Interest rates continue to rise and the Canadian housing market issuing through a volatile period, in this episode Carla & Adrian will dive into how these changes are affecting real estate investors and the property management space.
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 (00:18):
Adrian, today, we're going to talk about something that's in the news every single day. So this will be a headline that everyone is used to seeing, but I want to dive into it through your mind a little bit because I think we have a lot to offer to our listeners who are maybe challenged with some of this negativity that the media brings out all the time. And that's dealing with interest rates, how they're affecting the Canadian housing crisis, how that really wraps together, that's part of it, I suppose, and how it relates to investments on the real estate side and what investors could be doing to help mitigate a few different things that they're dealing with right now.
So I'm going to start us off by something that comes to me all the time from investors, and I've said it before in many podcasts, but it's their wanting to put their house into the rental pool per se, they think that their house is now going to be an investment property, but they're really concerned because they're going to be renewing their mortgage in a few months or a year and they're worried that their property that could possibly cash flow now isn't going to cash flow after they renew and, can they increase the rent by $300 because that's what their mortgage payment is going to increase by based on how interest rates are rising? So can you walk through an investor mindset of how they should be looking at this as we see interest rates going up and up and rental prices not going up at that same rate?
Adrian Schulz (01:48):
Yeah. So there's multiple answers to your question but, first and foremost, and I know I've said this again but I really have to stress it now, there's really never been a better time to be in a variable rate mortgage for rental property purpose. A couple of reasons. Number one, the interest that you pay on a rental property, mortgage, is a tax deductible expense. And since net rental income is going to be taxed at a higher than low tax bracket, I would argue that the interest that you're paying on a rental property mortgage should not be your primary concern because it's a taxable expense. What you need with your debt structuring for the rental property is you need the minimum monthly payment so that you meet your debt service ratio. So the lower of a payment that you can have, the better. You want to stretch your amortization. Instead of 25 or 20, go to 30. There are lenders that offer 30 year amortization so you're minimizing your mortgage payment.
And with a variable rate mortgage, yes, is it subject to change if the Bank of Canada overnight prime lending rate changes? Yes, it can change, but there are also variable rate products out there from a handful of lenders where the monthly payment does not change. It simply extends your amortization up to what's called a trigger point. And that's a detail that you should discuss with your mortgage professional. But you can get the benefit of a variable rate mortgage with the safety net of a fixed rate mortgage with some of those lenders where the payment stays the same. But the most important thing is that you have the ability to refinance that mortgage when interest rates change with a simple three month interest penalty calculation versus the convoluted never ending large penalties that people can occur with a five year fixed rate mortgage.
There's endless other benefits of a variable rate mortgage, but it's really important that people consider those and right now variable rate mortgages for rental properties and fixed rate mortgages for rental properties are very, very close. Go for the variable, because here's what's going to happen. If the market, the real estate market, continues to be calm and maybe even get calmer, at some point with inflation, and people with an economics degree or people with common sense know, eventually if there's not enough business rates will come back down. And the beauty about that variable rate mortgage product is, yes, you were exposed to a bit of risk, but now you get to ride the whole wave down and save money again. So here's a pro trick. Get a variable rate mortgage, but calculate what your fixed rate mortgage payment would have been and pay that each month instead of the variable rate mortgage payment.
Because here's what you're doing, you're adding hundreds of dollars as a prepayment against your principle each payment. So what you do is you get a variable rate mortgage but you make fixed rate mortgage payments. You use an online calculator, and now you're prepaying and that prepayment is going to principle. Why? Because now when you go to refinance and take equity out, you've been paying early equity all along instead of giving that money to the bank for more fixed rate interest. So I really implore our listeners that own rental properties to strongly consider knowing the risks and the potential liabilities that come with that, the variable rate mortgage product. The other thing is, right now there is still an opportunity to maximize appraised values of your property. Properties are not appraising for significantly or notably less than they were a month or two ago.
They've just stabilized and they may be calm, but I don't think there's any market, any stable market, where real estate values have decreased. They've just stabilized, and forgive the realtors that are listening, but yeah, now when a home should be on the market for 500,000, you're putting it on the market for 500,000 instead of 540 trying to push the envelope. That does not mean that prices have gone down. That means that we can't push the envelope anymore with kitten and rainbow wishes that a home will sell for more than what it's worth. Anyway, ask me something else. Clearly, I'm passionate.
Carla Browne (06:57):
Kitten and rainbows. Kittens and rainbows, they enter every one of our podcasts.
Adrian Schulz (07:00):
It's the answer to all problems.
Carla Browne (07:03):
Yeah. Thanks for that. I think that definitely was a pro tip for a lot of people. The real estate market has been changing, and I don't want to date the podcast that we're doing, but the reality is that real estate goes in real estate cycles. So if you've been in real estate for a number of years, you are not shell shocked right now about what's happening in the market. If you've been in property management, you're not shell shocked either that we go through these ebbs and flows where we see a lot more supply and then we'll have some more demand. And right now I feel things are really very balanced. So is a property in the property management world necessarily renting in two days? No, they're not. But are they renting in 30 to 45 days? Yeah, they are. Usually, 30 days. I mean, give or take across Canada, of course.
So I don't think we should get so hung up on what the media is talking about when it comes to interest rates right now or the housing shortage. Do we have a housing affordability problem in Canada? We most certainly do in some centers, not in every single center. I think we've talked about that before. But there are still affordable places to live and the tips that you've given today really can help people who are investing realize that investing in real estate is a long game. We cannot invest in real estate and think we're going to the casino and cashing out that day. It doesn't work that way and there's going to be months that are better cash flow months than others. There's going to be sometimes where you put a tenant in for a year and you're not going to necessarily cash flow, but that tenant is paying down your mortgage. Let's not forget why we got into this.
So we can't think of it as a short term game and we have to realize that there's going to be ebbs and flows just like there is in any other type of investment that you're going to put your money into. So, Adrian, you talked about the calculator, I know our sister company, CENTUM in the CPG Group, does have an online calculator that people could go to in order to figure that out. Can you give us what that website is so people could utilize that?
Adrian Schulz (09:03):
Yeah. So you can calculate mortgage payments amongst other mortgage calculators as well at www.centum.ca. I do want to point out, how are the increasing interest rates affecting rental property investors? Look, I'll take Manitoba because Manitoba's a boring province as it relates to the roller coaster of prices.
Carla Browne (09:30):
I thought you were going to say it was like the hub of Canada or something.
Adrian Schulz (09:35):
No, no, no, no, no.
Carla Browne (09:35):
Whoa, whoa, whoa.
Adrian Schulz (09:37):
I have no future political aspirations so I'm happy to say that Manitoba is boring, but you could apply this principle in Saskatchewan, Alberta, and likely other provinces as well. Our 20 year single family home increased by more than 6.5% per year. That's the 20 year average. So if your asset is growing by 6.5% a year, and heck, even if you're paying 4.5% or 5% on your five year mortgage term, you're still ahead. And not only are you ahead by a percent or two, just interest versus the growth in the value of the asset, but someone else is making all of the mortgage payments so your internal rate of return is still going to be in that 5% to 10% range. And you know how we talk about real estate, you can smell it, you can see it, you can even taste it if you want, and touch it.
Carla Browne (10:47):
If you're going to say that, you should actually refer to what podcast you actually blurted that out in. And I can't remember when that was.
Adrian Schulz (10:53):
Oh yeah. To this day, my wife says when we're going for a walk, she says, "Oh, why don't you go lick that house?" Anyway, bottom line is, are interest rates changing? Yes. Are they back to where they were pre-pandemic? Yes. And are assets still growing in value? Yes. Can you still win and benefit immediate, short, long term from real estate investing? Yes. So onward and upward.
Carla Browne (11:26):
Exactly. Now that's real property management.
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