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Investors chase positive cash flow – that is our whole premise. Then WHY is it that when opportunities to increase arise, so many miss taking the necessary steps to tap into it. Over the last 21 years, I have made more money and increased my cash flow the quickest by being aware, being in action and being prepared when the window of opportunity opens.
Another One Of These Windows Has Been Throw Open – But Only For A Short Time.
On February 13, 2013 our research showed that a mortgage rate war was preparing to occur this spring. Our discussion with insiders and major financers (banks, Credit Unions and private lenders) revealed a massive amount of money sitting on the sidelines in these institutions – money that was ear-marked to be put into the mortgage market. However, at the same time, CMHC rules were tightened, banks were tightening their internal lending criteria and mortgage application numbers were declining. For a lending institution, this was not a pleasant situation to be in. Money has to be put to work – or it doesn’t earn income.
Remember, right now we are living in a very low yield environment and Canada is, with its reputation of a safe financial haven, is attracting masses of international money looking for a place to park. This inflow is keeping the yields down even further.
As we analyzed all of the moving parts, including but not limited to the situation described above, it became quite obvious what was going to happen. Financial institution would have to be more aggressive, chasing mortgage lending numbers, with a diminishing number of borrowers.
So what could they do? Well it would be easy to loosen up the borrower criteria (like they did in the early 2000’s); however, we saw how that turned out… OUCH. The “Risk Managers” at these institutions wouldn’t want to repeat this mistake (at least not yet, although history has a way of repeating itself eventually).
The other option to get that money into the market before another institution grabs the borrower, is to make rates more attractive. The lending institutions want the strong borrowers and they want to lock them in as long term clients and they are willing to discount their rates to do so.
And here it is, your opportunity to act, your opportunity to help solve these institutions’ problems. Yes, it is time for you to create extra cash flow from your current portfolio. That’s right, you don’t have to add more properties to your portfolio (although that is a secondary strategy) you can, and many of us have already, dramatically increased our cash flow by grabbing these low rates.
This will not last long and as a matter of fact, for most institutions you may not even see their posted rates dropped. Jim Flaherty, Canada’s Minister of Finance, said when one bank announced 2.99% – he encouraged the others NOT to follow suit (an interesting choice that if it occurred in any other industry: cell phones, food or automobile lending rates would bring a MASSIVE outcry).
So what are strategic investors doing? Simply take time to review your current mortgages and create a quick spreadsheet or document that answers and lists:
1. Which mortgages are coming due in the next 6 month?
2. What, if any, penalties are built into the ones that are coming due in the next 12 months?
3. Review the interest rates, terms and amortizations on these mortgages.
4. Take this list to your bank or professional investment focused mortgage broker and say, “What can we do with this portfolio at today’s discounted rates?”
Yes, this is even if your bank hasn’t changed their current posted rates. Many of these institutions are avoiding the public wrath of Jim Flaherty by simply offering steep discounts (if asked) on their higher posted rates in order to keep those who are strong borrowers and strong portfolios. Have your Sophisticated Investor Binder ready, in case they ask for your latest financials. Lenders are looking for prepared professionals to lend to, so present yourself that way.
Here is what investors are discovering:
1. It is best to use a well-seasoned Mortgage Broker who will strategically match the right property to the right lender.
2. Many banks are offering ‘cash-back’ mortgages right now, that may pay you enough for 50% or more of your re-negotiations penalty (in some cases MORE than the penalty).
3. Some institutions, for great clients, are even waiving the penalty if you lock in for 5+ years. Not all of them yet, and only for strong borrowers.
4. You may wish to stretch your amortization back to the original, thus lowering the payments even further.
By taking these steps right now, while the window is open, you can position yourself for more income without adding more properties to your portfolio. But it is in your hands and this window of opportunity is short.
These short term opportunities are why, at The Real Estate Investment Network Ltd., we always say treat real estate investing like the business it is to ensure your financial information is up to date and in order so you can ‘strike when the iron is hot.’
As an added bonus, the increase to your cash flow makes you look like an even better borrower to the lending institutions; therefore, the (un)intended consequence is that it will be easier to get a YES from lenders next time you bring in a new deal.
*Don Campbell began his investing career in 1985 with a house purchased in Mission, BC. He is the Founding Partner and Senior Analyst of The Real Estate Investment Network and currently owns over 170 doors in BC and Alberta.