Safeguarding your portfolio, part 1: a three-pronged approach

The world as we know has changed. 

The current economic crisis is a time of uncertainty for many.  We know that the financial decisions you make right now will have a profound impact on your ability to weather the storm as well as on your future financial well-being.

More than ever, prudent investors, either with an existing portfolio or looking to get into the market at this time, must pivot their investment strategy and revisit their capital structure (i.e. financing) to ensure that their portfolio withstands the storm and that they emerge out of it in a strong financial position so they can leverage the unique real estate opportunities that will surface down the road.

Many lenders by now have revised their lending policies in some way as a hedge. As well, some high margin investment strategies that investors may have relied on in the past to accelerate their growth such as short term rentals, flipping, construction, buy/renovate/refinance/rent (BRRR), and student rentals have seen a disruption in cash flow, increase in holding costs for project completion or challenges with financing upon completion due to the changing lending landscape.

With the mounting pressure and so many moving parts, some investors are giving serious thought to selling one or more properties or have agreed to rent reductions in some cases if they can afford it. 

What we know seeing so many investment portfolios across Ontario is that an investor’s portfolio capital structure is the anchor and sail during a storm. If the capital structure (i.e. how financing for the portfolio was set up) is not set up to allow for fluctuations in portfolio cash flow or to offer investors liquidity as a cushion, then the risk of financial destress during periods like this would be high. Capital structure is also like the sail an investor can control to reach their wealth destination.

It is important for investors at this time to pause, revisit with their mortgage advisor three key areas relating to their portfolio and pivot where needed.  They are:

1. STABILITY

The focus is to ensure that you have enough liquidity and reserves to hedge or deal with a disruption to your employment income and/or portfolio rental income. 

This also includes assessing the suitability of some of the tools available to you (such as mortgage deferrals) given your circumstances and future plans.

2. AGILITY

The focus here is to create some wiggle room within your monthly budget.

This includes: debt restructuring that is aimed at freeing up cash flow and as well as equipping you with financing tools that can help you cover any short term cash deficits.

3. OPPORTUNITY

With a strong anchor in place, you will be in a position to continue to grow your portfolio. The focus here to setup a financing road map that enables you to sail forward and continue to build your wealth. It is crucial as you setup financing going forward that you align your financing road map with the new lending policies and how lenders are currently evaluating applications and financing rental properties.   Yesterday’s financing rules are no longer applicable in some cases as lenders have cut down on loan to values, have reduced heavy reliance on rental income, introduced new policies regarding leverage and how they use rental income and are taking a much closer look income in general given the risks of job loss.

Dalia Barsoum is president and principal broker at Streetwise Mortgages and a regular columnist for Canadian Real Estate Wealth. She leads an award-winning team of mortgage advisors offering strategic income property and portfolio advice to Real Estate investors across Ontario.

Click here to setup a complimentary planning session with Dalia or Streetwise Mortgage Advisor.