Sep 072014
 

For cat lovers what could be a better housewarming gift than having a furry feline delivered right to your new home? :) The largest bank in Eastern Europe called Sberbank Rossii is offering this unique service right meow. :D For a limited time only anyone who signs up for a mortgage with this lender will be able to choose one from a selection of ten different cats on the company’s website.

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Then the bank will litter-ally deliver the cat to the customer’s new property. The home owner can play with the cat and take pictures of it but eventually will have to give the cat back so the bank can satisfy its other customers. But Sberbank is a Russian bank and this offur is not available in Canada or the U.S. Large banks are always thinking of creative ways to acquire new clients. This is probably one of the most bizarre strategies I’ve seen though :?

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Aug 172014
 

Some experts say the North American real estate market is starting to become overvalued again. In today’s post we’ll compare property prices to rents and explore whether or not overheated markets like Vancouver are headed for a hard landing :)

Let’s take two fictitious singles, Alice and Barry, who are both from Vancouver and work for B.C. Hydro, a utility company. They each have $20,000 in savings and they both want to move closer to work. Alice plans to rent while Barry plans to buy.

Alice manages to find a suitable apartment that’s located very close to her job. It only takes her 5 minute to walk to work :D She decides to invest her $20,000 of savings into the stock market.

  • Alice’s Apartment:
  • Location: 7418 Byrnepark Walk, Burnaby B.C.
  • Size: 800 sq ft
  • 2 beds, 2 baths
  • Rent: $1,600 a month

Here is the actual listing on Craigslist I found. The move-in date is not until Sept 1st, 2014. So this is a real life housing situation that could happen to someone in Vancouver right now. Click on image to biggify.

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Meanwhile, Barry also finds a place to buy, coincidentally in the exact same building as Alice, and also has the same number of bedrooms and bathrooms.

  • Barry’s Apartment:
  • Listed Price: $369,000
  • Location: 7418 Byrnepark Walk, Burnaby B.C.
  • Size: 792 sq ft
  • 2 beds, 2 baths

Here is the direct link to the actual listing on realtor.ca.I’ve taken a screenshot as well in case the listing is removed in the future.

 

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Barry decides to spend his savings on the down payment and get a mortgage for the remaining $350,000 balance. I’m currently paying 2.6% on my mortgage so let’s keep it simple and give Barry the same rate. Using a mortgage calculator we find that Barry’s mortgage payment amortized over 25 years is $1,585 per month, which is almost the same as what Alice is paying for rent :)

This is why a typical condo in Greater Vancouver costs $369,000. It HAS to cost this much in order to stay competitive with rental rates. Condo prices aren’t falling because lower prices would lead to lower mortgage payments, and it’s simply not rational for people to rent a place when it costs a lot less to easily own another (almost identical) unit in the same building.

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Jun 232014
 

It appears both the real estate and stock markets in Canada are at all time highs 8-O Meanwhile yields on bonds and GICs are still near record lows :( Even cash is losing its appeal because energy and food prices have pushed the inflation rate to a multi-year high. Which begs the question: Where can we still find value? What should people be investing in now?

Well I think I have the answer! ;) In May I blogged about looking into mortgage investment corporations. After some further research I bit the bullet and earlier this month I invested $10,000 in a MIC. This new investment generates a stable 7%+ annual return, uses real estate as collateral, thrives under inflationary pressure, is hedged against the risk of increasing interest rates, can be redeemed at any time with no penalties, and adds stability to my portfolio because a stock market correction would not affect my $10K principle balance at all.

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A mortgage investment corporation lets investors pool their money together to be lent out as mortgages. It essentially allows the average investor like you and I to participate in, and profit from, the mortgage lending business ;) This is the best thing since canned peaches! Banks make a lot of money by collecting interest on mortgage loans right? Well retail investors can also get in on this lucrative business model. Booyah! :D

A MIC is also a great hedge against inflation. If interest rates rise, a MIC’s return would also increase because higher mortgage rates mean more profit! People who invest in a mortgage investment corporation do not own the real estate. MIC investors simply make money from the enviable position of being a lender! It’s like peer to peer lending in the U.S., Estonia, or other parts of Europe, except every loan in a MIC is secured by real property ;) What a lollapalooza!

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Jun 172014
 

The Canadian housing market continues to defy gravity! :) According to CREA the average home price in May increased to $416,584, a 7.1% jump from a year ago. The number of homes sold also increased by 5.9% month over month, which is the largest gain in several years.

A lot of people feel concerned that this kind of growth is unsustainable. They question how prices can increase so much without personal incomes growing at the same pace. Many have concluded that we are surely headed for a correction soon.

I hope I can explain what’s going on, and why it would be perfectly normal for home prices to move even higher.

As an investor I know from experience that personal income has very little to do with purchasing power or prices. For example I spent over $200,000 on stuff in 2013 (mostly financial assets) even though my take home income last year was less than $50,000. Living in a debt based economy means we have the privilege to borrow money from other people so we may buy things even if we don’t have the cash :)

Local incomes also don’t account for the massive amounts of foreign money that gets pumped into the Canadian housing market each year. But what really affects the price of homes is the cost of financing. Over the last year mortgage rates went down in this country. A 5 year fixed rate term is under 3% now.  Cheaper financing options means people can buy more expensive homes.

Mortgage and down payment real estate market canada

If the Bank of Canada lowers its Key rate by 1%, bond yields would fall to almost nothing, and mortgage rates would be even lower than today. You could probably get a $300,000 mortgage for 2%, which would cost a new home buyer just $6,000 a year in interest to live there. That’s cheaper than renting a comparable property! On the other hand if the Key rate increases by 1%, mortgage rates will also climb, and many people wouldn’t be able to afford a $300,000 home anymore so home prices would drop across the board. If rates don’t move at all, home prices should simply increase at roughly the pace of economic growth, which is about 2% a year.

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May 092014
 

I recently received payment from my tenant for the first half of the year’s rent. So I have $5K now sitting in the bank. What should I do with it? Well I want to invest in the mortgage market. I first heard about mortgage investing when I attended a free industry seminar. But it wasn’t until recently that I seriously started to look into it.

Here’s how it works. When someone buys a home, they typically need a mortgage (a loan) which usually comes from a bank. But instead of getting the loan from a bank, what if we, as investors, lend money to this home buyer. Then all the interest the borrower pays would be our gain.

In Canada, there are companies called Mortgage Investment Corporations, which pool together investors’ money and underwrites and lends mortgages for home buyers looking to finance. A MIC (pronounced *mick*) is a flow through investment and 100% of the net profits are distributed to investors.

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A MIC is similar to a high yield bond because both are debt instruments for financing purposes and both have similar yields, which is perfect for me because I need some fixed income exposure in my portfolio right now. If any readers own a MIC, are you happy with its performance?

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