Leveraging Equity to Buy 1st Investment Property - tips?

Question

Hey guys! First time posting here - stumbled across this forum recently and what a great community!

So I was fortunate enough to buy my first condo in the Greater Vancouver area in 2020 for myself, and the property value has raised by approx $250K over the last 2 years based on comps in the same building. With that in mind, I'm in the motion of getting the property appraised and refinancing the mortgage to jump into our first short term rental condo in the Kelowna area (still evaluating!). Looking for something that will provide healthy cashflow via managing the rentals ourselves.

We were fortunate enough to lock a 2.3% fixed mortgage rate at the time, but I'm hoping to get some tips from other investors to ensure I don't over-extend myself when buying this investment property. With mortgage rates skyrocketing, and the possibility of renewing in 3 years at a much higher mortgage rate, I want to ensure I do this right and don't get slammed paying two large mortgage payments if things slow down in a recession.

Any tips or insight would be greatly appreciated!

Account Closed · Answer

@Benji Klassen @Khai Hong welcome to BP!  When you refinance / get a HELOC, you'll have to qualify for the new loan amount.  I would recommend that you connect with a mortgage broker to find out how much debt you can afford (at higher interest rates). Be conservative in what you think your can bring in with a vacation rental and make sure the numbers allow you to make ends meet.

Luke Crighton · Answer

@Benji Klassen as long as you make sure to know your own comfort limits its always good to be approved for as much as possible.  Just because youre approved doesnt mean that you have to use the total approval amount, but it also provides a bit of a buffer incase you run into a situation that may require the additional approval amount (ie. Purchase + Improvements, HELOC, etc)

Huong Luu · Answer

@Benji Klassen If you are going to jump into RE investing, I would suggest you get comfortable with debt. This is GOOD debt, if you can leverage it to buy a more profitable property. I run into a lot of investors who are shy on taking on (good) debt, and then can't make deals happen because they are short on funds.

You can use the HELOC as your reserve. Suggest you pay down the mortgages as much as possible and use the Smith Maneuver.

As well, CIBC and RBC are not accessible through regular mortgage brokers. You might want to try them out to compare HELOC limits.

Good luck

Benji Klassen · Answer

Thanks for the assurance @Joshua Messinger! Its a weird feeling when most of your friends and family are telling you to run the other way or wait! But the more I'm learning from other RE investors is that if you can find the right deals, there's no reason to hold back. Finding cashflowing properties in my area is proving to be mighty difficult though it seems! Rental prices really aren't caught up to house prices by a long shot.

Joshua Myers · Answer

The best advice I can give you is to worry about your cash reserves and cash flow more than your LTV or debt levels. If you conservatively cash flow and have 6-12 months of cash reserves then it's hard to not succeed over time.

Jose Porto · Answer

In this environment, ca$h flow is king. Make sure your investment property supports itself in a way in which it does not matter the external conditions.

Here's a dumb analogy that I like to illustrate the situation:

The way I see it is if your cow gives you milk every day, you will not care how fat it is, however if you need to slaughter it to eat, you will definitely want it to be fat and that may not be the case.

All the best to you!

Joshua Messinger · Answer

Hey @Benji Klassen!

Don't let higher interest rates scare you away from locking in that next unit! You should be able to find great deals no matter if we are in a recession, or in calm waters. But, tread carefully when getting into your next deal on the financing/analytical side to make sure things make sense cashflow wise, especially with interest rates rising you should plan for rates to continue to rise so you can be ready for what's to come.

If you have any more questions please don't hesitate to reach out and ask - I'd love to connect more!

Best of wishes,

Josh

Khai Hong · Answer

Clearly, I need to up my advice game. Allow me to have another go at it. I second Chris' suggestion to talk with a broker. In fact, it's generally suggested that people starting out should talk to at least 3 brokers to find one they're comfortable working with and who can get them the best mortgage for their investment goal. A mortgage is more than just the rate. Keep in mind that each time a broker checks your credit, it goes down by 25, but recovers after 6 months. Try running the numbers for a few properties and have 1 or 2 ready to discuss with the brokers you're vetting. I haven't checked recently, but I think Kelowna is now out of the "healthy cashflow" radar, unless you go the airbnb route (in which case check the city and strata limitations). Or find one that's undervalued because it needs a lot of work, fix it up, then rent it.

Regarding the HELOC, I just found out yesterday to my unhappy surprise that it doesn't really matter how much a property's value has gone up, the main limitation is still going to be personal income level. That's with Scotiabank, I got way less than the "80% minus outstanding mortgage" that I had heard about. I'll be talking to some brokers next week. Happy investing.

Regarding the HELOC, I just found out yesterday to my unhappy surprise that it doesn't really matter how much a property's value has gone up, the main limitation is still going to be personal income level. That's with Scotiabank, I got way less than the "80% minus outstanding mortgage" that I had heard about. I'll be talking to some brokers next week. Happy investing.

Duy Tran · Answer

@Benji Klassen I use my HELOC last year to purchase an investment property with my cousin in winnipeg. And cash flow is key to fight against heloc. My cash flow is quite positive after all but it does hurt a bit seeing the heloc interest every month kicks in haha.What area in downtown Kelowna are you looking at? Is it a condo? I looked at kelowna zonings and there’s not much option left for airbnb last time I check.

Leveraging Equity to Buy 1st Investment Property - tips?

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