How cash buyers can capitalize on the current market

Rising rates, opportunities

When interest rates shoot up, the real estate market inevitably feels the tremor.

For many, affording a home becomes a towering challenge. Let's break it down. Today, financing an average starter home priced at $900,000 (with 5% down) will set you back $5,725 monthly. That's almost twice the rental cost for the same home.

To qualify, without any other debt, you'd need an after-tax income surpassing $220,000. And here’s the kicker—you'd have to qualify at rates 2% higher than the standard ones, which means over 8%.

This same starter home is often what new buyers and investors are both eyeing. Historically, these homes were great for positive cash flow. Imagine a $900,000 home, leveraged at 2.5% interest. It would bring in a profit with just $3,000 in rent monthly. But this profitable picture was largely painted by affordable loans.

However, with economic instability, banks tighten their grip. Rates for non-owner occupied property buyers can surge by 1% to 1.5%. Banks also set strict guidelines regarding the debt coverage ratio, which essentially measures if the rental income can comfortably cover the property's expenses (and then some).

With current rates, most investors would need to make a hefty down payment—often more than half of the property’s value—to even consider a positive cash flow.

Borrowing against your primary home for another property's down payment? Once a viable strategy, it now seems a distant memory. Simply put, the costs of borrowing heavily outweigh the returns from rentals. This shift has left many potential real estate investors on the sidelines.

While there will always be buyers for lower-end single-family homes, albeit fewer, the investor-specific properties, like fourplexes and apartment buildings, face uncertainty. Some landlords, especially those using variable-rate mortgages, find their investments draining their pockets.

Their solution? Selling the property. But here's the snag, prospective buyers face the same soaring interest rates.

To understand the math, let’s dive into ‘cap rates,' a term investors throw around to measure an asset’s return. It's calculated by dividing the asset's value by its net operating income (NOI), giving a percentage as the result. But with higher property prices, the returns diminish.

In a world where investors won't borrow at 6.5% for a 4% yielding asset, the numbers simply don’t add up.

Unlike a young family fuelled by dreams of homeownership, investors prioritize the bottom line. If the income from a property remains stagnant (or even declines), the only logical way to boost returns is to slash prices until the yield is enticing enough.

Enter the cash buyer.

These investors have two unbeatable advantages—no competition and no interest rates to fret over. The ability to close a deal quickly, say in seven days, often leads to significant discounts.

This is the game plan my investment fund, CashOffer LP, banks on. The next step? Wait out the economic storm. As history suggests, the Bank of Canada eventually loosens the reins on interest rates. By then, property values rise, and the smart cash buyer can refinance, earning a significant profit, all while enjoying a steady cash flow.

For those ready with cash to dive in, the next 12 to 18 months promise a golden window of opportunity.

I’m gearing up for it, and if you'd like a deeper dive into my strategy for this high-interest landscape, watch this video on Youtube. Or feel free to reach out, I'm open to sharing my playbook.

If you are interested in learning more about the current market dynamics and what it means for everyday buyers and sellers, you can always catch our latest Vantage Report

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

AJ is the owner of Kelowna’s downtown boutique firm, Vantage West Realty. The firm takes pride in breaking the mould when it comes to how they practice real estate. With a well-deserved reputation as a real estate renegade, Hazzi has been shaking up the Kelowna real estate scene since 2002.

Having been a student of real estate through two market cycles, AJ has come to see an absence of truly qualified professionals specializing in investment real estate. This has become AJ’s role within the firm and the community: To educate clients on how to achieve financial freedom through real estate.

Arming his clients with knowledge on where to find positive cash-flow, how to renovate for profit, and other creative avenues that most agents completely ignore, Hazzi has carved out his niche as a real estate investment advisor (REIA), and loves nothing more than educating people on the right strategy to capitalize on both boom and bust years.  AJ is a firm believer that the Kelowna market is rich with opportunity, if one knows where to look.

If you are in search of an advisor who practices what they preach, consider that AJ has built his own real estate portfolio up to include multi and single family cash-flow rental properties, development property, resort property, fix and flips, and commercial properties. By sharing the lessons learned from his own experiences, his clients get the knowledge and confidence to invest without having to make the expensive mistakes he and many new investors have made along the way.

His goal is to impart on people, especially of the X and Y generation, that depending on RRSPs and Government Pension Plans to look after us down the road is risky business. Most people don't realize that as little as one or two properties added to your real estate portfolio now, can secure a comfortable, even lavish, retirement.

Bringing a consultant's approach rather than the tired, old-fashioned sales approach, AJ and his partners offer a world class service from finding, pre analyzing, and negotiating your next acquisition, to property management, all tailored to today’s busy investor.

To hear what AJ Hazzi's clients have to say about his service view the testimonials.

Contact Information

For more details or to reach AJ Hazzi, please visit www.vantagewestrealty.com

Email [email protected] Cell 250.864.6433

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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