Is there a correction or crash coming? The CMHC head has repeatedly stated his fear that there is.
Conversely, we are equally confident (and putting our money where our mouth is) that values will continue to go up.
However optimistic we are though, it is always a good practice to prepare for downturns through strategic investments and preemptive planning.
So how can you protect your downside? Here are a few elements to consider:
1) Keep a reasonable LTV on your portfolio
What if there was a 10-20% drop or correction in values? What is your current LTV? How much equity do you own in your property? How much leverage have you applied? If you had to sell, would you be underwater or upside-down?
Look at these items and Consider their impact; in times of market uncertainty, don’t over-leverage yourself.
Think LONG term, don’t react emotionally, ride out the cycle, and be prepared to hold more than a few years when necessary.
2) Evaluate your assets for cashflow
Excluding appreciation, would your property still make sense to purchase? Hint: It should have or why did you buy it!?
Properties should be looked at first for cash flow and equity pay-down. Then simply allow appreciation be a nice cherry on top; a pleasant reward.
Having cashflow is a buffer against bad times and creates strong reserves to weather ups and downs.
Houses require large capital investments, are leveraged usually 5 to 1, and are not liquid, so banking solely on appreciation is gambling.
3) Stress Test Rents
If vacancy rates go up in the market you’re investing in, could you still manage positive cash flow?
What if you had to decrease rents by 10% to keep the property tenanted?
Although historically rents have stayed flat during recessions, you must also consider increased vacancy rates and your specific market.
GTA rents rarely drop in a recession as the economy is fairly robust and immigration increases every year, but can the same be said about a smaller single industry market, like Kirkland Lake?
Consider the Alberta oil sands in 2015-2016. People left the province and there were less renters available in the market. If you’re investing in Toronto, this might not be an issue, but how would your market fair if a major employer had large layoffs?
4) Stress Test Your Portfolio
Although you should have invested for cashflow first, if you didn’t and there is a correction on the horizon what actions can you take?
You can consider selling off your assets, but first look to see if you can reposition the underperforming asset.
Make sure your properties are at their highest and best use and ensure that you have adequate cash reserves in case of big expenditures (like renovations or to purchase furnishings to change strategies.)
Remember, these are worst case scenarios and precautionary measures.
With Canada’s strong fundamentals and massive immigration we don’t foresee a gross correction coming. Perhaps less people buy, but then more people will rent.
If values did go down, nobody would be building new units either. So people immigrating into Canada, or moving inter-provincially, would need to live somewhere…which would be into our existing units. So, we are confident that rents will increase or at worse stay stable.
As long as you are cash flowing now, you should be good to weather any of these stormy situations!