Essential Tips for Investor Financing
The following essential tips for investor financing should better prepare you for the ever evolving world of mortgage financing for Canadian investment properties. With more and more people investing in real estate, in many ways it has somewhat become the new “stock market” for investors. Due to greater demand and higher competition in the market and sometimes for the same property, you need to educate yourself about the financing process and work with an experienced competent, confident team of specialized professionals in order to be successful and realize the rate of return to which you aspire.
While a lot of things may have changed in the real estate investing world, some things remain the same. Real estate investing can be very lucrative and can go a long way to fund your retirement, your kids or grand-kids’ college fund, or providing a financial legacy when done properly.
Educating yourself about how to secure financing for your investment property is especially useful in today’s investment climate where change is the norm. What you may remember, or may have learned from financing an investment property in past years (even up to a year ago) has likely changed, and if you’re new to real estate investing, securing financing isn’t the same as financing your own home.
Currently, volatile markets like Vancouver and Toronto make things even more complicated, as there is so much attention being drawn to these markets from local and foreign investors, the media, and even government bodies. If you want to invest in these busy, frothy markets, you absolutely need to have your financing in place and be able to close a deal quickly and more than likely without any subjects (this is scary business).
Fortunately, despite what you may read in the media, the Canadian real estate investment landscape consists of hundreds more markets than just these two as you’ll see when we take a closer look at the “current real estate landscape”. Victoria recently has joined as one of the frothy markets, but not to the same degree as Vancouver. By reviewing “investor preparedness” and some straightforward ways you can put your “best financial foot forward” will definitely help to secure the desired financing for your investment property.
A look at the current landscape
Let’s talk about the current real estate landscape. Most of us are aware of the housing markets in Metro Vancouver, the Greater Toronto Area (GTA), and now Victoria, where housing prices continue to rise and real estate activity is busier than ever. But these volatile “frothy” markets are NOT the norm across Canada. These are markets at the extreme end and are skewing the Canadian averages with respect to housing prices and activity. Most other Canadian housing markets are more balanced and affordable like Ottawa, Montreal, Quebec City, Halifax, Regina and Winnipeg to name a few. Then there are other housing markets, such as Calgary, and to a lesser degree Edmonton, that are now in the “buyers markets” phase of the real estate cycle for a multitude of reasons such as: economic downturn or low market absorption due to over building in relation to population growth.
So, all in all, the Canadian real estate market is a very “mixed bag” at the moment and wise investors need to be aware that the “ever-increasing” average Canadian housing prices that are being reported are being skewed higher by the extreme, highly volatile markets.
There are still good property opportunities with solid returns if you look beyond Vancouver and Toronto. A simple search of condo titled properties under $100,000 across Canada on Realtor.ca turned up a number of well-priced, affordable properties in places like many major urban markets across the country such Richmond, BC; Edmonton, AB; Moncton, NB; Prince George, BC; Regina, SK; Saskatoon, SK; Windsor, ON;, London, ON; Hamilton, ON; Ottawa, On;, and Montreal, PQ, as well as smaller communities such as Chilliwack, BC; Medicine Hat, AB; Red Deer, AB; Penticton, BC, or Williams Lake, BC; Brandon, MB; Gimli, MB and dozens more balanced, non-frothy markets that may provide good investment opportunities in relation to rental rates.
As I noted earlier, the banking and financial world is changing almost daily. In addition to the “A” lenders* regularly adjusting their mortgage lending policies and procedures, the federal and provincial governments are bringing in tighter legislation with respect to mortgage financing and real estate investment. Not only are there governmental concerns about the volatility of markets like Metro Vancouver and the GTA plus the impact of “foreign” investors (rightly or wrongly), but there is also concern about the continued increase in the average Canadian’s debt load. Added to this issue, are the global financial challenges that are emerging and, as a result, we have a situation in which lenders are very cautious, while low interest rates attract buyers who want to secure cheap financing.
Prepared and savvy investors can use these circumstances to their advantage by working with an experienced investment real estate mortgage broker (like Jeff Cassidy of Port City Financial) to help them to secure excellent financing arrangements that are well within their means and will afford them the investment property they want to purchase. The reason I highly recommend an investment real estate mortgage broker over a regular mortgage broker is that the former is generally more familiar with the lenders’ requirements for investment financing than the latter.
I also favour working with a mortgage broker over going directly to a lender, because the mortgage broker is working on your behalf as a client and deals with several lenders; whereas the mortgage specialist is working for one lender and is an employee of that lender. So ask yourself where does the mortgage specialist’s ultimate allegiance lie?
When lenders are cautious, the most important thing you can do is be prepared to present your best possible “financial picture”. This means having your financial house in order and being a prepared investor.
*The “A” lenders include the Big 5 Canadian chartered banks: Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), Scotiabank, and TD Canada Trust (TD); and other traditionally less dominant banks/financial institutions such as National, HSBC, etc.
A recent survey by the Real Estate Council of Ontario found that about a third of investors weren’t prepared or knowledgeable about the home buying and financing process. Regardless of whether you work with a mortgage broker or if you must go directly to a lender, before you meet with a potential lender, have your finances in order:
- Create and have a written real estate investment plan, even if it is a 1-year or 3-year plan. The clearer you are, the better you can articulate where you wish to go financially.
- Put together a personal financial binder that contains all the important information that the lenders will require, which I touch on in the remaining sections.
- File your income tax returns regularly and on time, and pay your taxes; have your last two years of Canada Revenue Agency Notices of Assessment available. Not completing your latest tax return is the biggest deal killer for the average real estate investor.
- Manage your debt effectively. Know what is on your credit bureau and know your credit rating/score. I recommend that you understand what is reported on your credit bureau and track your credit score on a regular basis (check out Transunion.ca or Equifax.ca for on-line credit report service); make regular payments on your credit cards (not just the minimum interest payment); pay your loan payments and ALL bills on time; and take appropriate steps to reduce your debt.One of the most effective ways to improve your credit score is to ensure that your debt utilization (amount borrowed vs. amount available to use) is less than 50%. A debt utilization of more than 50% has a negative impact on your credit score.
- Work with your accountant to ensure all your financial paperwork is up to date and at hand before you meet with a potential lender. Maintain copies of leases, the most recent statements of other mortgages you hold, investments and other assets, etc. You want to provide a complete financial picture. All of this type of information is best to be kept in the financial binder for ready access as required.
- Have the funds for your down payment readily available. Work with your mortgage broker to understand how much you’ll need for a down payment and what your options are with respect to the type of mortgage you can expect. It’s useful to understand your options before your file is provided to a lender.
- Be realistic. Despite the song’s lyrics, “money for nothing” doesn’t exist. Despite low interest rates, lenders will substantiate everything and they want to verify that you’ll have the capacity to service your debt as interest rates rise. For example, on a variable rate mortgage application the lender is looking to see if you qualify by using the 5-year posted (not discounted) rate.
If you are self-employed, lenders require that you must be in good standing with the Canada Revenue Agency and be up to date on filing your tax returns. It also helps to have little or no unsecured debt and to keep credit card balances low. You need to demonstrate that you have capacity to achieve consistent levels of income, and that you can manage debt well and don’t have a high debt service ratio.
As a real estate investor seeking financing, it is essential for you to be knowledgeable about the property you wish to purchase and be able to present the opportunity well. It will always serve you well when you are able to describe the investment property, and have all the numbers and supporting documentation such as current leases, most recent tax assessments, etc.
If you are purchasing a property within a multi-family dwelling, then you need to have details about the building/complex as a whole not just the property in which you want to invest. Lenders will also require access to specific details about your potential investment property—items such as copies of the strata council/condominium board minutes, the latest AGM minutes and the depreciation report/condominium reserve fund study, bylaws, and the current condo/strata insurance certificate, etc.
In planning your first or subsequent investment property purchase, another consideration is that each of the “A” lenders have their own rules/thresholds or protocols regarding financing mortgages with an investor who has more than one property. Therefore, it is advisable to strategize with your mortgage broker as to what lenders you should use based upon your real estate investment plan. This step can make a massive difference when you own multiple investment properties.
Current lender thresholds/rules, as of June 2016 and subject to change at the lender’s discretion:
|Lender||Max # of properties threshold||Max Conventional Loan To Value||Max Amortization|
|TD||6 rental property mortgages,
if props have no mortgage N/A
|credit score < 730 = 75% LTV
credit score > 730 = 80% LTV
|CIBC||Unlimited, but they have discretion||80%||25 year|
|RBC||5 rental properties – no rental offset used,
50% rental added to Inc.
|BMO||16 rental mortgage, but they have discretion||80%||25 year|
|SCOTIA||5 rental properties – 50% of rent and wash||80%||30 year|
|NATIONAL||16 properties – rental wash if props.
reported on prior year tax return
|B or C
|All require CMHC insurance:
3 to 4 rental properties
|85% CMHC + charge a premium 3.6%||< 80% = 30 yr.,
> 80% = 25 yr.
Depending on the situation, credit unions can be a viable alternative to the most well-known institutional lenders. But bear in mind that credit unions are generally limited to a more local market dealing with local buyers depending on their lending charter. They can also lend conventionally as the chartered banks do.
“B” Lenders & Private Lenders—beyond the “A” Lenders
Depending on your financial picture you may prefer, or need, to look beyond the traditional Canadian chartered banks in order to secure financing for your investment property. Alternative mortgage lenders or “B” Lenders typically are other financial institutions such as insurance companies, smaller corporate lenders and smaller banks that may provide financing; however, they will generally require Canada Mortgage and Housing Corporation (CMHC) insurance on the mortgage. This means there will be additional costs incurred for the life of the mortgage (CMHC premiums of up to 3.6% of the mortgage value amortized over the life of the mortgage). However, these types of lenders may be very useful to investors who have a down payment of less than 20% or require an insured mortgage for a number of reasons.
As the traditional lending avenues narrow, private lenders are no longer a last-resort option; in fact, they provide a valuable alternate mortgage lending option for investors who may not qualify under new rules for mortgages from “A” lenders or for CHMC secured mortgages. This may be the case for some investors who are in the employee or self-employed categories that have some unique circumstances.
Private lenders may also be useful for investors who are looking for short-term interim financing for such things as when a property is undergoing an upgrade. These properties, upon the upgrade completion, will eventually be re-evaluated/re-appraised and most likely qualify at a higher value for traditional financing. Generally, private lenders will charge higher interest rates than traditional institutional financing options.
Once again, working with an experienced investment real estate mortgage broker, an experienced investment real estate agent and a real estate accountant will enable you to determine if structuring the financing for your investment property through a private lender is suitable for you and will provide the return on invest you require.
As previously mentioned and worth repeating, the real estate investment and financing worlds are changing almost daily, so if you haven’t invested for a while you need to be aware that change is the new norm and you can’t assume what you “knew” is still valid.
Once you’ve made the decision to invest in real estate and educated yourself about the current financing situation, you’ll still need to secure the financing you need for your investment property.
These are a few important steps to remember and take:
1. Get your financial house organized in order to present the best possible “financial picture”;
2. Use a professional investment real estate mortgage broker to help you talk to lenders that are the “best fit” for you and your investment property; and
3. Work with, and listen to, an experienced investment real estate agent who will guide you to properties that are right for you and your investment capacity, and work together with your mortgage broker to present you to the best possible advantage to potential lenders.
A good, solid team will help you achieve the financing you need to purchase your investment property and realize your investment goals, whether they are to fund your retirement, provide a college fund for your kids or grand-kids, or in order to leave a financial legacy as mentioned at the beginning.
Final thought: Non-Resident Opportunities in Canada
This is a great time for US investors to realize a discount on investing in Canadian properties due to the favourable exchange rate: all properties will be at approximate discount of about 25-30%. This means US investors earn a premium on their investment dollar.
As non-residents, it’s a bit more complex for US citizens to invest in Canadian real estate but given the roughly 30% discount on the US versus the Canadian dollar, it may be worth it to the savvy investor. A non-resident investor in the Canadian market needs to consider more than the “difference between the dollars”.
There are specific rules for non-resident investors, as well as, tax implications that may or may not be favourable for all non-resident investors. However, with the discount in the Canadian dollar to the US dollar combined with the typical 65% loan-to-value mortgages at the current incredibly low interest rates, this translates into tremendous potential return for non-resident investors. If you or someone you know are a non-resident of Canada and want to invest in Canadian real estate, I encourage you to learn more about the rules for non-residents investing in Canada, which you can check out at CRA or on Strategic Investment Realty’s specific non-resident page or contact me directly at email@example.com.