PrefBlog

Some landlords are learning the risks of investing with a negative carry:

In recent years, many mom-and-pop real estate investors in the two cities have been quietly paying more in mortgage and other ownership costs than they receive in rent, trusting they’d eventually sell at a profit thanks to rapidly rising home values, experts say.

But as interest rates shoot up and price growth slows, some highly indebted landlords are beginning to feel the squeeze more acutely. That financial pain could eventually push rents even higher, some experts warn.
…
It’s not uncommon for homeowners who’ve seen the value of their first home soar in recent years to borrow against their home equity with a HELOC to fund the down payment on an investment property, [Toronto-based mortgage broker] Mr. [Ron] Butler said, speaking about the Ontario market. Borrowers often don’t disclose to their bank they intend to use the HELOC to acquire a second home, he added.

Once they’ve drawn the cash for a down payment from the HELOC, borrowers typically apply for a mortgage to finance the rest of the real estate purchase, Mr. Butler said.

With HELOC rates climbing, many of those highly leveraged investors are now scrambling to convert their line of credit balance into mortgage debt that comes with fixed payments, according to Mr. Butler. The risk is that some may not be able to do so.

That may be because the additional debt they’ve taken on from the investment property means they don’t meet lenders’ requirements. Another obstacle is the fact that climbing interest rates have raised the bar borrowers must clear to pass the federal mortgage stress test, Mr. Butler said. Yet another hitch is that mortgages, unlike HELOCs, require payments of both principal and interest, resulting in bigger monthly outlays for borrowers, he added.

Well, rising rents is one way the situation might be resolved. Another way is for the investors to eat the negative carry for an indefinite period; and the third is for the investors to sell at a loss. As the rental market seems to be priced at all the market can bear, I’ll suggest that the third is the most likely option with the timing set for the deals to close around the time the mortgage (if any) renews. That’s what happened in 1980 and again in 1991.

But amid all this talk of rising prices, some may simply wish to relax:

Prices for recreational and medicinal cannabis have dropped by 8.3 per cent and 10.2 per cent, respectively, over the past year, and by roughly 25 per cent in both categories since the end of 2018, according to Statistics Canada. The annual inflation rate hit 6.7 per cent in March, the highest since 1991.

This entry was posted on Monday, May 2nd, 2022 at 7:03 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.