What better experience for a cautionary tale than to experience it yourself and then to tell others. Hopefully by sharing some of our experiences with you, it better prepares you if you also invest, or are thinking about it. So with that, here begins some of our current experiences with Real Estate investing in Calgary.
My wife and I have been actively buying rental properties and reselling properties we renovate since 2003, well before the economy took fire. So by the time things did take off, we were fairly well entrenched. The problem we ran into was financing and this is the brick wall many investors run into.
Once you start getting up to a certain number of properties, it tends to get harder to get financing from the main banks like TD, Scotia or RBC. Sure, you can still get them through the B lenders, such as GMAC, Exceed and numerous others of the same format.
The downside is that since they understand your options are slightly limited (from their side they are also dealing with riskier opportunities, but that is what their business model is built on) there are different challenges you face. These include higher interest rates on the mortgages, usually higher setup fees, you are restricted to using certain lawyers they have on their approved list (who also tend to charge more) and you generally have fewer options with terms.
These challenges and extra expenses however are worth it if the property analysis shows the property will work as a good long term investment. Thorough analysis of the property, evaluating the costs to purchase, operate and maintain the property along with properly managing it to make those numbers work is part of what makes successful investors. Unless the rug gets pulled out from under you that is.
When the economy turned in 2007, we actually stopped purchasing properties after picking up five in the spring and early summer and thought it was best to just manage the properties through the downturn and make what we had work. So here comes 2010, Canada seems to be recovering nicely, at least according to all the statistics, the housing market seems to be fairly steady and things are turning around.
This is the where the surprises start to come up for us. We have two properties whose mortgage terms are coming due this year. The first property we purchased in 2005 and came due at the end of May and the other is one of the properties we purchased in 2007 whose term comes up at the beginning of July.
Well much to our surprise and delight (this is meant in the most sarcastic way possible), we discovered that the lender, GMAC, has decided to get out of the mortgage business and are no longer accepting new mortgages. This has actually worked out for us quite well as we did purchase the property five years ago, we have sold it for more than we hoped for and we have one less property in our portfolio, but it could have been worse if we hadn’t held it for so long.
This brings us to property number two which we have only held for three years, bought just before the downturn and is now worth less than we originally paid. This property was mortgaged for us by Exceed mortgage at a higher rate of 6.8%, with huge fees, we never missed a payment and it cash flowed positively. Yet Exceed informed us a couple of months ago that they are not renewing many mortgages now and for the most part are getting out of rental properties. So we have either to get new financing or sell it to pay off their mortgage.
Currently this particular property is worth about the same amount as the mortgage due to the decreases in value. Although depressing, it’s something we can normally live through as it does pay for itself and creates positive cashflow. However to get new financing now, we would need to put down another 25% of the value and suddenly it becomes a poor investment with all the money stuck in the property. Our other option is to sell it, which is the route we have chosen.
Unfortunately, for us, since the values are down, after all the commissions for realtors, lawyer’s fees, and other miscellaneous expenses, we will have to pay out a considerable amount just to sell it. We understand there is a risk with Real Estate and because of the dollars involved sometimes it can be a costly risk.
It’s just disappointing to us that our position is being dictated by lenders who have profited so handsomely from us, who we never missed a payment to, and who originally targeted this segment of the market when it was most profitable for them and now are bailing when it doesn’t suit them anymore. Perhaps this is just a whine, but hopefully it is also a cautionary tale to others out there with mortgages potentially coming due.
So if you also have some mortgages coming due with some of these B lenders, have a plan in place in case you need to get other financing or if you need to prepare to sell a property. With potentially rising interest rates, another option may be to check in advance to see if perhaps you can take advantage of a blended rate and get an extension on the term at the same time! By being proactive you may get a great rate set up for several more years, rather than finding out in six months they too are getting out of the rental market!
Thanks for sharing this article. I can see this happening to all of us as the rules are changed.
Thanks for Advise.
Thanks for the comment Nassir. I do seem to be hearing more of this happening from other investors, so it is definitely something people need to be aware of. We have reminders that update us on when mortgages are coming up for renewal, this can be handy to keep an eye on as we are now very aware we have nothing else coming due until mid 2011 now. Hopefully by then everything is more stable and happy!