Jim Pellerin
Sun
I’m confused about recent announcements by the federal government that make it more difficult for people to purchase real estate as an investment.
The major change is that banks can now lend a maximum of 80 per cent of the value of the property being purchased, which means the investor must come up with the 20 per cent down payment.
Let’s try to figure this out.
When the recession struck in the fall of 2008, the government wanted to increase spending so it lowered mortgage rates. This decrease in rates has made it easier to buy real estate and has created a higher demand for properties. And sellers are getting good prices for their properties.
Personally, I’m enjoying very good interest rates on several of my investments as a result of this change. Because of these low rates, my properties provide a great passive income every month.
But with the new rules, which take effect on April 19, the government is now insisting investors need a larger down payment to purchase a property. And there are a number of other qualifying rules. As a result, there will be fewer investors buying and more properties will be available. Properties will stay on the market longer and prices will decrease. To me, this is counterproductive. The good news is that people will stop wasting their money on CMHC fees and CMHC will make less money.
For the more savvy investors, this will help them with their already smart existing strategies. They are already buying with 80-per-cent financing and using other people’s money for the balance either through vendor take backs or other second mortgages or loans. This means the experienced investor gets better deals, because prices are lower, and the new investor will have to wait. The rich will get richer and the poor will get poorer.
Rather than waiting or dealing with all these challenges, these potential new real estate investors would probably end up just investing in their mutual funds or their bad stock choices.
I know a lot of people who have lost hundreds of thousand of dollars in the last year and that have not recovered and probably never will. These people want my help with their investment portfolios because they recognize my success with real estate investments. I am showing them how to double their money in only a few years with low-risk real estate investment strategies.
Why did the government implement all these rules? I think it’s because of all the bad investments the uneducated and the uniformed investors have been making. Many real estate investors buy on speculation. That is, they buy a property hoping that it will go up in value. Or worse, they buy a pre-construction property, expecting to get financing when the construction is completed. If the market has an adjustment, like it just had, and property values drop, like they just did, they would not be able to get financing for the eventual purchase and they lose the deal, which also causes problems for the home builders.
Rather than figuring out what the real problem is, the government has made it harder to buy properties. Not a great move in my estimation.
Instead, the government should embrace real estate investing as a viable investment strategy for everyone. It should look at ways to make it simpler and ways to help people be more successful.
It should provide tax credits for anyone interested in real estate investments and it should allow real estate investments to be purchased directly from their RRSPs. It should help people become more financially literate by providing good common sense financial education, rather than encouraging them to get financial advice from financial planners who usually have little experience and are probably worth less than the investor they are giving advice to. These advisers should all be real estate investors themselves so they have real experience and understand a deal.
Real estate investing, when done properly, is the safest and simplest way to build a nice strong portfolio of investments that provide continuing passive income.
Jim Pellerin is a real estate investor and the author of 7 Steps to Real Estate Riches.
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