Tag Archives: investment property

Feedback on Your Questions

Over the next two weeks, we’ll answer some of your e mail questions that are certainly topical and questions that thousands of others have, as well:

Your question: I enjoy listening to your program on 1150. We may have a very large amount of money coming in soon. My question is: Do we buy a place and pay off the mortgage completely, or put some of the money elsewhere?

First and foremost, remember that I only ever give feedback on what I would do. But there isn’t a lot to go on here. I assume there aren’t credit card balances, lines of credit, or car loans. If there are, consumer debts are first, paid off from smallest balance to largest.

Then I want you to have a three month of income emergency fund in a simple savings account. That’s not to be touched unless it’s a real emergency.

Next, make sure you have your RRSP, or Tax Free Savings Account, maxed for the year, depending on your tax bracket, etc.

When you ask about buying a place, I’m guessing you mean investment property or your own home. If it’s your place – yes. And you can pay cash for it, which is the dream of 99% of home buyers. Do it! There is nothing like a free and clear house.

If it’s investment property, the hard rule is to have at least 50% down. Then you are in a position of strength, and not risking it all, AND the 50% down means you’ll always be cash flow positive.

Your question: My investment of $30,000 recently expired, and is now sitting in the bank at 1%. We do not want to tie it up again as I am in my late 70s, and want it available if needed. Could you advise us as to what is our best option? We are on a limited budget and this is our savings. We do not have any mortgage and we have a line of credit of $40,000, but it was for a family member, who is also paying it. Our monthly income is approximately $2500.00.

While I’m not an investment advisor, you don’t need one. That $30,000 is almost all of what you have. Take the lousy 1% the bank is paying and know that it’s risk free. Rate = risk, so a higher return means you’ll have to take on more risk. And you’re late middle age, so it’s not worth it.

I don’t like the $40,000 line of credit at all. It’s a floating interest rate, and that’s already hit you for half a percent and climbing. I like it even less that a family member used your credit to borrow. Today they may pay, but what happens when they don’t? And please don’t kid yourself into thinking that won’t happen. Please!

You need to protect yourself first, because nobody else will do it for you. Do two things right away:
-Have a heart to heart talk with this relative and get them to refinance it out of your name or pay it off – NOW.
-Immediately move your $30,000 nest egg to a different bank than the line of credit is at. All the documents you have signed state that they can just take your investments and use it to pay off the debt you owe them – period. Do not risk your entire life savings on a relative. Never, ever. I won’t even talk about the big problem that this relative should never have come to a late 70s person to sign a loan and that you should have said no.

Go to another bank today and transfer the savings. Then have a face to face with your relative that the time to just make interest-only payments is over. Please!

Making the Connection: Vegas and Yesterday’s New Mortgage Rules

Yesterday, the Finance Minister announced a number of new regulations designed to tighten the lending standards for mortgages insured through CMHC. The main three are:

-Refinancing is now capped to 90% of appraised value, down from 95%
-Mortgages on investment properties now require a minimum of 20% down payment
-First time home buyers must have enough documented income to qualify for the payment equivalent of a five year fixed rate mortgage. The buyer may choose a variable rate option at a lower payment, but the income has to be there to be able to make higher payments in anticipation of rate increases.

In practical terms, on a $200,000 mortgage, the buyer needs to qualify for a $1065 payment of a five year term, even if they choose a variable rate mortgage that would actually be $923 a month. (Currently at 4.09% vs. 2.75%). That translates to an additional $345 a month of income, or reducing other monthly payments by $138 a month.

That brings me to my trip to Vegas last week. Vegas is one of the ground zero cities in the U.S. mortgage meltdown. The city that never sleeps had a decade of building house after house, and selling it to investors with no money down, gambling they’d be able to flip it at a higher price to the next buyer – kind of a legal pyramid scheme. And homeowners saw the value of their homes double and triple over a decade and, on average, cashed out their equity every two and a half years, for an average of $30,000 each time.

Now that the music has stopped and reality has set in, the majority of residents owe way more on their homes than the value. You won’t see the devastation on the strip, but drive a few miles north on I-95, and you see foreclosures and bank owned sales, after foreclosure and empty homes.

An even bigger problem are the upscale, luxury condominium projects that just came on line in the last year. They’re 20-30 stories, often, like the Panorama complex, multiple towers – and pretty much empty. At the end of the strip is a twin tower called One – Las Vegas. I saw four cars and a security guard. I’m guessing one entire tower of 20 some stories is empty.

Visitors to Vegas are down 10%, and I’m surprised it’s not way higher. The casinos, hotels, and malls are noticeably empty. Gambling revenue is also way down and the hotel occupancy rates are the lowest since 1984. The Tropicana is in bankruptcy, and even Hooters Casino is in default on their loans.

Unemployment is over 13%, and expected to peak at about 14.5%. Vegas has the greatest fall in personal incomes, highest national foreclosure rate, and the largest percentage of homeowners who owe more than their home is worth.

THAT is the end result of a real estate bubble and insane speculation of buying homes people couldn’t afford, with teaser, variable rate mortgages and no down payments. It works for a while, but it’ll always come to an end. THAT is why the Finance Minister preemptively amended mortgage rules before we potentially get to that point.

Every kid puts their hand on a hot stove once. Yet us adults keep making stupid financial gambles over and over, somehow thinking the next time will be different. Yes, it’s our money, but when our gambling starts to affect the overall economy, it is reasonable for the government to set some basic ground rules.

My rules, and advice for anyone who will listen, go way beyond that:

-Broke people shouldn’t buy or own homes.
-Never buy an investment property without at least 50% down. Because when the roof needs to be fixed or there’s no tenant for two months – you’ll lose it all.
-First time home buyers need to be debt free and have 20% down to avoid our outrageously expensive mortgage insurance in the first place. It’ll make it a dream home, not a mortgage and debt nightmare.