Clients often don’t want to delay retirement to accommodate a longer mortgage, one advisor says.carebott/iStockPhoto / Getty Images
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Some investors are parking or postponing their dreams of owning a rental property because of higher interest rates and economic uncertainty.
“There’s definitely been a pullback in buying individual homes or units to rent,” says Russell Feenstra, wealth advisor and client relationship manager at Nicola Wealth Management Ltd. in Vancouver. “It’s a bit of a wait-and-see approach to see if [interest] rates normalize and potentially come down at some point in 2024.”
He notes these clients are redirecting funds originally intended for real estate into high-interest savings accounts while investigating alternative mid- and longer-term investment opportunities.
“They’re not sure what to do in the short term, but they can receive a 5.5 per cent return with very little to no risk and full liquidity, which is quite attractive in this environment,” he says.
For clients soured on real estate investing completely, some have been enticed by investment-grade and high-yield bonds, which Mr. Feenstra says are better positioned for the first time in years. Others may invest in the private lending space such as commercial mortgages and private loans.
“While they have a longer time horizon, they still want income and liquidity,” he says. He’s been looking at yields in the 6 to 8 per cent range on those types of holdings.
Mr. Feenstra also tends to suggest balanced portfolios made up of a combination of fixed income, equities and real estate depending on clients’ risk tolerance and objectives.
Rising house prices and rent controls
Colin White, portfolio manager at Verecan Capital Management Inc. in Dartmouth has also noticed some clients are shying away from real estate investing.
“For years, real estate has always been put on a pedestal as something that’s foolproof and always works out,” he says. “Now, some of those views have come home to roost. The confidence is gone. People used to be very quick in trying to get a rental property.”
He notes that even before the economic uncertainty, Nova Scotia and the rest of Atlantic Canada experienced an interprovincial migration boom. People mostly from Ontario and British Columbia who were priced out of their own real estate markets headed east to purchase cheaper property, often paying well over asking to secure the home. This caused house values to rise exponentially, shutting out much of the local population used to paying more modest prices for income properties, Mr. White explains.
His advice on the situation depends on a client’s priorities. For example, a client who purchased an income property on a variable rate just before the quick escalation of interest rates may already be underwater on the investment at the time of renewing the mortgage.
“The cost of borrowing has gone up and they can’t afford to carry the place with rent controls in place and they can’t raise the rents fast enough,” Mr. White says. “It should cause people to take a look at all of their priorities and consider what’s really important and how they want to deal with the change.”
So, more money needs to be allocated to the mortgage. Some affected clients simply want to increase the amortization to keep the payment the same – but Mr. White notes they don’t tend to understand the impact of that decision right away.
Difficult conversations ensue about, say, carrying a mortgage for an additional 10 years and the effects on their retirement plan. Clients often don’t want to delay retirement to accommodate a longer mortgage.
“We then look at their budget to find a way to make the bigger mortgage payment,” he says. “That’s when they choose to make major lifestyle changes.”
Sometimes, extending amortization isn’t even an option because the client may no longer qualify at the much higher interest rates, says Jeremy Enwright, a mortgage broker at SafeBridge Financial Group in Toronto.
“The easy money train of real estate investing is over,” he says. “Larger qualifying terms also means reduced access to capital and liquidity.”
Mr. Enwright says client options include refinancing to at least make the return on investment positive or locking into a fixed term.
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