Erin McCoy and Kevin O'Leary discuss cottages and mortgages

[Music] I am here with my great friend Kevin Oir, and we are in the beautiful Mokes on Lake Joseph. We're going for a little boat cruise, and we're going to talk about real estate, especially cottage real estate, and also all the things that Kevin's up to, which is a lot.

So, Kevin, I call cottaging like the next thing—uh, like I guess hockey is to Canadians. Everybody aspires to own that other place where they can have great family time and memories. But I know your opinion in terms of an investment.

“Well, look, I mean, I sit here with you on a day like today, cruising in this boat across this beautiful lake. There's no place like it on Earth. So when you start to attribute that value to why you would buy a cottage, you can understand why people put such a huge number on these places. Even though it's really a three-month phenomenon, people love it up here, as I do, as you do. I mean, this is truly the essence of being Canadian. You can dive in this water and drink it; where else on Earth can you do that?

So yes, I like cottage investments. However, you've got to have your eyes open when you're going into this because the truth is, for most of these cottages, they're not bought as investment properties. They end up being a huge financial expense every year to the people that own them. There's no property I own that costs me more than this place does because my wife goes nuts every year renovating it.”

“But that's a choice, right?”

“Kevin, it is. It's a lifestyle choice, but I don't want people to invest in cottages thinking that that is the best asset class in real estate. It is for family; it is for enjoying your life, but it is not the best in terms of capital appreciation.”

“So let's talk more about that for a second because people that bought cottages in the 60s and 70s, they have never seen such appreciation. I mean, they really are benefiting today. And even people now that, okay, I agree with you, that maybe bought in 2005 to 2008, they're trying to possibly sell, and they're not able to recoup what they paid for. They bought in the height of the market, but there's still an opportunity. And we're not just talking Mokes but in other lakes and other waterfront areas going now north, north or west or east, where you can pick up great cottages in remote areas, beautiful lakes, and even they will probably appreciate over the long term.

So would you say, as a long-term hold, it's something that you could advise that would be a great investment?”

“Yeah, you've hit on the real issue because if you're going to buy a cottage to flip it as a trade, that's not going to work for you. Because, I agree with you, people that bought 2007 to 2008, I still think they're underwater. But if you take the cottage on into the family portfolio of what matters in your life, that makes sense. Because anybody that bought any property 25 years ago, 20 years ago in this area and all the surrounding lakes has made a ton of money. And you have to make the assumption over the next two decades the same will occur, and I generally do endorse that.

The question is, can you support the taxes, the maintenance, and the costs of being in that cottage for the next 20 years? That's the decision you have to make now. So the advice you're talking about is when you're trying to choose if you want a cottage, it’s making sure that if it’s a lifestyle that you want, you have a little extra cash that you can afford to do it, most likely getting a mortgage, which we'll talk about in a second about your company. But it's about making sure you go somewhere that is affordable, understanding all the costs that are involved in ownership.”

“Yes, and I think cottages have to be taken on as part of what I call the family nut. There is going to be a financial monthly cost maintaining, and taxes being the number one and number two of what you're going to be paying. And if you're on board for that, and you can fit that in your lifestyle, it is the most wonderful investment you can make in your life. Like, just look at this place; unbelievable.”

“So let's go to the mortgage side of things for a second. All right, now you have your new company related to mortgages. Okay, so like mortgages, do you help people when it comes to wanting cottages?”

“I call these kinds of mortgages entrepreneurial mortgages in the sense that most banks won't do them. Some banks will do cottages; others won't. That's right. The truth is, you need a lot of equity if you're going to get a mortgage for a cottage. You know, be ready to put up to 25% of equity. Sometimes 35%. In islands, you could be as high as 60%.”

“Right?”

“Yeah, because it's almost impossible to get a mortgage on an island. There's all kinds of issues with that. But maybe if you're at 50% equity, you can do it. We look at these loans on a one-on-one basis. You just looking at the individual, what other assets? If you're going to mortgage, you have to be ready for the volatility of the value of a cottage because, as you know, in a down cycle, they can depreciate 30%, and you can get a no-bid situation. A cottage like this one across the lake here, if they want to sell it tomorrow, they may not be able to get liquid for 2 years; it could take years. And a lender looks at that and says I have to adjust my risk accordingly.”

“Is mortgage part of your strategy for investing in cottages? It's not an easy road at all. I can give you many examples of people who have tried to buy cottages in the sort of $2 to $5 million range that were not able to get a mortgage at all. It's not from a lack of qualification; it's more from the lenders worried about the lender's asset itself. The lenders are pulling their horns into assets like this because the assumption is—and clearly we can talk about this—we are in a rising rate environment on mortgages. They've gone up 33% in 5 months, and you know you don't see 2.76% anymore, and you would never see that on a cottage. We're north of 3 and A2.37 now, which is still fantastic.”

“It is, but you can't get those loans for cottages. Looking at a 5e on a cottage, I think you have to be ready to be over 5% if you can get it. And the lenders like me and many others that I compete with, if we're going to look at a portfolio like this, we spend a whole lot of time going into the file because we know the liquidity risk is huge. That's the problem.”

“What is interesting, Kevin, though, a lot of banks are actually now, because of the popularity of cottaging, they've started to treat cottaging as if they are like homes. A lot of people, as you know, are downsizing in the city. They're taking that McMansion, getting something smaller, cashing in on the money that they made from selling that monster, and they're taking that money in the capital and bringing it up into cottage country where they like to spend their quality time for the eventuality of retiring in this area. So as a result, the banks have come to kind of wise up.”

“So, somebody that's done a lot of real estate up here and a lot of mortgages and helps people get their financing in order, it has become a heck of a lot easier, especially within the last 5 years. Now, with the way things are going, what's your prediction in terms of the economy and what we're going to be expecting in the years to come?”

“Well, let's go back to the issue of the mortgage. If you can convince a lender that you're eventually turning your cottage into your primary residence, they may buy that story and be far more open to the idea of funding a material mortgage. I mean something worth a million dollars—that can happen because there is a trend for people to move here and live their lives here because there's a lot of good attributes to that. I would say that's at the beginning—maybe in the first or second inning—in terms of liquidity of mortgages up here. But you're right; that is a trend, and over the next 20 years, it's going to play itself out, there's no question. They're building the new ones as if they are primary homes. Absolutely. Every cottage that's built on this lake now has better systems, controls, and construction quality than the primary residences had built 10 years ago.”

“I agree with that. We will see some kind of a correction in real estate, but not be as damaging as it was before. In other words, I remember cycles after 7 years we lost 30%, and then you had to wait another decade to get back to even. We never had that problem here, but the government clarity, the new policies, the amortization schedules from 30 down to 25—obviously, a 33% increase in rates in primary residences—all these are headwinds. You telltale signs—you can't fight City Hall. You can't fight a rising rate environment. My best-case scenario for real estate, including cottages, for the next 5 years is flat; that's what I think. And then you're going to get this rapid period of appreciation when people feel okay. Rates have stopped going up; let's…”

“And I'm calling for a 200 basis point rate hike over the next 3 years. There was a period from 2003 to 2007. We had a 200 basis point, 2% increase, very slowly. I think it's going to happen again, and I can see it in the fund flows inary funds, which is a great barometer for me.”

“It is a great barometer. So right now, people are pulling their horns in from bond funds and putting more money into floating rate funds. Our fastest growing fund right now is our floating rate fund, which gives you more cash every month if rates go up, right? It's a protection against inflation, and that is paramount on everybody's mind.

And so when I, you know, two months ago, let's say a ticket came in for $100,000, it would be all the Canadian bond fund. Today, it's half the Canadian bond fund. Half rate. And that just happened in the last 2 weeks; that's how fast things can change.

Kevin, thank you so much for your time today and the boat ride. Well, that was just [Music] awesome.”