BOOM Magazine Issue 10 by Boom Magazine

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Going Long The rules are changing and with them the stigma surrounding long-term fixed-rate mortgages. Because 10-year rates are at an all time low, longer terms are starting to look like a better option than ever. Find out what a switch could add to your current portfolio.

Should You Retire with a Mortgage? Thanks to record low mortgage rates, paying off your mortgage before starting retirement is no longer a requirement. We take a look at several factors that can help your decision as to whether or not you need to be mortgage free prior to becoming a retiree.

Acquiring Financing in a Tough Market

There are no easy loans to get from banks nowadays. Investors have to be ready to think outside the box to finance projects and be ready for the road checks put in place to make sure they are up to par. Canâ&#x20AC;&#x2122;t get a bank to give you a loan? We have some possible solutions.

Finding Great Real Estate Deals Sometimes a great deal in the making is the last place you would look. Guest writer Julie Broad provides a checklist for real estate investors to help ensure the next project you take part in is successful. Remember, even a fixer-upper can end up being profitable.

A Guide to Investing in Canadian Cities

It may be one country, but ask any Canadian and you will find out that every city is different. BOOM takes a look at the hottest up-and-coming markets for real estate investors looking at Canada as well as which cities are a bust.

Investment Toolbox: The CAP Rate

For investors looking at multi-unit residential property, the CAP rate is a useful tool to estimate how profitable the property will be. This issue provides a step-by-step walkthrough of how a CAP Rate works and how you can use it to your own advantage.

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 weâ&#x20AC;&#x2122;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 Julie Broad Julie Broad has been investing in residential real estate for over a decade across Canada. Sheâ&#x20AC;&#x2122;s a featured keynote speaker and an award winning real estate blogger with a passion for helping others transform their financial future with real estate investing. Connect with her at: www.revnyou.com

Sylvia Sigurdson For over 14 years, Sylvia has been assisting people with their mortgage needs, originally as a licensed realtor and now as an Accredited Mortgage Professional (AMP) at Mortgage Depot in Victoria, BC since 2004. She has specialized in helping her clients acquire investment real estate as part of a wealthbuilding strategy and excels at structuring mortgages with the greatest tax advantage in mind. www.mortgagecanada.com

Julie Jones Julie Jones is an independent accredited mortgage professional (AMP), whoâ&#x20AC;&#x2122;s focus is on providing the best mortgage option for clients financing needs. With a BA from Queens University, and extensive experience working in the real estate industry, she is able to offer the best options when it comes to your financing needs. Knowing that your time is of upmost importance, she only brings the best options forward. Customer service is top priority. www.bcmortgageinfo.com/julie

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Going Long By Sylvia Sigurdson With all of the recent changes in lending rules, and in light of the upcoming modifications being implemented by The Office of Superintendent of Financial Institutions of Canada (OSFI), for the first time in many, many years, investors are considering locking into long-term fixed-rate mortgages. And with 10-year rates at an all-time low, it just makes good sense.

This became especially relevant when the rules changed after 2008. Many purchasers who bought a home with ‘No Money Down/40-Year Amortization’ didn’t have many options when their mortgage came up for renewal, as the down payment regulations had changed from zero down to 5%, and the amortization periods reduced from 40 years to 30. But staying with their original lender was always available to them, as they would simply allow the amortization After the 2008 credit crisis, many real estate investors to continue as scheduled with the interest rates availhad a hard time qualifying to purchase more prop- able at renewal. erty using the rules they were used to. They even had difficulty refinancing or renewing the terms of their If some form of requalifying becomes mandatory, current portfolio. ‘Stated Income’ for self-employed then there’s even more reason to lock your mortborrowers almost disappeared over night. Rental off- gage into a 10-year term. With fixed rates lower than sets were replaced with rental addbacks (the former ever before, it makes sense when looking at it from counting as much as 100% of the rent towards the a numbers perspective. For every $10,000 of your mortgage payment; the latter effectively using only mortgage balance owing, the difference could be less as little as 20%). than $4/month. For example, if you have mortgages totaling $750,000, simply multiply 750 x $4 = $300/ The next adjustment in mortgage rate thinking started month more than going with a current 5-year fixed to take place last fall when the discount on a variable rate. Not a lot of money for five more years of peace rate mortgage decreased significantly from as much of mind. as Prime - .85% to as little as Prime, or even Prime + .20%. Because five-year money was available for Many of you may still have your mortgage locked almost the same rate, it stopped making sense to take into rates over 4% and 5%. Ask your lender what the the risk of going variable as the likelihood of Prime payout penalty would be and find out if it makes sense decreasing any further was so remote, and the pos- to pay it out early. With today’s all-time low interest sibility of it increasing over the next five years was, rates, your mortgage specialist can run your numbers and still is, high. to see if it makes sense to switch into a longer term now instead of waiting for your renewal date. The latest argument to be made is related to the tightening of mortgage lending rules. With the recent an- Because of the impending mortgage changes coupled nouncement from OSFI, one of the possible changes with current record-low rates, it would be prudent will be to have to requalify for your mortgage at to review your entire mortgage portfolio, including renewal time. Under the present guidelines, as long the one on your personal residence. It could be an as you’ve been making your mortgage payments as ideal opportunity to fine-tune your current situation agreed, there’s currently no review process required for potential long-term security and savings, while with your lender when your mortgage comes up for simultaneously avoiding many of the potential chalrenewal. lenges in Canada’s mortgage future.

Should you Retire

Thanks to record low mortgage rates, pay ment is no longer a requirement. We take decision as to whether or not you need to b

e with a Mortgage?

ying off your mortgage before starting retirea look at several factors that can help your be mortgage free prior to becoming a retiree.

Should You Retire with a Mortgage? By Mimi Chiahemen Conventional wisdom says: pay off the house before you retire. Senior finance representatives, like Patricia Lovett-Reid (senior vice-president, TD Waterhouse) certainly tout as much. She warns that, “people who fail to pay off their mortgages by the time they hit their golden years are risking their dream of having a secure and fulfilling retirement,” Older families aggressively rid themselves of mortgages between 2007 and 2009, according to data from the Canadian Realtors Association (CREA). Some 45.5 percent of Canadian households headed by people between 65 and 74 had mortgages in 2007; by 2009, only 41.6 percent of the same households held home loans. Only 15.1 percent of households headed by people over 75 (in 2007) still had mortgages in 2009.

Here are some ways to approach that calculation: – Holding a long-term fixed-rate mortgage is like selling a bond. It helps you hedge against inflation and interest rate increases. It changes your investment asset allocation, says David Hultstrom, a Woodstock, Georgia, financial adviser. So, if you have a retirement portfolio with $600,000 in stocks and $400,000 in bonds, and you have a $200,000 mortgage, your asset mix is really 75 percent stocks/25 percent bonds. Paying off the mortgage, without changing the asset allocation on your investments, would make your overall approach more conservative.

– What does your future cash flow look like? A traditional fixed-rate mortgage is far cheaper than a reHowever, a 2011 housing study by the Royal Bank of verse mortgage. If you think you are going to want to Canada found that 57 percent of Canadians surveyed live on some of your home equity in the early years expected that would still be paying off their mort- of your retirement, you are better off stretching out gage debt after they turned 55, and nearly one-third the mortgage. Once it is paid off, you would be faced said they would still be carrying that debt past the with more expensive alternatives, such as home eqage of 65. uity lines and reverse mortgages, if you then decided you wanted to take money out. The data is certainly complex and could cover a lot of different situations: mortgages being paid down – What else would you do with the money? If you as people age, borrowers losing homes during the keep your $200,000 mortgage and plow $200,000 U.S. housing crisis, and more. But it does point to into stocks, it is no different than investing on mara disinclination by retirement-age people to hold gin, financial adviser Michael Kitces argued in an mortgages. The question is: Are they – and the con- article, “Housing: A Potentially Active Player in cliventional wisdom – right? The answer: maybe not. ent Wealth Strategies” published in the April issue With mortgage rates still skirting historic lows, the of the Journal of Financial Planning. This is some“pay-it-off-before-retirement” argument may be less thing that most investors would be reluctant to do. compelling. It may even make more sense to keep But many other advisers quoted in the same piece that mortgage as long as you possibly can. Pre-re- said they would tell their clients to do just that: Over tirees who are unsure how to handle their mortgages decades, stocks tend to return roughly 10 percent anshould consider a lot of factors, including what else nually, according to Ibbotson Associates data. Why they might do with the money and how long they pull money from the market to pay off a fixed-rate think they will stay in their house. mortgage charging less than half that in interest?

â&#x20AC;&#x201C; How well do you sleep at night? If you are a safety player who worries about paying bills and you keep large sums of money in the bank, you may be better off paying off your mortgage with those bank account proceeds. If you are getting 0.8 percent on your bank savings and paying 4 percent on your mortgage, it will be like bumping up your return by an additional 3.2 percentage points. â&#x20AC;&#x201C; How long will you stay? If you expect to sell your home and move within five years or so, the mortgage payoff decision matters less. You will pay it off anyway when you sell your home, so letting it ride until then could offer you greater flexibility without too much cost.

Acquiring

Financing in a Tough Market

Acquiring Financing in a Tough Market By Dean Brookstone

The current Canadian financial market has altered the real estate landscape. There is an increased access to credit, which investors can take advantage of to secure assets and protect themselves against inflation. Unfortunately, lenders are also restricting which investors receive loans by stiffening requirements that have to be met and providing less flexibility on rates. With so many obstacles facing investors seeking a loan, it’s important to ensure several things before speaking with a bank. First things first, investors seeking a loan should get a valuation before applying for a loan. Banks will be double-checking to see if the loan an investor is requesting is accurate to market value. The best way to get off on the right foot is to both have the same numbers when sitting down to discuss a loan. Another key to receiving a loan from a bank lies in credit. Investors can build their credit ratings by simply getting a credit card from a department store like the Hudson’s Bay Company and paying off their purchases immediately. This can also be done on a larger scale through previous successful projects. But just having a good credit score doesn’t mean that it will be reflected accurately on a credit report; apply for a personal credit transcript from a major agency such as Equifax or TransUnion Canada and make sure there are no inaccuracies. If there is a problem, report it immediately to the credit agency, which will take a written note and add it to the report so potential lenders will see both sides of the story. Although it sounds straightforward, investors have

to make sure to fill their paperwork out properly. Banks are becoming increasingly vigilant about examining paperwork to ensure they only lend to the highest quality investors. In addition to the paperwork, arrive at the bank with any other extra information that could be required; confirmation of income, proof of funding available for a down payment on the project, and documented payment histories will all help to ensure the loan application goes smoothly. It also doesn’t hurt to provide proof of where down payment funds are coming from to ensure trust. The bank will want to make sure the deposit is accessible; if it is in a savings account, make sure to bring transcripts dating back several months. If an investor doesn’t meet the bank’s criteria, they can turn to mortgage funds to cover the costs. Mortgage funds or other alternative lenders will generally take on projects that banks don’t want because they examine each project at an individual level; this is especially important for investing in small towns, where banks are usually unwilling to take on projects. Still, alternative lenders do have their risks, but these problems are avoidable if the investor does their homework beforehand. Prior to engaging a lender, make sure they are registered with their respective province’s financial institutions commission. The other option available for investors in a bind is short-term financiers. This is exactly what it sounds like – a quick fix that can be used to see the investor through until a point where they can receive a loan

from a bank or other lender. However, short-term financiers do come at a cost; their rates tend to be nearly double that of a bank and the typical term is somewhere between one to two years. If neither of these options sounds appealing or a low credit rating is barring them from actually being a possibility, there are still a few choices. Investors can seek joint venture partners to cut costs down the middle, or turn to family members or friends to provide the loan. An alternative course of action is to get a second mortgage. This is really a last resort and should be used only to meet immediate needs. If the investment profits over the long term, investors can recuperate the loss of credit by being successful in the particular endeavor. As requirements get tighter, investors will have to make sure they arenâ&#x20AC;&#x2122;t giving banks a reason to refuse their loan application and look to a variety of other sources to seek primary funding for their upcoming projects.

Finding Grea Deals

at Real Estate Sometimes a great deal in the making is in the last place you would look. Guest writer Julie Broad provides a checklist for real estate investors to help ensure the next project you take part in is successful. Remember, even a fixer-upper can end up being profitable.

Finding Great Real Estate Deals By Julie Broad Where others see a problem, the best real estate investors create an opportunity. But sometimes, even experienced real estate investors can miss out if they don’t seize the chance immediately. I know because I almost missed out on a deal that’s made us $100,000 and counting. I’m talking about a little house that looked more like a tool shed than a dwelling. Just a 600 square foot wood structure, sitting on a concrete slab with no basement and no garage - it was darn near the last thing I wanted to own. I really couldn’t imagine anyone living there and figured it was a waste of time to even think about buying it. But my husband told me to do a reality check, because there were a lot of reasons to like the deal:

That area, and specifically within a block of this property, was being totally redeveloped with mixed use properties The lot was large even though the house is not We could pick up the property for no money It was one of the cheapest properties we’d seen listed in the City for years and years The current rent would cover all carrying costs until we figured out what to do with it Five years later that property, which essentially is a large chunk of land in an emerging area, has more than doubled in value and the rent has covered all the costs. It’s just as easy to get excited by a property that isn’t really a good opportunity as it is to miss out on the ones that are. So next time you are about to walk away from a deal or you think you’ve found a great one run through these four items in your mind before you make your final decision. Will it rent easily? I couldn’t imagine myself living in that little shack but I was not the target market for that rental. If there will be strong demand for the property as a rental, it doesn’t matter whether or not you would live there (just make sure the target market you’re after is one you’re prepared to deal with because some tenants require more time and energy than others). Are emotions driving your decision? Emotions weren’t involved in this particular purchase, but it’s something to be aware of in every real estate deal. If, at any point in the negotiations, you feel that it’s a deal you HAVE to make or that you won’t do it because of some emotional reason (I’m afraid of losing money, I’m afraid of missing out) you need to take a step back, take a breath and review everything. When your emotions are involved, you can’t make rational decisions. What do the numbers say? My Dad told me about a conversation he had with his accountant regarding one of his properties. He asked the accountant what the numbers said about the profitability of the building. The accountant said with a smile, “What do you want them to say?” In

other words, was this for a bank, a buyer, or the tax-man? The answer can be different depending on whom you want to appeal to because there are plenty of ways to make a property look like a good deal. It’s up to you, as a buyer, to make sure the numbers really say what the seller claims they say. In this deal, the numbers sold me. The rent covered all the expenses and left a small cushion for surprises. And, the tenant we had in place was signed on for a year. Before you purchase a rental property, review each and every lease in place, and then double check the rent with the tenants, get copies of the bills direct from the vendors and check market rental rates for the area to make sure the current tenants aren’t overpaying. Are You Judging the Book by Its Cover? Many opportunities are missed because a property makes a negative first impression. The best deals are often those that look rough but can be repaired and restored for little cost and effort.

A Guide to I Canadia

It may be one country, but ask any Canad different. BOOM takes a look at the hotte investors looking at Canada as well as wh

Investing in an Cities

dian and you will find out that every city is est up-and-coming markets for real estate hich cities are a bust.

A Guide to Investing With a relatively stable economy, Canada is one of the top destinations for real estate investors. But in a country this large, there are huge differentiations not just from province to province but from city to city as well. In order to figure out which cities are opportune for investment, there is a list of qualities they must fulfill.

But even the right city has areas that will be more profitable than others; investors must closely examine the area to ensure people will want to live there. The things to look for are schools, hospitals and business districts; this ensures even if a tenant leaves, someone else will take their place and maintain a constant cash flow.

First off, they must have a low unemployment rate. If nobody is working in the town, odds are there wonâ&#x20AC;&#x2122;t be many people around to occupy a building, let alone be able to pay rent. This means investors have to look to cities where jobs are actively being created and may have to take a step out of their own town to find the right place to invest.

Using these characteristics as a guideline, here are the top cities in Canada to invest inâ&#x20AC;Ś and a couple of the worst.

Even if the selected city is growing on an industrial and population scale, there are still a few smaller issues to tackle before finalizing the project; things like high income taxes can hurt an investment and be detrimental to achieving maximum profits (this is a serious issue in Quebec and Toronto). Landlord rules can also put a damper on an investment because the owner cannot set the rent as they deem appropriate if it surpasses a statutory limit. Just like with high income taxes, landlord rules vary from city to city; Ontario regulates rent hikes where as Alberta does not.

The Best Calgary Alberta is fueled by the oil industry, and in turn the oil industry is fueled by Calgary. Suffice it to say, there is plenty of opportunity in Calgary for investors looking for steady returns. Calgary boasts one of the lowest unemployment rates in the country at 4.9% (as of January 2012), which is supported by Albertaâ&#x20AC;&#x2122;s energy sector. These energy investments are creating jobs and bringing in a fresh source of tenants for real estate owners. Furthermore, vacancy rates are decreasing in the city and rents are going up. With all of these conditions occurring simultaneously, Calgary is an optimal area for real estate investment.

g in Canadian Cities Edmonton Much like in Calgary, Edmonton is also showing a decrease in rental vacancy and increasing rent prices. This is thanks to a growth in manufacturing and services sectors in the city, which are constantly bringing in new people. Migration to Edmonton is creating a demand for rental units for people setting up in a new city and is a great reason to invest in Edmonton. Saskatoon There is yet another prime location for real estate investment in the prairies. Much like Edmonton and Alberta whose expansion is based on oil, Saskatoon is seeing huge growth in the potash industry (a salt that contains potassium in a water-soluble form). Coupled with very low land prices, not to mention a total economic growth of 4% in 2011 driven by their resource industry boom, Saskatoon is yet another option for investors seeking to diversify their real estate portfolio. Winnipeg Although it isnâ&#x20AC;&#x2122;t growing at the same pace as Edmonton or Calgary, Winnipeg is nonetheless a viable city for real estate investment. The unemployment rate sits at 5.5% (as previously mentioned, Calgary is at 4.9%) while their GDP growth is forecast to aver-

By Dean Brookstone

age 2.5% in the coming year. The vacancy rate is also steady, barely altering from October 2010 at 0.9% to October 2011 at 1.0%. Although Winnipeg lacks the draw of the industrial boom, it makes up for it with affordability. For investors seeking larger margins in potential cash flow, there is a huge opportunity to be had in Winnipeg. The Worst Vancouver Despite low vacancy rates, foreign investors have massively inflated prices in the city. The cost of the initial investment in comparison to future gains via rent is detrimental for an investor, leaving Vancouver as one of the worst cities in Canada to purchase rental property. Toronto Toronto faces the same problems as Vancouver, but is also dealing with a large unemployment rate on top of it (9.2% in 2011). There is also very little increase in demand for property, which stems from a lack of large government contracts and minimal industrial growth compared to Calgary or Edmonton.

Investment Toolbox: The CAP Rate For investors looking at multi-unit residential property, the CAP rate is a useful tool to estimate how profitable the property will be. This issue provides a step-by-step walkthrough of how a CAP Rate works and how you can use it to your own advantage.

Investment Toolbox: The CAP Rate By Julia Hauser Jones Once you find a multi-unit residential property that is in the right area and has all the right indications for growth, it is important to make sure you are paying the right amount for the property. Most listings will state that the property is “income positive” or “cash producing”, but it is necessary to do a little digging. Financial Statements can be misleading and you need to take all the factors into account. Here are two ways that the Capitalization Rate (CAP) can affect you when looking for a property.

ties, maintenance, interest, property taxes, and bank charges. Insurance Items which may be kept off this list include income tax, depreciation and vacancy percentage. Adding these back to the Operating Expenses will decrease your NOI and in turn increase your CAP rate. If you were looking to achieve a specific CAP rate on a property, make sure you add these in. Be diligent and make sure you ask for proper financials; if they do not provide these it could be a red flag.

If you are looking for a Specific CAP rate:

Looking for Financing on a property – CAP rate and CMHC insurance:

A lot of listings for multi-unit properties will list a CAP rate. This CAP Rate refers to a rate of return on an investment property based on the income that the property is generating. This particular CAP rate is equal to the Net Operating Income (NOI) divided by the Purchase price (as a percentage). Keep in mind that the NOI can be sewed and does not include all the expenses. Realtors are always wanting to list with an attractive CAP rate. Realtors will state what the CAP rate is on a property using a sewed NOI and the purchase price, but they may not have taken into account all the factors which may affect the NOI. The Net Operating is based on the Gross Income minus the Operating Expenses (the Gross Income is the income paid before any expenses have been taken off). The Operating Expenses include, utili-

When looking for financing on your multi-residential property, keep in mind that more often than not it is more beneficial to pay for a CMHC premium on the mortgage for multi-residential properties and get a lower interest rate than it would be to have a conventional mortgage at the higher interest rate. Banks will lend at a lower rate if the mortgage is CMHC insured. You are also able to borrow at a higher loan to value (LTV) if the mortgage is CMHC insured. Knowing this, one other thing to keep in mind is CMHC and most banks on insured deals have a CAP rate for specific areas. They will use this to calculate the purchase price and only lend to a certain Loan to Value on the calculated purchase price. Here is an example:

- Purchase Price $ 1,850,000 - NOI $ 130,000 - CAP rate 7.07% A mortgage at 80% LTV will give you $ 1,480,000 and you will only have to come up with $370,000 in down payment If the bank has determined that in the specific area you are purchasing the property the CAP rate is 9.5%, then the purchase price becomes: $130,000 / .0950 (CAP rate) = $1,368,421 Calculated Purchase Price = $ 1,368,421 A mortgage at 80% LTV will only give you $ 1,094,736 as a mortgage and you will have to come up with $755,263 as a down payment. CAP rate is a tool to estimate the rate of return on investment properties but can also be used by the lenders as a tool to adjust the purchase price based on the area that you are buying in. Typically downtown urban areas have low CAP rates and as you move out to the smaller towns they get higher. Work with your mortgage broker to know how much you are able to borrow before you get into all the other due diligence details that come with buying multiâ&#x20AC;&#x201C;unit residential properties. Finding out early on if the purchase price is accurate will save you a lot of time and energy in the long run.