Real Estate Insider: February 2018 News Report

Welcome back to the Real Estate Insider, readers! This past month, we came across a variety of hot topics you'll want to invest some reading time in, including how marijuana may boost the value of your home, why you should know your credit score, and why you shouldn't chase the lowest mortgage rate!

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There are a lot of factors to consider when deciding on either a fixed or variable rate mortgage, and everyone is different. Luckily, ‘RateSpy.com’ has compiled a checklist to make your decision easier! Check it out: >>

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Mortgage rates are seeing a steady increase for the first time since the early 1990’s, and that trend isn’t stopping next renewal term! Are you prepared for a rate increase? Read more about current trends here. >>

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DON’T GET TRICKED BY CHASING THE LOWEST MORTGAGE RATE! There are so many other factors that could save you so much more money in the long run! Read about them all here. >>

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There are a lot of expected benefits from the legalization of marijuana, and a boost in housing prices may be one of them! A Study in America found homes close to recreational ‘pot shops’ saw an increase in value by about 8%. Read more here. >>

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Are you aware of you Debt-To-Income ratio? It may be time to take a look! Learn what it is and why it is so important when qualifying for a mortgage or line of credit! >>

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With the recent real estate “Boom” in Toronto, we have seen the number of people getting their real estate license do an equally impressive “Boom”, but how many of these new agents are successful? How many Toronto realtors are doing less than 1 deal per year? The number will almost certainly shock you, and they are all laid out for you here. >>

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While young adults living with their parents give them the ability to save money, study has shown that it may be draining the parent’s retirement funds by more than 24%! Read more about the increasing trend here. >>

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Do you want to invest in Real Estate but maybe aren’t ready buy an investment property? Here are 6 ways to passively invest in the growing real estate market! >>

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Capital Gains tax has been a hot topic in recent months; especially since house flipping and income properties have increased in popularity. But what about when you are about to inherit some real estate from a relative? How does the taxation work? Read this article to find out the best way to approach these situations. >>

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Knowing your credit score is important! Get your credit score and report for free here! >>

Russel's Review: The Real Estate Retirement Plan By Calum Ross

A lot of people ask us for recommendations on real estate and related books to read.  Well, today we are going to start a new periodic series on the blog that reviews recent real estate books that we’ve read.  So without further ado, here goes…

What is the Book?

The Real Estate Retirement Plan – An Investment and Lifestyle Solution for Canadians by Calum Ross with Simon Giannini.

What You'll Learn

The book starts by talking about traditional retirement and why, for many reasons, today’s younger and middle aged population will not be able to look forward to some of the typical retirement income sources of previous generations (ie workplace pensions, generous government entitlements, etc). The population needs to prepare itself for funding their own retirements going forward.

It then segues into a "good debt vs bad debt" discussion about how the public has no problem borrowing to buy depreciating assets like cars or other toys, but find it risky to borrow to invest and buy cash flowing and appreciating assets (ie real estate or equities). People need to start viewing their personal balance sheet more like a corporation, get rid of their bad debt, and also convert their dead equity (ie equity in their personal residence) into productive equity by using it to invest.  The best way to do that for most people would be to refinance equity in their home to buy additional investments, either cash flowing real estate or dividend paying equities. Come retirement time, this strategy should pay off in spades, and the author shares many examples.

Later in the book it talks about building your team, such a mortgage broker and real estate agent, and later about investing in real estate and how to profit from this borrow to invest strategy long term.

Why I Recommend It

I agree with the majority of the concepts in the book and put them into practice personally and with our clients all the time.  It's especially good for beginners as it's written with easy to understand terms.

My Critique

Some of the examples used I thought were pretty rosy. This is definitely not a get rich quick concept; more of slow, steady climb in wealth concept. Don’t want to people thinking this stuff is easy!

So there you have it folks.  Our first book review on the blog. If there are any other books you are interested in hearing about feel free to drop us a line ☺.

Check out our video review of this book here!

You can order a copy online today at Amazon and Indigo. Happy reading!

Growing Trends for 2016 Real Estate - Crowdfunding

Have you ever wondered what it would be like to own a large commercial property (i.e. retail plaza, office complex, high rise apartment building), but unfortunately don’t have the millions of dollars in the bank to make it a reality? Well the rise of crowdfunding in real estate might just be the opportunity you’ve been looking for.

But first, what exactly is crowdfunding and how does it work?

You might be familiar with fundraising sites such as Go Fund Me or Kickstarter, or US based peer-to-peer lending sites such as Prosper or Lending Club. Crowdfunding for real estate is similar to these platforms and the basic premise is simple. An investor can access individual real estate properties through an online platform and pool money with other investors to invest the required funds for a property. Say for example, the property cost $10 million dollars, it could be split into 10,000 shares of $1,000 each or 0.01% ownership for each share.

Real estate crowdfunding falls into two sub-groups: debt and equity.

In debt crowdfunding the investors act as a lender for, rather than as, the owner of the property. In such circumstances, the investment would be secured by the property and the investor would be entitled to monthly interest and a return of principal, but not to any benefit from property appreciation.

In equity crowdfunding, the investor becomes an indirect owner of the property by obtaining shares, limited partnership units, or other securities in the entity that owns the property/project. This form of investment carries inherently more risk, but also a potential greater return as a result of a direct interest in the property appreciation.

Crowdfunding for real estate is still in its early days in Canada. However, it has been making significant inroads in the US. The Ontario Securities Commission has been reviewing the industry as it matures and tries to regulate to protect investors. So check back often on the regulations as the industry matures in 2016.

Though crowdfunding will allow more people access to the commercial real estate market, for companies being able to solicit investments in projects from the general public online both greatly increases companies’ ability to raise the capital they need, from a greatly expanded pool of potential investors, but may also greatly increase the likelihood of lawsuit, especially if the investment performs poorly.

So there you have it. We are on the precipice of “the democratization of the real estate investment opportunity”. Are you excited?

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Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620

Positive Cash Flow = Positive Debt Coverage Ratio (DCR)

After you determine an income property yields a POSITIVE CASH FLOW, the next step is to calculate the property’s ability to service mortgage financing costs out of this cash flow.

The standard measurement within the investing world is referred to as the DEBT COVERAGE RATIO (DCR). DCR is simply comparing the property’s net operating income (NOI) to the projected mortgage financing costs – typically on both a monthly and annual basis.

Banks/Lenders typically look at DCR closely, wanting to confirm that the cash flow is sufficient to cover the related debt cost (aka monthly mortgage payment). In fact, most often they are looking to see a positive margin, which exceeds the mortgage servicing costs.

Source: Politico

Using a ‘break –even’ analogy, if the cash flow just meets the debt service costs - this would be a simple ‘break even’ outcome.

Consider the following illustration:

Property 1 
Net Operating Income - $75000
Mortgage Costs (Debt) - $50,000
DCR – 1.5

Property 2
Net Operating Income - $45,000
Mortgage Costs - $50,000
DCR - .9

*All $ amounts are annual

In the case of property 1, the cash flow exceeds the funds required to cover the mortgage requirement. In the case of property 2, a deficit is created ($5,000) which is not only an annual loss, but creates a negative return on actual cash invested.

In layman’s terms, a DCR of (1) is a ‘break-even’ - a DCR of (1.5) is ‘positive’ - a DCR of (.9) is ‘negative’. For investment purposes, this is how you should approach your analysis.

Just a final word on the bankers/lenders, you’re ability to negotiate favourable mortgage terms are clearly impacted by the property’s DCR. This gives you some insight as to how they evaluate risk in underwriting mortgages and how it ultimately impacts your proposed purchase.

How are lenders approaching DCR in your area? How does it affect rates offered and other terms proposed? 

Feel free to reach out to us, should you have interest in the Windsor-Essex market. As always, appreciate any feedback in the comments!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434