Grabbing opportunities as the window closes
There’s a window of opportunity in Canada’s real estate market. Rates are at near-historic lows and property values have taken some short-term hits. In a matter of weeks, new debt load rules are coming into place. Despite the liquidity challenges many investors are facing one top investor thinks one key strategy can help almost any investor take advantage of these opportunities before they disappear: rent to own.
Rachel Oliver, managing partner at Clover Properties, co-host of Mothers of Real Estate TV show, and a longtime advocate for Rent-to-Own (RTO), says that in the COVID defined market, RTO can give investors an entry point they didn’t know they had. She says that investors concerned about liquidity in the face of layoffs, income cutbacks, and a recessionary outlook, can combine an RTO strategy with another key tactic to ensure they maintain liquidity as they take advantage of new opportunities.
“Sometimes, you have to look no further than your backyard to take advantage of real estate opportunities to solve a liquidity problem,” Oliver says. “I see this as a great time to explore refinancing my personal residence and pulling out equity. Which means setting up a home equity line of credit (HELOC) to inject some cash into my bank account. But I don’t want the cash just sitting in my bank account, because I have to pay interest on this money each month. Instead, I look for ways to make money on the bank’s money. Interest rates are low and that means lower cost of borrowing. For RTO investors like me, this can mean higher cashflow and capital gains.”
Oliver says that typical RTO properties in Ontario require about $80 to $100 thousand of her HELOC. This may be different for other investors, though as Oliver focuses on entry-level homes ranging between $350 and $550 thousand dollars. She says she can use this as a part of the 20 per cent down payment and closing costs on her next RTO property. While she says some lenders currently approve this, as lending rules change things may be getting tougher. Time, again, is of the essence.
Crucial to taking that opportunity in time, Oliver says, is to have an investor-savvy mortgage pro in your corner. While she is not a broker and wouldn’t comment on specific borrowing rules and rates, she says that developing a relationship with a broker is key to agile RTO investing. Oliver says her own broker is in tune with the “ever changing” policies and rules in the lending space. She knows how to structure the mortgage applications to meet Oliver’s specific goals and get lender approval. Oliver says this is often faster than working with the banks directly.
In Oliver’s experience, despite the apparent snags and complications presented by the pandemic, getting a HELOC is an achievable goal. It’s simply a matter of meeting a lender’s criteria for credit and income to debt ratios. She says, though, that investors with deferred mortgages are unlikely to get a HELOC.
Oliver did a recent RTO deal in Peterborough, Ontario on a property purchased for $490 thousand, at 80 per cent LTV interest at a 2.99 per cent rate. The down payment, closing costs and expenses totaled around $94 thousand, coming from the HELOC at a rate of 3.05 per cent. The monthly expense of the HELOC sits around $239 and the RTO deal generates $990 in monthly cashflow after property taxes, insurance, mortgage and HELOC interest.
While Oliver uses RTO deals with HELOCs to keep her stream of investments ticking along, she says HELOCs are especially helpful for investors looking to enter the market without $100 thousand in savings. The HELOC allows investors to enter the market with the bank’s money, meaning they get access fast and in the rapidly changing world of Ontario real estate, that speed is essential. It’s important, Oliver says, to wed the HELOC with an RTO plan. The RTO arrangement offers the immediate cashflow needed to service the HELOC every month.
Oliver says that, in all of these arrangements, a ‘people-first’ approach is key, finding the right people to commit to an RTO contract. If done right, finding the right people avoids major or typical risks in the RTO-HELOC plan. She says that bottom line, as mortgage rules tighten for homebuyers, there will be more opportuities for real estate investors to help families RTO to get into homeownership. Oliver stressed that RTOs are not for every investor because putting together a rock solid deal can be very time-consuming. That’s where she comes in, helping time-strapped investors with screening people, vetting properties and papering the deal.
“Our formula doesn’t start with a property, it starts with people – usually a family who cannot get a mortgage through a bank,” Oliver says. “We assess their affordability, their down payment, credit situation and their ability to commit to a 3-4 year Rent-to-Own contract. The people we work with are emotionally and financially committed to the RTO process. It is the investors who purchase the property first and then try to get someone to Rent-to-Own it who can find their deals to be a bit more volatile.”