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Hot inflation ‘blew the doors off’ in July
On Tuesday, the wizards over at Statistics Canada announced Canada’s annual inflation rate rose to 3.3% in July, up from 2.8% in June. CIBC senior economist Katherine Judge indicated that the Bank of Canada will raise it’s key lending rate by 25 bps in September, the 11th increase in a row, and a stunning 5% in 18 months.
I agree, and predict that rates will rise another 0.75% over the next 24 months, despite nearly everyone I know predicting a recession and a drop in interest rates to ‘normal levels’ of around 2%.. What do you think?
It has also been widely talked about that any impact on rates in real estate will not be felt for 18 months from the interest rate bump. Hence, we will only feel the true effects of the first rate bump this fall..
So how will this affect real estate investors in the next 24 months? For multifamily in particular, it’s going to be a very rough ride. The flight to CMHC, in particular the MLI select program, has largely displaced conventional lenders in the marketplace. CMHC has now made changes under the guise of stopping reno-victions by restricting equity takeouts, and refusing to fund at all unless your debt is with a CMHC ‘approved’ lender.
This means if you are in the middle of a BRRRR using a bridge loan, a vendor take back, or a private mortgage, you do not have the ability to refinance your debt with CMHC.. period! Even Harbour Mortage, the largest interim bridge lender in Canada, is not on the ‘approved’ list!
Even worse, CMHC is so backed up with applications you likely won’t even fund for 6 to 9 months after application! Investors in multifamily apartment buildings today will either have to pay in cash, or borrow from conventional lenders on a 1, 2, or 5 year term before going to CMHC. So how does this affect deals today?
If you are buying. At the current GOC bond rate of 4.1%, conventional financing will cost around 6.5% to 7% interest, on a 5 year term, 25 year amortization and a 1.3 debt service coverage ratio (net income/payments). This means 5% capitalization rates on apartment buildings are history. You will be able to borrow at a maximum of 75% loan to value, and this most likely means you will need a CAP rate of 8% or so in order for the deal to make sense. Sellers will, however, want last year’s prices and will tell you why a 4% CAP on their building makes sense.
If you are selling. Since price is your net operating income divided by CAP rate, you have seen a substantial ‘loss’ in the short term value of your building. The best strategy (and what I am doing) is to renew short-term (1 to 2 year) mortgages to buy time for a) rents to catch up, and/or b) a better interest-rate environment. Either way, I will achieve my target return on investment in time.
You see, the assets in my portfolio have been stress tested, and I’m currently enjoying raising my rents aggressively across my prairie apartment buildings, and there is likely another $400/unit rent to come in the next 24 months. Selling now would be foolish, hence I’m holding on until things change.
For heavily leveraged single family real estate investors, the situation is even more dire. Many have variable rates with HELOC components that have thrust borderline deals into extreme negative cash flow alligators. In a market trending down where selling may not be an option, what true options do these investors have?
Would love to hear what you think.
Cory
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15 Replies
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Thank you for sharing! This is great information. It is crazy to see the changes they are making!
I want to confirm my understanding about the following:
“… BRRRR using a bridge loan, a vendor take back, or a private mortgage, you do not have the ability to refinance your debt with CMHC”
If I stay with my current mortgages, mentioned above, CMHC wouldn’t refinance. But there is the option to I move to a CMHC approved institution then CMHC would refinance?
But I guess the question becomes is it worth it right now.
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Yes, you can move to a conventional lender first & then move to CMHC.
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True, but expect to get only about 50% loan to value as they will use a 1.3 debt coverage ratio and a rate of 6.5% so a LARGE gap to cover before getting CMHC.
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Yes that is correct.
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You can still bridge before going to CMHC and there are approved lenders that can be taken out by a CMHC-insured mortgage.
If you are planning to bridge, you will likely need to plan for an interest reserve (IR). This is when the lender requires you to pay some portions (sometimes 100%) of the loan interest upfront. This ensures that payments are covered, mitigating their risk.
Like anything a lender propose, IRs are negotiable and will vary depending on the perceived risk (operator, market/location, business plan, amount, length of term, etc.)
Before working with a bridge lender, just make sure that they are an approved CMHC lender and can be taken out directly by a CMHC-insured mortgage.
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@Mark_Baltazar What are your views on CMHC? How is it impacting the way you invest?
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<div>From Colliers, who is calling on LOW CAP rates for some time: Assets more tied to fundamentals, such as population growth and the job market, continue to perform well. Multi-family</div>
cap rates remain extremely low – below four percent in strong markets – based off expectations of double-digit rent
growth and strong investor demand. Canada’s record-breaking population growth post-pandemic, combined with severely
unaffordable home ownership, has buoyed the investment market for apartments even in a high-rate environment
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CMHC is still an extremely viable option to exit shorter-term financing for buy & hold strategies. In fact, I think it is becoming the go-to option in order to be able to take-out existing debt.
We are currently in the process of refinacing a few buildings into the standard CMHC and MLI Select programs.
One of the strategies that we are working on with our lenders is “rate buy-down”. This allows us to pay an upfront fee to secure a lower rate for the term of the mortgage. This helps increase the mortgage advance while maintaining the target debt coverage ratio.
CMHC processing times: we currently have applications and expect closing within 6-7 months. In our dicussions with lenders, these times have increased for a couple of reasons:
1) there was a rush of applications leading up to the submission dealing of June 19 in order to take-advantage of CMHC premius before they went up.
2) Current rates are making conventional financing harder as they limit the morgage advance.
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Thanks Mark. I remain skeptical of CMHC and their extremely unreliable lead times has already cost me a deal, and I find most vendors will not accept a 6 months financing condition.
CMHC could be a viable refinance strategy but it’s not nearly as enticing as it once was. If there are bridge lenders out there that are still on the ‘approved’ list do you have a list of them or a link?
VTB was by far the best refinance strategy but the door has slammed on that option too.
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Most of the larger institutional or institutional-backed lenders will bridge to CMHC at purchase.
We had a closing where the seller (large REIT) would not budge on timing and given that the building was nearly stabilized we wanted to go straight to CMHC. We worked with First National on that deal. First National gave us a 5-month bridge to close and submitted the CMHC application at same time.
Fortunately for us, we turned a few units during that 5-month period and were able to get a large CMHC advance than originally anticipated.
If timing is an issue with CMHC, I’d run a short-term bridge to close quickly.
Some of the lenders / brokers that will do this that we have worked with include: First National, Peak Hill Capital, Firm Capital, CMLS. There are many others.
My $0.02
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I had this option to bridge on a recent deal but decided to pass as it was too expensive, and would duplicate legal costs for such a short time frame. This seems like a silly way to do a deal especially if the building is performing well and the intent is CMHC right away (vendors will not wait to close).
20 years ago I did all conventional lending, 25% down, 1.3 DSCR, 25 year amortizations and the numbers worked well, and we are going to that model again. There is simply too much risk for investors to put all of their eggs in the CMHC basket. Why do I say this? Because they keep changing the rules as they go.
– Restricting the use of equity takeout’s.
– Requiring appraisals on purchases and refinances (never did before).
– Offering enticing products like MLI select that they have now increased premiums on, and increased premiums on standard CMHC loans at the same time.
– now refusing to fund unless existing debt is with a CMHC ‘approved’ lender, whatever that means, hence no BRRRR’s using a VTB which was a very popular way to do a deal.
What will CMHC change, remove next?
In short, if your business plan depends on a refinance with CMHC this is an especially risky proposition in today’s marketplace. You are essentially relying on the government to be a partner with you when their best interests do not align with investors. There is a place with CMHC financing in multifamily of course, but it should not be the go-to method and I don’t believe it will be going forward.
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@BiosisRealEstate in the other post you spoke about CMHC. I thought you would find this thread an interesting read.
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@CorySperle I hear you! On the small residential side I see mortgages going through the same problems.
Are you seeing those problems only with CMHC? Or commercial mortgages too?
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Thank you for sharing @Mark_Baltazar @CorySperle . Your know with CMHC financing is amazing!
I have been hearing that the more cash you have the better the chances for a mortgage and CMHC financing. In your opinion, what option would you recommend and why:
A) Closing with Interest Reserves
B) Closing with a bigger downpayment
C) Closing with money in reserves
D) Other
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A large down payment (at least 25% equity) AND reserve fund of 7% of the building purchase price MINIMUM. CMHC especially MLI select is too risky for owners now due to never ending rule changes. CMHC is a bloated, oligarchy that has a complete monopoly on the industry and is a very unreliable partner. I would strongly recommend not using them.
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