How to weather the liquidity storm
The May 6 issue of Canadian Real Estate Wealth was full of interesting articles. I shared one earlier today and thought that this article by David Kitai was also a worthy read.
"Given the scale of the economic devastation wrought by the COVID-19 pandemic, many real estate investors have found themselves pushed to the edge in the course of a single month. With liquidity issues arising across Canada, investors need novel strategies to weather this storm.
One leading mortgage broker explained that employing some clever solutions can steady an investor’s ship by providing liquidity in a time when it’s desperately needed. When the storm passes, the broker thinks they’ll be well-positioned to take advantage of the opportunities that will, inevitably, arise.
“Andrew and Jennifer own a primary residence and two rental properties in Toronto…Jenn was temporarily laid off and one of the tenants at their Toronto property did not make the April rent payment,” Dalia Barsoum, president and principal broker at Streetwise Mortgages, told CREW when asked about a situation where her office has helped investors weather the storm. “They reached out to us as they needed direction on the financing strategies and tools they can utilize to help ease some financial pressure and plan for the future as they would like to eventually invest again.”
Andrew and Jennifer were considering a mortgage deferral, but Dalia and her team conducted a comprehensive review of the couple’s finances and saw a number of restructuring opportunities that allowed them to increase liquidity and create additional monthly cash flow.
The couple took funds from their primary residence at a low rate, helping to consolidate several expensive debts including a car loan, an RRSP loan, and an unsecured line of credit. In simply restructuring those payments, the couple got $1,200 of extra monthly cash flow. Barsoum also recommended that the couple re-amortize their home mortgage from 22 years to 30 years at a lower rate, resulting in another $350 of extra cash flow through a reduced mortgage payment. She helped the couple understand how to use pre-payment privileges in a smart way to reduce the effective amortization on the loan and to still pay down their mortgage as they originally planned.
To handle shocks, Barsoum set the couple up with an advanceable, secured line of credit on their primary residence for $150,000, providing a liquidity cushion that didn’t drain their monthly budget.
“With this extra cash flow and a line of credit in their back pocket, the clients can now cover the shortfall on their rental property until the situation improves,” Barsoum says.
Barsoum thinks the widely touted option of mortgage payment deferral should serve as a “last resort,” especially when options the ones employed by Andrew and Jennifer exist. Barsoum is using a few other novel strategies to help clients in different situations, as well. She’s aware that the current situation risks impacting property appraisal values, in a time-sensitive moment she is locking in appraisals for her client’s properties. Road-blocks in deals are coming up, too, and Barsoum suggests utilizing private funds with a clear exit strategy to help bridge those gaps where one property’s closing requires the sale of another, which hasn’t sold as the market has slowed.
While she accepts it’s too early to say where exactly the real estate opportunities will arise in a post-COVID Canada, Barsoum believes that those investors who are able to weather this storm through these novel strategies, without creating any undue excess in their debt load, will be well-positioned to pounce on opportunities as they arise.
In the meantime, investors should look at the specifics of their situation and develop plans accordingly.
“Every investor’s story, finances, and dreams are different,” Barsoum says. “It is important to assess the degree of each of these risks on a case by case basis through a detailed assessment of the client’s finances and develop a customized action plan.”