How do you scale this?

19 Replies

Hi all, 

I'm new here so please excuse me. I'm sure this may have been asked before but I'm having trouble finding the references. 

I currently own a side-by-side triplex income property in the Toronto area. It has good cash flow and should have great appreciation as well thanks to the local market. 

I'm on the look out for another property but I'll have to finance the downpayment from a LOC. It hurts the cash flow financing this way that's fine for property #2. My question is, how can I go about securing #3 afterwards? My home's equity will be pretty maxed out at that point and the equity build in the rentals won't be enough to leverage for another down payment. Is there a better way to finance #2 to set up buying #3 (or 4, 5, 6 ...37?)

I'm trying to figure out how to scale this and I'm running out of ideas. The 'cheap' houses around the Toronto market go for around $400-500k. Am I better off to stop scaling buy and hold and try something like flipping houses bought off tender to get another lump sum for a downpayment and lessen the leverage? 

Any advise (particularly those with a Canadian perspective) is welcome.

Thanks all,

Mike

Welcome- The first few properties are the hardest.  I usually buy new properties with equity from other investments.  As you prove yourself to be a reliable owner/manager you will find the money comes easier.  If you identify a great property, the money will come.  If not from banks there are many ways including owner financing, private money, outside investors and many more.  Buy #2 and get it stable and when you find #3 look for the financing with some track record behind you.  I have over the years managed to develop a relationship with a small savings and loan and it is literally a phone call for me to get a mortgage.  I take a little from an existing property and voila-I bought something new with no cas from my pocket.  It's a wonderful life.  Play smart, plan to work hard, and love learning.  Always enjoy today!!

Thanks for the advice Dawn. 

I'm finding the down payment aspect to be my more concerning issue at the moment. With putting minimal down payments for the LTV and using conventional lending for the first few properties, there isn't much equity in them to draw on for expanding my holdings. I've only had the triplex for just under a year at this point. Local markets are still hot, so I'd like to get in sooner than later and capitalize on the fast equity build for longer term strategies.

I'll look into the options you've noted and seek out a smaller, more flexible S&L/Broker and try to start building a relationship there. Private lending just doesn't sound like a good idea with current posted mortgage rates being as low as they are. Still, I guess if you want to grow you need to make some gambles and incur some added expenses(?).

Www.askBenWhy.com cash flow university

The above link talks about multi family and how can you negotiate seller financing with the seller participates in the financing, it doesn't do away with bank financing but it gives you some ideas. Ive reviewed the course and I think it's worth the money. Ben's a very good teacher.

@Ben Leybovich  

Thanks Brian. I'll check out the site and see what he's offering for the Cash Flow University program. It's wait listed, so I've signed up for the updates. Based on his copywriting I'm expecting big things!  ;)  

I've watched Ben's BP podcast relating to his first major apartment building acquisition (in progress). At this point he is already heavily involved with investors so that podcast was more of inspiration than it was actionable insights for where I'm at in my process. 

As an FYI to those that may be following this thread, the url posted by Brian is incorrect (an honest mistake). The url is actually justaskbenwhy.com

@Mike Basden

Mike, what kind of down payments are you using for your properties?  20-30% conventional?  Or are you branching out to shorter term financing with lower DP requirements?  Also, how are your cash reserves?

We're required to put a 30% down payment on investment properties here in Canada if going with conventional lending unless you go with mortgage insurance. Commercial mortgages for larger developments are a bit different but I prefer to operate in the 2-4 unit properties rather than larger apartment buildings for now. 

Cash reserves are a little low since we haven't been doing this long (just over a year) and we've had to make improvements to the properties. 

Originally posted by @Mike Basden :

We're required to put a 30% down payment on investment properties here in Canada if going with conventional lending unless you go with mortgage insurance. Commercial mortgages for larger developments are a bit different but I prefer to operate in the 2-4 unit properties rather than larger apartment buildings for now. 

Cash reserves are a little low since we haven't been doing this long (just over a year) and we've had to make improvements to the properties. 

 Mike,

One a residential property (1-4 units) you will not qualify for an insured, high ratio mortgage {they are for owner occupied only}, therefore you will need to make a conventional downpayment of 20%.   Any amounts demanded above that is strictly at the discretion of the lender: they may have an internal policy of 30% down or it may be based upon the risk you present as a mortgagor.  I would suggesting speaking with different lenders or having a sit-down with a mortgage broker.   We have several residential properties (2-4 units) and have never made a downpayment larger than 20%.

Once you step into the commercial world >$1-2mm, the underwriting criteria and process is different.  For those 5-6 unit properties stuck in the no-man's land - too many units to be residential, but not worth enough to interest the commercial boyz & grrls, RBC and {perhaps} TD will underwrite them as residential properties.

Now, once in the commercial space a deal may qualify for CMHC insurance which has a hefty price tag, but would allow you to have a downpayment as low as 10-15% (pending the strength of the deal and whether the vendor will carry-back).

Hey Brian, I'm also from Newmarket. 

Generating capital is every Investors dig questions. How you do it, where you do it and most importantly why you do it? We used Joint Venture partners to buy the 50 ish doors we have. Otherwise we would not of been able to purchase the amount of properties we did (all in the GTA). I would start to figure out what my long terms and work backwards from there. Figure out what you want from the properties and what it represents to you and your family. 

We've found National Bank to be very investor-friendly; 20% downpayments and after a year if you show no rental income loss on your tax return they don't consider that mortgage payment in your debt to income ratio. They've lent us 4 $250k mortgages at 80% LTV in the past 2 years and seem eager for more.

Toronto does seem like an overheated market right now. We're looking to the US market in the short term and hoping for a correction in the Canadian market before continuing to purchase here. I figure if you're desperate to purchase before the price goes up it's probably better to wait. 

I think - maybe I'm wrong - that your next steps are going to be let the dust settle after the rehab, then look into either getting another source of cash (private, HELOC on your primary, etc.), or look at portfolio loans where you can get away with smaller DPs.

Thanks for the correction Roy. You're right. A maximum LTV of 80% is all you can get on a non-owner-occupied, 1-4 unit rental property. Sorry about that. I was going from my faulty memory.

We've been working with a broker for both purchases so far. The first was 20% down and we claimed a unit was owner occupied, the second we were told required 30% down because it wasn't owner occupied. I haven't been a fan of this broker from day one, but she is in my wife's business network. Sound like it's time to dump her and find someone else...the broker, that is... not my wife.  :)

Thanks for the tip on National Bank, Jennifer.  The core of the Toronto market is skyrocketing as are the burbs. Our most recent purchase is actually in Barrie since we're practically priced out of the central market. Barrie is a tough market for renters. Good places at reasonable prices are hard to find. We were able to show the units before the sale closed (and while still staged). We did it open-house style and had over 40 different renters come through over two days. Secured tenants for both upper and lower units that weekend; solid credit and references. Our next rental will probably be there as well.

Originally posted by @Mike Basden :

We've been working with a broker for both purchases so far. The first was 20% down and we claimed a unit was owner occupied, the second we were told required 30% down because it wasn't owner occupied. I haven't been a fan of this broker from day one, but she is in my wife's business network. Sound like it's time to dump her and find someone else...the broker, that is... not my wife.  :)

Thanks for the tip on National Bank, Jennifer.  The core of the Toronto market is skyrocketing as are the burbs. Our most recent purchase is actually in Barrie since we're practically priced out of the central market. Barrie is a tough market for renters. Good places at reasonable prices are hard to find. We were able to show the units before the sale closed (and while still staged). We did it open-house style and had over 40 different renters come through over two days. Secured tenants for both upper and lower units that weekend; solid credit and references. Our next rental will probably be there as well.

We started off with a broker, found it was useless.  He was quoting us 5%+ for 3-5 year variable mortgages and a 50% haircut on the rents in the debt-to-income ratio forever.  We have 5-year fixed ones at sub-3% with NBC.  Shop around. 

@Jennifer Pereira , et al:

If you're securing portfolio loans for sub 3% down, how do you get a positive cash flow?  I have a model that looks at a portfolio 3% DP loan assumption and even after 1.4% rent to purchase price ratio and the 50% rule, my cash flow is REAL slim per month.  I understand getting in with a cheap loan and little money down but how do you offset the higher mortgage payment?

I think she meant sub 3% lending rates, not down.

Ahh, understood.  Jennifer, what DP requirement are you getting with that sub-3%?

Thanks in advance, all!  Great thread.

@Felipe A.

It's with a 20% downpayment. I'm not aware of any Canadian banks that allow mortgages on investment properties with less than 20% down (unless it's a 2-4 unit and the owner occupies one).

Originally posted by @Felipe A. :

@Jennifer Pereira , et al:

If you're securing portfolio loans for sub 3% down, how do you get a positive cash flow?  I have a model that looks at a portfolio 3% DP loan assumption and even after 1.4% rent to purchase price ratio and the 50% rule, my cash flow is REAL slim per month.  I understand getting in with a cheap loan and little money down but how do you offset the higher mortgage payment?

 Felipe

The current thread is discussing financing in Canada.  Portfolio loans on residential properties are near - if not - extinct in Canada at this time ... at least I haven't seen one offered in some time.   Commercial lending is another story and portfolio (or blanket) financing is possible.

The sub 3% being referred to above is the interest rate on the mortgage note.  The bank prime rate in Canada is 2.85% at the moment and good borrowers can get even lower (we just renewed a mortgage at 2.4%).

@Roy N. Duly noted!  Thanks for clearing that up!

Originally posted by @Jennifer Pereira :

@Felipe A.

It's with a 20% downpayment. I'm not aware of any Canadian banks that allow mortgages on investment properties with less than 20% down (unless it's a 2-4 unit and the owner occupies one).

 Jennifer:

Down payments of 10-15% are possible on multi-units with CMHC insurance and/or a vendor carry.

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