Starting a business is rewarding and challenging.  Entrepreneurs put their heart and soul into growing the business and wear multiple hats in running their operations.  Understanding the impact of being self employed on getting a mortgage is not a top priority for entrepreneurs.  There are options that exist for self employed borrowers but not as many options as someone who is full time salaried employee.

There are 3 factors in determining which mortgage option suits the business for self borrower:

1. Length of time being self employed: Being self employed for more than 2 years provides more mortgage options.
2. Amount of downpayment available for mortgage financing: Increased equity into the property reduces lenders’ risk and provides security since the borrower has sweat equity invested into the property.  There are mortgage products with as little as 10% downpayment for buying a home & 85% for refinancing.
3. Credit score: Having a 680 credit score or higher with excellent credit track record is beneficial

Have rates ever been this low? With historic lows for the 5 year and 10 year terms, it is very enticing to take advantage of today’s low interest environment.  The question is whether one should go for 5 or 10 year. Before I answer the question, consider the following:

• US Federal Reserve stated its benchmark rate will remain at or near zero till the end of 2014
• Canadian household debts is at an all time high and will continue to increase since Bank of Canada has to remain close enough to the US Federal Reserve benchmark rate, otherwise the Canadian dollar will skyrocket negatively affecting exports in a sluggish global economy
• Governments around the world have been “stimulating”, printing, money since late 2008 to get the global economies growing again which has lead to high government debts and deficits. Basically, governments are carrying the load until the private sector feels it is their time to start spending again.
• The European zone is in crisis and it is taking on huge amounts of debt by bailing out countries

These factors will eventually lead to inflation, but when will it happen? in 2015? 2016? 2020? No one really knows, but it will happen.  In my opinion, the longer the rates remain superficially low, the more aggressive the increases will be to control inflation.

Homeowners who are taking on or renewing their mortgages in 2012 will renew in 2017 (if they take a 5yr term).  Based on the fact the US Federal Reserve will keep its rate at or near zero and the Bank of Canada will stay relatively close till end of 2014, it is likely aggressive rate increases will commence in 2015 to control inflation and slow down Canadian household debt.

Today’s 10 year fixed mortgage term is at an all time low and provides a good protection from economic and rate shocks.  Consider this: would you take a 5 year fixed at 3.99% in 2017? What’s the risk of a 10 year term one might ask?  The mortgage is portable and assumable and the day after the 5 year anniversary, the penalty is based on 3 month interest NOT interest rate differential. I believe it is a great time to consider a long term safe mortgage strategy.

To run your personal mortgage analysis comparing 5 year term versus 10 year term, please contact me.

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.

Happy Investing!

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

Bank of Montreal’s 2 week promotion of 2.99% 5 year fixed rate has initiated a flood of emails from lenders lowering their interest rates on various mortgage terms.  Yes, the gloves are off since we are back from the holidays and the real estate market is active again.

Can this rate be beat?  The answer is yes if one looks at a longer term.  Here is a scenario I ran for clients today based on a $250,000 mortgage:

Option 1: 10 year fixed 3.89% amortized over 30 years.

Option 2: 2.99% 5 year fixed amortized over 25 years, renew at normal interest environment of 5.75% for 5 years (click here for historical chart).

For both options, the monthly payments are set exactly the same over the 10 year period.  Here is a screen print of the comparison chart:

Summary:

• Option 1 home equity after 10 years: $75,706  (10 year fixed results in additional equity)
• Option 2 home equity after 10 years: $69,576
• Payment shock with option 2: $310 per month when renewing from 2.99% to 5.75%
• With inflation hedge mortgage strategy, additional equity would be obtained with option 1

In conclusion,  mortgage rate is important, however looking at the long term picture and minimizing the cost of homeownership is key.

To discuss how you can be mortgage free sooner, please contact me.

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.

A new year is upon us and we are hearing the same things: “Real estate is overvalued by 10%, 25%…”, “We are due for a correction”…. I agree that real estate prices, and I’ll only speak for Toronto since this is where I live and conduct my business, have appreciated over the last few years, however, one can’t generalize since real estate is very local.  As per my previous posts “2 Factors That Can Affect Your Home Value”, interest rates spike or unemployment spike are the 2 factors that can derail real estate prices. The other factor, is some major global disaster such as a country defaulting on its debt, would affect everyone and everywhere.

There is lots of information on TV, radio, newspaper and on the internet. It can be overwhelming and paralyzing.

I am a firm believer in putting a plan together and taking action.  Since it’s early in the year, it’s a great time to put a financial plan (when you want to be mortgage free or think about buying an investment property to create long term wealth or topping up your RRSPs or consolidating debt to improve cash flow) then take action.  It’s best to look back at year end and be grateful for taking action this year as opposed to wishing had done something 12 months earlier.

Please feel free to contact me to discuss your personal mortgage and financial goals.

As mortgage lending rules have become more strict and real estate prices have appreciated over the last few years, it’s becoming more challenging for some first time home buyers to qualify for a mortgage without a co-signer.

I was approached by a first time home buyer who was interested in buying her first home, a condo in downtown Toronto, and she needed her mother to co-apply in order to qualify for the mortgage.  As a first time home buyer in Ontario, she would qualify for up to $2,000 land transfer tax rebate and up to $3,725 from the City of Toronto depending on her purchase price.  Since her mother, who is a homeowner, is on title, the first time home buyer would have lost 50% of the rebates (since she’s 50% owner in the property).

In order to save the buyer a few thousand dollars, with the lender’s approval, the buyer was registered with 99% interest in the property and her mother with 1% interest.  This setup allowed the first time home buyer to maximize the land transfer rebates available from the Province of Ontario and the City of Toronto.

It’s important to work with a professional who is experienced and understands how to reduce their clients homeownership costs.

To discuss your personal mortgage needs, please contact me.

BAR??  Yes BAR, which stands for buy, add value and refinance.  The toronto real estate market is hot and finding good deals can be a challenge especially when supply is low and there are quite a few interested buyers (I wonder how many are frustrated with their stocks and have decided to invest into real estate).

A property that shows well in a good area will probably go for over asking or very close to asking price.  I have come across listings where the sellers were disappointed for not getting multiple offers which resulted in increasing the listing price the next morning!

It can be frustrating since real estate investment is about numbers and not getting emotionally attached to a property. Working with a realtor who specializes in real estate investment is critical since they are knowledgeable in a local area, know local rents and understand how to add value to a property to create additional income.

Here is an example of a property I came across in Toronto: a 2 bedroom, 2 bathroom semi-detached with a finished basement in the “beach”.  The potential was to separate the main floor from the basement (creating an additional income suite) and adding a powder room w/ laundry on the main floor.  The strategy is to create a second income suite up to code and refinance the property once the renos are complete to recover the renovation costs.  This accomplishes the following:

1. Increase property value
2. Increase rental income (2 incomes versus 1)
3. Create positive cash flow property

BAR (buy, add value & refinance) is one strategy for real estate investors to create long term wealth.  It’s key to have a strong experienced team (realtor, mortgage broker, contractor and other trades) who understand what the objective are and have done work for real estate investors.

To discuss your personal real estate investment portfolio or questions regarding real estate investment, please contact me.

When buying a home with 5% downpayment, the mortgage has to be insured per Government requirement.  The insurance premium is 2.75% (for 25 year amortization) or 2.95% (for 30 year amortization) which equates to the homeowner having 2.25% to 2.05% equity in their home at the day of closing.  In the first few years of homeownership, the majority of the mortgage payment pays for the interest portion and minimal mortgage principal is paid down.  It’s important to keep in mind that if one is planning to move in 5 years (outgrow the 1 bedroom condo), once the costs (realtor fees, legal fees, downpayment requirement for new home & closing costs) are taken into account, the seller might find themselves to be short of funds which will mean they have to stay for a longer period of time in their current home.

It’s important to have a plan to paydown the mortgage principal which fits a person’s long term goals. Afterall, getting a mortgage, setting the payment and forgetting about it is not a sound approach to financial freedom.

To discuss your personal mortgage financing needs, please contact me.

For example cities such as Windsor and Oshawa are reliant on the automotive industry. Since the automotive industry downturn, many jobs that support the auto industry have been lost as well (tool & die, transportation, manufacturing companies, sub suppliers…). As unemployment numbers rise, the supply demand pendulum swings towards more people selling their homes and/or less having the appetite to buy homes since there is a lack of job security which lowers real estate values.  This has been evident in Windsor over the last few years which continues to struggle in creating jobs.

Keep in mind the next time you are looking for a home or an investment property in a city, to take a look at job creation activities such as companies relocating or expanding, infrastructure investment or a city that is diversified in multiple industies. Afterall, having all the city’s eggs in one basket is risky!

To discuss your personal mortgage needs, please contact me.