Interest Rates and Investment Properties - Time to Buy

As with all great opportunities, they have a finite window. All it takes is one condition or metric to change slightly and that potential opportunity becomes either something less of an opportunity or it dissappears altogether.

I've always been an advocate of buying income properties, at any time, as long as you can find the right property. That being said, I believe that at this point in time, the economic conditions have never been better to buy a multi-unit residential income producing property.  More specifically, historically low interest rates make owning an income producing property that much more enticing.

In the Beginning ...

At the outset of my real estate investing career I recall looking upon Japan with envy. They were going through a prolonged period of stagflation which meant that the benchmark interest rate was at zero percent. I'm not talking about the totality of the Japanese economic situation and their stunted growth, but primarily about their rock bottom interest rates which would translate into extremely low mortgage rates.  At the that time I remember paying 7+ percent interest on my commercial mortgages and thought "wouldn't it be great if I could get access to such cheap money".

Benchmark Interest Rate & Canadian Bonds

Fast foward 12 years and Canada finds itself with a benchmark interest rate of 1%.  Canadian bond yields are also at historic lows.  Most recently the 5 year bond has been hovering in and around 1.4%.  Bond yields are signficant as financial institutions/lends tend to base their commercial mortgage rates on the bond yield + XX%.  Needless to say, the cheaper the cost of funds, the greater the potential cash flow from an income producing property.  I financed my last deal recently (12 plex) at 3.48% with NO CMHC insurance.  If it had CMHC insurance it could have been as low as 2.75% which is absolutely mindblowing.

US Economy

While these low interest rates won't last forever, they will be here for at least another 18-24 months as there is too much happening both politcally and economically for the Bank of Canada to make any aggressive moves.  It is no secret that the US economy is still reeling from the effects of the sub-prime fiasco and is recovering at a VERY slow pace.  The US fed has even gone on record and indicated they it will not be raising interest rates for at least another 12-18 months.  The US is our largest trading partner which means that Canada relies heavily on the US to buy our exports.  If the Bank of Canada raises interest rates, our dollar will rise in value making our exports too expensive against a weak US dollar thus significantly harming our Canadian exporters and the Canadian economy at the same time.

Canadian Economy & Inflation

The Canadian economy remains the envy of the world.  While we are enjoying one the best gloabal economies, Canada is not an island and is also affected by the rest of the world's economies.   Our economy is growing at a relatively good pace, but not so fast as to create any significant inflation concerns.  Canada's annual inflation fell in July with consumer prices just up 1.3% from a year ago, well below guidelines.  With inflation not a significant factor, there is not much to spur any immediate interest rate hikes.

Mark Carney Threatening Rate Hikes

Canadian household debt has been a major concern for the Bank of Canada and Mark Carney.  He has been pounding the table trying to get Canadians to reign in spending ahead of inevitable interest rate increases, however, at this current time they are just empty threats as Mark Carney is able to achieve the same end result just by threatening to raise rates.

Bottom line

Interest rates are cheap and you have a limited window to take advantage of it.

Author: Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor