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Magazine b e s t
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contents
6 The Choice 8 The Creation 10 Perfect Alignment 12 David vs Goliath 14 The Commandments 16 Contributors
With all investments, there are many different asset types in real estate, but how do you decide which one is the one for you?
With all investments, there are many different asset types in real estate, but how do you decide which one is the one for you?
The creation of equity through real estate is often viewed as buying real estate and hoping that it appreciates. How you go about buying that real estate can help build you even more equity, faster. Writer Tyler Hoffman explains how.
After experiencing the longest and most lucrative rise in real estate values in history, another opportunity presents itself.
When looking to finance your investment real estate, people often turn to a mortgage. However, when we think of mortgage, a bank should never be your first choice.
In the face of recent changes to financing rules, leveraging your investment becomes more difficult than it should. Stephanie Shiu clarifies the changes and the implications that it has on you.
about BOOM Magazine BOOM Magazine is all about property investment. When this magazine was conceived, the market lacked some real content relating directly to property investment. It seemed like just about every realtor could contribute an article about selling your home and it would be in blogs and magazines all over the place. BOOM Magazine was created for the property investor, by the property investor. Each month, you will see contributions from professionals in the market as they share their experience in the field. Within BOOM Magazine, you can expect the very best of our market - whether it relates to property investment, financing and leveraging, or the different asset types, BOOM Magazine will be sure to have it as an editorial. Would you like to contribute to BOOM Magazine? Email editor@bestofourmarket.com and we’ll talk. Would you like to influence the direction of the magazine? Register to subscribe and vote on the polls on what type of articles you would like to see more of.
contributors
Tyler Hoffman
Stephanie Shiu
Tyler Hoffman has been helping families and business owners hit a home run in personal finance since 1999.
Stephanie Shiu is an independently trained and professionally licensed mortgage broker who will provide you with the best advice for your mortgageand financing needs.
A former professional baseball (AA) Umpire, Tyler left his childhood dream to help others achieve more in life financially. Tyler earned his Financial Management Advisor (FMA) designation from the Canadian Securities Institute in 2006 and was the Personal Finance Course Instructor for Vancouver Community College from 2006-2008. In this issue, Tyler has contributed the article “The Creation” which speaks about the creation of equity. www.tylerhoffman.ca
With a Diploma in Urban Land Economics from the University of British Columbia and over four years experience in the Real Estate Industry, she has the knowledge and skills to help you find the right mortgage. Stephanie takes great pride in the customer service she provides and relies on referrals and your repeat business. In this issue, Stephanie has contributed the article “The Commandments” and “David vs Goliath”. www.stephanieshiu.ca
contributors
Jark Krysinski
Patricia Lok
Jark Krysinski is part of the Jark Krysinski & Associates group - a group of professionals working in their capacity as a team of Realtors and Real Estate Assistants.
Patricia recognizes that selling or buying a home is one of the most important decisions you'll make in your life. Your home may be your largest asset; this could be the biggest financial move you've ever made.
With our fluency in English, Chinese, Japanese, German, Persian and Polish (among others) we offer a personalized service that is second to none. With an extensive background in Real Estate Investments, we look at every “house” as not just a place you call “home” but also as a place that will “sell well” when you are ready to move on to the next. In this issue, Jark has contributed the article “The Choice” which speaks about asset types in property investment. www.soldbyjark.com
Her experience in real estate, combined with her outstanding negotiation skills and a thorough knowledge of the local Vancouver real estate market, enables her to offer you the highest caliber of advocacy, guidance and assistance. In this issue, Tyler has contributed the article “Perfect Alignment” which speaks about the opportunity that the baby boomer generation has created. www.patricialok.ca
The Choice By Jark Krysinski
With all investments, there are many different asset types in real estate, but how do you decide which one is the one for you?
Privately owned homes
Privately owned homes are a single-family residence occupying an independently owned piece of land. This type of property is highly valued because of here are no simple answers in real estate, so the amount of space and level of privacy it offers. here is an initial look at the very basics of se- The negative side of this property is the fact that the lecting an investment property. A residential house may remain unoccupied and available for rent investment property is your ticket to making money for a long period of time because of its high value through resale or leasing of the property to residents. and also because of the limited amount of tenants it There are three different kinds of residential proper- can hold. ties including condos, homes and multi-family properties. Each type has its own set of financial require- There is also a bigger chance that the residential ments as well as advantages and disadvantages. investment property can depreciate in value due to
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ties. A condo is mostly valued lower than a privately owned home, all things being relatively equal.
Multi-family properties
These properties have individual houses that are located within a single building. Examples of these are apartments and duplexes. Multifamily housing has the advantage of having different residents so the sources of income are diverse compared to condominiums and privately owned homes. It would be a rare occurrence to have all the units in a multifamily property unoccupied at the same time, which means that the owner is always guaranteed income every month.
negligence from the residents and developments in the city. The property manager also has to provide regular maintenance, which can be costly if the unit has a high vacancy rate.
Condominiums
This type of residential investment property has units that are built in a complex. The condos themselves are independently owned but other parts of the complex like roads, gardens, swimming pools and playgrounds are held in common for all the residences in the complex. Agreements and bylaws are set in place to govern the conduct of the residents and fees are collected to pay for the maintenance.
Selecting the right type
As an investor, you should consider the pros and cons of each type of residential investment property before deciding on the type you would like to invest in. Each of these investments offers a very different type of protection from risk, as well as different commitment levels and income levels. For example, a multi-family property might have a safer cashflow schedule, but a privately owned home may have a higher appreciation rate and could be easier to resell. The problem with all of these types of investment vehicles is that they all perform differently in different markets. Each investment requires a significant amount of research on the market as well to ensure that your investment is based on an educated decision, rather than the hype of what people are saying. Many different markets can be subjected to a lot of hype because of the rise in home values but it is important to balance out how much you are spending to keep up that investment. If it requires a significant monthly out-of-pocket payment, you should reconsider that investment and switch to something that is cashflow positive.
In the end, you do not have to be alone while investWhen condos are well managed, the value of each ing. Consulting a professional is your best move as unit goes up and the opposite is true as well. The they are much more educated in the field than you maintenance of such a property usually tends to be would be, even if you are a seasoned investor. good, due to the joint ownership of the shared facili-
The Creation
The creation of equity through real estate is often viewed as buying real estate and hoping that it appreciates. How do you build it fast?
By Tyler Hoffman
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reating equity is something that anyone can do. Here are some key strategies that will enable you to do so.
of the automatic 25 years that the lender “gives” you. Lenders make the most interest on 25 years so naturally they’ll sell that to you based on the fact that it will give you the lowest payment. Remember, in the first half of your life, we want to create equity.
As you can see in Fig 1., by going from a 25 year amortization to a 20 year amortization you won’t By using a variable rate mortgage you generally will have to come up with that much extra each month pay less interest – historically this has been the case. but you will get more money going towards the prinFor instance, at the time of writing this article, a vari- ciple. For some of you, you might even be able to go able rate mortgage is 3.45% while a 5 year fixed is below 20 years. 4.80% and a 3 year fixed is 4.5% Why pay 1.35% more? On a $250,000 mortgage you would be paying Just by changing your amortization from 25 years to $184 more a month in interest if you went with the 5 20 years (and assuming rates do not change over that year fixed. Another way of looking at this is that over time) you will save $2265.60 a year or $45,312 over the 5 year term you would have paid $11,040 more the length of the mortgage! By doing this you will assuming that the variable rate never changed. begin to create equity in your home that much faster. A very simple way of saving a ton of cash and time is to take an amortization of 15 or 20 years instead
In addition to reducing your mortgage amortization schedule, you should also:
Max out your RRSPs each year and borrow if you have to – take the refund that you’ll be getting and plunk it down on your mortgage balance each year. Most lenders will allow you to pay down 15% of your mortgage balance in the form of a lump sum. If you are earning $40,000 and contributing the maximum $7200 (18%) that means you will be saving roughly $2068 – that’s an extra $2,000 that you slap on your mortgage. Over 5 years, you will have paid down an extra $10,000 dollars. Pay your mortgage weekly or biweekly. By doing this, you will save some inertest costs to you. Just make sure that when you set this up that your lender isn’t just spreading out the usual monthly payment over the entire month – when they do that, you are no further ahead.
Use the same strategies you used when saving for your down payment: get rid of any unnecessary bills that you don’t genuinely need. Lower some of your service plans if you have to, such as your cable bill and internet. At the end of the day, you need to live and have a life, but if you can be disciplined enough to create as much equity in your early years as possible, you open a world of opportunity for yourself to really maximize your real estate. Your goal is to get to a loan-to-value ratio of 60% or better. This means that if your house was worth $200,000 you would want to create 60% equity in it by paying down the mortgage to $120,000 or better! Once you reach this LTV ratio that is where you can begin to look at the next phase in your strategy.
Fig. 1 - Assuming $250,000 Mortgage @ 5%
Amortization 25 Years 20 Years 15 Years
Principle Interest $423.03 $1030.98 $611.83 $1030.98 $939.33 $1030.98
Monthly Payment $1454.01 $1642.81 $1970.31
Difference $188.80 $516.30
The Opportunity By Patricia Lok
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After experiencing the longest and most lucrative rise in real estate values in history, another opportunity presents itself.
If you aren’t ready to make the downsize move yet, it’s still a great time to plan for it. Buy a condo now, ideally one that you’ll want to live in later, but use it as an investment now to help you make the move when you’re ready.
he rise in real estate values was a financial lift that ran with – and was partially fuelled by – the boomers’ most productive earning years. After having enjoyed the longest and most lucrative Why condos? And why now? rise in real estate values in history, another real estate opportunity presents itself. As any financial advisor will tell you, an investment today is better than an investment tomorrow. If you Far from a “perfect storm” the current opportunity doubt that advice, think about this – don’t you wish in the Vancouver area real estate market can be de- you’d bought more real estate 10 years ago? Even scribed as the “perfect alignment”. Think about this: five years ago? Or gold? Or a GIC? Like boomers detached house values are at their highest ever at a themselves, any good investment improves with matime when condo values are lagging, condo selection turity – it’s the time value of investments that counts. is high, mortgage rates are low, rental vacancies are Whether it is compound interest expanding your cash near zero, and our population is still growing. All this account or a growing economy helping your real esis conveniently at the moment when many boomers tate assets increase in value, time is the real driver of are either downsizing or planning for retirement. asset growth. Let’s see how all these factors play together to spell opportunity. In addition to this, mortgage rates are at historical lows, so the carrying costs of a real estate investment Possibly more than any other generation or any other are also relatively low. With Vancouver rental vacanregion, the boomers of Canada have purchased real cy rates in the low single digits, it should be easy to estate. That demand, reinforced by a very strong attract renters to help offset your leveraging costs. economy well-positioned to take advantage of global growth, helped to drive home values steadily up- Why condos? The selection in the condo market is wards. Attracted by Canada’s opportunity, safety, good and the prices are good. A combination of facstability and natural assets, people came from around tors from the Olympic Village to the HST, from trafthe world and created more housing demand, further fic jams to bicycle lanes to a shortage of land, have increasing values. all encouraged developers in Greater Vancouver to build higher density condos instead of spec houses. What this has created is a significant percentage of Fewer houses and more condos lead directly to highCanadian boomers sitting on very large equity in er house prices and lower condo prices. However, the their homes. However, if you’re the typical family in market always corrects, so we shouldn’t expect this this situation, you may be wondering how and when favourable imbalance to last. to take advantage of your equity. Right now, in our perfect alignment, the answer is to buy a condo. If Why else? Condos are real estate, which, generally you are at the leading edge of boomerdom, it may al- safer than stocks, will always have some intrinsic ready be time to downsize. Cash in your home’s eq- value for resale, will be able to generate rental inuity at its peak and buy your retirement home when come if done right, and will always put a roof over prices are soft and selection is high. Pocket the dif- your head if you need it. With a renter helping to ference – or better, invest it in another condo. pay the mortgage down and generally rising property prices are pulling your investment’s value up, you
are getting third-party help to build your personal net worth.
other $400, making your grand total carrying costs $2425 per month.
There’s no free lunch, however. You will need to come up with the down payment, probably from refinancing your primary home, through your Registered Retirement Savings Plan, or through your own personal savings. For a couple who are in their prime earning years, having built significant equity in their home and with expenses dropping now that children have gone on to their own lives, this can be a painless way to access money – money that can then be leveraged with the help of rental income to give you more financial flexibility as retirement approaches.
Current average rent in Vancouver for all apartment types is about $1100. But if you take out all the basement suites and so on, and consider that most condos are in newer concrete buildings and the rents there are higher, a typical condo rental of $1425 is not unreasonable for the apartment in our example. This means that your total net cost per month to purchase a $400,000 asset would be only $1000 per month; your tenants will contribute more to your retirement than you do. Your accountant will likely advise that you can deduct at least a portion of that “loss” from your income taxes, although remember that when you sell the condo you will pay capital gains tax on the net increase in value.
Let’s look at some sample numbers. The benchmark price of a “typical” condo apartment in Greater Vancouver is just over $400,000. That will probably buy you a one bedroom unit in Vancouver West, or a two bedroom in Vancouver East. If you put down 20% (the usual minimum for an investment property) and financed the rest with a 25 year mortgage at current rates (current bank rate for a 5-year term is 5.39% but a mortgage broker should be able to get you one at 3.79%) your monthly payment would be about $1650. Add to that, say, $250 for maintenance fees and $125 for property tax for a total of $2025 outlay per month. If you also finance the 20% down payment from equity in your home, that would add an-
Before making any moves, be sure to talk to an investment advisor, a mortgage broker and an accountant for advice on your specific situation, on market and interest rate trends, and on the best locales to consider. Every situation is different, but every situation has potential. Unlock yours.
David vs Goliath By Stephanie Shiu
When looking to finance your investment real estate, people often turn to a mortgage. However, when we think of mortgage, a bank should never be your first choice.
financial life tied up in your mortgage, it doesn’t always make sense to restrict yourself to a single lendany Canadians still figure that if you need er. a mortgage, you stop by your banker’s office and take the best deal they say they That’s where a mortgage broker comes in. You’re can give you. However, there are many other options hearing about them because it is a fast-growing infor getting a mortgage in Canada. Your bank repre- dustry. Increasingly, savvy homebuyers are demandsents only one lender and the person on the other side ing more information, more choice, and better value of the desk from you is working for that bank – not with their mortgages and they are getting that with for you. In today’s economy, with so much of your mortgage brokers. In Canada over one-quarter of all
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On any given day, a mortgage broker can give you almost instant insight into countless mortgage rates and options. Maybe a lender has just announced a special deal on a mortgage that’s perfectly suited to your needs. Your bank doesn’t carry it and the only way you would learn about it is through a broker. The difference could be worth thousands of dollars to you. Beyond the access to a huge range of lenders, mortgage brokers are there to “go to bat” for you with the lenders. They can weigh the pros and cons of your various options, they know what the lender is looking for, and they’ll negotiate on your behalf. They can help homebuyers – or future homebuyers – polish up their credit rating to ensure they’re eligible for the best possible rates.
mortgages are arranged by mortgage brokers. Most of these mortgage professionals are independent. While they are often part of a brokerage firm, they don’t work for any particular lender – they work for the homebuyer. What many Canadians don’t realize is that there are about 50 different lenders out there – including the major banks, of course – with a large range of different mortgage products and rates. There are mortgages specifically designed for small business owners or for first time homebuyers who are struggling to save up a down payment or top-drawer deals for homebuyers with excellent credit ratings. The point is that an independent mortgage broker has access to a large range of options and they can shop around and compare rates and features to get you the best mortgage deal. Whether you’re buying your first home or your tenth, whether you’re thinking about an investment property, a cottage, a home reno, or a debt-reduction plan, there’s a mortgage for you.
Mortgage brokers work hard to provide service at flexible hours to accommodate your schedule and because they build their business on referrals, you know they’re working hard to do the best possible job for you. One more thing you should know. There is a new, elite breed of broker that has broken away from the pack, a mortgage planner. The mortgage planner actually goes several steps further, taking a holistic look at your financial situation and finding a mortgage solution that can be the centrepiece of a financial plan. The right mortgage, built into a solid financial plan, can save or make you thousands of dollars. These highly-trained, accredited mortgage professionals are the new standard in the mortgage world. They can negotiate a tailor-made mortgage to help you slash debt and build wealth. That is why there has never been a better time to speak with an independent mortgage planner.
The Commandments In the face of recent changes to financing rules, leveraging your investment becomes more difficult than it should. Stephanie Shiu clarifies the changes and the implications that it has on you.
By Stephanie Shiu
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oncern over rising consumer debt has prompted Ottawa to make three changes to Canada’s mortgage rules earlier this year, which included: 1. The maximum amortization period has been reduced to 30 years from 35 for government insured mortgages (i.e. mortgages with high loan-to-value ratios of more than 80%); 2. The maximum amount Canadians can borrow to refinance their mortgages has been reduced to 85% from 90% (just a year ago the government reduced refinancing to 90% from 95%); and, 3. Government insurance backing on home equity lines of credit has been withdrawn. 30 year maximum amortization for high ratio mortgages (down from 35 years) This rule has the largest impact on first time buyers, young families, and people with uneven income. Relative to a shorter amortization period, the 35-year amortization mortgages were very attractive to homebuyers as a way to get into the housing market by allowing them to obtain higher loan amounts or by lowering their monthly payments. For example, a $250,000 five-year mortgage at 4% interest on a 35-year amortization schedule has monthly payments of $1,102. At 30 years, the monthly payment increases to $1,189. This means that some buyers have had to increase their monthly payments or lower their target home purchase price.
Protect at least 15% of your equity.
Refinancing your home to pay down high-interest debt is still a smart strategy to save interest in the long term. However, there are common sense limits to using your home as a piggy bank, of course, and now the new rules dictate that you must protect at least 15 per cent of your equity, up from 10 per cent. Where this could cause a problem is with those who are overextended on highinterest debt. Canadians now have less access to their equity to refi-
nance and consolidate high interest debt into a lower mortgage rate, a strategy used to save thousands in interest and lower monthly payments to ease cash flow. This change also means homeowners will have less access to their equity for investing, renovations, or to fund educational needs.
per cent loan to value, a product option that was not widely used. Secured credit lines will still be available to 80 per cent loan to value.
If you think the new mortgage rules have affected you, call an experienced mortgage broker so that they can assess your financial situation. It’s worth a Home equity lines of credit no longer qualify for professional mortgage analysis to determine which government mortgage insurance option is the most beneficial to you. Ottawa also took action to reduce the increasing use of home equity lines of credit, or HELOCs by withdrawing CMHC insurance on those with less than 20
issue 1
BOOM
Magazine b e s t
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m a r k e t