Financing Investment properties!
Hi there, I’m Kyle and a beginner real estate investor. I have my primary residence here in BC, and 4 months I purchased ago a rental in Windsor making me 500/ month. I am now looking to purchase another property … however my broker told me I can only afford another place up to 300k. . My question is… how do people afford so many doors? After 3 properties do people have to turn to JVs where your partner holds the mortgage? Is it commercial lending I have to turn to, where the lender doesn’t look at my income? What other ways are there other than the two I stated? Any help would be appreciated!
cheers Kyle
Welcome to BP, @Kyle Madden. Residential mortgages (4-5 units and less, depending on lender) are primarily based on your PERSONAL ability to carry the mortgage. Assuming rules haven't changed (I haven't done a residential mortgage in some time), lenders count only half the income against 100% of the expenses for rental properties during underwriting. This means that at some point (usually after 3-4 properties) your debt service ratios are out of whack and you no longer qualify for a conventional residential mortgage. Strategies to continue to grow include:
1) Get a partner to be on title and help qualify
2) Use private money
3) Move to commercial properties (5-6+ units)
I made the jump to commercial multifamily a while ago and haven't had any issues growing my portfolio. Commercial mortgages are mostly tied to the property, using criteria based on NOI and LTV. Your net worth is also considered in underwriting, but lenders typically only look for a net worth of ~25% of the property value.
There are many mortgage specialists on this forum that can provide more detail and insight, and I'm sure you'll see some responses pop up quickly. Good luck and have fun!
You have to be creative. I would use j.v. as a last resort, but that's just me. Others will say to 100% use other people's money.
I worked and worked and worked to save up for my first downpayment. And then for my second down payment. In the time that I was renovating those 2 houses, they increased in value, and so I refinanced my first property. Now I was at my credit limit based on my job income. So I couldn't buy another using a mortgage. So I had money from my refinance, and I bought a small cash flowing house for 100% cash, in a secondary market. Way cheaper. I fixed it up, and increased its value. Now with the added rental income, I qualified to refinance house #3. And I used that money to buy 2 more, with 20% down. And from there, its snowballed. I force appreciate the house value, add rental income, and use refinanced money for downpayment on the next property.
But now, I've finally reached my limit and have a hard time getting residential mortgages. I was lucky to be able to refinance in December. So now I'm going to switch to commercial property, like the gentleman who commented above me is doing.
Originally posted by @Chris Baxter:Welcome to BP, @Kyle Madden. Residential mortgages (4-5 units and less, depending on lender) are primarily based on your PERSONAL ability to carry the mortgage. Assuming rules haven't changed (I haven't done a residential mortgage in some time), lenders count only half the income against 100% of the expenses for rental properties during underwriting. This means that at some point (usually after 3-4 properties) your debt service ratios are out of whack and you no longer qualify for a conventional residential mortgage. Strategies to continue to grow include:
1) Get a partner to be on title and help qualify
2) Use private money
3) Move to commercial properties (5-6+ units)
I made the jump to commercial multifamily a while ago and haven't had any issues growing my portfolio. Commercial mortgages are mostly tied to the property, using criteria based on NOI and LTV. Your net worth is also considered in underwriting, but lenders typically only look for a net worth of ~25% of the property value.
There are many mortgage specialists on this forum that can provide more detail and insight, and I'm sure you'll see some responses pop up quickly. Good luck and have fun!
Is your mortgage broker from BC? If so you may want to talk to a mortgage broker from Ontario. We have some different lenders they may not be aware of that we can use.
If you want me to give your situation a look, send me a pm and I can see if your current mortgage broker is missing something.
Love the replies! Great information.
Nice to be among y’all!
#3 Managing Your Property Contributor
It depends on your income as to how much you can borrow. Chris is right in that they only count half of your rental income as income and they often add in other expenses like heating even when tenants are paying for that. You can try talking to another broker. Also look at what other debt you have and if you can pay some of that down (eg car loan). The stress tests that the banks do will also limit how much you can borrow.
As others have mentioned commercial lending will not look at your personal income however they usually look at your net worth.
If you want to continue investing with residential mortgages there are really 2 solutions: increase your personal income or buy properties with higher cashflow, properties with ~$1000 cashflow or more really help as adding more properties won't really hurt your qualifying, however, even with this strategy you will eventually hit other limitations as for example some lenders have a maximum amount of properties you can have (for example ScotiaBank allows for 3 rentals and 1 primary). I have heard up to 7 or 8 it should be fairly feasible if you buy the right properties.