Canadian Money Forum banner

1 - 15 of 15 Posts

·
Registered
Joined
·
3 Posts
Discussion Starter #1
Hi, I'm 23 years old and moved just outside of Winnipeg to help my family with a farm they purchased two years ago. I plan on living there for a while. When I moved, I rented out my house, and I purchased another rental property a few months ago. Details are as follows:

1st house:
Amount owing: 158,000
Value: 190,000
Mortgage: 900/month (paying 207 accelerated weekly, @3.17% on a 5 year term expiring in 2 years)
Property tax: 175/month
Insurance: 105/month

Total costs = 1180/month (figures are rounded by less than $5 in each case)
Rented out at $1600/month (one-year lease) for $420 positive monthly cash flow. (I'm leaving out equity to compensate for maintenance, repairs, and vacancy)

2nd house:
Amount owing: 156,000
Value: 170,000
Mortgage: 725/month (monthly payment @2.79% on a 5 year term)
Property Tax 180/month
Insurance 105/month

Total costs = 1010/month
Rented out at $1550/month (one-year lease), for $440 positive monthly cash flow (again, leaving out equity to compensate for incidentals)

The tenants in both cases do minor repairs themselves.


My parents are cosigners on both the mortgages as my income isn't very high. Also, I have separate bank accounts for each property with the rent coming in and expenses going out. I use that money as a cushion should a property require an extensive repair, and in the future plan on using it to purchase a third investment property.

I understand I'll need 20% down to purchase a third property, but I have no clue on how to go about getting financing. Any help would be greatly appreciated!
 

·
Registered
Joined
·
6,880 Posts
Start talking to banks or mortgage brokers. Lending is really tight these days, so don't be surprised if they say "no", just keep asking until someone says yes.
 

·
Registered
Joined
·
3 Posts
Discussion Starter #5
Any advice on how to get them to say yes?

You can purchase a "secondary" property with 5% down. (I had to put 10% because with my two mortgages and my parents mortgage credit was running tight)
 

·
Registered
Joined
·
6,880 Posts
The rules for acceptance change all the time. Right now it seems they are focused on your taxable income being able to service the debt. You generally don't run into a lot of issues until you hit 5 properties (including personal use) total, after that it gets even more difficult.

The only thing I've ever found that helps is to just keep asking. Banks even have different groups internally which may be able to do the deal when a different department already said no. For example with TD, they have their in branch mortgage specialists, they have their independent mortgage specialists (don't work in a branch), they have their small business mortgage specialists, they have private wealth management mortgage specialists...then you may also talk to specialists from the agricultural department if appropriate...each of these departments have their own underwriters and qualifications that need to be met. I've been rejected multiple times from the same bank that later financed the same deal many times.

Now remember that there are multiple banks, each with their own divisions...and mortgage brokers who have different contacts...you can take a lot of "no"'s as long as you eventually get a yes, and you only need one to say yes.

I'd write up a business plan and present it to the bank. It takes you to a more professional level.
 

·
Registered
Joined
·
56 Posts
Having cash to cover 6 months of PITI is a typical requirement and, honestly, it is a pretty wise. You don't want to be in a position where you are going default if a rent payment doesn't come in, or you have no options if a major expense strikes.
 

·
Registered
Joined
·
34 Posts
Having cash to cover 6 months of PITI is a typical requirement and, honestly, it is a pretty wise. You don't want to be in a position where you are going default if a rent payment doesn't come in, or you have no options if a major expense strikes.
Always smart to build up some kind of reserve to cover being empty for a couple of months should the market change on you or ability to rent out in a declining market and top up with your reserve for a while if necessary, or again an inadvertent mishap/insurance claim where you need the deductible.

Typically we are finding that if you have full 1 year plus leases in place you present them to the lender and they count a portion (think it is 50%) towards your income. The 20% down is to fall outside of high ratio insurance mortgages. Also look into lines of credit, you might find these are more favourable as we most certainly did for revenues with zero payout penalties, and the ability to apply all income to the balance reducing the interest but at the same time able to pull up to the max limit in the event of unforeseen circumstances. We haven't used mortgages since the turn into the new millennium on any properties we leveraged on, choosing LofC's as the preferred options for us through a numbered company ownership. You also have the option to lock in at any time all or a portion of the line of credit on a fixed interest rate if you are concerned with these moving upwards. We've never done fixed, always variable and found it saved us in the long run over fixed. Some folks like the security of knowing how much each month for a fixed term, for us we've found when comparing we've saved more sticking with variable over time.

Do talk to insurance companies about their policy on insuring more than two properties. Some insurance companies when you reach a certain level of income generators will insist you have to go over to commercial insurance and these rates are typically much higher. Just a heads up to talk to insurance companies as you grow your revenue portfolio, as things have changed in recent years we've found depending on where you are as well I guess.

Kudos to you OP for investing in revenue properties at such a young age, and good mom and dad for helping you, just as we did our 20 year old to buy her first property she rents out past 4 years the rooms at University that's built a little equity, paid itself down quite nicely, returned us $10,000 of the initial $20,000 we helped her with, and helped keep her student debt free. Two more years and she will complete, likely sell that one if she doesn't feel comfortable not being so readily hands on to handle rooming rentals. It's quite likely she will sell though and buy another in the suburbs of a larger metropolis as a full revenue non-resident and purchase her main home acreage home as she gets married. The larger population areas for sure we've witnessed tend to gain much better equity growth long term than the smaller populated areas, but equally the initial purchase prices are considerably higher. Also she needs to consider that instead of getting $3100 per month in rental income (her room will become available if she is not there also), she'll pay more for a property closer to her family home, rent at may $2200 per month but equally only be dealing with one contract not 6 individuals plus likely a lot more equity gain long term by comparison in the past has indicated has been the case.

Just sharing the last paragraph and this with you to give you some other ideas maybe to building for the future. Of course just as with each side of a stock sell and buy, one thinks it's going up the other it's going down, you will get those that think our RE market is way too high on price (been hearing that my whole life when it was 15% the values what it is now!), uncertain and the sky is falling in going forward. I've also listened for several years now of many saying interest rates are going up soon, and in reality they've pulled back three or four times even moreso since I've witnessed. No one knows for sure what will happen and my crystal ball on predictions has been fuzzy my whole life - I just go with history, logic, where we are at in our time of life, and common-sense has always told me that typically everyone needs Shelter. We have never, ever planned "fix and flips" no matter how vibrant the market at a given time. Every property we've ever bought/built has been with a very long term hold horizon, so if the market pulls back we can ride it out till it bounces back upwards again. I strongly advocate you go into all property investments with a long term horizon, but if you can net a quick few "G's" selling quickly and want to then fine, just don't back yourself against the wall for a quick turn around in case you get caught with your pants down on unforeseen market turnaround.

Kudos to you again for starting young whilst time is on your side. Hopefully you are able to make the most of the TFSA's as well!
 

·
Registered
Joined
·
5 Posts
Your best bet is going to be talking with a mortgage broker for options.

The best lender out there my mortgage broker was able to find is National Bank of Canada. I currently have 6 rental units, and National Bank will actually lend on up to 16 rentals! (TD/Scotiabank for example cap you at 4-5 he says typically).
 

·
Registered
Joined
·
915 Posts
House 1 House 2
Rent 19,200.00 18,600.00
Property tax 2,100.00 2,160.00
Interest 5,008.60 4,352.40
Insurance 1,260.00 1,260.00
Maintenance 1,200.00 1,200.00
Operating Profit 9,631.40 9,627.60
Tax @ 27.75% 2,672.71 2,671.66
Net Income 6,958.69 6,955.94

Annual return Invested Capital Yield
13,914.63 360,000.00 3.87%

I think you should question whether another property is the right way to go when you consider the time spent and the lack of diversification of investments.
 

·
Registered
Joined
·
102 Posts
I'd hold off on 3rd property to avoid over-leveraging yourself. You haven't built much equity in either property yet (which isn't necessarily bad from a tax perspective but it doesn't seem you have a principle residence and you're not making a very high income?) If this is the case I'd rather pay down some of the mortgages on each, build equity and then borrow against the rentals in the future for your 3rd.
 

·
Registered
Joined
·
301 Posts
House 1 House 2
Rent 19,200.00 18,600.00
Property tax 2,100.00 2,160.00
Interest 5,008.60 4,352.40
Insurance 1,260.00 1,260.00
Maintenance 1,200.00 1,200.00
Operating Profit 9,631.40 9,627.60
Tax @ 27.75% 2,672.71 2,671.66
Net Income 6,958.69 6,955.94

Annual return Invested Capital Yield
13,914.63 360,000.00 3.87%

I think you should question whether another property is the right way to go when you consider the time spent and the lack of diversification of investments.
Dude, ROIC is a useless metric for RE...you very well know that his debt capital cannot be employed in any other activity, since it's all in the form of mortgage capital.

Stick to established measures for this type of investment/industry: NOI, cap rate, ROE, affo, etc.
 

·
Registered
Joined
·
1,133 Posts
Hi, I'm 23 years old and moved just outside of Winnipeg to help my family with a farm they purchased two years ago. I plan on living there for a while. When I moved, I rented out my house, and I purchased another rental property a few months ago. Details are as follows:

1st house:
Amount owing: 158,000
Value: 190,000
Mortgage: 900/month (paying 207 accelerated weekly, @3.17% on a 5 year term expiring in 2 years)
Property tax: 175/month
Insurance: 105/month

Total costs = 1180/month (figures are rounded by less than $5 in each case)
Rented out at $1600/month (one-year lease) for $420 positive monthly cash flow. (I'm leaving out equity to compensate for maintenance, repairs, and vacancy)

2nd house:
Amount owing: 156,000
Value: 170,000
Mortgage: 725/month (monthly payment @2.79% on a 5 year term)
Property Tax 180/month
Insurance 105/month

Total costs = 1010/month
Rented out at $1550/month (one-year lease), for $440 positive monthly cash flow (again, leaving out equity to compensate for incidentals)

The tenants in both cases do minor repairs themselves.


My parents are cosigners on both the mortgages as my income isn't very high. Also, I have separate bank accounts for each property with the rent coming in and expenses going out. I use that money as a cushion should a property require an extensive repair, and in the future plan on using it to purchase a third investment property.

I understand I'll need 20% down to purchase a third property, but I have no clue on how to go about getting financing. Any help would be greatly appreciated!
You are correct on the 20% down payment. This is the minimum required for a rental and some lenders will even insure the loan. Rental income is generally considered as an income to help you qualify however only at 50%. You will have to provide all up to date leases. If the majority of your income is rent, then you can run into problems - You'll find yourself talking to high risk lenders who generally charge higher rates. If not, you shouldn't have any issues with regular lenders as long as you qualify within the norms.
So a simply answer to your question about getting financing: talk to a high producing mortgage broker. They will pave the way!
 
1 - 15 of 15 Posts
Top