term value of your building. The best strategy (and what I am doing) is to renew short-term (1 to 2 year) mortgages to buy time for a) rents to catch up, and/or b) a better interest-rate environment. Either way, I will achieve my target return on investment in time.
You see, the assets in my portfolio have been stress tested, and I'm currently enjoying raising my rents aggressively across my prairie apartment buildings, and there is likely another $400/unit rent to come in the next 24 months. Selling now would be foolish, hence I'm holding on until things change.
For heavily leveraged single family real estate investors, the situation is even more dire. Many have variable rates with HELOC components that have thrust borderline deals into extreme negative cash flow alligators. In a market trending down where selling may not be an option, what true options do these investors have?
This is the driving force behind the Real Estate Resilience Summit, where myself and 15 other experts will be presenting, and debating, the state of our country and solutions for real estate investors who are putting their asses on the line to provide housing for Canadians. We are like you, facing the same set of challenges and are leveraging all we know and then some for this one of a kind event.
If you haven't already punched your ticket to the virtual event of the year, don't delay as we have LIMITED $25 off tickets available and selling fast!
Punch my ticket to the Real Estate Resilience Summit and be a part of this epic shift.
Cory Sperle