Homeowner · Brampton, On · Member since 2013 · 72 posts · 8 votes
Hi all,
i'm setting up to buy my first investment property. Conventional financing is a little difficult. I'll make this deal happen, but i don't know how i'll finance the next property. I'm in for the long game - i'd like to purchase at least 3 in 2 years and have at least 10 properties in 5 years. Canadians, how do you finance your 2nd, 3rd,...10th properties?
I currently have a tiny home in GTA, on which i've been accelerating mortgage payments to pay off 10 years ahead of schedule. I have a job with decent earned wages, but only one income for the family. I have savings for a very decent downpayment on investment property. My current bank will only give me about $100 mortgage because they are mostly looking at my earned income (not considering downpayment or future income from rental.
I went to a mortgage broker who can get me more mortgage but at significantly higher % (4.5% instead of 3%).
Canadians, how do you finance your 2nd, 3rd,...10th properties? (After that, i figure i will know the game).
Thanks a lot,
The Canadian banks are starting to tighten-up their lending for investment properties ... yet they will still give our large - albeit insured - mortgages for owner occupied. RBC, Scotia (who just tighten things last month), and BMO still appear to be in the market for investment mortgages.
That said, if the bank has capped you at 100K mortgage - which won't buy a pretzel stand in TO - you need to check your debt to income {some banks will use DTI calculations similar to the US, others may also look at the "total household after-tax income to household debt" ratio}.
Making accelerated payments on your own home is an excellent strategy as that debt is not earning you any money. However, if you have grossed-up your payments, in addition to paying bi-weekly, your monthly debt service may be sufficiently large the bank has concluded you could not service more than another 100K of debt.
If you are planning to make a conventional purchase (LTV <=80%) you will get more cooperation from the banks ... thought some my try to convince you to ensure it even with a downpayment of 20-25% {ignore them}. You should also be able to secure a rate below 3.0% if you are willing to go with a 5-yr term variable rate product.
Now, if you mortgage broker is finding you products from tier II lenders, then you will get a larger mortgage (though technically you still need to qualify at the BoC 5yr posted rate w/ a 25yr amortization) as they have more appetite for risk ... you will also pay for that appetite 4.5 - 7%
If you can produce signed leases and tenant estoppels for the property you are purchasing, most of the banks will count 50% of the rental revenue in addition to your earned income {some use to count up to 70%, but most have pulled back} for qualification.
Finally, #2-#4 are essentially rinse & repeat: you will have to qualify for each subsequent property considering the debt of prior mortgages, but you will also get to use 50% of existing rental income.
When you arrive at mortgage #5 things change. Some banks, RBC as an example, will only entertain 5 residential mortgages {including your personal residence} ... and that's not 5 with them, but 5 in total. Others have their own internal policy and limits. That said, by the time you reach five residential mortgages your DTI likely will be flirting with the threshold ... probably long before that in the GTA.
For properties 6+, you might be able to still use conventional financing, depending on how much equity you have built in your prior properties and to what degree you have improved the rental revenue ... but the process gets more difficult each time. It was at this point we decided to pursue commercial properties only (financing is based more/mostly on the property itself and not your salary). You can also find yourself one or more private lenders who would be willing to carry a mortgage ... you will pay 6-10% interest which in our current markets will really limit the properties which service that level of debt and still cash flow adequately.
The Canadian banks are starting to tighten-up their lending for investment properties ... yet they will still give our large - albeit insured - mortgages for owner occupied. RBC, Scotia (who just tighten things last month), and BMO still appear to be in the market for investment mortgages.
That said, if the bank has capped you at 100K mortgage - which won't buy a pretzel stand in TO - you need to check your debt to income {some banks will use DTI calculations similar to the US, others may also look at the "total household after-tax income to household debt" ratio}.
Making accelerated payments on your own home is an excellent strategy as that debt is not earning you any money. However, if you have grossed-up your payments, in addition to paying bi-weekly, your monthly debt service may be sufficiently large the bank has concluded you could not service more than another 100K of debt.
If you are planning to make a conventional purchase (LTV <=80%) you will get more cooperation from the banks ... thought some my try to convince you to ensure it even with a downpayment of 20-25% {ignore them}. You should also be able to secure a rate below 3.0% if you are willing to go with a 5-yr term variable rate product.
Now, if you mortgage broker is finding you products from tier II lenders, then you will get a larger mortgage (though technically you still need to qualify at the BoC 5yr posted rate w/ a 25yr amortization) as they have more appetite for risk ... you will also pay for that appetite 4.5 - 7%
If you can produce signed leases and tenant estoppels for the property you are purchasing, most of the banks will count 50% of the rental revenue in addition to your earned income {some use to count up to 70%, but most have pulled back} for qualification.
Finally, #2-#4 are essentially rinse & repeat: you will have to qualify for each subsequent property considering the debt of prior mortgages, but you will also get to use 50% of existing rental income.
When you arrive at mortgage #5 things change. Some banks, RBC as an example, will only entertain 5 residential mortgages {including your personal residence} ... and that's not 5 with them, but 5 in total. Others have their own internal policy and limits. That said, by the time you reach five residential mortgages your DTI likely will be flirting with the threshold ... probably long before that in the GTA.
For properties 6+, you might be able to still use conventional financing, depending on how much equity you have built in your prior properties and to what degree you have improved the rental revenue ... but the process gets more difficult each time. It was at this point we decided to pursue commercial properties only (financing is based more/mostly on the property itself and not your salary). You can also find yourself one or more private lenders who would be willing to carry a mortgage ... you will pay 6-10% interest which in our current markets will really limit the properties which service that level of debt and still cash flow adequately.
Homeowner · surrey, British Columbia · Member since 2013 · 98 posts · 8 votes
12y
Thanks to having no debt but a mortgage which the rental income covers I am able to get a second mortgage for decent amount and am using my LOC for part of down payment. At the moment I am trying to see how I can get a second mortgage with 5 or 10 percent down only( and yes I will pay the penalty for being less than 20%) but since I am looking at flipping that I will include in the cost. the goal is do a few flips to have the down payment for rental unit and a flip. the Bank that has been good to me so far has been Vancity.
I would also add, We use Joint Ventures partners to qualify for the mortgages and provide the capital to invest. This is how we continue to buy properties.
Homeowner · Brampton, On · Member since 2013 · 72 posts · 8 votes
12y
@Roy N. This was such a good reply, that I keep going back to it in trying to make my long term strategy. Follow up question: could you elaborate on the part below.
Roy wrote:
"If you can produce signed leases and tenant estoppels for the property you are purchasing, most of the banks will count 50% of the rental revenue in addition to your earned income {some use to count up to 70%, but most have pulled back} for qualification.
Finally, #2-#4 are essentially rinse & repeat: you will have to qualify for each subsequent property considering the debt of prior mortgages, but you will also get to use 50% of existing rental income. "
My DTI can only accomodate 100,000 additional mortgage. If i can't find a way to finance a 2nd property, then I won't bother tying up all my money here.
If i purchase 2nd property within 1 year of 1st property, will the bank still look at my rental income in considering my DTI? Or do they need to see some kind of track record? You mentioned having signed leases in place when negotiating mortgage - then i'm more likely to get financing when buying an existing rental proerty with tenants in place rather than bying SFH and making it a rental? Correct?
My DTI can only accommodate 100,000 additional mortgage. If i can't find a way to finance a 2nd property, then I won't bother tying up all my money here. If i purchase 2nd property within 1 year of 1st property, will the bank still look at my rental income in considering my DTI? Or do they need to see some kind of track record? You mentioned having signed leases in place when negotiating mortgage - then i'm more likely to get financing when buying an existing rental property with tenants in place rather than buying SFH and making it a rental? Correct?
Thanks a lot, Comments welcome from all,
Dominka,
Here on BP you will hear the refrain in the US that the banks want 2-years of rental income before they will count it towards qualification.
While many lenders here at home officially have a similar requirement, only once in the past three years have we even been asked how long have we been renting property. If you are pursuing a conventional mortgage (LTV <=80%), that will not be carrying default insurance, I doubt you will be asked. If you are concerned about it, there are industry courses and seminars you can take (might cost you a few hundred to a few thousand depending on if you plan to get a certification or not), that are accepted in-lieu of real experience.
As for estoppels and signed leases. Normally, when you are purchasing a property with existing tenants, the lender will look at 50% of the verifiable rental income {i.e. it use to be 70-75%} to count as part of your income for the purposes of calculating your DTI (or family after-tax income / total debt). Each lender has their own idiosyncrasies in this are: some only accept signed fixed term or annual leases (i.e not month-to-month, even if it is written); some will accept estoppels from month-to-month and long-term tenants w/o a written lease; yet others will require estoppels in addition to the signed lease {to be certain there are no verbal considerations being given to the tenants that are not reflected in the lease}.
In the couple of instances where we were stretching ourselves (acquiring two properties in the same month, closing the same week), we made signed leases and estoppels a condition {just tell the vendor, your lender is insisting} and offered to collect the estoppels ourselves {which you want to do anyway}.