Archive for the ‘Real Estate Investing’ Category

How have the recent changes to Canadian mortgage lending affected single family real estate investors? The recent changes The Honourable James Flaherty, Minister of Finance, made were specifically directed to “reckless speculators”. But the new rules have impacted all the single family home real estate investors in a negative way and possibly increased the risks to banks, the very thing he is trying to avoid.

Three things have happened with the new rules. They have:

  1. chased some potential real estate investors away
  2. made it more expensive to become a real estate investor
  3. made it more risky for people to become real estate investors.

Real estate is a way many people choose to build assets and increase their cash flow. Let’s face it the stock market is not for the unsophisticated investor and mutual funds make the mutual fund managers rich, not the investor. There are not a lot of options out there.

We are fortunate to live in Canada. Our banking system is sound and survived the recent global melt-down very well. The circumstances that occurred in the US did not happen here because of our rules and regulations. Banks in the US had loans that were 100% backed by the government so they could lend money to anyone with a pulse at no risk to the bank themselves. In Canada that was not possible as we already had the 5% down minimum from the CMHC.

Real estate speculators didn’t cause the crash. It wasn’t even Wall Street as much as people want to believe that. It was the US Central Bank and the US Government that caused the global melt-down by removing free-market conditions and keeping interest rates too low.

So why does a small real estate investor in Canada have to pay for bad US economic policy? Mr Flaherty even stated that there was no clear evidence of a real estate bubble in Canada yet he still introduced rules to increase the cost of real estate investing.

I was looking at a recent property and I was declined the CMHC mortgage. They identified that I had two risky rental properties (one at 5% down and one at 20% down, I was trying for 5% on this one) and under the new rules I would be unable to qualify for 5% although a couple of weeks earlier I had and the new rules had yet to come in effect yet.

I now have three options:

  1. Come up with 15% more for a total of 20% down, bypassing the CMHC, increasing my financial commitment and lowering my ROI
  2. Come up with 10% more and find a joint venture partner to come up with the other 10% for the down payment, bypassing the CMHC, increasing my financial commitment and lowering my ROI. This also increases the cost as I now have to spend money on lawyers’ fees to come up with the proper partnership agreement as well as this has increased my risk since I am no longer 100% in control of the property. I also have the added risk of the actual partnership.
  3. Or just pass on the deal

I actually found a partner but as we worked through the deal too many questions arose so we decided to pass on the deal. Now, the rent-to-own tenant lost a beautiful house and the current owners still holds the property.

I think the Canadian banks and mortgage lenders were doing a good job of their due diligence lending money to single-family home real estate investors already. The new rules just increase the risk and cost to real estate investors. It might even increase the risk to banks as they may lax their due diligence and wind up with more bad loans just because someone has been able to come up with 20%.

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