There are a few key things homeowners need to consider when deciding if their investment is worth it.

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Inflation rose more than 8%, the highest annual change in nearly four decades, according to Statistics Canada. And in a scramble to bring down that inflation rate, the Bank of Canada raised its benchmark rate to the highest level since 1998: 2.5%.

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The hope is that inflation will return to normal 2% by 2024. For Borrowers fixed mortgage rates, they would have locked in a certain interest rate when they purchased their property. For variable rate mortgagesthe interest rate paid by the borrower is linked to the central bank’s inflation rate.

Canadian borrowers face a five-year fixed rate of around 4.5-5.5%. Variable rates are between 3.8 and 4.5%. And rates are at least two percent higher than a year ago.

Now that the days of easy money are a distant memory, real estate investors hit by rising interest rates may need to adjust their behaviors in order to maintain positive cash flow, or at least breaking even in these difficult times.

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Remember, real estate is a long game

Large real estate investors, such as developers, buy properties to hold for years, through many up and down cycles.

“My view is that if you’re going to invest, you should be a long-term holder,” says developer Gino Nonni of Nonni Property Group.

“I don’t know how many times you can buy something and then turn around and make a substantial profit in a short time. At a minimum, mom and pop investors pay off their mortgage and generally the value of the asset will increase.

He thinks the scarcity of land will always limit supply and put pressure on prices. The result is a safe, long-term investment.

“That’s how I see it, and that’s what I tell my friends when they ask me. I tell them to always hold on.

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Put your investment into perspective

Millennial broker Jacky Chan, president of BakerWest Real Estate, has invested in real estate his entire adult life. He prefers real estate to other investments because it’s less volatile, and with the world’s population growing by around 80 million people a year, people will always need a place to live. Prices may slow down, but overall they are going up.

“The faster an investment moves, the more closely you need to watch it, especially with the recent hype of NFTs and cryptocurrency,” Chan says. “But look at any real estate market in the world with a growing population, and it was significantly cheaper 50 years ago than it is today.”

Two things matter in real estate investing, Chan says: positive cash flow and capital appreciation. If the investor is not overleveraged by too much debt, he must maintain a long-term perspective and not be scared off by interest rate hikes.

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If you own a $1 million property and have a $500,000 mortgage at 5%, you’re looking at, in simple terms, $25,000 interest per year.

If ownership increases by 5% in one year on the $1 million investment, that’s an increase of $50,000, so the owner has a net profit of $25,000.

“Even though the rate has gone up, the value of real estate continues to rise.”

When the going gets tough

Let’s say you bought a condo to live in and bought another one as an investment. With interest rates rising, what if you take out a variable rate mortgage and the rent doesn’t cover the higher mortgage payment? Mortgage adviser Alex McFadyen of Thrive Mortgage has seen a lot of people buying second homes over the past two years, and now they may find themselves strained. All the experts will tell you that selling the property should be a last resort, but how do you avoid that when the costs are rising?

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“Are you asking if the property itself is really underwater, or are there any expenses we can cut or eliminate?” McFadyen said. “That’s the first thing we determine.”

He asks his clients to write down all of their real estate expenses, including management and maintenance fees, taxes, utilities, and any upcoming repairs to the home. If it’s a primary property that’s causing them stress, he asks them to write a cash budget spreadsheet to see what’s coming in and going out. McFadyen finds that the biggest spender is often car loan or credit card debt, or — more commonly these days — travel debt. Reduce those debts and throw that money on your mortgage instead, he advises.

Take control of the situation

If the expenses are really unmanageable, McFadyen advises clients to consider consolidating their debt with a loan, such as the possibility of taking out a second mortgage or home equity line of credit(HELOC) to master it. He predicts that consolidation will be a “massive trend” over the next 12 months.

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“I ask my clients, ‘Are you able to sleep at night right now?’ If someone isn’t able to get out of debt effectively, what’s the downside of settling down with a second mortgage or HELOC to help things along? »

McFayden has a client who owes nearly $75,000, which caused their credit score go down to 500 (a good score must stay above 650). By consolidating their debt, it became a more manageable one-time payment instead of multiple payments that only covered the interest owed. The key is to do this before you drown in debt.

Restructure for difficult times

In the long run, everyone agrees that real estate will go up in value, so do what it takes to get through the interim.

McFadyen helps some of his clients re-amortize their 20- to 30-year mortgages, for example. With a longer amortization period, customers have lower monthly payments, which helps reduce expenses and eliminate payment shock.

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McFayden also advises mortgage holders who are due for renewal to consider a refinance option and lock in a one- or two-year mortgage until rates stabilize. If historical trends are any indicator, we’re near the top, he said. Many of his clients take this approach because short-term mortgages have good value, if rates come back down as expected. This means the borrower is not locked into a higher rate. Plus, they don’t face a huge penalty if they want to take advantage of lower fares.

“We’ve seen people worry about rising mortgage payments and we’ve helped them stick to short terms, to stem the tide,” McFadyen says.

But also, knowing when to sell

That said, when someone is over-leveraged, with negative cash flow and sleepless nights, it may be time to sell that investment property. You have to think about your mental health, advises McFadyen.

“If you are significantly underwater and it not only impacts your quality of life and there are no options to re-amortize or consolidate debt, and you cannot afford to ‘making payments and that’s impacting your quality of life, and if the property also has expenses coming up, then we recommend letting go,” he says. “If they’re so stressed out and they’re have the ability to pull through, they should consider it a last resort.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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