If talk about a housing correction are keeping you out of the property investment game, here are seven top reasons to overcome those fears. As real estate veteran Paul Kondakos, president of RealtyHub.ca, points out your time to buy an income-producing property may be now.
1. Mortage Rates - Canadian bond yields continue to sit at historic lows, as a result it is not uncommon to secure multi-unit residential financing with interest rates as low as 3 - 4%. While Canada has enjoyed a prolonged period of historically low rates, the window of opportunity is finite as interest rates have no where to go but up. (Window of opportunity - up to 18 months)
2. Vacancy Rates - CMHC has reported that vacancy rates have been trending downward across most major urban centres across Canada with rates sitting as low as 1 to 2% in many areas. In addition, recent changes to mortgage rules in Canada have made it more difficult to qualify and thus will force many to become renters instead of buyers, thus putting even more downward pressure on vacancy rates in the coming months. (Window of opportunity - up to 36 months and beyond)
3. The Spread - This is the difference between your mortgage rate and your cap rate and determines the strength of your cash flow. Even with the market cap compression taking place in the larger urban centers like Toronto and Vancouver, smaller urban centers still offer healthy cap rates in the 7-8% range (you need to do your research or have a great JV partner). Thus, with mortgage rates as low as 3-4% you can achieve a very healthy spread of 3-4%. (Window of opportunity - up to 18 months)
4. Home Equity - With the Canadian real estate market on fire, home owners have enjoyed a significant increase of the equity in their homes. Equity can be unlocked through a mortgage re-finance or HELOC (Homeowner's Equity Line of Credit) which can be used to purchase an income property. The added bonus is that the interest costs of the re-finance or HELOC can be written off on your taxes. (Window of Opportunity - up to 18 months)
5. CMHC Insurance - Placing CMHC insurance on a multi-unit property reduces the mortgage rate by between 1/2% to 1% over the life of the mortgage and represents significant savings. CMHC is approaching its $600 billion government-imposed limit on issuing mortgage default insurance. While the government may raise the limit, this is just another reason to buy now and take advantage of CMHC mortgage insurance while it is readily available. (Window of opportunity - up to 36 and beyond)
6. Time - In real estate investing, time is your best friend as it facilitates appreciation, mortgage paydown and cash flow. The longer you own an income property, the greater the ROI. (Window of Opportunity - becomes smaller the longer you wait)
7. Alternatives - With interest rates at historic lows, bank accounts, savings bonds and any other interest bearing investment vehicle offer little return on your capital. The stock market has shown incredible volatility with neglible returns over the past decade and shows little signs of improving any time soon. REITs offer a respectable return on your investment, but investing directly into the asset itself (income property) offers an even greater return on your investment.
Writer: Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor