Despite the high rent costs for residents of Toronto and Vancouver, the ownership costs of real estate investors have only increased in recent years, causing them to still lose money.
According to the owner of Butler Mortgage, Ron Butler, “it’s all about leverage” referring to rising interest rates and the slowing down of the increasing rental fees.
Butler Mortgage provides a home equity line of credit (HELOC) for real estate investors due to its variable interest rates that lenders typically adjust depending on the benchmark interest rate determined by the Bank of Canada.
Since 2022, the key rate has been increased by 0.75 of a percentage point, and is expected to further surge in the coming months, steadily inflating HELOC payments for investors who purchased high-value property at the beginning of the pandemic housing boom.
It’s quite common for homeowners who have experienced an appreciation in the value of their first home to borrow against their home equity with a HELOC to fund the down payment said, Mr. Butler. He also stated that the cash drawn for the down payment from the HELOC is typically used to apply for a mortgage to finance the remaining portion of the real estate purchase.
Due to increasing HELOC rates many investors are opting to switch their line of credit balance into mortgage debt which offers fixed payments. However, not all will be able to do so due to additional debt accrued from the investment property making them not meet lending requirements.
Yet according to John Pasalis, president of Realosophy, most landlords have fixed-rate mortgages that won’t need renewal for a few years and aren’t as vulnerable as those who have used HELOC. Certain thresholds also allow some landlords to enjoy fixed installments, where lenders direct more monthly payments toward interest instead of the principal as rates increase. Despite this fact, landlords are still unable to fully cover their ownership costs, with data provided by Mr. Pasalis showing that investors who bought properties in the Greater Toronto Area with the intention to rent them out were not breaking even.
According to Mr. Pasalis, the average price of condos that were then leased within a 12 month period was just over $600,000 with the average annual tax bill being $2,235, and the average condo fees adding up to $514 monthly. The average rent price for group properties analyzed by Palasis was under $2,250, yielding a $550 loss each month. However, Mr. Pasalis also indicated that in the GTA “people are investing based on the capital gains,” anticipating that the property’s worth will appreciate significantly by the end of the year.
With investors having to face escalating ownership fees, and tenants, and the burdensome increase in rent expenditure with no reprieve in sight, there will continue to be outcries and tension from all parties involved.
We know that in these uncertain times with fluctuating financial requirements and ever-increasing property fees, it may currently be unclear which path you ought to take towards achieving your real estate investment milestones. If you’re seeking clarity on the future of your investment, or concerned about rising ownership costs and little to no returns, contact us for a free consultation. We are happy to talk with you and put you on a path toward securing a promising future for your investments.