Get Pre-Approval to Lock in, or Wait? Read this guys story on Interest Rate

Meet the interest rate that really affects your life

Alex Thomas couldn’t have chosen a better time to lock into a five-year, fixed-rate mortgage. The Toronto-based public relations professional locked in a 3.39-per-cent rate for 120 days at the beginning of July. He bought a house in October, but if he had waited any longer, his monthly payments would likely have gone up.

Why? Because Canada’s long-term interest rates have been steadily climbing since June. When Mr. Thomas locked in, the 10-year Government of Canada Benchmark Bond – the rate that’s most closely tied to mortgage rates – was about 2.4 per cent. It has steadily been rising since then, hovering around 2.6 per cent.

“I’m glad we got preapproved,” he says. “By the time we got our mortgage, the rate had already gone up twice.”

When it comes to interest rates, most of the attention is on the Bank of Canada’s overnight rate, which governs short-term lending. But it’s long-term fixed income rates that have the most affect on people’s wealth. Rising five-year, 10-year and 30-year yields impact everything from mortgage rates to portfolio returns.

Unlike the overnight rate, which the Bank of Canada is responsible for moving, the long-term rates shift based on what’s happening around the world.

For most of last year and until late May, the 10-year Government of Canada bond rate was in the 1.6 per cent to 2 per cent range. Then, U.S. Federal Reserve chairman Ben Bernanke said that he might slow down the U.S. government’s quantitative easing program – it’s been buying $85-billion (U.S.) worth of its own bonds since last fall.

That announcement caused long-term bond rates to rise around the world.

“The Bank of Canada had nothing to do with that,” says Darcy Briggs, a portfolio manager with Franklin Templeton Investments. “These rates are greatly affected by events occurring outside of the bank’s control.”

For house hunters like Mr. Thomas, the most obvious impact of rising rates is higher fixed-mortgage costs, says Mr. Briggs. According to Ratehub.ca, in May Canadians could get a five-year fixed rate for 2.64 per cent. That rate is now closer to 3.4 per cent.

Variable mortgage rates are based on the overnight rate, explains Mr. Briggs, so those costs haven’t increased this year.

Rising rates have also had an impact on certain investments, but especially on bond values, says Allan Small, a senior investment adviser at HollisWealth. When yields rise, bond prices fall, he explains.

“If a bond issue today is paying 6 per cent and an old bond is paying 5 per cent, then who would want the bond that’s paying less?” he asks. “That lower-paying bond then gets sold at a discounted price.”

In June of 2012, the Government of Canada issued a 10-year bond for about $100. Because rates have risen, that bond is now worth about $90.

“People in retirement have flocked to bonds because they’re low-risk investments,” Mr. Small says. “But over the last couple of months, they see their portfolio down, even though the stock market is going up, and they’re wondering what’s going on.”

However, it’s not just falling bond prices that have affected wealth. Certain equities are affected by higher rates, too. Investors who hold real estate investment trusts and utilities will have noticed that returns have fallen.

These two sectors typically offer higher-than-average yields, which is attractive in a low interest-rate environment. When bond rates rise, though, the risk and return properties of these stocks become less attractive. It starts making more sense to own a more stable fixed-income instrument than an equity investment, Mr. Briggs says.

“At 1 per cent, that bond doesn’t look as attractive, but it gets better at 2 per cent,” he explains. “That makes the outlook for other investments not as bright.”

This doesn’t matter as much to investors who are solely in the market for income, says Mr. Small. Hold a bond to maturity and you’ll still get the same return as you would have when you originally purchased it.

If you want to sell a stock or bond, or want to see your portfolio rise, then you may be out of luck.

“If you’re concerned about the value of your portfolio, then you have to be mindful of the risk.”

To minimize the impact of rising rates, Mr. Small avoids bond funds, which don’t have a maturity date and often fall when rates rise. He buys the actual bond for clients because he’s able to hold the security to maturity and receive the full payout he was entitled to when he purchased the bond.

“I know at some point in the future, it will reach its maturity date, so I don’t care about the price,” he says.

Some investors may also want to pare back their exposure to real estate investment trusts, utilities and other interest-rate-sensitive stocks, Mr. Small says. If rates continue to rise, then these stocks could be hit again.

Instead, consider owning some bank stocks. Financial institutions also pay attractive yields, but they benefit from rising rates – higher rates allow them to make more off the dollars held in savings accounts.

For Mr. Thomas, the only affect rising rates would have had on him would have been on his mortgage. He doesn’t yet invest, but he’s planning to start. When he does, he says he will keep his eye on where rates are headed.

“I’m reading about what’s going on with rates,” he says. “That could impact where I put my money.”

Globe and Mail Special article posting

Barrie waterfront development draws fire at meeting

Harmony Village drew a crowd Monday, just maybe not the audience it wanted.

People filled the Council Chamber at Barrie City Hall for a marathon public meeting on a rezoning application for the huge, proposed residential/retail-plus development near the waterfront.

With five towers ranging from 22-31 storeys, Harmony Village would have 1,255 units in high-rises and townhouses for 3,000 residents, a hotel, dinner theatre, community centre, medical offices and wellness centre on the 6.8-acre site. There are also to be pathways and public spaces surrounded by shops, restaurants and cafes at 51-83 Bradford St. and 20 Checkley St., along with a new road connecting Bradford to Lakeshore Drive.

Monday's message from residents is it's too much - in terms of height, density, traffic, shadowing, noise, etc. And not enough parking.

Don Hamilton represents a couple of dozen residents of nearby Grand Harbour and said Harmony Village would largely complete the neighbourhood, but it should align with the existing high-rises of about 16 storeys.

"We don't believe this project should be designed to overwhelm and over-shadow the existing developments," he said.

Gary Bell, a Barrie land use planner, said the project is an over-intensification of the property.

"It's a scale of development well above what is desired or intended or needed on Bradford Street," he said.

"We have seen the tall towers of Toronto," said Nancy Quinlan of Toronto Street's Grand Harbour. "But we're Barrie, we're not Toronto."

Lorne MacDonald, who lives on nearby Ellen Street, said Harmony Road is not needed, that the area doesn't require two more intersections.

And he says the development is too big for the land there.

"They're trying to put a size 12 foot into a size six shoe," he said. "The only open space they are proposing to leave is Harmony Road."

Brent Clarkson, who lives in the Nautica tower on Ellen Street, said development projects need to fit in with the character of a neighbourhood - and that's more than design, height and building materials.

"This project fails in any reasonable sensitivity test," he said, noting traffic and noise concerns as well. "It requires substantial modifications."

"They seem to want to put green space inside for the residents, pavement outside for their neighbours," said Robert Bishop of Ellen Street.

"They should have to prove to the city that they need to go higher and that there are municipal benefits," said Ian Rowe, who lives at Bayshore Landing, two towers of 15 storeys on Dunlop Street West. "Make sure all the pie-in-the-sky stuff gets into the zoning bylaw."

But all the comments about Harmony Village Monday were not negative.

Jill Price, who owns businesses in the downtown, said this type of intensification is the future.

"They're looking at developing the site in a creative way and a memorable way," she said. "This is the way we need to move. . .to better life in the downtown core."

Price said the downtown needs the people, the shoppers, to thrive.

Most residents who spoke Monday acknowledged this property will be developed, but wanted to limit its impact on the neighbouring community.

Coun. Lynn Strachan, who represents this area, was unhappy with the applicant's initial presentation as it related to relief from city bylaws - for height, setbacks, etc.

"They have come here with a vague proposal for a site-specific rezoning, but not the rationale," she said. "We didn't get a lot of information about the zoning proposal."

An official from Harmony Village then quoted from a report that had been submitted to the city.

But Mayor Jeff Lehman wasn't satisfied.

"What is the planning rationale for towers that are twice as high as are allowed?" he asked.

Lehman didn't get a clear answer - other than there is no particular rationale for any height, or height limit.

Harmony Village would be geared toward those 55 years old, and older, although not exclusively. It carries a $600-million price tag over eight years for the project, with towers ranging from 22-31 storeys. It would employ nearly 6,300 people to build, generate $8.2 million in annual property taxes and create 874 full-time jobs. At more than two million square feet in total size, it would also include nearly 1,300 parking spaces.

Depending on city approvals, shovels could be in the ground for Harmony Village in 2014.

The developer acquired this property from the proponents of Blue Simcoe Development, a project which was to include towers of 24 and 25 storeys, and 595 residential units.

The property is currently zoned transition centre commercial and environmental protection, which is site specific for the former development plan.

Harmony Village-Lake Simcoe Inc. wants to amend Zoning By-law 2009-141 to create a new site specific zoning bylaw to reflect its development plans.

Site plan control for this property has been delegated to city planning staff, although it could be 'bumped up' to a council decision if that's the wish of Barrie councillors. The site plan will likely be discussed at tonight's public meeting.

Once it's held, the rezoning application goes to city planning staff for a report to Barrie councillors, who decide whether it is accepted, rejected or changed.

Other plans are also afoot for this part of Barrie.

A centre for excellence in education is being proposed on 11 acres of land which includes Barrie Central Collegiate, Red Storey Field and the former Prince of Wales School.

Development of secondary and post-secondary institutional uses there, along with commercial and residential uses, would allow Central to be rebuilt and the development of a university campus, with student residences.

Laurentian University wants to build a campus in the city's downtown, and Barrie council is onside – although this still requires provincial approval. - BBRUTON Barrie EXAMINER

Barrie-area couple says strict rules making it hard to evict errant tenants

photo Mark Wenzel

After their tenants were arrested on drug charges and the apartment nearly burned down, the deGroots thought they had just cause to evict their errant tenant.

Not so fast, said officials at the Landlord and Tenant Tribunal Board.

“At the tribunal, our case was dismissed. We lost,” Catherine deGroot said from the shaded deck of her home near Elmvale.

“Where are the rights for the landlords?” her husband Tony demanded.

Struggling with a recent ALS diagnosis, his frustration has turned from his disease to their inability to evict a tenant from their rental property on Blake Street that was the scene of an early morning fire on Aug. 12.

The deGroots learned about the fire when they listened to a voicemail that had been left for them at 6:30 a.m., Aug. 12, requesting they call the Barrie fire department.

They were told the fire started in the bungalow’s front apartment in the basement when a mattress that had been leaning against the wall caught fire.

Catherine deGroot said she knows exactly where the mattress was, because she’d entered the premises — after leaving letters requesting the tenant be available at 5:30 p.m., Friday, Aug. 9 to meet with her — and had a friend photograph what she calls “the absolute squalour” of the apartment.

Clothes strewn around the apartment and hanging from the kitchen sink were the least of her worries. Four cats meowed pitifully, both from hunger and the discomfort of a full litter box and flea bites.

“We couldn’t stay in there long, the fleas were up to here,” she said, pointing to above her ankle. “My feet were black with them.”

Dishes and dirt were piled on every surface, and deGroot admits she missed the syringes and condoms firefighters later told her they found in the basement.

She now believes her tenant wasn’t available to meet with her Friday because she was in jail.

Although the tenant wasn’t charged, a drug bust did occur at the home June 13 by the Barrie police department’s street crime unit.

According to police, at that time two men, a woman and sleeping child were found in the home on Blake Street. A third man entered the home, and he was promptly arrested for cocaine possession. One of the two other men was arrested for five drug-related charges and the other man was released. The young woman was arrested and released. In all, police found almost $2,000 worth of prescription drugs and cocaine and approximately $4,000 in cash.

The deGroots say they originally had a good relationship with the woman. But when her circumstances changed, when rent wasn’t paid and neighbours noticed drug activity, the relationship soured.

The tenants living in the back portion of the bungalow called 911 when fire broke out early that Monday morning.

“We were just falling asleep watching a movie when the TV and A/C flickered,” Jason Malak said. “‘We thought we’d blown a fuse, but the other lights were still on. Then I could hear noises underneath the kitchen — we don’t have a downstairs — and I thought someone was breaking in. Then we heard voices and I noticed a little bit of smoke.”‘

Malak said he opened his door and was greeted by smoke pouring out of the other apartment’s air-conditioner.

“There was a lot more smoke outside. We called 911,” he said.

His girlfriend is about seven months pregnant and was taken to Royal Victoria Regional Health Centre for smoke inhalation concerns before being released.

The couple was removed from their apartment — that was mostly untouched by the fire — until the hydro and water could safely be turned back on.

Public fire and life safety officer with the Barrie fire department, Samantha Hoffman, said the fire was suspicious in nature because no one was living there when it started.

“Yet there was evidence to show that someone had been in the unit shortly before the fire,” she said.

Four cats perished in the fire.

The deGroots’ insurance company has boarded up the former tenant’s apartment and said work would soon began to clean up after the fire.

But the deGroots’ concern is that their tenant still has legal rights to return once it’s fixed.

“Our fear is (she) is still tied to Blake Street and we still have to get her out,” he said.

Running her Landlord Legal business in Barrie and Meaford, April Stewart is a busy woman.

Stewart said she’s seen many drug-related attempted evictions by landlords fail for any number of reasons.

“We do a ton of drug cases. It’s a significant part of our caseload,” Stewart said. “We see all of the drug or alcohol and other societal problems.”

She said she’s seen apartments become flophouses where a “tenant’s associates can show up, hang out and find a place to sleep” without the landlord unaware what’s going on.

Steward represents landlords at the Landlord and Tenant Tribunal Boards because she says while tenants can get free representation, landlords can’t.

“Sometimes, because the tenant went to jail, the landlord thinks he can change the locks,” she said. “But the tribunal board is there for a reason, to terminate tenancies. Nobody else can do that.

“So just because your tenant is in jail, or not paying rent for some reason, that doesn’t mean the agreement can be terminated.”

The legal paperwork landlords are required to complete can be daunting, Stewart said, and tenant evictions very much rely on the ‘very high threshold of proof’ landlords must submit to the tribunal.

Stewart said when criminal charges are pending against a tenant, having the arresting police officer attend the tribunal is often the proof the tribunal requires.

“If there are reasonable grounds (presented), a conviction would stick,” she said.

Landlord Nancy Lowe knows a little about dealing with unruly tenants.

After checking all three tenants’ references and meeting their parents, the Barrie woman allowed the three twentysomethings to move into her rental property on Campbell Avenue a few years ago. She said the tenants punched holes in the walls, destroyed the rug, scraped enamel off the bathtub and broke the glass patio doors and several windows.

Two years later, Lowe has been in and out of court and finally garnisheed the wages of one of her former tenants — to the tune of $21,300.

“I had to get the judge to order the parents to serve them,” Lowe said. “My advice to landlords is, stick with it. It’s a lot of legwork, but I didn’t give up and got the money they owed, plus my expenses back.”

In the meantime, the deGroots are responsible for hiring a pest control company to rid the apartment of fleas because that’s not covered under their fire damage policy. - Cheryl - Barrie Examiner

News Article: CMHC moves to take steam out of housing market

Ottawa is taking new steps to cool the country’s housing market.

Canada Mortgage and Housing Corp. is limiting guarantees it offers banks and other lenders on mortgage-backed securities. The measure comes amid the federal government’s efforts to protect taxpayers from financial risks in the housing sector, further cool lending and add upward pressure to mortgage rates.

The Crown corporation has notified banks, credit unions and other mortgage lenders that they will each be restricted to a maximum of $350-million of new guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program. The decision comes in the wake of “unexpected demand” for the guarantees, a spokeswoman for CMHC said in an e-mailed statement.

The conversion of loans into securities with CMHC backing has become a popular way for lenders to tap funds from a broad range of investors, enabling banks to issue more mortgages and at a lower cost.

Federal Finance Minister Jim Flaherty, concerned that Canada’s housing market might overheat and infect the economy, has been taking steps to cut back the flow of mortgage credit. This spring, he went as far as to publicly chastise some banks for dropping their mortgage rates too low.

He is also taking steps to reduce the degree to which taxpayers backstop the housing market.

This year, he announced he would restrict the ability of banks to buy bulk insurance from CMHC, and he curtailed the use of government-backed insurance in securities sold by the private sector. Ottawa released a legal framework for covered bonds, another type of bond backed by pools of mortgages, last year. It said banks could not use insured mortgages in such securities.

In addition to removing fuel from the housing market, these moves force banks and other lenders to take on more of the risk of mortgage defaults, rather than offloading that risk to Ottawa.

Canada’s housing market slowed in the wake of the government’s moves, namely Mr. Flaherty’s decision last summer to tighten mortgage insurance rules. Still, prices in most areas continued to climb, and sales have begun to bounce back.

“The government is attempting to tighten credit conditions for home loans, for example the changes to CMHC’s underwriting standards last year, and this is the latest iteration of that effort,” said National Bank analyst Peter Routledge.

He said that the four largest mortgage underwriters, Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Nova Scotia, had made good use of the NHA MBS program “and I expect that their funding strategies will change as a consequence.”

“Given the differentials in funding costs via NHA MBS or unsecured long-term funding, I could see [an additional] 20 to 65 basis points in the cost of funding mortgages for the larger banks,” he said. “All else equal, we could see mortgage rates start to move up in unison.”

At the start of this year, after consultations with CMHC, Mr. Flaherty said the Crown corporation could guarantee a maximum of $85-billion worth of new NHA MBS this year. By the end of July, lenders had already issued $66-billion worth of the securities, compared to $76-billion during all of 2012. As a result, CMHC is imposing the $350-million cap on each issuer effective immediately, while it comes up with a formal allocation process this month that it will put in place for the final four months of the year.

The Crown corporation guarantees timely payment of interest and principal to investors in both types of securities, and charges the banks a fee for the service.

On its website, CMHC states that “MBS [have] helped to ensure a ready supply of low-cost funds for housing finance and to keep mortgage lending costs as low as possible for homeowners.”

Mr. Routledge said that smaller mortgage lenders don’t create enough NHA MBS to be materially affected by the new $350-million cap.

The amount of NHA MBS being issued shot up during the financial crisis, as banks sought cheaper sources of funds to continue lending mortgages. The securities are backed by pools of insured mortgages, and investors receive monthly principal and interest payments that stem from the payments homeowners make on the underlying mortgages. Banks sell the securities to investors, or to be used in the Canada Mortgage Bond program.

Source: TARA PERKINS The Globe and Mail

Why Barrie? Why Real Estate Investing? Check Out this Video Interview with Don R. Campbell and Shannon Murree!

Special thanks to Don R. Campbell of The Real Estate Investment Network™ (REIN™) for offering this EXCLUSIVE, can only be seen here, interview with Investor-Only REALTOR, Shannon P. Murree of  Barrie with RE/MAX Chay Realty Inc Brokerage. The City of Barrie is one of the Top Investment Towns and Rated by analysts and researchers of REIN Canada.

Check out this new and never seen before interview. 

Questions answered like: 

• Why Barrie?
• What makes a top 10 Town?
• What are the influencers?
• Who are the important players?
• What could cause a chosen City/Town to fall out of the top 10?

Happy Real Estate Investing!

*disclosure: For informational purposes only. Not to be construed as any legal, accounting or financial advice. Not intended to solicit anyone with any agency agreements whether written or implied. Shannon P. Murree is a licensed Sales Representative with RE/MAX Chay Realty Inc Brokerage is Independently Owned & Operated The Real Estate Investment Network™ (REIN™) is a Canadian business that has been in operation since 1991. Its Members have purchased over $4.0 Billion of real estate. We are Canada’s leading resource center for real estate investors.

REIN™ is a successful Education, Analysis, Research and Leadership resource that provides real estate investing workshops, services and products for its Members. Its 2,700+ Members are individuals, corporations, and entrepreneurs who are interested in learning how economic events affect real estate markets across Canada and how they can position themselves to take advantage of this information.

Is an income property right for you?

If you’re considering buying an income property during your retirement, think carefully before you do so. As long-time property investor Rui Torrao says, “Investment in real estate isn’t for everyone.”

You have to appreciate that—unlike investing in stocks and bonds—this kind of investment isn’t passive. You’ll need to do your homework, stay on top of the real estate market, and master all the details of managing your property to get a good return, even if you hire someone else to do much of the day-to-day work.

“It’s not hands-off,” says Don Campbell, author and senior research analyst at the Real Estate Investment Network, an educational and research company. “You’re in essence buying a small business.”

You also want to consider that you probably already have a big stake in the real estate market through the equity in your house. That may not matter much if you consider your home primarily a place to live and you don’t intend to sell it to realize your retirement objectives. But it can be a factor if you consider your home an investment you may need to cash out of at some point.

In that case, if you buy a rental property—particularly in the same city—that means a lot of your wealth will be riding on real estate’s good fortune.

If holding real estate directly isn’t your thing, you do have a more passive alternative: buying units in real estate investment trusts (REITs). These have some clear advantages, says Michael Missaghie, portfolio manager with the Sentry REIT Fund, Canada’s largest REIT mutual fund.

He points out that REITs are easy to buy and sell with low transaction costs (they trade like stocks). As well, you’re assured of professional management, and REITs provide a well-diversified real estate portfolio that you just don’t get if you buy one or two properties on your own. REITs may hold commercial or industrial properties, office buildings, apartments, shopping centres, hotels and the like.

On the other hand, Campbell says direct investing gives you more control, you save on fees if you have the skills to manage your assets yourself, and you can invest in residential market segments like six-plexes that are too small for REITs to touch.

Which gives you the best return? It depends what you compare. Interestingly, analysts Michael Smith and Matt Koskinen at Macquarie Capital Markets Canada did a head-to-head comparison last October of investing in apartment REITs versus condos. They first compared returns from investing in a Calgary condo to Alberta-focused Boardwalk REIT. Then they compared returns from investing in a Toronto condo to eastern Canada–focused CAP REIT. In both cases, they found the REIT investment came out ahead consistently in recent years.

Campbell reiterates the best direct real estate investments are in niche markets like small multiplex buildings rather than condos, and he avoids Toronto altogether. He contends you can generally make more money through direct investments “if you do it right.”

**originally posted CTV

MARKET CAP COMPRESSION SQUEEZES INVESTORS

Really great tips by another Real Estate Investing Pro:

MARKET CAP COMPRESSION SQUEEZES INVESTORS

No doubt, some of you read the title of this article and thought ... huh?  "Market cap compression" is just a fancy term which merely states that prices for commercial real estate continue to rise.  The market cap has an inverse relationship to the price/value of a commercial property.  In essence, as the price/value of the property goes up, the market cap goes down or becomes "compressed".   In the past few years we've seen significant market cap compression in the commercial sector which is primarily a function of low interest rates coupled with no real alternatives to park investment dollars.  The question is, what does this mean for the average investor either looking to buy their first property or their fifth?

1. Look outside of major urban centres

I've always been a major advocate of investing outside of the major urban areas such as Toronto, Calgary and Vancouver.  As much as I would love to buy properties in those cities, the cap rates for multi-unit residential properties have reached historic lows and thus don't make economic sense for investors looking for cash flow.  Five percent market caps have now become the norm in Toronto.   I've even started to see caps as low as 3.5%.  With caps that low, your investment property is unlikely to cash flow.   Further, when the mortgage resets after the initial term, investors are opening themselves up to signficant risk if and when interest rates rise.

Why look to the smaller urban centres?  Because cap rates in the smaller urban areas tend to be a percentage point or two higher than their more densely packed counterparts.  That's not to say that all smaller areas are created equally.  Investors need to focus on the key metrics to find the right place to invest which includes GDP Growth, low unemployment, low vacancy rates, population growth, etc...  Smaller cities that investors should be looking in include, but is not limited to, Kitcher/Waterloo, Guelph, Cambridge, Hamilton, Durham region (Pickering, Ajax, Whitby, Oshawa) and Kingston.

2. Watch the bond markets

The bond markets are a critical metric and commercial investors  need to keep an eye on them as they are used to establish the ultimate cost of funds (mortgage rate).  Over the past 30 days, the Canadian bond markets have seen a significant increase in bond yields which will ultimately place upward pressure on commercial mortgage rates.  In the longer term, if the movement in bond yields proves to be a trend and not just a blip, market cap compression will begin to reverse as cap rates have a close correlation to the cost of funds.  Investors need to be weary in the short term that they aren't buying commercial properties today based on the recent trend of extremely low cap rates and getting financed at the new higher mortgage rates.

3. Lock into longer terms

With mortgage rates at historic lows, even with the recent run in the bond market, locking into longer term rates such as 5 and 10 year terms will make economic sense for most long term investors.  This type of certainty allows for predictable cash flow and signficant mortgage paydown during your mortgage term.  More importantly, it significantly mitigates the risk of rising interest rates.  

4. Ensure you have a healthy spread

The key to profitable investing is to ensure that you have a healthy spread (the spread is the difference between the market cap and your cost of funds).  Market cap compression in the larger cities such as Toronto have all but squeezed the spread in most cases to zero.  To illustrate this point, the average 12-plex in Toronto has a cap rate of approx. 5%.  The cost of funds for this type of property are typically between 4-5%.  In essence, there is almost no spread, which means that the investment property is unlikely to cash flow.  Even worse, the investor could be in a negative cash flow situation having to pull money out of their pocket every month.  I personally like to work with spreads of 2.5% to 3% to ensure healthy cash flow and to provide a buffer should interest rates rise upon rate reset. 

5. Be weary of too much leverage

Real estate investing and leverage go hand in hand.  In fact, without leverage, most real estate investors wouldn't exist as they wouldn't be able to pay for their property entirely in cash.  As much as I love leverage and have used it extensively to make significant gains, it must be approached with extreme caution.  Basically its the old adage ... too much of a good thing.  While taking on large amounts of leverage/debt may seem like a great idea now that interest rates are at historic lows, one must keep in mind that in all likelihood, when the mortgage resets in 3, 4 or 5 years from now, on a balance of probabilities, mortgage rates will be significantly higher than they are today.  If you are overleveraged this can pose a significant problem with your cash flow and your ability to service your debt.  As a rule of thumb 65% to 75% LTV, in a longer term (5 or 10 year) are usually a pretty safe bet.

Authored by:: Paul Kondakos, BA, LL.B, MBA - Professiona Real Estate Investor

 PAUL KONDAKOS | POSTED ON  MONDAY, JUNE 24, 2013 Realtyhub