Episode 53

Ep 53 - How To Correct Negative Cash Flow From High Interest Rates?

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Show Summary:

Many investors who own rental properties are facing a challenge due to the high increase in interest rates. This has resulted in a negative cash flow for them, meaning they're not earning as much as they used to from their property portfolio. Variable rate mortgages have been a popular choice for investors because they offer low penalties for exiting and higher pre-payment privileges. However, with the recent rate increases, investors are finding it difficult to generate positive cash flow.

To address this problem, there are three main options available. The first option is to consider an interest-only mortgage or line of credit. While these come with higher interest rates, they allow investors to save on the principal portion of their payments, resulting in lower monthly payments and stronger cash flow. It's important to note that the availability of these options may vary depending on location, debt ratios, and credit scores. Seeking advice from an expert is recommended.

Another solution is to change lenders. By doing this, investors can extend their mortgage amortization period, potentially up to 30 years. This extension leads to lower monthly payments, even if the interest rate remains the same. It's crucial to understand the natural amortization left on the mortgage before making the switch. Changing lenders can provide more flexibility and improve cash flow.

The third option involves adding second suites to the rental property. By refinancing the mortgage and using the extracted equity, investors can create additional rental units. This increases rental income and helps offset the negative cash flow. It's essential to comply with local zoning and municipal regulations when considering this option. If adding a suite is not possible, using the refinanced money to improve the property can still boost cash flow.

These strategies have proven effective in helping investors save money on their interest expenses and overcome the challenges posed by the increased interest rates. It's advisable to seek professional advice to determine which option suits individual circumstances. If you believe you're affected by these challenges, reaching out to a knowledgeable expert can provide valuable guidance and support.


Scott Dillingham: We'll come back to this version of the wisdom lifestyle money show. I'm your host, Scott Dillingham. Today, I'm going to be talking to you about a challenge that a lot of investors are going through. And investors that currently own rental properties. A majority of them have the variable rate mortgages and because the interest rates have went up so high they're missing out on the positive cashflow that they would normally receive from their portfolio.

Now traditionally variable rate mortgages are the way to go for investors. There's very low penalties to exit. You have higher pre-payment privileges. So if you want to pay this off faster, you can. And then obviously they're historically lower rates. Okay. But since everything went up, the opposite is true. So now a lot of investors are facing challenges where they are not having enough positive cashflow.

And they're in a negative cashflow scenario. I get calls all the time from investors and they want to sell, they want to know what their options are, that type of thing. And there's three main options that I keep finding. I keep letting investors know. So I want to let you know the same thing. This way it might help you write, it might turn your negative situation into a positive situation.

Now also keep in mind, these are options that we're able to provide to investors. Okay. Not every lender can offer these things. So when in doubt, I suggest you call somebody on my team. Now if that's what you're interested in, our phone number is five one nine. 9 6 0. 0 3 7 0. That's the main reception. And then obviously we'll connect you with somebody on the team.

But so here are the three solutions. That I offer to my investor clients that are struggling. So, what you can do is get an interest only mortgage or an interest only line of credit. So we take your current mortgage and we convert it to this type of product. Now interest only, you don't pay it off, but if you speak to a lot of investors, that's good. The real investors.

They're not interested in paying this off. Somebody who might buy one property or two. A lot of times, they still have that homeowner mentality where they want to pay off debt and the, you know, they want to get rid of it. But if you're an actual, real solid investor with a large portfolio, you know that you don't actually want to pay off these things, why pay it off right. When you can get the appreciation, you can get the cashflow.

And then none of that money is going just to pay down principal it's dead equity. That's what they call it. It's dead equity. If it just sits there doing nothing for you. So an interest only mortgage or line of credit. It does have a higher interest rate. Than an actual mortgage. So that would be the negative thing here, but because it's interest only you save that principal portion of your payments.

And because you're saving that. It actually ends up. Much cheaper, monthly payments in because those cheaper monthly payments that's, what's giving you the stronger cashflow. Now, depending where you live, you know, also these products may or may not be available. So it is location specific it's debt ratio, specific credit score, specific rates. So you have to have a decent overall portfolio, but when in doubt, again, reach out to an expert and we can look at that and see.

You know what those options are for you. So another great option is to change lenders. So a lot of people think. You know, I'm going to stay with my lender and you know, I've got the variable and I'm going to lock it into a fixed now to save. But by changing the lenders, what we can do is re extend your amortization.

So by re extending it. We can get you up to 30 years with, primary lenders. And the benefit of doing this right. As again, lower payments. So you might have a variable and your lender could offer you 5.2, if you lock it in. And again, I'm just making up these, rates because we actually, we do have some that are lower, but let's just pretend for the scenario. It's 5.2.

Okay. But they're going to lock you in at the amortization, the natural amortization that's left. Right. So if you had variable, you probably went to a negative amortization. So now they're going to lock you into your natural emiratisation. So let's say you originally started with a 30 year and you've had the home for seven years. The natural emiratisation would be 23. So that's what they're going to give you when you lock in your interest rate.

But by changing lenders. And let's say the rate is also 5.2. So mentally in your mind, you're like it's a wash. It's the same rate. Yes, but now I can get you 30 years instead of 23. So that lowers your monthly payments as well to potentially increase your cashflow. So those are options there for you too. And actually I do want to touch on one more thing on the interest only product that I forgot.

The interest only, especially if you get the line of credit, you can convert it to a mortgage at any point in time. So if you felt there was a better rate in the future or whatever you have that opportunity to lock that in. So I just want to touch on that. I didn't want to forget that. And then lastly what a lot of investors are doing.

Is there adding second suites to the property? So you can take your mortgage now, refinance it and pull equity out of it and use those proceeds to add a second suite. And of course you have to check with your local municipality. You want to check with the zoning and make sure all of this is supported.

But the key benefit of this is you're taking. You know, the equity out, but you're adding another unit in because you have that extra unit that is more rental income. Which is exactly what you need because you're in a negative cashflow scenario. So even though you're taking money out via the refinance,

What just increasing your monthly payment, because you can add extra rent. That's ideal, even if you cannot add another suite. But you still take money out of the property and you use that to improve the property. That's going to give you a higher cashflow. So you have to look at the balancing effect and see.

You know, does this added payment, will I get at least this much or more when the property is renovated? And if so, then that might even make sense for you. So those are the three ways. So the interest only mortgage or the line of credit. Swapping lenders. Right. And extending your maximum amortization and refinancing to add a second suite to the property or renovate a property. If it's in disrepair.

So those are the key strategies that I keep repeating to my investor. So I was like, you know what, I'm just going to record a quick podcast episode about this because. People are asking me for this all the time. And this we've used this strategy. A mixture of them or an individual strategy. And we have helped our investors to save money on their interest expense.

For the bank of Canada rate increases. So if you think that you're affected by this and that these solutions might help you reach out again. My office line is 5 1 9. 9 6 0 0 3 7 0. Thank you.

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Scott Dillingham