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Easing the squeeze

by Contributor on 04 Apr 2018

Property ownership in Canada recently became a little more challenging, especially if you want to increase your profitability as an investor. The Bank of Canada has boosted its interest rate twice this year, and recent changes to the Residential Tenancies Act expanded rent control to most private rental units in Ontario. It’s important for property owners to take steps to simultaneously protect their ROI and avoid potential issues with the new regulations.

The new rates and regulations provide the push for us all to do a little housecleaning around our portfolios. Here are three ways you can maximize cash flow, keep your balance sheet in the black in the coming year and stay on the right side of the Landlord and Tenant Board’s watchful eye.

1. Don’t drag your heels
Make sure you’ve prepared all of your rent increases properly and on time (ideally before the end of the year) to counteract any increase in your interest rates on a variable mortgage. Preparing rent notices properly means adhering to the letter of the law, laid out in the Landlord and Tenant Board’s regulations. Fortunately, the board has provided a format to follow in your rent- increase documents and procedures, which you can find at ltb/Notices of Rent Increase & Instructions/ N1.pdf.

The guidelines with respect to the amounts and timing of those increases are strictly enforced, so educate yourself thoroughly.

2. Find a better rate
Shop your mortgage around to other lenders to see if you can find a significantly better rate. If you’ve been running with variable-rate mortgages for the past few years, it might be worth it to pay the three-month penalty and switch lenders if it can get your rates significantly lower. I can think of two specific scenarios where this might be the case.

First, if your mortgage will be coming due within the next six to 12 months, it’s time to start preparing for renegotiation anyway. By doing so now, you can lock in at current rates before they rise even further, which most experts feel is inevitable. Just be wary of a massive jump in either rates or payments with the new mortgage you’ll be negotiating.

Note that the interest penalty for breaking a fixed-rate mortgage can be huge. It’s usually a fairly complicated calculation based on interest differential, but essentially you’re liable for the full amount of interest that the lender would have received from you over the full term of the mortgage, even if you decide to pay it off now and move to another lender. That can be an expensive proposition if your mortgage still has three to five years left to run on your current term, so be sure to sit down with an experienced financial analyst to run the numbers accurately before you make a move.

The other scenario where it might be worth switching to another lender is when you’re dealing with a variable-rate mortgage. After all, the rate on a typical five year variable rate mortgage has already jumped twice in the past year alone, so this seems like the ideal time to make the switch to a fixed rate mortgage, especially if you have the advantage of a minor three-month interest penalty for renegotiating the agreement.

Even better, locking in a fixed-rate mortgage with the same lender shouldn’t incur any interest-rate penalties whatsoever, and it’s usually easy to do with just a phone call or email to your current account representative. That’s an easy way to set yourself up for success in the face of climbing interest rates without making big changes in your current financial arrangements.

Before you make a move, be sure to get the full details on your term, renewal dates, penalties and provisions, and then calculate the bottom-line effects that a rate change will have on your specific mortgage. I wish there were a simple, one size-fits-all formula to figure this out, but every case is different. With sky-high property values in some parts of the country, though, a small move can make a big difference to your bottom line.

3. Re-evaluate
If a property is already tight when it comes to profitability and cash flow, you might want to consider liquidating it. If the numbers aren’t working now, things are bound to get even more problematic as rates increase.

What would you get for the property if you sold it now? If you reinvested the money in a more positive cash-flowing asset, how much better off would you be? Of course, there will be costs involved with selling the property (potentially including commissions, transfers and taxes, etc.), but if you can create a more stable investment with a higher cash flow and a higher return, it could be well worth it to make the change sooner rather than later.

All things considered, the recent interest rate increases make this coming season a good time to re-evaluate your overall portfolio. It’s your opportunity to weed out the non-performers, get some liquid assets on your side and reinvest those assets to create better deals to maximize your returns – especially if we’re talking about assets you acquired early on in your investment career, when you might have been happy to work with a smaller margin or tighter cash flow. Now could be the time to clean those out and raise your game.

The trend in Canadian real estate appears to be increasing regulations. As an investor, rather than sitting back and watching your returns dissolve, it’s your duty to find the opportunities hidden in the challenges. That’s the only way to secure the returns and peace of mind that got you investing in the first place.

Paul D’Abruzzo is a real estate investment advisor, industry-leading Realtor, speaker and private performance coach. He and his team specialize in the acquisition, purchase and sale of investment-grade property in southern Ontario. Get free, instant access to real estate deals in southern Ontario before the general public and learn how to analyse them quickly and easily, just like the pros do, at

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