Will Your Canadian Property Weather The Economic Storm?

Can Your Canadian Real Estate Weather The Global Financial Storm?

Here’s how to analyze how your property will fare

By Don R. Campbell

Merrill Lynch, and now Macleans, have recently come out with predictions of a national real estate calamity. Canadian Real Estate Association and Royal Lepage paint a much sunnier picture. The truth is Canadian investors and homeowners know that the truth lies somewhere between the chick-littles saying that the sky is falling and the pollyannas telling us that this correction is just a blip.

To uncover the truth in this storm of mis-information, it is important to go back to the basics, the facts and figures that actually drive a real estate market either up or down. These basics have held true through decades of up & down markets and those who focus on them when making their decisions will reduce their risk and increase their returns. Here’s how to analyze your property’s exposure to the financial storm buffeting real estate worldwide.

First, it’s vital to remember that property markets are not national; they are regional and local, and even vary widely from neighbourhood to neighbourhood in the same city. Looking at national numbers and coming up with an average is like putting your head in an oven and your feet in a freezer, and saying on average that the temperature is fine. There will always be some hot real estate markets and others that will be cold, but national and provincial figures are much too generalized to be used by Canadian homeowners and investors to make fundamentally sound decisions on their most important asset. So, focus on your target neighbourhood numbers, rather than national or provincial headline figures.

The road to good decisions is via research, followed up with careful analysis. The twelve questions listed below will help you decide if your local area and personal property is poised to go up, stay flat or collapse. Each of these factors can affect real estate prices in any direction, and each is an important component in determining which way real estate values will be going. Overall, to dramatically reduce your risk, ask and analyze these key questions for your target town or neighbouhood. The more “yes” answers you get, the better the market will perform.

1. Is the area’s average income increasing faster than the provincial average?
2. Is the area’s population growing faster than the provincial average?
3. Is the area creating jobs faster than the provincial average?
4. Does the area have more than one major employer?
5. Is real estate booming in the surrounding region more than where you’re looking?
6. Will the property values benefit from a major new development nearby?
7. Has the local and provincial political leadership created a “growth atmosphere”?
8. Is the region’s economic development office helpful and pro-active?
9. Is the neighbourhood located in an area of renewal or gentrification?
10. Is there a major transportation improvement occurring nearby?
11. Is the area attractive to “baby boomers”?
12. Is there a short-term perceived problem (negative stories, short-term layoffs) that will disappear?


Each of these questions, and where to get the answers for your region, is discussed in great detail in the book Real Estate Investing in Canada (version 2).

It is important to remember that current real estate market conditions don’t tell us what the market will look like in the future, it is a direct reflection of what has occurred in the past. Only by addressing the above economic fundamentals can help in making projections of long-term values.

And, in fact, there are thirteen major influences on the long-term value of property. Underlying the local analysis above of your property market is the thirteenth factor: the positive outlook for Canada generally. Our banking system has been rated the most stable of any in the world by the I.M.F., our debt load is one of the smallest of any population in the major world economies, our governments paid down debt during the good times so we are prepared for these next 18 months of economic turmoil and the majority of the major economist around the world are point to Canada as the country that will play a leading role in the recovery.

While the world is undergoing significant economic and financial turbulence, Canada is well positioned to provide other countries with what they need over the coming decade, even during an economic slowdown. These factors are called the three “Fs” of existence: food, fuel and fertilizer.

No matter what the economy is doing, the world needs these commodities. Even with a slowing or recessionary economy, the world will continue to consume these staples, then as the recovery begins to hit and the economic stimulous packages have an impact the demand for these staples will increase. As a stable democracy, Canada will become the ‘safe and secure’ provider of choice. Therefore, generally speaking, the Canadian economy and real estate is among the best positioned to withstand the economic storms that are buffeting property values in many other countries.

However, we must remember that only by analyzing the above 12 fundamental factors for your specific city or neighbourhood can you can properly evaluate your property’s prospects for withstanding today’s financial and economic storms. It’s also the way to sleep better at night, while the winds of economic turmoil howl outside our homes.

Don R. Campbell is the best-selling author of Real Estate Investing in Canada (now in version2) and President of Canada’s Real Estate Investment Network™. Discover additional detailed real estate research and analysis on the BC market as well as those across the country. Visit www.myREINspace.com and tap into an ever growing community of investors focused on economic fundamentals.

What's Next for the Globe & Canada?

Could it be that people are allowing themselves to be fooled?

YOU Can make more of a difference than the government

The sad part is that the parties know that FEAR makes people make poor decisions - so they are stirring up the fear, making the economic situation WORSE by doing so. No, why would anyone vote for someone who wants to DESTABILIZE a country in time of turmoil.

YES what they used to call global warming and they now call climate change (that way it can be argued either way) is an issue that will affect what is going on in the world. But a system of trading carbon credits, or taxing the big bad corporations (read: employers of the majority of Canadians) isn't going to do much more than provide OPTICS for those proposing such. Everyone was FOR the carbon tax in BC - until it came in and actually added expense to the average consumer (gas, autos, environmental levies) and now the same people who wanted it are saying that the government were crazy to implement it. Do you think the same thing would happen on the national stage - OF COURSE it will. Someone pays the tax at the end of the day - and at the end of ALL lines in an economy are the consumers of the goods (you and I).

Here's an idea, let's start looking at how we can all reduce our consumptions. Turn off those extra lights, turn down the thermostat (or program it it do it for you), turn off the TV (imagine how much energy that would save if we all just shut of the TV for a couple of days a month). Here's another thing to consider - how about if we all just started to PAY ATTENTION to what we eat and where it comes from. Why do we insist on buying specialty apples from some other country when we grow perfectly good ones right there (think how much carbon that would take out of the air). It is NOT just the big bad corporations who create carbon, they create carbon to provide you and I with what we demand... if we didn't demand it there wouldn't be any profit in it and they wouldn't make it. How many miles does YOUR food travel to come to your plate, can YOU make a difference by paying more attention to the distance your food travels ABSOLUTELY! A lot more than more government regulations.

The "GREEN SHIFT" has to come from you and I not some government theory. Consolidate your trips to the store, while there, look at where the product came from (and choose local or closest to you!), read books on "Food Miles" and if you really want to know what's behind the curtain read The Omnivore's Dilemma: (http://www.amazon.ca/Omnivores-Dilemma-Natural-History-Meals/dp/0143038583/ref=sr_1_1?ie=UTF8&s=books&qid=1223667415&sr=1-1) a book that will change your life and change how you think about 'what's behind the curtain' on all of these announcements and why it would be EASY for us to make a difference.

I just wish the public would look around a bit, not buy into horrible rhetoric and boil down to the facts - we need economic stability before we can afford the billions and billions of dollars of programs that these politicians are promising.

By the way, increasing taxes is NOT going to help stimulate the economy - it will slow it down. Does anyone really believe that adding more taxes is actually going to be 'returned to the people' as some of these leaders are spouting. Come on, who are they fooling (sadly more than ever).

Grab October 10th (Friday's) National Post and see the start of an important series on "Fundamentally Speaking" (page A8 in my edition paper) The series begins with don't fall prey to the 'prophets of doom.' They are just trying to manipulate us into making decision based on emotions not facts.

Are You REALLY Taking Responsibility - or Just Telling Yourself You Are...

What Do You Mean There Is NO Magic Pill?

How The Answer To Two Questions Makes Life’s Decision Easy.

As I sat and continued to stare blankly at my computer screen I pondered the ‘right’ decision. I had just received another promotional e-mail about a world class, “too good to be true”, first and last time ever offered, marketing workshop that was being held in San Francisco. (I think this might have been the 3rd time they’ve offered this ‘last time ever’ event).

The workshop was 3 days of intense education with some of the most successful and best marketing minds in North America. These marketing gurus have been recognized for their successes in spearheading the amazing turnarounds of faltering businesses, writing best selling books, hosting the best marketing boot camps, as well as their huge contributions to special charities.

OK there was no question that I’d learn something – but at what cost? Couldn’t I just find the information out myself? My business although relatively successful in its own right was nowhere near where I wanted it to be. I had hit my ceiling of limitations when it came to marketing and growing my business. I was frustrated, yet immediately went into my pattern of ‘self-sufficiency’ I thought “I’d gotten this far on my own knowledge, why do I need this event (even if they were being truthful on what I would learn).”

I knew it was up to me to be the leader for my business for my managers and staff, but frankly I had hit my own glass ceiling.

So, here I was reading the fifth promotional e-mail that I had received after signing up on their marketing website. Everything sounded great, however my brain immediately went to value and math – How could it be worth it? It sounded pretty darn expensive…

…all I had to do was come up with two airplane tickets to San Francisco for one of my key managers and me, pay at least 4 nights of food and accommodations and scratch a check for 7,500.00 for the course itself. (OUCH!) That’s $12,000 for a weekend, come on who are they kidding? That’s a ton of money to take out of the limited marketing budget.

I knew I was going to be absolutely certain that I was making the right decision so I called and asked all the ‘really hard’ questions. I was going to make sure that I was going to get my money’s worth. And… they better not try to sell me stuff that I had to run to the back of the room to buy and spend more money or ‘miss out’ on the opportunity.

The guy I talked to on the phone was great (later I found out that he would be the presenter of the topic ‘Fortune 500 Sales Strategies’ at the workshop) and he systematically answered every question I asked.

The more I talked to him the more comfortable I got in asking the tough questions and by the end of the conversation I gave him my credit card number and I was away to San Francisco with my right hand manager. Hoping that the value was there and was going to leave with knowledge, not a disappointing feeling.

The Lesson Of Two Perspectives

To make a long story short, the workshop for me was in fact as amazing as they had said it would be. I committed to taking meticulous notes, (which I still refer to). I fully engaged in the process of learning, I went there with the full focus of getting as much value out of it I could... I was ACTIVELY making it a win so that even if the event was mediocre I would come out ahead. Six years later I can look back and honestly say it changed how I think and the way I do business.

In fact, by being so engaged and taking responsibility for the value I received I met someone, not a speaker, who gave me an idea that helped add immediate 11% profit to my business’s bottom line. This wasn’t a valuable agenda item in the marketing e-mail it only came to me because I was there being pro-active and creating value for myself.

Interestingly enough it had much less of an impact on my manager, and, even now I will sometimes find myself feeling frustrated with his lack of understanding of what was presented during our time in the workshop. His commitment level was not pre-set before the event, he didn’t have the “I’m going to CREATE value” attitude I brought to the event.

So, when I sit back and analyze that weekend, even today, I see that value is given only to those who take life as an active pursuit, not a passive event. Same event, dramatically different results… the only difference was in attitude going in.

The Big Lesson

The reason for sharing my story is this; as I struggled with my decision prior to buying into the workshop all that I was able to see was the ‘what’, that they were selling. I was looking strictly at the value of the product and services that they told me they would be providing me during the workshop and the subsequent program.

I made it about them as if it was a magic pill they would give me so I would wake up as a richer and more successful business owner.

While questioning potential value is still an essential part of my due diligence, what I have since learned is that I was only really seeing one variable in a multi-sided equation.

What I have discovered since that time is that there are two other very important questions that need to be answered before doing the deal on (in this case) any further education workshops or membership type processes. Whether it’s registering for a marketing workshop or signing up for a gym membership, I believe there is a fundamental shift that must be made in our thought process. And the more ultra-successful people I speak with the more that they say these questions are now second-nature to them.

The first question that you must ask yourself is, ‘Am I worth the investment in myself?’

If I take the course, buy the book, register for the workshop, become a member, gain the knowledge, how will I leverage the investment I am making…’in myself’! What will the return on investment (ROI) in me be?

The business that you are spending your money with is gaining a return on your investment in their product or services. That is their mandate, clearly. They are in business to provide value by offering their product or service or membership at a price that makes sense. If they have been around a long time and have many repeat clients who are willing to provide proof and comment that the product or service gave them value, then the value will be there in one way or another. A little due diligence will tell you whether others are getting value or not. The variable in the equation is you. And that is why this first question is so important… but not as important as the 2nd one.

The second question is: “Can you TRUST yourself to follow through?”

Are you in the game to win, or are you in the game hoping that something good just shows up in your life, with no effort. You have done your due diligence on potential value, now what are you going to do with the tools you purchase (the tools of education, insight, resources etc.) How are you going to capitalize on your investment in you!?!

This second and much tougher thought process is the one that I believe that the majority of people never really ask themselves. And, even if they do ask it, there may be a tendency to fool oneself. Some people outright lie to themselves.

The question is simple; the answer however is usually not; to ensure that you capitalize on the investment you are making… in your self? It’s just not about the workshop, the membership to the club, or the expensive CD’s. It’s about you and what YOU honestly and truthfully want out of the game of life.

Seminar Junkie or Action Taker

Whole seminar industries are built around the knowledge that the majority of people lie to themselves when answering the key 2nd question. They know that most people will say “All Right, this is the time I am breaking my patterns. I‘m going to follow through.” This is how come after all of these years, that the same pattern of “I’ll teach you a little bit, but you have to spend thousands of dollars on follow-up course to know the real truths” seminars continue to work. There is no REAL follow-up required other than going and signing up to the next level.

It is designed this way because it artificially makes you feel as if you are moving forward and taking action. You told yourself that this time you were going to ‘follow-through’ and they gave you an easy, no work way to do that… sign-up to the next ‘thing.’

Sadly it is all based around people not TRUSTING themselves to take the knowledge that they’ve learned, the benefits that the membership offers, or the guidance that the books and cd’s offer , and capitalize on it.

Value is There When You Play Full On

As entrepreneurs, business owners, investors, we put tremendous pressure on ourselves to succeed. At the same time we often look outside ourselves and create excuses to blame someone or something for our own shortcomings, which stops us from having the success we say we are committed to achieving.

Next time you are faced with an opportunity to attend a workshop, become a member, buy the program; remember to ask the two other questions;

#1 Am I worth the investment in me?

#2 Do I trust myself to follow through and capitalize on my investment?

If the answer to either of these questions is no, then it becomes very clear that you’re not ready for the next level of growth and that’s OK... just know you’re not ready. And when you are, the choice will get very clear.

And when you are truly honest with yourself and you play full on creating value no matter what the situation, that’s when you know that real success, and all that entails is right in front of you.

I encourage you to take full responsibility, grab control.

Do's and Don'ts of Successful Real Estate Investors

Do's and Don't of Successful Real Estate Investors

Recently I was asked for some do's and don'ts to being a successful real estate investor for a radio interview and it was an interesting exercise to grab all of these thoughts together.

I thought I'd share these with you and ask that you add your own from your personal experience:

Do's

#1 Build a strong team that supports your long term vision. All of whom should have extensive experience with real estate investors. These include: accountant, corporate lawyer, real estate lawyer, mortgage broker, realtor(s), research source, fellow investors.

#2 Eliminate 'Day Trade' mentality with real estate. Stock markets can move substantially on a day to day basis and because of this many investors watch their stocks every day. With real estate, there is no get rich quick... it is a long term process that is driven by long term economics. Fluctuations will always occur in the market.

#3 Study the economics that support your region - rather than national 'averages.' Become a specialist in one or two geographic areas. The smaller your niche the more apt you will be to be successful. It will be easier for you to stay focused on what matters to YOUR bottom line.

#4 Focus on positive cash-flow - no matter what the market conditions positive cash flow is important and makes your life easier and allows you to get closer to your Personal Belize.

#5 Don't be afraid to ask anything of anyone. Learn from those more successful (or more experienced) than you. If they are too busy to help, ask someone else. There are no bad questions and definitely no reason to play the loan wolf trying to solve problems on your own.

Don'ts

#1 Don't allow yourself to get too high when you hit a home run or too low when you make a mistake. This also goes for market conditions, if the market is screaming hot, don't get caught up in it and when it comes back to normal don't talk yourself into being too low. It is what it is and as a business owner you can't afford the emotional roller-coaster.

#2 Don't line-up for a pre-build condo. That is speculation not investing.

#3 Don't buy a property just because it seems cheap - you may quickly find out that it wasn't so cheap after all.

#4 Don't let a property promoter sell you a property without you doing your own due diligence on the area. If you fell pressure to buy, step away! The quick decisions are always the ones that turn into the mistakes.

#5 Don't ignore tax planning in your overall scheme. Speak to a real estate accountant, give them your plan so they can help structure your whole program

#6 Never, Ever buy a piece of real estate based on a 'Tip' always follow your system -don't skip steps they are there to protect you during market fluctuations. Many skip steps in the Quickstart system during hot market times only to find that the steps they skipped are the ones that would have saved them during real market conditions. The steps are there for a reason not just for fun.

visit www.myREINspace.com discussion forums to post your do's and don'ts

Hot Real Estate Topics for Summer BBQ Talk

Hot Real Estate Topics of the Summer of 2008.
A quick overview of the hot topics around the BBQ this Summer.

Suddenly it seems live everyone you meet at a summer BBQ is a real estate expert and they want to share with you all of their extensive knowledge about how the world will end.

If you have seen the Lotto commercial with the two snobby 'rich' people talking about what to where at a BBQ and what to speak about you will understand that the ad is funny because it has a base of truth to it. Their one comment is while at the BBQ with those who haven't won a lotto, "talk about fuel costs because they like that." Well that commercial should now be changed to 'talk about interest rates and property values."

Here is part 1 of an overview of these hot topics and some analysis of each one, I trust you'll find it useful to have some perspective based in the reality of the market.

BBQ Topic #1 Elimination of zero down mortgages and 40 year amortizations.

You would think by some comments I've heard and read from people not really active in the real estate market that this was one of the signs of the apocalypse when in reality the elimination of these came as no surprise at all and not that much of a big deal.

Only a VERY, VERY few investors ever took advantage of these two options during the time they were available, and many banks didn’t even offer the program (despite CMHC's backing). These changes will not have much of an effect on the market. I find it quite entertaining to watch the gyrations and pontifications of people who have never used these products stating that it is the end of the financing world, when in fact it was a brand new product and the market has done very well over the last 100 years without it. It also ensures that the Canadian market won’t set itself up to be like the US and UK. A smart move by all concerned.

Most investors have been taking advantage of the 30 year amortization mortgage to increase cash flow as cash flow is the key in all markets.

BBQ Topic #2 First time in 6 years that average year-over-year Canadian Real Estate price was ‘down’

Anyone investing based on national average prices isn’t really investing, they are guessing and speculating. Sophisticated investors focus on the economics behind a specific market not generalization (like national averages). When prices were up in some areas, they were down in others – hence the reason the overall average is down.

That being said, as we discuss just about every month in REIN – Prices and markets never run on straight lines (although that would make life a lot less exciting ). There will always be fluctuations in the market… it is just that so many beginning investors believe the concept that the markets should skyrocket every year (like they had the last 3 years) and so as soon as the inevitable pause occurs, panic set in. Markets that have gone up at a too fast rate, will always adjust to find their new normal based on the real economics of the region, and then begin once again to build from their new base.

The only way to be a true investor (rather than a speculator) is to study the unbiased economics that we present every month and because we aren’t in the business of selling real estate, and don’t profit whether you buy, sell or hold we can cut through the positive and negative hype and get to the truth. Those who actually understand the importance of research have had an amazingly relaxing summer knowing that their decisions are based on long-term fundamentals – not month to month (or even year-to-year) gyrations of the market. And that is why we have so many members who have been coming out every month for 15+ years!

If you truly want to cut to the reality, take out the goldmine scorecard and re-do the work on your target area. It is designed to protect you in all market conditions. That way if you are feeling fear, following the goldmine scorecard system will make sure you have all the facts (either justifying your fear or eliminating it by just looking at unbiased, non-emotional facts). Another way is to tap into the conference call and interview archives we have in the downloads section of www.myREINspace.com as they will provide you with the facts you need as an investor.

And to get the latest facts, ensure you are on myREINspace.com regularly to read the economic fundamentals. This will help you keep a long term perspective while still keeping a close eye on what is going on today. Then you can make decisions based on reality not emotions.

BBQ Topic #3 What’s next for interest rates, there is talk of rising Bank of Canada interest rates

Financing properties, even for the average home owner is taking more effort than it did over the previous 3 years. So remember not to get mad at your banker or mortgage broker – the goalposts have moved and they are just the messengers of this change.

That being said, as predicted at REIN, the Bank of Canada is between a rock and hard place on interest rates. They need to keep an eye on inflation (and keep a cap on that) by raising interest rates, but at the same time they want to keep them low so the dollar weakens and the Eastern Canada market can revitalize. Raising interest rates may be inevitable (due to food and fuel inflation), but that would have a detrimental effect on the manufacturing based economies in the East.

The good news underlying this situation is that it can only be a gradual increase when they do it, and will provide investors lots of time to lock-in their variable mortgages in the future

Right now, variable rate mortgages are still one of the cheapest and most flexible options available to investors. The gap between variable and fixed can be as much as 1.5% - thus increasing potential cash flow. Recent variable deals that REIN Members have arranged have been prime minus .25% and a more rare prime minus .6%

If you are someone who can’t sleep at night worrying about interest rates increasing, then locking in at a great rate (not the posted rates) is a good option for you, but understand that safety will cost you money on a monthly basis.

BBQ Topic #4 There seems to be inflation on the horizon. What does inflation mean to Real Estate Investors?

During inflationary periods, hard assets perform the best as their values increase along with inflation. Property values ride the inflation wave, rents increase (as many of the rent controlled areas increases are based on the CPI) and as an informed investor you will have chosen your properties in areas where demand is to continue because of job increases and in-migration. The other thing that occurs during times of inflation is that wages increase more rapidly (and there is more labour unrest, strikes etc as more people demand more money to fight inflation).

Inflation also can drive interest rates up, so ensure that you keeping listening at the REIN Workshops as we discuss whether it is time to lock in or not.

The cycles of inflation / deflation / stagflation are somewhat predictable, what has lead to more attention on these items this time around is the 24 hour news and business news that is available to the average consumer (even if they don’t understand what the story means to them.) and #2 the ridiculous lending practices that were being followed in the US and which are coming home to roost right now.

In the next post I’ll be discussing other hot topics of the summer BBQ season:

• The US housing markets,
• The US economy,
• Energy & commodity prices and how they are going to affect certain markets in Canada,
• How a Saudi Arabia investment will affect Canadian real estate demand
• How REIN predicted the massive changes to the automotive industry in Ontario June 5th 2005 and how that past prediction can help you today.
• How market sentiment can affect your property values even when economics don’t change
• And other hot BBQ topics important to investors

Please remember that the Western Canada REIN conference is coming very soon where we will be releasing the BRAND NEW Top 10 Alberta Investment Towns as well as other research revealed for the first time. REIN Members attend FREE as part of their Membership. Here is a link to other details on this annual event.

Eliminate 'Tenants' From Your Life To Change Your Paradigm

Attracting Your Best Customers For Your Business

We are about to change the paradigm of landlord and tenant relationships. The time has come for us, as investors to start to understand the business that we are in is actually a business. No different from any other business out there.

Many people call the purchase and operation of rental real estate an investment and by doing so lump it in with all of the passive investments such as mutual funds. This, in turn, creates the belief that real estate investing is similar to other investments, when it is truly not. Yes CRA rates real estate income as passive income when treating it from a tax perspective, however the truth is that it is far from passive if you want to do it right.

Let’s face reality, by investing in real estate, you are starting up a business, a business that provides a product and service to the community. This business has every component that a successful business has (and most other investments do not): marketing strategies, income, expenses, accounting, financing, management of the day to day operations and balancing of assets and liabilities.

Investment real estate, whether commercial or residential, is also like other businesses in that it will only be successful if you find a way in which to attract quality loyal customers to purchase your product or service and to provide it to them at a price that makes sense to both you and your customer.

That means that the absolute first step in becoming a sophisticated real estate investor is to begin to think of your tenants as clients or customers. Without them you do not have a successful business no matter how hard you work or how many properties you own. Change your thought paradigm from tenant to customer and your marketing and business opportunities will begin to grow exponentially.

This subtle shift opens up a whole new thought process for your business, you can immediately start modeling other successful businesses (in any industry). At one time we have all been customers of businesses that we enjoy and became loyal to, that means we have first hand knowledge about the power of customer loyalty.

You can learn from your experiences by analyzing what they do to keep you as a loyal customer. Pay more attention to why you return to the same store or service provider over and over, then begin to find ways to transfer these strategies into your rental real estate business. For instance:

Is it like they know what you’re thinking?
Does it seem like they intuitively know what you need?
Do they listen to your concerns?
Do they make dealing with them an experience you enjoy?
Do they reward you with loyalty rewards?
Do they do little things to thank you for your loyalty or repeat business?
Do they appreciate your business?

As simple as this thought shift sounds, it truly is one that will change how you look at your business from now on and more importantly help you to stand out and become a landlord that renters WANT to stay with over the long term.

Over the coming weeks we will be going into detail on changing the paradigm of passive investment to active property owner and the strategies that will allow you to simply increase your bottom line and decrease the hassles.

In this thread, why not add your experiences from interactions with companies that you have become loyal to or really enjoyed. Take a shot at writing why your drawn back to them. Then we can start a conversation on how those experiences can be adopted into the rental real estate business

Multi Family Property Investing

The Multi-Family financing market is in continual flux due to the so-called sub-prime crisis. The rules seem to change on a month by month basis.

The following is an article written by Peter Cook, Assistant Vice President of Commercial Lending at First National Financial Corporation. First National is one of Canada’s largest apartment lenders.

It provides insights into the market, choices that need to be made when considering the financing of your Canadian multi-family properties.


THE LOWEST RATE MAY NOT ALWAYS BE THE BEST DEAL

The emergence of the World Wide Web has had an amazing impact on our day to day lives, especially in the way we shop. The convenience and speed of the Internet has turned many industries into a commodity. Searching for the lowest airline tickets and car rental rates, purchasing shares of your favourite stock or finding the lending institution with the lowest home mortgage rates has become a simple process without leaving the comfort of your home computer. The days of obtaining sound advice and great service from your travel agent, stock broker or banker is becoming a thing of the past. The lowest price seems to be the only factor when consumers make major purchases or financial decisions.

When arranging new mortgage financing apartment owners should be careful not to convert the commercial lending industry into a commodity. Selecting a lender based solely on the lowest interest rate quotation may not always be the best deal.

Securitization has increased the number of lending institutions and commercial mortgage products available to the apartment industry. Borrowers have their choice of financial institutions including chartered banks, life insurance companies or a number of mortgaged-backed security lenders. Financing products available include CMHC insured, conduit and conventional mortgages. The method of determining the interest rate, the timing of when your rate may be set, borrowing costs and closing requirements will vary depending on the lender and product you choose. Signing a financing offer and providing a deposit to the lender with the lowest rate may be a costly mistake.

Interest rate quotes provided sixty days prior to the funding date may have little value if you’re not permitted to establish the interest rate until five days before closing. In a rising interest rate market this type of limitation by your lender may cost you several thousand dollars in additional interest. Several lenders will allow the option to set the rate early with or without additional cost. Borrowers should have their lender disclose details of when the interest rate may be established and any additional costs associated with an early rate set.

A clear understanding of how the lender determines the interest rate is also an important factor that varies among institutions. Most commercial mortgages are established based on a spread over Government of Canada bond yields. Bonds yields are published daily in major newspapers or may be found at the Bank of Canada website (bankofcanada.ca.). A number of institutions have moved to setting their rates on a spread over their internal cost of funds. Borrowers may be at a disadvantage as the lender’s cost of funds are not published and do not always fluctuate at the same time as bond yields. Request that your lender provide a quote based on a spread over Government of Canada bond yields only and define which bond they will be using to set the rate. Another convenient option of determining interest rates for smaller commercial mortgages is a spread above or below residential posted mortgage rates.

Borrowers often do not consider the lender’s closing costs when choosing a financial institution. The difference in costs between lenders may be equivalent to adding several basis points to your interest rate quotation.

Third party report costs will vary depending on the appraisal, engineering/structural or environmental companies that are approved by your lender. I’ve had appraisal quotations on the same apartment building range between $2,500 and $5,000. Environmental reports and engineering/structural reports will also vary depending on the engineering firm completing the investigation. The difference between firms may add $2,000 to $3,000 to your borrowing costs.

The lender’s legal fees may vary by several thousand dollars depending on the law firms approved by your lender. We recently had three quotes for legal fees on a $2,000,000 mortgage that ranged between $2,500 and $5,000.

Insurance requirements also differ between lenders. Increased liability coverage or other additions to your policy required by your lender may add several hundred dollars to your annual insurance premium.

Lender’s processing fees may range from 0.10% to 0.50% of the loan amount depending on the institution.

Hiring a mortgage broker to arrange your mortgage financing is often a great idea to help navigate through the lending process and shop for the best rate. However, a half point brokerage fee adds 0.12% (12 basis points) to a five year term and 0.075% (7.5 basis points) to a ten year term mortgage.

Although most lenders will not provide details of future renewal fees and requirements, having a basic idea of their current structure and fees may provide an estimate of costs at maturity.

The following is an example of two quotations on a $2,000,000 mortgage with different interest rates and closing costs. The example proves the lowest rate is not always the best deal.

Lender A Lender B

Loan Amount $2,000,000 $2,000,000
Interest Rate 5.15% 5.0%
Term 5 years 5 years
Amortization 25 years 25 years

Interest Costs – 5 years $482,498 $468,069
Lender’s Processing Fee 2,000 10,000
Appraisal Report 3,000 5,000
Structural Report 1,200 2,500
Environmental Report 1,200 2,000
Legal Fees 2,500 5,000 Additional Insurance Requirements nil 3,750 ($750/yr)

Total Cost of Borrowing $492,398 $496,319

Although the quote from Lender B was 0.15% (15 basis points) lower, the total cost of borrowing over the first five years was $3,921 higher than Lender A. If the borrowing costs were converted into the interest rates over the five year term, the equivalent rates would be 5.27% for Lender A and 5.35% for Lender B.

Also, having a great relationship with a commercial lender is a key to the success of any real estate investor. Borrowers should take into consideration the level of service provided by the lending institution, including location of where their mortgage will be administered, staff response time, industry knowledge and product availability. Saving a few basis points in rate on your mortgage may easily be off set by obtaining the wrong advice or receiving poor customer service.

Borrowers should take their time when arranging new mortgage financing and receive written quotations from more than one lending institution. The financing proposal should not only include the current interest rate but how and when the interest rate is to be determined. Also, request a detailed list of all costs associated with the transaction including estimates for legal fees, third party reports and insurance requirements.

Fortunately, the Internet has yet to turn the commercial lending industry into a commodity. Experienced real estate investors know the importance of a lender in their long-term success and do not always base their financing decisions solely on interest rate. Obtaining a competitive rate along with low costs, sound advice and great customer service is still a necessity and available in our industry.

Peter Cook is the Assistant Vice President of Commercial Lending at First National Financial Corporation. First National is one of Canada’s largest apartment lenders and has over $16,000,000 of mortgages under administration. Peter may be reached at 416-593-2913 or 1-800-465-0039.

This article first appeared in the FRPO’s Fair Exchange magazine and is published with permission from the author Peter Cook.