If you’re not living under a rock in the ocean, you are probably hearing the media screaming at you that interest rates are rising and the Canadian housing market is going to crash. In fact, the Bank of Canada just raised their overnight lending rate by 0.5% to a grand total of 1% last week. If you can keep your head about you while everyone around you is losing theirs, there is still money to be made in this market. Like every investment, I look to the long term. I don’t have a crystal ball, and I can’t tell you what the average sold price will be in 6 months or a year, or even what the trend will be. What I can do is look at the data and make an educated guess that by 2032, housing in Canada will be higher than it is today. Let’s not forget that even if markets stay flat, you are (hopefully) getting cash flow and mortgage pay down on your investment, no matter what the price does. So what can we do to protect ourselves against rising interest rates in the short term?
Pay down high interest debt. - Pay off credit cards and high interest loans. This is good to do in the best of times.
Lock in your interest rates - This one is entirely up to you. Locked in or fixed rates are higher than variable rates by a few percentage points. If you can’t sleep at night because you are worried about what the next rate decision is going to be, it is worth it to lock in your rate to take the worry out of your life. Historically, variable rate mortgages tend to do better over the long run than fixed rate mortgages, but peace of mind is worth a few percentage points. Some banks (like TD) don’t adjust the payment amount on your mortgage when rates rise. Other banks (like Scotiabank) do. Something to keep in mind.
Own Cash Flowing Real Estate - When rates rise, people want to pay less for housing. They are payment shopping, not house shopping. The question always has been, how much house can I get for “x” payment? If you own rental properties and are banking on appreciation, what happens when prices fall? You now have a liability, not an asset. The goal has always been to have an asset that provides value to my life. Cash flow at the end of the month helps to weather repairs and maintenance, and interest rate hikes.
Sell Under performing assets - If you find yourself owning a property that has become a liability rather than an asset, sell it. Especially if you think you might need the money in the next 12 months. Or find a way to turn your under performing investments around. Can you adjust your strategy and turn it into an Airbnb? Can you raise rents on turnover? Provide value add services such as storage or coin laundry? If the property is affecting your lifestyle, then you know it is time to move on.
Plan for mortgage renewals - If your mortgage is renewing shortly or in the next few years, look at your situation and evaluate what the change is going to potentially be and look to see if that stills fits your plans. If an increase in interest rates upon renewal will make your payments unaffordable, maybe you can re mortgage now for a new 5 year term, finance your higher payments through another property, increase your payment now voluntarily to see how it goes or perhaps it is time to sell. The point is, don’t let a renewal and higher payment catch you by surprise. Plan for it and expect it.
Do Your Research - Better yet, listen and follow the people who know more than you. I’m not an economist. But I listen to what economists are saying and I read the data that is coming out. This can provide comfort in uncertain times and help to keep you from making impulsive decisions.
Start A Business - If you have a money-making idea and you’ve been mulling over the idea of starting a business, there is no better time than now. When prices are going up around you, those that can create value in the marketplace are going to be rewarded for their efforts.
Keep some cash on the side lines - As mentioned before, when rates rise, housing tends to slow down a bit. Having some cash on the side lines is a good idea if you are looking to buy in the next few years. You may find some deals. It’s also a good idea to have a cushion in general. If payments are increasing and margins are getting tighter, it only makes sense to have a cushion to fall back on when the going gets tough.
Lend money - If you are in the position to become a private lender on qualifying real estate deals, take advantage of higher rates to increase your cash reserves. There are always people out there doing really cool things that need funding to get them through. There are brokers that can help you get started and vet your potential clients and deals to make sure that everything is set up for success. Learn how it works and the pitfalls to watch out for.
Learn a new skill - This one is a little abstract, but the more value you can bring to the marketplace, the more you are worth and the more you can charge for your services. Rising interest rates signals a draw down in a debt-based economy. How do you counteract tighter financial squeezes on your wallet? By creating more value and generating more income.
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I'd love to hear your thoughts on this! Have a great week while working past those obstacles on your climb to success. Let's Grow Together!
Jonathan Beam
Real Estate Investor and Entrepreneur
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
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