In this episode we're switching it up a little bit and doing a dive deep into mortgages because what's happening in the mortgage industry is something that every investor seems to be on high alert about, so our resident mortgage expert Adrian Schulz will be breaking it all down in this special extended episode.
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Welcome to Canada's Property Management Podcast, your number one resource for investing, managing and maximizing the value of your real estate assets. And, now here's your hosts, Carla Browne and Adrian Schulz, Canada's rental property experts.
Carla Browne (00:19):
Hi, Adrian. How you doing today?
Adrian Schulz (00:22):
Carla, we just finished a session of flash flooding, so I'm doing great.
Carla Browne (00:27):
As I was telling you earlier, that was our yesterday, so it's pretty interesting. There's wild weather all across Canada is what I'm hearing. Doesn't matter where you are in Canada, there is like just abnormal weather. But, today... I guess I'll date this a little bit. Today is actually the first day of summer.
Adrian Schulz (00:46):
Yeah. Do we talk seasons now? You know, I was going to say in regarding to flash flooding, it's either... Well, what is that? Global warming? Or, perhaps it's the end times, depending on which side you fall on.
Carla Browne (00:59):
Well, you know, there was... It was kind of Noah's ark here where there was cars floating in the streets [inaudible 00:01:04] yesterday, so it was... Who knows? Could be.
Adrian Schulz (01:06):
I wonder if they'll bring two of each one of us onto Noah's ark.
Carla Browne (01:11):
I hope so. Okay. Let's get down to business here. Today, we are... We're switching a little bit. Instead of our normal podcast topics, I thought we would dive deep into mortgages because mortgages and what's happening in the mortgage industry right now is something that every investor seems to be on high alert and it's because we're hearing all of these things. Right? Like, there's a housing crash. There's a housing bubble. There's a housing shortage. There's a housing affordability problem. It's a seller's market. It's a buyer's market.
So, we hear all of these things that are in the media, most of them making our investors either super excited or super anxious or possibly both. But, I always think there's opportunity. So, I thought I would switch it up a little bit, bring you on in a different light, because a lot of people don't realize, Adrian, that you are just not my co-host. You have so many other hats and roles that you play.
Adrian Schulz (02:02):
But, my primary role is to be your co-host.
Carla Browne (02:04):
Well, I like that and I try to believe that every day, but I know that there's a lot more to your day to day. So, to our listeners, Adrian Schulz brings over 15 years of experience in the real estate industry and to his mortgage brokerage business as a mortgage broker with Centum Financial Services. He's also a member of the Mortgage Professionals Canada, an associate of the Canadian Condominium Institute, and serves as a director at the Manitoba Real Estate Association and the International Real Estate Federation. He's a busy guy and his focus, so that everyone understands why he and I are so connected and love doing this podcast together, is that his focus at Centum is on the residential mortgages and investment properties, and he primarily works in around that Winnipeg area where we all know he resides.
So, welcome to the show, Adrian.
Adrian Schulz (02:56):
Thank you, Carla. You know, on episode 60 or 70, whatever it might be, you finally officially welcome me. Thank you.
Carla Browne (03:03):
Exactly. You're the first guest except that you're our co-host too. That's [inaudible 00:03:08].
Adrian Schulz (03:08):
And, only guest.
Carla Browne (03:09):
[inaudible 00:03:09] Yeah. [inaudible 00:03:10]
Adrian Schulz (03:10):
First and only guest.
Carla Browne (03:11):
We haven't had any guests on our show up to this point. That might change in the future. We've talked about that. But, anyways, let's dive in to the mortgage industry and the investment real estate industry and what's really happening there. And, I think the two buzzwords that are really going on right now is inflation and interest rates, and people get really confused about how they're so correlated and why they work together. Can you talk us through that as we're going through these inflationary times, what that really means to our interest rates?
Adrian Schulz (03:43):
Well, inflation essentially is the cost of things going up. Okay? In its simplest of terms. And, interest rates specific to mortgages... And, for those who don't quite know what the term mortgage means, a mortgage is simply a real estate backed loan. Okay? When it's called a mortgage, there is a physical, and if you've listened to prior episodes, touchable, smellable, tastable, piece of real estate attached to that loan, making it a mortgage.
And, obviously interest rates and inflation or cost of inflation are very closely tied together and one of those reasons is as the cost of things goes up, you can reduce the speed of cost of things going up by increasing interest rates because it means there will be less cheap money available for people to spend. Right? The more cheap money there is, low interest rate money, the more disposable income there is to go into the marketplace. Right? So, the government can use the Bank of Canada prime rate and banks can use their prime lending rates to somewhat throttle the way and the amount of money that exists in the economy.
But, now I'm falling asleep just explaining that. Let's talk about how it actually affects you. Right? High inflation means things are expensive and getting more expensive and less affordable. Low interest means you can acquire more real estate at a reduced cost. Right? Cost of borrowing. The higher interest rates are the more interest you're paying, which reduces your borrowing ability, which reduces your cash flow on investment properties. Right? But, then of course there's those little thing called tax deductible expenses, also known as interest, so I would argue for investment properties that higher interest rates are not necessarily all the evil that the media makes it out to be. They're actually wonderful times of opportunity.
But, Carla, I'm sure that you have more than one question.
Carla Browne (06:15):
Yeah. No. I have lots of questions for you today, but I think that that's a really good point that you just made. Well, I mean, all the points are good, so don't get me wrong. But, the fact that there is always opportunity and that's really what I want our listeners on this specific podcast to understand, is that there's a lot of market, what I call market influencers, out there, the media being one of them, and the media's job is to tell us everything that's awful and everything that is [inaudible 00:06:42] and sensationalize everything and scare us really because we're very interested in hearing about those things. We're not always hearing about wanting to hear about the good things. That's just who we are as humans, which is really kind of sad when you think about it.
But, as an investor, what should we be watching that will really influence these opportunities that you're describing? Like, where are these opportunities that you see in the...? From a mortgage perspective?
Adrian Schulz (07:06):
So, from a mortgage perspective, I see the opportunities, A, being right now there are less people in the market looking to acquire real estate, primarily due to fear. Right? About what's going on. But, two, is their borrowing capacity has been reduced. Right? So, I cannot say an exact statistic but I would argue that one or two out of 10 potential home buyers will have hit the pause button or just can't right now. Right? So, that means you've got a 10 or 20% better chance of acquiring opportunistic real estate. And, those one or two out of 10 that may be out of the current buyer's market, guess what they're doing for the time being? They're renting.
Carla Browne (08:00):
Adrian Schulz (08:01):
Right? So, not only is there more available inventory for a potential real estate investor to acquire, but also their key audience that they want to reside in that investment property needs a rental property to live in. Right?
Carla Browne (08:01):
Adrian Schulz (08:19):
So, it's like double opportunity right now and the beauty about real estate investing and the interest that is paid on those investment property mortgages is that it is in fact a tax deductible expense. So, what does that mean? That means that the interest that you pay is coming from pre-tax or before tax money, whereas in your own home, right? Your... Your... The house. The roof over your head. That interest is paid with after tax money. Right? So, you don't have to have the same level of yield to paying interest on an investment property mortgage because the added bonus is that it's got that equity growth. Right? And, as you have equity growth on that real estate, that investment real estate on which the interest is tax deductible, that equity that's growing, you can cash that out over time and the equity cash out, the re-finance, is not taxed. Right?
So, tax deductible expense on the interest, equity growth, the ability to pull that equity out, the cash out without being taxed, to then again buy additional real estate investments or diversify and purchase stocks, mutual funds... I'm not going to say GICs. I just can't do it, but I did by accident. But, you get the picture. Right? So, you've just... You are in a great position right now if you have the borrowing capacity to acquire investment properties either on your own or with a business partner. I think this is not a time to be fearful. To the opposite. This is the time of opportunity if you're a real estate investor.
Carla Browne (10:18):
Mm-hmm. Absolutely. You're really talking about the real estate investors that are just maybe getting into the market. But, there's also the flip side of that, of that if you already hold investments, you should be talking to your mortgage broker as soon as possible.
Adrian Schulz (10:33):
Oh, yeah. So, yeah. I think a lot of people are scared of their mortgage renewals right now.
Carla Browne (10:37):
Adrian Schulz (10:37):
Be it on their primary residence or on their investment property because five year fixed rates, right? And, remember, life is variable. Your mortgage should be too. Five year fixed rates are in...
Carla Browne (10:49):
That's a good [inaudible 00:10:49].
Adrian Schulz (10:50):
Isn't it? Yeah. I actually... It's not mine. I can't take the credit. But, five year fixed rates are right now in that four and a half, five, even up into the five and a half, depending on when you're listening, because mortgage rates are a roller coaster right now so if you like amusement park rides, get yourself a mortgage. So, mortgage renewals right now are not fun, but they also present a wonderful opportunity to consider refinancing, resetting your mortgage. Did you know you can reset your mortgage back to a 25 or 30 year amortization? So, when you reset your mortgage, okay? AKA, refinance your home. You can extend the amortization to 30 years, which will lower your monthly payment. Okay?
You can also take up to 80% of the appraised market value as your new mortgage. So, if your home is worth $400,000, okay? You can take 80% of that 400,000 as a new mortgage and if there's cash left over between what you currently owe, now you've got cash to go and buy another property. Right? Or, diversify your investments as you see fit. So, you took what was kind of a scary unpleasant situation at renewal because of the renewal rates you were offered... And, by the way, never ever accept your financial institution's renewal offer. They literally will provide you their worst offer first. Okay? You go shop that renewal with a mortgage broker. Okay? Or, you know, if you want to do it yourself, then go back to your financial institution and say, "Look, here's what I found. Why did you offer me this? It's an insult." And, boom. They lower their rate. Right? I find that a bit disrespectful because why is my own bank giving me the worst offer first. But, they're a business. They're a financial institution. Right?
Anyway, long story short, great opportunity during time of renewal to consider a mortgage reset, extend amortization, lower your monthly payment, and get cash out.
Carla Browne (13:09):
Yeah. You know, we've had a number of investors that have come to us just in the one office that I work, I work in quite closely, where people are getting their mortgage renewals, realizing that because of the interest rate, even though it hasn't been huge, it is a change. They were already maxed. Maybe one of them hast lost employment or change of employment along the way. And, they're not actually able to afford the house that they're living in. But, they're looking at it differently. They're like, "What could you rent this out for? Maybe we could rent it out and pay off our mortgage and expenses and we could be renting something a little bit less so that when our situation changes, we might be able to move back into that house." Or, maybe they'll become an investor.
So, you know, it's another way accidental landlords, as I call them, come to us but it is a way for them to start without losing what they've already invested into that property because that's what you do. If you just... If you sell it and you're not going to get it all out, you end up having... You're having a loss there which could potentially happen. So, I always like to really dig into this one, the data versus emotions, because I always... Like, you know, people do not buy logically. We don't. I mean, I see it all the time. It's... And, that's why actually people come to us is because this... And, it becomes very emotional instead of just looking at it from a logical perspective.
So, the data versus emotion. So, making the decisions based on data is really what we should be as real estate investors. This is a business, but it doesn't always happen. So, what advice would you give to new investors when it comes to that mortgage financing? What is the data that they should be looking at, Adrian?
Adrian Schulz (14:49):
So, let's go back to the year that you were born, Carla. 1990.
Carla Browne (14:54):
Okay. Sounds [inaudible 00:14:56].
Adrian Schulz (14:58):
No. Let's go back to the eighties. Okay? So, in the 1980s, five year fixed mortgage rates were in the teens. Okay? The mid-teens.
Carla Browne (15:09):
Adrian Schulz (15:10):
On average. That's in the eighties. In the nineties, they were still double digit mortgage rates. Okay? And, they started going down. Okay? In the 2000s, the rates were in the six to eight percent range. Okay? In 2010, they were hovering around five and a half. So, there's a trend here. Right? Rates are coming down each decade. For the last few years, we were enjoying like two and three percent mortgage rates. Okay? And, now we're back into that four and a half, five and a half range.
If you took all those, right? All those decades. 80, 90, 2000, 2010, 2020. Right? The average mortgage rates in those decades is going to be between five and 10. And, guess what? Our parents, they were paying those rates. And, guess what? The biggest asset that the majority of Canadian families had before and have today is real estate. Real estate continues to grow in value even when mortgage rates are in that five to 10% range. They still came ahead. And, we will too. Not sure why the world is panicking about mortgage rates because looking at history, they're still historically low.
Carla Browne (16:46):
Totally. I don't know if we... I think we talked about this on a previous podcast, that when my husband and I bought our first house, we were super young. I always say super young and dumb. And, we found this house. It was relatively new and it was like one of those shiny objects. We just needed to have it. Probably couldn't super afford it, but they had at that time assumable mortgages, so we assumed this mortgage, both out of our... We would have never actually probably been able to buy the house. We were able to assume the mortgage because these people needed to get out of it and we paid 12 and three quarter percent interest rate and...
Adrian Schulz (17:25):
But, you [inaudible 00:17:25]. You still came ahead.
Carla Browne (17:26):
I never thought anything of it. I was so happy to have this house.
Adrian Schulz (17:29):
Carla Browne (17:30):
I mean, I could make the payments, so that's all that really mattered. Right? It... It worked. But, I think to your point, there's always going to be home ownership. There is always going to be people who need to rent. There is lots of opportunity in this rental market, both from what you've said and even just based on what we know from immigration that's going to be coming into Canada. Like, over 400,000 people are coming in. I mean, those are all people that are primarily going to need to rent a property. Unemployment is low, so renters can actually pay. But, it is going to unfortunately take some people out of the home ownership market right now.
Adrian Schulz (18:06):
Carla Browne (18:07):
Temporarily. Yeah. So, the other thing that I think is really interesting when you look at interest rates and you look at that data is that there's always good... There's always good deals in investing and real estate. So, whether it's 6% or 16%, you have to look at what you're trying to get out of that property, and we've talked about this before as far as real estate tactics in investing. You know, the short term versus the long term. So, this is where you really need to pull in that power group of people, so, your mortgage broker, your realtor, your property manager, your lawyer and your accountant, and really have these discussions on what is it that you're trying to achieve with this property and then find out where these deals or where the best opportunity is going to be for you because there is always opportunity.
So, Adrian, if I had to say to you what would be the pro tip or the best advice that you would offer to an existing investor and then to a new investor right now, given what you know about the mortgage industry? What would you say?
Adrian Schulz (19:09):
Well, a couple of things. Number one, and this should go without saying, is very much to have your power team in place. Right? And, I would say this selfishly because I am a mortgage broker. But, I'll tell you how I got to being a mortgage broker very quickly is when I started buying investment properties, I hit a cap at my own chartered bank. Okay? And, they said, "We do not give you more than five rental property mortgages. That's the max at our bank." Right? So, I was forced to go looking around and I was fortunate that my realtor referred me to a good mortgage broker and that mortgage broker said, "Yep. I understand. No problem. Here are all the options." Right?
But, then that mortgage broker actually took the other mortgages and said, "Hey, there's opportunities here. This one. Equity takeout. This one. Stretch the amortization to improve your cash flow." All of this advice that you could have never just gotten at the retail bank. Right? So, if you trust your accountant, if you trust your realtor, your lawyer, heck, your doctor, right? Start learning to trust someone who's in the business of professionally arranging mortgage financing because not only is it your biggest asset, it's also your biggest liability for debt. Right? So, wouldn't you want someone qualified and trained and licensed to be taking care of that?
So, there is a long-winded answer to number one. Right? But, number two. I would suggest take a moment and Google the term 30 or 40 year mortgage rate history in Canada. Take a look at that information and you will stop listening to the panic and pandemonium that the media is creating, alluding that interest rates and rising interest rates is somehow the end of home ownership. It is complete b dot s dot. Okay? No need to panic. Endless opportunities. Still wonderful mortgage products for various different needs. And, I think take this time as everyone else is panicking and being worried about the end of the world as it pertains to mortgages and real estate home ownership. Take this time as your opportunity and seize the opportunity that exists. While the other eight out of 10 people are being worried, you're moving forward with your investment real estate goals and aspirations because you're seizing the moment.
Carla Browne (21:50):
Thank you. I think that's such great advice to give both for existing and new investors. And, you know, stop listening to the media, as Adrian has said. We cannot get pulled in. I actually had a reporter contact me on Friday, actually, and the whole story that he wanted to do that day was he just wanted to paint the picture on how rental rates are rising and unfortunately everything I gave him was not what he wanted in his story because I was like Mrs. Good News, right? I mean, this is... Yes, rental rates are going up and actually not in every segment of the market. You know? And, they also want to paint this very national picture.
The rental industry is not national in scope. Mortgage rates are. But, the rental industry isn't. It's very regional and very market-specific. So, I wasn't giving him all of the... All of the power that he needed to write this story in the way that he wanted to. I wasn't buying into it, though, because I don't think... There's not a negative aspect to our industry. There is always opportunity, like you said.
So, the other thing that people always want to know is what about the crystal ball, Adrian. What's your crystal ball say? We won't hold you to this. There's...
Adrian Schulz (23:01):
Okay. Well, it's not a crystal ball because I don't believe in that, but I do believe in gut. Right? Like, that your first gut reaction to things is usually the right one.
Carla Browne (23:01):
Adrian Schulz (23:11):
And, that applies like in almost... No. It does apply in all areas of life.
Carla Browne (23:15):
Well, actually, you didn't really like me the first time you met me, so I want you to take that back.
Adrian Schulz (23:22):
No, no, no, no, no, no. It's not that I disliked you. I just thought that you may actually be able to stand firm on your two feet when you're talking to me and that intimidated me. So, nothing to do a like or dislike. Right?
Carla Browne (23:36):
Okay. Sorry. Sorry. [inaudible 00:23:37]. I digress.
Adrian Schulz (23:39):
No, no, no, no. No. No. But, that's good fun. So, I don't believe in a crystal ball, but gut reaction is this. What goes up must come down. So, to put that into perspective, if the government chooses to continue increasing a bank account at a prime, right? And, mortgage lenders continue to increase their mortgage rates. And, at the end of the day, that's not going to stop inflation. I'm not sure why they don't have some skilled economists over on Parliament Hill in Ottawa, but anyway, that's a different discussion for a different time.
Bottom line is this. We're just going to get pushed into a recession and not if. When we're pushed into a recession, rates will fall and they will fall greatly to encourage spending. It's called an economic cycle. Right?
Carla Browne (24:32):
Adrian Schulz (24:33):
They used to teach it in high school. I don't think they teach it anymore. They certainly do teach it in university, but it's just a basic economic cycle that we're going through. Yes, it's extreme because we had a pandemic, but I think the key here is, and it applies to all things in life, literally all things... What goes up must come down.
Carla Browne (24:55):
Yeah. That's so true. Everything's a cycle. Right? There's an economic cycle. There is a real estate cycle. There is a rental cycle. All of these things go... They just go in a big circle and for anyone who's been around, any of our listeners who have been around for a while, they'll know this. They've seen it before and that's why they're not panicking. But, you know, those who maybe haven't experienced it are definitely feeling the pinch along the way. So, if we can instill a little bit of confidence in the world to everyone today, I think that would be a good thing.
Adrian Schulz (25:26):
Go talk to some older people.
Carla Browne (25:28):
Adrian Schulz (25:29):
Carla Browne (25:29):
Exactly. You know, they will tell you the things that they've gone through. They probably will. They will tell you in all different ways. Maybe some... Some... Lots of hardship. Like, I don't think our kids will ever have hardship like maybe our grandparents or great-grandparents ever experienced or anything like that.
Adrian Schulz (25:43):
Carla Browne (25:44):
Our life is pretty safe. Our life is pretty stable, even though... And, like, if you think about it, we went through a pandemic and we're all like not...
Adrian Schulz (25:52):
Carla Browne (25:52):
I mean, there was definitely some bad things that happened there, but, I mean, for the most part we're all recovering here.
Adrian Schulz (25:57):
Wisdom comes with age.
Carla Browne (25:59):
Yes. Yes. It does. And, I think calmness also can come with age too, that you can be a little bit calmer and kind of take the ebbs and flows a little bit differently. Adrian, how do people find you?
Adrian Schulz (26:12):
Centumfinancial.ca or if you're really keen, chatwithadrian.com.
Carla Browne (26:17):
Adrian Schulz (26:17):
You can book an appointment there.
Carla Browne (26:19):
Awesome. Thank you for all of your little tidbits and your pro tips today. It was great having you on as both my co-host and my guest. And, like we said, if anyone has any questions please reach out to Adrian. He'd be happy to help you with any of your mortgage needs and changes that need to happen along the way. So, I think we're going to end this one unless you have anything else to say.
Adrian Schulz (26:42):
You know what? One free plug. You're just one property away from changing your life and I have a little webinar that goes over that. Okay? It's an introduction to how to become a first time real estate investor. So, you just go to onepropertyaway.ca, register for the webinar. It's 30 minutes of your time if you follow the directions. It's not like AK tell or a shopping channel commercial. It's just pulling out the equity out of your primary home to buy your first rental property because it truly will change your life. It's onepropertyaway.ca.
Carla Browne (27:15):
Excellent. And, we know that's how you got started in this whole game because we've heard that story before, so thank you so much again Adrian for doing this for us and that's Real Property Management.
Thanks for listening to Canada's Property Management Podcast. If you like this episode, please subscribe and give us a rating which will help us reach more listeners. Until next time, connect with us on social media and online at www.realpm.ca.