There are a few key things that owners should consider to decide if their investment is worthwhile
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Inflation is up more than 8%, the highest yearly change in almost four decades, according to Statistics Canada. And in a scramble to bring that inflation rate down, the Bank of Canada raised its benchmark rate to the highest amount since 1998: 2.5 per cent.
The hope is that inflation gets back to a normal two per cent by 2024. For borrowers with fixed mortgage rates, they would have locked in a certain interest rate when they purchased their property. For variable-rate mortgages, the interest rate that the borrower pays is tied to the central bank’s inflation rate.
Canadian borrowers are dealing with a five-year fixed rate of around 4.5 to 5.5 per cent. Variable rates are in the 3.8 to 4.5 per cent range. And rates are at least two per cent higher than a year ago.
Now that the days of easy money are a distant memory, real estate investors affected by higher interest rates may have to adjust behaviours in order to maintain a positive cash flow—or at least break even during this difficult time.
Big real estate investors, such as developers, buy properties to hold for years, through many up and down cycles.
“My views are that if you are going to invest you should be a long-term holder,” says developer Gino Nonni of Nonni Property Group.
“I don’t know how often you can buy something and then turn around and make a substantial profit in a short period of time. At minimum, mom and pop investors pay their mortgage down and typically the value of the asset will go up.”
He believes the shortage of land will always constrain supply and put pressure on prices. The result is a secure, long-term investment.
“That’s the way I view it, and that’s what I tell my friends when they ask. I tell them to always hold.”
Millennial broker Jacky Chan, president of BakerWest Real Estate, has been investing in real estate his entire adult life. He prefers real estate to other investments because it’s less volatile, and with the world’s population growing by about 80 million people a year, people are always going to need a place to live. Prices may slow down, but overall they go up.
“The faster an investment moves, the closer you need to monitor it, especially with the recent hype of NFTs and cryptocurrency,” says Chan. “But look at any real estate market in the world with a growing population, and it was definitely cheaper 50 years ago than it is today.”
Two things matter in real estate investment, says Chan: positive cash flow and appreciation. If the investor isn’t over-leveraged by too much debt, they should maintain a long-term outlook and not get spooked by interest rate hikes.
If you own a $1 million property and have a $500,000 mortgage at five per cent, you are, in simple terms, looking at $25,000 interest per year.
If the property increases by five per cent in a year on the $1 million investment, that’s an increase of $50,000, so the owner has a net positive of $25,000.
“Even though the rate has gone up, the real estate value is still increasing.”
Let’s say you purchased a condo to live in, and purchased another as an investment. With interest rates climbing, what happens if you took out a variable rate mortgage and the rent isn’t covering the higher mortgage payment? Mortgage advisor Alex McFadyen, of Thrive Mortgage, saw a lot of people buy second properties in the last couple of years, and they might now find themselves stretched. All experts will tell you that selling off the property should be a last resort, but how do you avoid that when costs are mounting?
“Ask yourself if the property itself is really underwater, or are there expenses we can remove or eliminate?” says McFadyen. “That’s the first thing we determine.”
He gets his clients to write down all their property expenses, including management and maintenance fees, taxes, utilities, and any upcoming repairs on the home. If it’s a primary property that’s causing them stress, then he asks them to write out a cash flow budget spreadsheet to see what’s coming in and going out. McFadyen finds that the main culprit for expenses is often a car loan or credit card debt, or — more commonly these days — travel debt. Cut those debts and throw that money at your mortgage instead, he advises.
If expenses are truly unmanageable, McFadyen advises that clients consider consolidating debts with a loan, such as the possibility of taking out a second mortgage or home equity line of credit(HELOC) to get it under control. He predicts consolidation will be a “massive trend” in the next 12 months.
“I ask my clients, ‘are you able to sleep at night right now?’ If someone isn’t able to effectively get out of debt, what is the downside of setting yourself up with a second mortgage or HELOC to help things?”
McFayden has a client who owes nearly $75,000, which caused their credit score to go down to the low 500s (a good score should stay above 650). By consolidating their debt, it became a more manageable single payment instead of several payments that were only covering the interest owed. The key thing is to do it before you’re drowning in debt.
Long term, everyone agrees that real estate will go up in value, so do what it takes to get through the interim.
McFadyen is helping some of his clients to re-amortize their 20-year mortgages to 30 years, for example. With a longer amortization period, the clients have reduced monthly payments, which helpsto reduce expenses and eliminate payment shock.
McFayden also advises mortgage holders coming up for renewal to consider a refinance option and lock into a one- or two-year mortgage, until rates settle down. If historical trends are an indicator, we are near the peak, he says. A lot of his clients are taking that approach because there is good value in short-term mortgages, if rates do come back down as expected. That means the borrower isn’t locked in at a higher rate. Additionally, they don’t face a huge penalty, if they do want to take advantage of lower rates.
“We’ve seen folks worried about rising mortgage payments and we’ve helped them lock into short terms, to stem the tide,” says McFadyen.
That said, when a person is over-leveraged, with negative cash flow and sleepless nights, then it could be time to sell that investment property. You’ve got to think about your mental health, advises McFadyen.
“If you are significantly underwater and it’s not only impacting your quality of life and there are no options to re-amortize or consolidate debt, and you can’t afford to make payments and it’s impacting your quality of life, and if the property also has upcoming expenses, then we would recommend letting it go,” he says. “If they are in so much stress and they have the ability to get out from under it, they should consider it as a last resort.”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
President Joe Biden issues first veto on retirement investments bill
The veto comes after Congress voted to block a rule allowing retirement plans to weigh impacts of social factors and climate change on investments.
Scott L. Hall and Patrick Colson-Price, USA TODAY
WASHINGTON — President Joe Biden issued his first veto Monday after Congress voted to block a Labor Department rule allowing retirement plans to weigh the long-term impacts of social factors and climate change on investments — a move Republicans say is a “woke” policy that hurts retirees’ pockets.
“I just signed this veto because the legislation passed by the Congress would put at risk retirement savings of individuals across the country,” Biden said in a video posted to Twitter. “They couldn’t take into consideration investments that would be impacted by climate impacted by overpaying executives.”
Senate Republicans, along with two Democrats, voted on the measure March 1, needing only a simple majority for it to pass. Sens. Jon Tester, D-Mont., and Joe Manchin, D-W.Va., who are both up for reelection next year in Republican states, voted with Republicans.
The GOP-controlled House of Representatives voted on the legislation last month. In a message to the House, Biden said “Retirement plan fiduciaries should be able to consider any factor that maximizes financial returns for retirees across the country.
“That is not controversial – that is common sense,” he said.
Ahead of the bill going to his desk, Biden said he would veto it. A two-thirds majority of Congress would be needed to override Biden’s veto.
President Donald Trump vetoed 10 bills, while President Barack Obama vetoed 12 bills.
Environmental, social and governance or ESG for short, is an investing strategy that takes into account businesses’ environmental and social risks as part of a wider financial analysis.
It is popular with major pension funds that invest the retirements of millions of workers as well as retail investors.
Republican lawmakers and conservative advocacy groups have decried the ESG rule.
Florida Gov. Ron DeSantis, who will likely run for the 2024 GOP presidential nomination, has become a leader in the anti-ESG movement.
Many conservative states, such as Florida, Texas and West Virginia have launched investigations because of the rule.
Conservative advocacy groups backed by right-wing donors have mounted a campaign in statehouses across the country. They say that ESG is just another example of “woke” influence on big business.
Reach Rebecca Morin at Twitter @RebeccaMorin_
President Joe Biden issued the first veto of his presidency Monday on a resolution to overturn a retirement investment rule that allows managers of retirement funds to consider the impact of climate change and other environmental, social and governance factors when picking investments.
Republican lawmakers led the push to pass the resolution through Congress, arguing the rule is “woke” policy that pushes a liberal agenda on Americans and will hurt retirees’ bottom lines, while Democrats say it’s not about ideology and will help investors.
The resolution, which would rescind a Department of Labor rule, passed both chambers of Congress with Democratic Sens. Joe Manchin of West Virginia and Jon Tester of Montana voting with Republicans in the Senate.
“I just signed this veto because legislation passed by the Congress would put at risk the retirement savings of individuals across the country. They couldn’t take into consideration investments that wouldn’t be impacted by climate, impacted by overpaying executives, and that’s why I decided to veto it – it makes sense to veto it,” Biden said in a video posted to social media Monday afternoon.
Biden is seen signing the veto in the video, taken in the Oval Office earlier Monday.
The veto makes good on Biden’s frequent promise to veto legislation passed by the GOP-controlled House he disagrees with. Even before Republicans took control of that chamber, Biden often mentioned his ability to nix their priorities. “The good news is I’ll have a veto pen,” he told a group of donors in Chicago just days before November’s midterm elections.
Opponents of the rule could try to override Biden’s veto, but at this point it appears unlikely they could get the two-thirds majority needed in each chamber to do so.
Biden’s first presidential veto reflects the reality of a changed political order in Washington with Republicans now in control of the House after they won back the chamber from Democrats in the 2022 midterm elections.
Previously, Democrats controlled both the House and the Senate. Now, the president’s party only has a majority in the Senate.
Most legislation passed by the current GOP-controlled House will not be able to pass the Democratic-controlled Senate. But the resolution to overturn the investment rule only needed a simple majority to pass in the Senate. Republican lawmakers advanced it under the Congressional Review Act, which allows Congress to roll back regulations from the executive branch without needing to clear the 60-vote threshold in the Senate that is necessary for most legislation.
Opponents of the rule have argued that it politicizes retirement investments and that the Biden administration is using it as a way to promote a liberal agenda.
Republican Sen. John Barrasso of Wyoming said at a news conference earlier this year, “What’s happened here is the woke and weaponized bureaucracy at the Department of Labor has come out with new regulations on retirement funds, and they want retirement funds to be invested in things that are consistent with their very liberal, left-wing agenda.”
Supporters of the rule argue that it is not a mandate – it allows, but does not require, the consideration of environmental, social and governance factors in investment selection.
Senate Majority Leader Chuck Schumer said in defense of the rule that Republicans are “using the same tired attacks we’ve heard for a while now that this is more wokeness. … But Republicans are missing or ignoring an important point: Nothing in the (Labor Department) rule imposes a mandate.”
“This isn’t about ideological preference, it’s about looking at the biggest picture possible for investments to minimize risk and maximize returns,” he said, noting it’s a narrow rule that is “literally allowing the free market to do its work.”
The statement of administration policy warning that Biden would veto the measure if presented with it similarly states, “the 2022 rule is not a mandate – it does not require any fiduciary to make investment decisions based solely on ESG factors. The rule simply makes sure that retirement plan fiduciaries must engage in a risk and return analysis of their investment decisions and recognizes that these factors can be relevant to that analysis.”
This story has been updated with additional developments.
By Engen Tham and Julie Zhu
SHANGHAI/HONG KONG (Reuters) -Credit Suisse told staff its wealth assets are operationally separate from UBS for now, but once they merged clients might want to consider moving some assets to another bank if concentration was a concern, according to an internal memo.
The memo, dated Sunday and seen by Reuters, gave talking points to Credit Suisse staff for client conversations after a historic Swiss-backed acquisition of the troubled bank by UBS Group.
“For now, assets are still legally separated. Once that changes, you (clients) may of course want to consider moving some of your assets to another bank if concentration is a concern,” the memo said.
That response was suggested to Credit Suisse staff if they were asked by clients what they should do if they were also a UBS client and wanted to avoid too much asset concentration, which can be a concern for wealthy customers.
In a package orchestrated by Swiss regulators on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse and assume up to $5.4 billion in losses.
UBS will become the undisputed global leader in managing money for the wealthy through the takeover of its main rival, triggering some concerns about concentration risks for clients.
Credit Suisse also told staff to inform clients that plans for its investment banking business will be communicated in due course as details of its acquisition by UBS were still being worked out, according to the memo.
“We do not expect there to be any disruption to client services. We are fully focused on ensuring a smooth transition and seamless experience for our valued clients and customers,” a Credit Suisse spokesperson said.
Credit Suisse is also going ahead with its annual Asia Investment Conference in Hong Kong, starting on Tuesday, the spokesperson said, adding the event, however, would now be closed to media.
In a separate memo on Sunday, the bank told employees that its day-to-day operations were unaffected after it agreed to the UBS takeover.
“Our branches and our global offices will remain open, and all colleagues are expected to and should continue to come to work,” Credit Suisse said in the memo sent globally and seen by Reuters.
Reuters reported on Friday, citing sources, that a number of major banks including Societe Generale SA and Deutsche Bank AG were restricting new trades involving Credit Suisse or its securities.
Regarding counterparties having stopped business with Credit Suisse, the bank said in the client talking points memo that it believed the transaction “will help to restore confidence to the financial markets more broadly.”
Market players remain concerned about the next moves at Credit Suisse and the impact on employees, investors and clients.
UBS Chairman Colm Kelleher told a media conference that it would wind down Credit Suisse’s investment bank, which has thousands of employees worldwide. UBS said it expected annual cost savings of some $7 billion by 2027.
(Reporting by Engen Tham in Shgnghai and Julie Zhu in Hong Kong; Additional reporting by Scott Murdoch in Sydney; Editing by Sumeet Chatterjee, Himani Sarkar and Jamie Freed)
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