Daniel St. Jean: The Windrose Group, building a mortgage brokerage of over 200 transactions a month. Wow! And primarily for real estate investors with private lending in both mortgages, private markets and promissory note loans. She's done many buy and holds. Claire, how are you doing?
Claire Drage: Good. Not bad. Big chilly out there today, but not bad at all.
Daniel St. Jean: All right, so much is happening right now in the market, especially in when it comes to financing and mortgages. Talk to us a little bit about what's happening and what people seem to be able to do. I've got some questions for you in a minute, but overall, what's happening and what are people saying and what are they afraid of?
Claire Drage: Absolutely. There's definitely a lot of uncertainty, unless you've been living under a rock obviously we know interest rates have risen, they continue to rise. So I figured I'd start by covering a couple of things. One is, what do I do with rates rising? Now my property doesn't have cash flow.
Where do we think rates are going? And what recommendations would I have as an investor? Cause do you continue to buy or do you hold out. What are those options there? So the first thing is rates are rising. We of course, have seen that increase. The Bank of Canada meets on the 26th of October.
They are expected to continue the momentum of what they've already started. Which is aggressively continuing to rise the rates. My personal opinion is we'll probably see a quarter, if not a three quarters of a percent increase on the 26th of October. We'll then see likely a quarter of a percent increase in December.
When we look through to 2023, the consensus is that if these continued increases continue to stave inflation and the Bank of Canada's committed to this, they're not likely to back out now. We are likely to see the prime rate drop next year. By one to one and a half percent. So this sort of rise that we've seen recently in the rates, I'm having a lot of discussions with investors about what they do?
I have a variable rate, Should I lock in? Should I hold out? My prompting doesn't have cash flow anymore. Help, what do I do? So the reality is I wanna put it in a bit of perspective. One is that the rates have gone up for everyone. So you're not special. Okay. being really honest, they're like, Oh, won me.
It's won me for everyone. It's nothing special about you and why your rates gone up. I think there's a couple of things that are really important to understand since 2008 interest rates have been historical lows. One 2% interest rates, 3% at a high. The one thing we've forgotten, cause that was 15 years ago, is we've totally forgotten that is not the normal interest rate.
We've basically had free mortgages for the last 10 years, 15 years. Prior to 2008, a five year fixed term, a variable rate was typically cheaper, but a five year fixed term was always around 4, 4 1/2%. That is actually the normal standard. Good balanced economy, interest rate we should be paying.
The downside is we've been so used to paying such low rates for 15 years. It appears to be such a big sticker shock, but the reality is, I've been talking, every time I talk, rates are going to go up. So what have you done in the last 15 years to make the most of the low interest rates? Have you put aside the positive cash you've got because you've had way more than what would be in a normal scenario?
Have you paid down the mortgage? Have you used a line of credit? Have you bought more properties? Has low interest rates given you the ability to continue to grow that if they'd been four or 5%, you wouldn't have been able to. The reason why I go through that is I think we've gotta look back and go look at what you've accomplished.
If you've bought 3, 4, 5, 6, 7 properties, a hundred properties, and you've benefited from low interest rates, you've almost been Not elevated, that's the wrong word. It's always like you've had a good leap into the market and a strong one. Like you've had a bouncing board behind you. You had no headwinds.
Now, we've got some headwinds, so we have to deal with them as business owners. I think when you own real estate, you've got to treat it like a business. Okay. So my revenue has stayed the same, but my expenses have increased cuz my interest rates potentially gone up. Either because I have a variable rate or because I have a fixed rate and I've just renewed and I've gone from 1 1/2 to 4 1/2, and it's been a bit of a shock.
I think that as a business owner, it's really important to analyze your portfolio, not just analyze each property and your portfolio as a whole. On acquisition, you do your cash analysis. Looks like a goodbye. I can increase the rent. It looks great. You used maybe a 2% interest rate when you were looking at your cash flow.
I think it's important for investors to look at the cash flow of their business on a more regular basis, every quarter, every six months, every nine months, once a year, all of those, because I think as a business owner, we've constantly got to ensure we're increasing income, revenue, and we're managing expenses.
That was a long-winded way of going, suck it up buttercup. Everyone's interest rates got up. The reality is we have to look at this as a serious business and realize that we've all had an amazing opportunity this last 15 years to accelerate our portfolios. So with that, I've obviously talked about sort of interest rates going up and then leveling and going down next year.
That is on the assumption. That inflation gets further into control and we don't see significant changes in supply and demand. What should I do? Do I continue to buy or do I hold out? And I know Jamil's gonna talk a lot about the market. I think the discussions I've had in the last few weeks have been about back to basics.
Back to foundation, which is there money in the buy when you purchase the property? Can you force appreciation? What is the new market rent versus the rent you can actually get because you are creating a superior product for a tenant to look at. Because we all know there is a very big shortage of people you know who are looking to rent, who can't afford to buy.
When first time home buyers are outta the market. They've still gotta live somewhere. Not everyone wants to continue living with mom and dad. I think going back, you remember 10, 15, 20 years ago, counting the payment and looking for opportunities is where the money was, when you created the equity in the properties.
I think that's a key thing now. And the one thing I would say, I've had at least six discussions in the last 10 days with investors where they've analyzed their portfolio, they now negatively cash flow. And my question is always, can you hold out? Can you afford to hold out? Can you afford to put $300 extra into that negative cash flowing property knowing you've got some mortgage pay?
That you've got some of that mortgage payment is creating equity, which is a forced savings plan. Can you hold out or do you have to sell or reposition that property differently because are you on the verge of a consumer proposal or being so negative and do you have to go get a job that you just quit two years ago?
Sometimes you've gotta make some of those tough decisions, but I think we have a year or two of some real reality checks and going back to those foundations that a lot of us started our careers with in this business.
Daniel St. Jean: You're right. But see, okay, now I'm gonna be the, is that the right expression? Devil's advocate, because I heard you say that like 10 years ago, the rates were 4% or 5% and were just gone back to what it was after having the bonuses for the last many years. But here's something we have to keep in mind. And I'm talking about, for example, where we live here in Agron, the lake.
We bought 12 houses back in 10 years ago. And we bought them for $300,000. So when we bought the houses for 300 and we were paying 5% and we were renting them for 2000, we were laughing now at the same house. Across the street just sold for 725, they're gonna pay 5%, but, which is like way more. But guess what? The rents have not gone up that much substantially. So it was easy for us 10 years ago and we were even back then 5% was not a problem. But now 5% of 750,000. Getting a little challenging.
Claire Drage: You know what, You're not devil's advocate. That is absolutely true. So then that's when it comes down to why are you buying real estate? So there are so many different reasons on why people buy real estate. For some people it could be that they've got excess cash and they wanna put the cash in something that's gonna appreciate in value, and they're saving the cash from themselves. So by putting it into real estate, there is not much liquidity.
Therefore I know my money's protected from me and my family and spending it, and it's an investment. So having a negative single family home in Niagara isn't necessarily a bad thing. If it means you've got a mortgage buy down, pay down. So that's a false savings plan, and your money is invested in bricks and mortar as opposed to the volatility of the market.
If you're someone that's looking for, No, I need positive cash flow. And a single family home in Niagara Falls is not gonna cut it. You're gonna be looking into those secondary markets or the ability to add additional units, or you're doing in the short term rentals. So your focus is gonna be, what real estate can I purchase that creates that positive cash flow without me having to pay cash?
Or have a 50% loan to value mortgage. So that's where I'm seeing people having to adopt their strategy. One of the things that you know, I'm seeing a comeback on is, rent to own. If a property doesn't have cash flow and you have an existing tenant, so your mortgage rate goes up because you took a variable, which was smart.
The property no longer has cash flows. You can't afford to hold out. You need that cash flow. So are you talking to your current tenants about switching into a rent to own program where their additional payment they'll make each month will help with that negative cash flow? And you've got a clear potential exit strategy.
I say potential cause rent to own, not guaranteed to close, but depending on how you're qualifying. I know Alfonso got a great rent to own the program, Daniel got lots of experience in it. I'm seeing people, I'm talking to people about being just a little bit more out of the box and creative.
If your problem is you don't have cash flow, then what're your options with that property? If you can't afford to ride it out for the next 18 months, then you can rent it to own . Do you need to sell? And selling is not a failure. I constantly repeat this over and over again. People think, I need to be able to boast that I own 18 doors or 12 doors.
No one cares how many doors you've got. You're gonna have a hundred doors and be in big financial trouble on the verge of it. But is your equity in that property? Making you money sometimes redeploying your equity into other revenues, whether it's private lending or a better cash flowing strategy is not failure.
You're just repositioning a product. The property in your business. You are swapping out something that costs you money, an expense in essence, into a viable asset that creates revenue. So making that decision to buy doesn't mean you failed. It means you're smart as a business owner of your portfolio and you're making some of those tough decisions feel tough, but once you've done it, you realize it's better than the alternative.
Daniel St. Jean: Yes. You were talking about if it goes into negative cash flow, what are our options? What should you do? I used to tell people and I have to tell you, this was never very popular, but I'm gonna share it with you anyway. I always looked at the property that we bought when we owned those 12 properties here that we bought. In one block, I kept talking about cash flow.
We were poor in the pocket, but we were getting richer in the books because as you say, every month the mortgage goes down and every month the value of the properties went up. So when we decided at one point to sell eight of those properties, we still own four. We made 1.1 million when we sold them in two years.
Quite made up for all the months while we were in negative cash flow at the beginning, because when we bought these properties, we had a primary investor who got a mortgage. We were paying them a fee for doing the mortgage, and then the rest, the other 20% was on RSP. So when we paid all of that at the end, yes, it was negative cash flow, but again, poor in the pocket, but richer in the books.
A lot of people, especially that other organization there that you know, R E I E N where all they talk about is cash flow. I was not very popular there. But guess what, we did really well when we hung on and then sold the houses at the right time in the market.
Claire Drage: You know what? You're so right because everyone's strategy is different. We shouldn't, not every investor is exactly the same. Maybe I can afford to have a thousand dollars a month being a forced savings plan for myself in my portfolio because I don't need to live off the income from my portfolio today.
You were doing a Wayne Gretzky, right? You were looking at where the puck's going, Not where it is right now. And that worked cause obviously it worked and you're in a strong financial position now. I think it's really important as investors that we take, we look around, obviously you wanna surround yourself with people that are successful, but not everyone's strategy, not one strategy is gonna fit for everyone, And I think that's important.
Some people wouldn't like to have 28 properties in Timmins. If they live in Toronto, for example, not everyone wants to buy an Alberta or the East Coast for multifamily cash flowing. I think it's really important to understand how much time you can dedicate to your portfolio, what risk you can handle and also, where do you think things are going and can you sustain yourself while you hit those goals.
Daniel St. Jean: Now I have a list of questions here. Let's go with this one. So with the rates rising and concerns with real estate market values, is private lending too risky?
Claire Drage: Great question. I compare private lending where you act like you are the lender, you're gonna give someone a private mortgage or a loan comparable to the stock market and get dividends on stock, for example. When I look right now at private lending it's no riskier than it was before. Nothing's changed. Any investment is risky. The key thing is the exit strategy. If you're loaning a real estate investor, borrower, money to do a BRRRR. So buy, renovate, rent, refinance, rinse and repeat. The key focus, one of the key focuses is the refinance.
Based on the volatility in the market, what is the bank looking at? On the refinance. So the one thing that I've noticed in the last nine months, we're doing very little flip financing. Flipping awful right now. The numbers don't make sense with the cost of materials, the timelines, the delays, and the unsurity of the market.
You can't use a comparable sale from six months ago or three months ago, in your analysis. So there's too much volatility, there's too much risk. That's really risky. So in our opinion right now, when it comes to private lending against those, So the BRRRR strategy we are seeing is even stronger than it was before.
Less risk because the lender is not looking at what is the market value of the property if it's sold. So if it's a duplex, they're not looking at the market value, they're looking at the rental income. So does the rental income that you are actually getting, does it debt service the property and leave you with a 10% to 20% positive cash flow on revenue.
Revenue, whether that's the rental income, storage unit rental, laundry services, signs on the roof or the sign of the building or in the yard, whatever it might be. So the banks, the lenders on the refinance look at rental income.
What we're seeing is market rent. When an appraiser says, Oh, it'll rent for 1500, those that have renovated well are getting lots of rental applications and people are paying slightly higher for a newly renovated, fresh looking, fabulous property. That is very favorable when you go to the bank and refinance because it's all about the market rent.
Ultimately the bank doesn't care what the market will pay. They wanna know what actual tenants will pay. So if you've got three months history of a tenant paying at the time you refinance, that's what the bank's looking at. That is really strong right now. You're still getting 75%, 80% loan to value on your refinance, so you've gotta make sure if you did a hundred percent financing on the purchase, do you have enough money as the borrower to build 20% equity?
That being driven by renovations, light or heavy and rental income increase. So that's where we're seeing the riskiness of private lending actually decrease for those that are doing the BRRRR strategy. But I would see anyone financing a flipper right now. I really want to make sure I am uber conservative or there's a plan B, which is, it's not a flip, it's a flip to themselves and or there's a difference, there's another exit strategy if the value doesn't come in.
Daniel St. Jean: Or they were lucky and got an amazing, they got the proper T 25, 30% under market value, and then that gives them a little bit of wiggle room.
Claire Drage: It's money. It's back to foundation money.
Daniel St. Jean: In the buy.
Claire Drage: Am I getting money in the buy and can I force appreciation? To create value and that are the key things I'm seeing right now is when the numbers still make sense and it's actually less riskier to do private lending right now, in my opinion, cause you've still got bricks and mortar.
Daniel St. Jean: Now, if somebody has a variable rate and a lot of people have, and of course keeps going up and it's gonna go up again next week, is there something somebody can do to help with that?
Claire Drage: Absolutely. Every one scenario is different, so I always look at it and go, Okay, if you're in a variable rate mortgage, and right now you've got prime minus 1%, then you are paying 4.45% and next week, it could go up to just over 5% or on the 26th of October. I think what you've gotta look at is what can you convert to and what is your priority? So if your priority is, okay, I need to reduce my monthly payment. I need to feel comfortable with just a fixed flat. So therefore you've gotta look at how long you have left on your variable rate term.
If I took out my mortgage two years ago and it was a five year variable, then I have the option should I choose to convert to a three year fixed term or more with the same lender? You've got it. If you're committed to a five year variable, you are committed to five years with that lender. Of course, you could move to a different lender and pay the three month penalty.
That's an option. You gotta look at one. What do you qualify for now based on increased qualifying criteria, and two, is converting to a three year fixed term. If you plan to sell it in a year. Might not be a good idea because your penalty to get out of that three year fix one year from now is gonna be significant rapes drop.
Then you're in a big interest rate differential. We will be back at tens of thousands of dollars on interest rates on penalties. So the numbers have gotta make sense. So one, what do you qualify for? And then let's do the math. If the difference in a two year fixed term or three year fixed term versus your current variable or your variable on the 26th of October is 50 bucks or a hundred bucks, or 300 bucks, at what point is it worthwhile to make that change?
I also think it's really important that you never ever take the bank's first offer of what their current fixed terms are. You can negotiate your conversion rate. The bank's just gonna, the individual at the bank, if you are with the green, comfy couch or the roaring red line or whatever it is, the fact is you can still negotiate on that conversion.
Sure. You've only got one option is to convert with your existing lender, but don't just convert, negotiate and we can definitely help you with giving you an idea of what is the best in the market. Because major banks are looking at their shareholders or their clients, not you. So they're not exactly gonna offer you a deal unless you negotiate.
Daniel St. Jean: Of course, I've heard this expression the last few weeks, mentioned quite a few times, and I'm not sure what it means. What does it mean to me? Trigger rate.
Claire Drage: The trigger rate. Oh my gosh. All these new terms we've got to learn in the last 5 or 10 years. So a trigger rate has actually been a popular terminology in our industry, but a lot of consumers don't have never realized what it is.
There are a number of institutions, obviously I won't name them, where you're able to secure a variable rate mortgage. But it had a fixed payment. It's called what we call a static payment, which means that as the variable rate, the prime rate has increased over the last six months also. Your payment didn't.
If you have a variable rate mortgage, but you've noticed your payments haven't gone up, and you might be thinking, Ooh. That's pretty cool. It's not because now it's gonna bite you in the bud. So if your payment has stayed exactly the same and we're in a rising prime rate market, a trigger rate is the interest rate that you would get if your payment was changing.
When you are no longer paying any principle down, you are at a hundred year amortization. What that means is your bank, your lender is gonna call you and say, you're now in a hundred year amortization, or what we call a negative amortization, which means your fixed payment hasn't changed, isn't even enough to cover the interest, so we need to change your payment.
I've had two calls this week already from investors that have noticed that they've got statements saying, I now have a 78 year amortization. What is that? They're really not realizing what they had signed up for originally that it was a fixed payment on a variable rate mortgage. So what happens when you get to the trigger rate, when you are no longer paying enough on that fixed payment to cover the interest?
The lender will call you or reach out to you and they will change your payment. The government has recently come out with legislation, which is requiring institutions to have an amortization no more than 40 years. That's the maximum. However, most institutions are wanting to set your payment back to the original amortization you take.
One call I had in the last week was an investor that owns four properties. All four of them had this static variable rate with the same lender, and each one of them is going to go up, could go up by $1,200 a month each. And they're not massive mortgages. We're talking three or $400,000. They're not big mortgages.
If you think you are one, you need to know, am I on a variable that's got a fixed payment? You need to check that out first. If you are, and you have not had the call or the letter saying they're changing your payment, it is coming. Now the challenge is the banks. This is like a surprise. We didn't know the prime rate was going to go up so fast.
My recommendation to clients is you can't escape this. The longer you delay the inevitable, which is you need to increase your payment, the more interest you're gonna pay. Cause right now your compounding is horrific because you are on a negative amortization. So with the clients I spoke to earlier, I said to them, Your payment's gonna go up significantly.
Today you need to just contact the bank or go online, increase your payment by 200, 300, 400, increase it by a little now so you control the process of how those increases occur. Cause the banks are gonna be calling the people that are on the highest amortization. So if I increase my payment by 400 bucks, that brings my amortization down to 62 years, I'm gonna be ahead of those borrowers that potentially have a higher amortization.
I'm delaying the inevitable, but it might not be as big of a sticker shock that your mortgage payment is suddenly significantly more. Now with that borrower we actually looked at is, so they're like, What do we do so they can afford to float? And take the negative cash flow that will be in their portfolio.
They will make a decision on whether they can afford to ride it out for six months or a year, see how the market goes. The other option we talked about is maybe you need to sell, Maybe you need to take the $200,000 equity you've got in the properties that will be eroded, with the negative cash flow.
Minus the mortgage, pay down and see if redeploying that net worth, that cash elsewhere could be a more viable option. And their properties are ones they've loaned for a few years, so their tenants rent hasn't increased. And in the market, the rent they could get today is very significantly higher than what their current tenants are paying.
I know Glen's gonna touch on some of those things during his presentation, but they're just the things to consider. But the trigger rate for some people has been a real shocker.
Daniel St. Jean: Okay you deal with other people who come to you and they own a house, and sometimes they add, like you say, $200,000, $300,000, $400,000 of equity order mortgage has been paid out completely.
Does it? I don't wanna use the word shock, but does it surprise you that people would live in a house worth $800,000 and they're so happy that they have no mortgage when they could actually invest that money somewhere and make, I don't know, a hundred thousand dollars a year at a good whatever. It doesn't seem to get in their head that they worked hard to get that house and pay it down. Why don't you now get the house to work for you?
Claire Drage: You know what you're so right. And I think it comes down to sometimes its culture and just what my parents would never borrow money for, it was to pay your mortgage.
I think it depends on where they're coming from. My first question is, what is your biggest asset? A majority of the time people say, My home no. That's not your home. Your home's a liability. Your biggest asset is your ability to earn an income. So if your liability can be turned around to create income for you, it's your biggest asset.
I think first it changed the conversation because some people can't sleep at night having suddenly a $400,000 line of credit that they're doing private lending on after they've spent the last 18 years paying the sucker off. So again, I think it comes down to a bit of mindset and if that is even.
Gonna make them feel more comfortable. You and I are in their industry, so we know, good debt is a good thing. Good debt, borrow money to make money. I always like to tell people, how would you like to be the bank for a change? All those years, those 18 years, you just paid the bank, How many hundreds of thousands of dollars. This is an opportunity. At your own pace, don't need to do the full 400 or 800. Maybe start with 50,000 to get started in being a bank yourself.
Daniel St. Jean: Exactly. I see Catherine is there, that's the hook that's just about in the, Oh no anyway, but don't go yet. Cause I want to ask you one last thought or advice that you wanna give to our community in regards to all of this craziness in the market. Now people are just like going Google, why do you want to tell these people?
Claire Drage: Let's talk. I'll be really honest with you. Everyone's got different fears, different worries, different concerns. Those that would never do anything before will definitely do nothing now, because there's more excuses not to take action.
I'm not saying that's a bad thing cause we all have to do things at our own pace, but sometimes we need to be informed by Google and can't answer all your questions. I should say correctly, I think it's really important that you speak to the right professionals, and there's always good and bad with any investment in any business, So I'd say work with the right advisors and get nonpartisan advice.
Speak to someone who's not gonna sell you a strategy, but that's gonna show you the good, the bad, and the ugly. So you can make an informed decision ultimately if you continue doing the same thing over and over again expecting different results. We know Albert Einstein would tell us that's the definition of insanity.
Daniel St. Jean: Yes. And just as the last message on, like check in little, the sky is not falling.
Claire Drage: There's opportunity out there abound. There's a massive opportunity out there right now. You've just gotta get off your butt and pursue it. That's the bottom line.
Daniel St. Jean: Thank you so much, Claire. As usual. It was brilliant.
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