Table of Contents
00:00:03:12 – 00:00:21:05 Scott Dillingham: Welcome to the Wisdom Lifestyle Money Show. I’m your host, Scott Dillingham. Today, I’m going to go over some of the most frequently asked questions. We’re getting tons with the market, with the rates going up and the markets slightly cooling. And people are wondering what to do. So, one of the number one questions that people are asking me is, should I buy in this market?
00:00:22:02 – 00:01:09:08 Scott Dillingham: So as a real estate investor, I believe, yes, you should. The past couple of years, when I look at my personal investing, I’ve been a little reluctant to get out there and invest because the market was crazy. There was bidding wars and things were going nuts and I just felt like I was overpaying for a property. But what’s happened is the properties have the values have cooled a bit and you don’t get those bidding wars that you did before. Some properties still do, but you can now buy properties where you’re the only offer, and in some cases, you can buy them at a discount below the asking price, which is great, that didn’t happen six months or a year ago. So yes, the rates are higher, but your purchase prices that you can get these properties for are much lower.
00:01:09:17 – 00:01:28:22 Scott Dillingham: The rents, they haven’t changed, at least in the markets that I invest in and I’m familiar with, they haven’t changed. They’ve maintained in some markets they’ve even went up. So, in those cases, right? The housing is coming down, the rents are the same, are going up and of course the rates are a little higher, which impedes the cash flow a little bit.
00:01:29:10 – 00:01:56:08 Scott Dillingham: But there are some changes to that happening, too, behind the scenes. Some of the lenders are discussing going with longer amortizations. So right now, it’s around 30 years and they’re talking about going to 35 and some have even stated 40, so that the longer amortization will offset the rate increase. From a cash flow perspective, while the rents are going up and the properties are going down. So, I think that it is a great time to buy.
00:01:56:08 – 00:02:28:20 Scott Dillingham: Now the property is going down. I don’t think that’s something that’s going to go on and on and on. I think it’s just there’s been a bit of a cooling in because there’s not so much attention or aggressive behavior in the market that it is cooling. So, the other thing to consider, too, is we have a housing supply issue in Canada. There’s not enough housing for everybody that lives in Canada. So, because the demand for housing is greater than the supply, the cooling of the pricing, I believe, is temporary and we’ll recover quickly once the rates sort of settle down.
00:02:28:20 – 00:02:59:10 Scott Dillingham: Now, where do I see rates going? So, if you consider COVID, right? COVID was a catalyst to get us lower rates. Pre-COVID, the rates were around 4% for a fixed and then they lowered the rates for COVID to keep the economy going and then once they got rid of those discounts, the rates were also back up to around 4%. So, during that time period, we had rates that were normal. Then they lowered artificially for COVID and then they came back up to normal.
00:02:59:20 – 00:03:21:12 Scott Dillingham: Now, right now, it’s the middle of July and last week the government raised the rates one whole percent. So now the rates have went up. So historically, everything goes up over time. So, it’s normal for interest rates to increase, but it’s usually gradual. But because of COVID and the shortages of things and inflation is being higher, they jumped it up.
00:03:22:06 – 00:04:10:23 Scott Dillingham: Do I think it’ll stay this high? Who knows? It’s really something that’s hard to predict, but I can’t see it going up and up and up and up forever. I feel like it’ll match inflation once we return to a more normal economy and the damages of COVID are gone. I really believe that the rates will simmer back down and even pre-COVID, if you look at history, if you look up interest rates for the past 25 years, you’ll see that they went up and down. So that’s what they do in a normal market. But right now, because of inflation and everything, they’re going up. So, I believe in the short term, you can expect them to go up a little bit more because inflation has been increasing, right? But once we catch on and things return back to normal, I believe the rates will come back down a little bit.
00:04:10:23 – 00:05:04:03 Scott Dillingham: Now, investors are asking me should they go with the fixed or the variable? So, I really think that’s your preference. The variable, though, will get you a higher purchase amount. So, I’ll cover that in the next question because that’s part of the next question. Personally, I’m staying with variable. So yes, the variable is going up, but right now, so is the fixed. So, if you’re locked into a fixed, I would renew your term. I do like the variable for a couple of reasons. So yes, I can go up and down, which is the negative. Well, not if it goes down. Of course, that’s a positive. But if it goes up, that’s a negative. But I get the variable not for the rate, but for the exit strategy. Right? So, what if there’s an apartment building that I want to buy and I’ve got all these properties in a five-year fixed, right? The exit fees are huge to get out of that, where if I have the variable, it’s just a three-month interest penalty, I can dispose of the properties and get that next project. So, I do prefer the variable for that.
00:05:04:03 – 00:05:35:21 Scott Dillingham: So, the next question and where the variable ties in is people are asking me like how to maximize your purchase price. So, there’s a couple of things that you can do. So, it’s a two-step process or two to solution answer, I should say. One is getting the variable. So, the variable has a lower stress test than the five-year fixed rate. So, because of that, you can qualify for a larger mortgage on your investment property or even an owner-occupied home if that’s what you’re looking to buy.
00:05:35:21 – 00:06:06:14 Scott Dillingham: Now the second part of that is working with the correct lender. So, what I mean is let’s say you go to a bank and I’m not going to name one, but let’s just say a major bank. Mostly they’re going to use only 50% of the rent. So, let’s say you rent the house for $2000 a month to help you to qualify to buy it. The lender is going to use $1000 of that to help you to qualify and that’s great, right? But what ends up happening is you end up hitting that brick wall where they say, oh, you don’t have enough income to qualify or your debt-to-income ratios are maxed out, which happens.
00:06:07:06 – 00:06:50:00 Scott Dillingham: But we have other lenders, some of which are banks, some are credit unions, who will use between 80 to 100% of the rents, depending on their methods. And some use rental worksheets that we fill out and by using those lenders, right? If they’re going to use 80% of the rent, you’re now at $1600 of that $2,000 a month example two being $2000 a month. That they use to help you qualify. So just by changing lenders, you can potentially maximize your purchase price. Now, these are primary lenders. I’m referring to, “A” lenders with no fees to use them. Obviously, if you go with an alternative lender like a “B” lender, there’s fees and things like that. But they will use more of the rental income.
00:06:50:00 – 00:07:49:10 Scott Dillingham: But ultimately, it’s by working with a broker that understands investment properties I think is the most important thing because they’ll look at your portfolio, they’ll do your pre-approval and say, here’s where you are. You’ve told me you want to go over here, and if we go with this lender, we can accomplish that for you and it really is important that this broker or lending specialist that you work with understands investors, because if you’re only working with owner occupied properties, that’s the lender pool that you have to choose from. You’re going to use those lenders. But when you work with investment properties, there’s the lenders that you would use and work with are different. So that broker or that lender may not have access to those lenders if they’re not regularly doing rental properties because you have to do so much volume on the broker side to be able to access most of the lenders, right? And if you don’t do those volumes, you don’t have access.
00:07:49:10 – 00:08:22:17 Scott Dillingham: So, it’s super important for you to grow your portfolio to work with the correct broker or mortgage agents. With that being said, obviously I’m biased, but I do recommend LendCity. That’s our focus is investment properties and if you are looking to grow, reach out to anybody on my team. Our office line is 5199600370. Or you can visit us online at LendCity.ca and someone on my team will be able to help you to get started and to grow your real estate portfolio. Look forward to chatting with you next time. Take care.