Bank of Canada announces rate

The BoC announced its latest target for the overnight rate Wednesday morning.

The Central Bank decided to maintain its overnight rate at ½% Wednesday morning, citing economic growth that is in line with its October Monetary Policy Report. Still, economic recovery has not been strong enough to warrant a rate increase.

“In Canada, the dynamics of growth have been broadly in line with the Bank’s MPR outlook. The economy continues to undergo a complex and lengthy adjustment to the decline in Canada’s terms of trade,” the Bank said in a release. “This adjustment is being aided by the ongoing US recovery, a lower Canadian dollar and the Bank’s monetary policy easing this year. The resource sector is still contending with lower prices for commodities. In non-resource sectors, exports are picking up, particularly in exchange rate-sensitive categories.”

However, cuts in resource-sector spending has impacted business investment, according to the central bank.

“The labour market has been resilient at the national level, although with significant job losses in resource-producing regions,” the Bank of Canada said. “The Bank expects GDP growth to moderate in the fourth quarter of 2015 before moving to a rate above potential in 2016. While bond yields are slightly higher, financial conditions remain accommodative in Canada.”

The Bank believes inflation risks remain balance. Still, it has identified vulnerabilities in the housing sector.

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Investment Hot Spots:
Oil Springs, Mayerthorpe, Malpeque, Langton, Durrell

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Looking for a unique property investment? This certainly fits the bill

The federal government has listed an interesting property for sale: The former Hells Angels clubhouse in Toronto.

“It reminded me of a Legion Hall,” Toronto realtor Desmond Brown told the Toronto Star. “I thought it was a fantastic opportunity because it’s such a renowned building — people have been driving by it for decades, wondering what it looks like on the inside. I’m one of the few people who isn’t biker, who had a chance to see it.”

The property boasts 2,500 square feet, stains throughout, and a possibly leaky roof.

It sits on a 30-by-120 foot lot in the ever-gentrifying Leslieville neighbourhood.

Ottawa seized the property from the notorious motorcycle club. It’s considered the largest Angels clubhouse in Canada.

The listing is expected to hit MLS in the coming weeks.

Real estate agents have compared the property to similar offerings, and have evaluated it around $700,000.

For tax purposes, it’s been assessed at $371,000.

However, its history could impact pricing, and one lucky investor could find a gem in the former hangout.

And, either way, investing in Toronto real estate has traditionally led to lucrative gains for buyers.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

Investment Hot Spots:
Charlesbourg, Cooper Creek, South Branch, Pinehurst, Gillies Corners

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Titan Equity Group placed in receivership

Titan Equity Group and its CEO, Lance Kotton, are under investigation by the Ontario Securities Commission, with the company head also fending off allegations he misappropriated investor funds.

No charges have in fact been made or those allegations yet proven in court.

The OSC alleges that Kotton used investor’s funds to purchase a home, luxury cars, and pay himself “excessive” management fees.

An Ontario Superior Court of Justice placed Titan in receivership at the behest of the OSC on November 16.

An OSC-issued temporary cease-trade order against Titan and its CEO has been extended to December 17.

There are allegations of personal enrichment. There are excessive management fees of more than a million dollars,” The OSC alleges in a court filing. “A court-ordered Inspector discovered payments over a million dollars towards personal credit cards and vehicle expenses of $600,000 in an 18month period.

“There are no audited statements for 2014, no 2015 interim internal statements, and no corporate tax returns for any fiscal years.”

According to court documents, Titan has raised $30.7 million from 335 different investors since 2011.

The OSC alleges Titan engaged in unregistered trading; illegal distributions; misappropriation of investor funds; and giving misleading statements to investigators. Again, no charges have yet been laid.

Kotton contacted the Star to share his side of the story.

“They’ve taken my office. They sent a receiver to itemize every item in my home,” he told the publication. “They’re trying to liquidate everything before I have a (chance) to prove myself.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

Investment Hot Spots:
Parkside, Kitimat, Sainte-Lucie-de-Beauregard, McIvers, Big White

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The new biggest challenge for investors

Until recently, I always believed the toughest part of investing in real estate was finding the “right” income property (eg. good geographic metrics, under market rents, purpose built, good shape, good location, etc.). In the past, my ability to find “diamonds in the rough” is what made me an effective and successful investor. However, my opinion has now changed.

Looking back over my past few deals I realize that in today’s environment, putting the right financing in place for an investment property is now more difficult than finding a good investment property and dictates your ultimate success or failure.

Financing

Most novice investors just assume that the bank is going to use the purchase price when determining Loan-to-value. They look at how much money they have available and work backwards. If they have $300,000, they can use $250,000 for the down payment and $50,000 for closing costs. This means they can buy a property for $1 million and the bank will give them a mortgage of $750,000 based on a 75% LTV. However this couldn’t be further from the truth today.

How did this situation come about?

Historically low interest rates in Canada have been the catalyst leading to:

Cheap cost of funds
Market cap compression
Increased demand for real estate as alternative investments (Bonds, T-Bills, GIC’s) offer poor returns
Limited supply

As an investor looking to acquire an income property, you welcome low interest rates but cheap cost of funds is a double edged sword. On the one hand you want as low an interest rate as possible to minimize expenses. However, there is a direct correlation between cost of funds and market caps. Both move in sync which means as interest rates go down, market caps follow suit (which means the price goes up).

Why does this matter?

Market cap compression directly affects cash flow. For instance, most income properties on the market in Toronto, and in surrounding areas, are being listed with cap rates of 4% to 4.5% (and in prime Toronto locations sub-3% market caps). The problem is that there is a big disconnect between actual valuations dictated by the market and the criteria that banks use to value an income properties for financing purposes.

Just this week I approached two majors banks regarding an income property in a prime Toronto location and was told they use a cap rate of 6% to determine value. A 6% cap rate on a good income property in Toronto is like a unicorn — they just don’t exist.

The numbers

Most people, like myself, like to see the real math and numbers to truly understand a concept. So here it is.

Assume a property nets $40,000. Based on a 4% cap, a seller would list that property for $1,000,000. Bring that same property to the bank for financing and based on a 6% cap, that same property would be valued at $667,000. The bank will typically offer 75% LTV which would translate into a mortgage of $500,000. The purchaser would have to come up with the balance, or $500,000 in cash, to complete the transaction. One of the great benefits of investing in real estate historically has been the ability to leverage and borrow from the bank.

As if that wasn’t a big enough obstacle…

To make things even tougher, most banks have their own internal guidelines when determining a property’s cash flow and they differ significantly from what you see on the property’s fact sheet when it is for sale.

For example, most real estate agents will assign $400-$500 in annual repairs and maintenance per unit under expenses on the income statement. Banks and CMHC tend to use $800-$900 per unit. If you plan to manage the property yourself, it doesn’t matter, they will assign a 4% (of gross) management expense.

Capital expenditures warrant another 1.5% to 2% of gross. What does this mean? It means that if you apply these guidelines the cash flow gets even weaker making it tougher to get the financing you need.

Unless you are a REIT or have deep pockets, the erosion of leverage makes it almost impossible for the average investor to enter this market.

The solution?

That will be my next entry. Stay tuned…

Author: Paul Kondakos, BA, LL.B, MBA – Professional Real Estate Investor

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

Investment Hot Spots:
Burin, Hacketts Cove, Shubenacadie, Daysland, Athabasca County

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Why a commercial mortgage app gets rejected

Traditional commercial banks often try to play things safe, and may be hesitant to support commercial projects considered too “unique.” Even commercial borrowers that have favourable tax returns and a sound business plan might find their applications for commercial mortgages denied. Worse, some banks will not even offer a good explanation as to why the applications were denied.

If you are looking to apply for a commercial mortgage, you might want to prepare yourself for the possible reasons banks reject applications.

Unfeasible business plans

Commercial loan officers will often ask applicants to show them their business plans. If your business plan does not seem like it can support the loan you are applying for, your application will likely be rejected. Make sure that your plan takes into consideration various payback options for the long-term loan you are applying for. Of course, you could always find a lender that is not too particular about your business plans.

Tax return issues

If the underwriter discovers something in your tax returns that violates the bank’s lending guidelines, he or she will decline your application in a heartbeat. Often, the problem might be related to low or insufficient net income, but other issues with your tax return may also raise some eyebrows. Ensure that your tax return has no problems before applying.

Lending limitations

There is often a cap to the amount of money a bank can lend. At times, a bank could limit the amount of cash it would provide you with, or even strictly detail what you can use the loan for and what you cannot. In exceptional cases, the bank might approve your loan but not lend you cash, which is as good as declining the loan altogether. If this happens to you, turn to another lender.

Insufficient or no collateral

Without collateral, the bank will outright refuse your application for a loan. Moreover, the collateral should be adequate enough to serve as a lien of your personal assets, much like with homeowners and their properties. If you have issues with this, choose lenders that do not require collaterals.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

Investment Hot Spots:
Head Lake, Oasis, Harrietsville, Crabtree, Dalhousie

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Good news for investors

A recently released study points to an increased need for rental properties for Canadians, as home prices continue their upward trajectory.

According to a Manulife Bank of Canada’s Debt Survey, published Thursday, 38% of Canadian homeowners feel that housing in their area is unaffordable. And two thirds of those expect housing prices to continue to increase in 2016.

The survey found that 28% of respondents found their local housing market “somewhat unaffordable.” 11%, meanwhile, believe their local market is “not affordable at all.”

A mere 10% believe their local market is “very affordable” and 51% say their market is “somewhat affordable.”

These results point to a large portion of the population who may have to rely on rentals in certain areas.

“The survey also revealed that those in Canada’s largest urban areas (Vancouver, Calgary, Edmonton, Toronto, and Montreal) are much less likely to describe their housing market as affordable (46%) than those elsewhere in Canada (68%),” Manulife said in a release. “Perceived lack of housing affordability was most acute in Vancouver, where just one in three (33%) indicated housing was affordable.”

Investors in specific regions will likely be impacted differently, however.

“In Alberta, Manitoba and Saskatchewan, almost one in five (19%) expect prices to decline in the next 12 months, while just 3% of homeowners in Ontario, 4% in British Columbia and 4% in Quebec expect price declines in the next year,” Manulife said.

Nationally, 63% of homeowners expect housing prices to increase; while a mere 7% expect to see them decrease.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

Investment Hot Spots:
Sainte-Hénédine, Manitou, Grande-Rivière, Silver Harbour, Rosedale

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