PLAYING IT SAFE? OR SEIZING OPPORTUNITY?
Financial advisors and institutions love to give those risk-tolerance questionnaires. After the 15th time of filling out the same questionnaire, before you’re “allowed” to proceed with whatever question you have, it gets a little redundant. But these days, that pesky questionnaire just became more relevant: most of the investing environments are changing – almost faster than any of us can keep up with.
If anyone is using last year’s intel to invest this year, that’s a problem. Growing our net wealth is currently more challenging: stock markets are down, bit coin is all over the map, real estate prices are down, and interest rates/inflation are both up more than we’ve seen in a very long time. In contrast, some bond yields have risen—last year’s reject, just started becoming a possibility for some conservative investors. https://www.bnnbloomberg.ca/rising-interest-rates-usher-in-a-new-era-for-savers-dale-jackson-1.1838720
The Bank of Canada’s rate is now 3.75%. For real estate investors this means higher payments on HELOC’s, and some variable mortgages may hit their “trigger rate.” https://www.bnnbloomberg.ca/what-mortgage-owners-need-to-know-about-the-bank-of-canada-rate-hike-1.1837728 It also means that some investors will have more difficulty qualifying for additional properties, and the cashflow on some properties may decline. On paper, some people’s net worth appears to be declining as property values decline, and stock portfolio’s decline.
Is your head spinning yet? The real estate investing game is changing so quickly, it’s almost impossible to keep up! Or is it? People still need a place to live (whether they buy or rent). The basic economic principle of supply and demand still applies, in real estate as in other business models.
In some places, it is still cheaper to rent than to buy a home. That means more customers for rental housing providers. And when it’s more difficult for investors to qualify, it is also more difficult for homeowners. Again more customers. And when inflation is rising at 6.0%, but wages are rising at 3.0%, it’s much more challenging to save for a bigger down-payment. https://www.atb.com/company/insights/the-owl/average-weekly-earnings-august-2022/ Bottom line: The demand for rental housing looks to be increasing for the foreseeable future. In addition, competition for properties might become less intense than recent years.
With places like Ontario, Calgary and even BC talking about changes to zoning laws in recent months, there are some very interesting opportunities on the horizon!
But here’s the challenge: how much risk will you tolerate, how much will you mitigate? For each problem, what are the solutions? Or is it better to play it safe? And if you have a life partner, what are they comfortable with?
Maybe now is the time to buy, with a larger down payment? 30-40% down doesn’t looks sexy with a cash-on-cash return, but maybe it allows better cashflow, or a better buffer for that rainy-day fund for each property.
Conservatives (not politically, but as investors) may prefer to simply do some private lending (fixed rate, fixed term). Find a good deal, with a good working partner, and proceed with caution—or try working with a mortgage broker who will qualify the property and your borrower for you! Did you know that you can even lend from within an RRSP? A good mortgage broker can assist there too. Then access a good lawyer to paper the deal.
For investors who are comfortable with a little more risk, maybe now is the time to Build to Rent. Yup, it’s becoming a trend. Why? Because when done well, this strategy should decrease repairs and maintenance expenses in the first few years. And, if applied to a multi-family building, then there might be the option to use less expensive financing after the project is complete and rented.
Knowing where each of us is on the ultra-conservative versus high-risk spectrum, just became really important. In our world of “keeping it positive and keeping it real,” we can clearly see opportunities this winter. We also recognize the fears, concerns and genuine safety measures that many investors are putting into play. No one can promise to mitigate all risk for their partners, but doing nothing is also risky in these inflationary times. It’s time for some soul-searching, and some tough decision-making, about real risks versus potential benefits of every real estate investment that each of us is considering.
