The biggest expense you have on your investment property is, in most cases, your mortgage. It’s no surprise that investors always look for ways to reduce this expense in any way possible.
With the Bank of Canada maintaining rates at historically low levels, you probably wonder where to find the best rates for investment properties and how you can maximize your returns.
Rates are important, but as discussed in the 7 Things to Know About Why You Can’t Get Financing at the Bank, rates are the second priority for investors – or at least – they should be.
My investor client Megan wanted to refinance one of her properties to purchase another investment property. When she first purchased this property, Megan went straight to her bank and locked into the lowest 5 years fixed mortgage product available on the market. Unfortunately, blinded by the low rate; Megan ignored the fine print that indicated that the mortgage was completely closed for the full term and that it cannot be refinanced.
Megan’s only option to access her equity in that property is to find a lender who’d approve a secured Line of Credit – in second position – or where she can obtain private funding.
While mortgage rates are very important variable in the financing formula, they should be secondary to obtaining the right mortgage product that aligns to your investment strategy.
Here are 4 Common Investment Strategies and how you can match your financing to each of them:
1. Rent to Own Investing
As a rent to own investor, you need to focus more on matching the mortgage term to the lease option term or keeping your options opened.
There are many variables in a Rent to Own that determine whether the tenant will be ready to purchase from you by the end of the lease term. Some of those variables are not fully controllable such as a sudden change in the tenant’s income situation or a market turn.
These days, I highly recommend a five year variable rate mortgage for Rent to Own investors versus locking into a fixed rate because:
- Variable rates are currently lower than fixed rates,
- You can lock in at any point – if you need to,
- You always pay a 3 months interest penalty regardless of when you break them.
The variable rate gives you great flexibility with the least costs.
Financing Advice to Increase the Chance of Success for Your Tenant Buyer:
- Make sure you separate your option contract from your lease contract and that you collect separate payments for each. This way, when the time comes and the tenant buyer is ready to purchase from you their broker can show the lender a clear proof of what they paid you towards the down payment. Some lenders will not consider the option payment if it is combined with the rental received from the tenant.
- Help your tenant buyer accumulate 10% in down payment funds at minimum. While the plan is to help them improve their credit and be in a position to purchase from you by the end of the lease term; unless their credit is in pristine condition by the end of the term (score and content); mortgage insurers such as CMHC, Genworth and Canada Guaranty will not finance the deal.
As a backup plan, if they have 10% down; the deal can still close with a Trust Company without the involvement of the mortgage insurers.
2. Renovate and Flip
If you plan on renovating run down properties and flipping them over a short time period for profit; it is important to keep your options opened to avoid any large mortgage penalties at the time of sale. Going with an opened mortgage for this particular strategy works best.
Depending on the property condition; lenders may require you to increase your down payment or offer you higher rates.
For example: a bank will not finance a property that has an oil tank, asbestos and knob and tube wiring but a B lender (Trust Company) would.
Discussing the nature of your purchase with your lending advisor upfront and being transparent about the condition will ensure you get the right financing from the get go and will save you time.
3. Renovate and Refinance
This strategy is similar to renovating and flipping, but you would be looking to refinance the property – after the property is renovated and rented out.
With this strategy, you need to focus on keeping your options open in anticipation of a refinance (i.e. going in with an opened rate mortgage, variable rate, a Line of Credit or a short-term fixed rate).
Lenders typically like to see at least 6 months’ worth of mortgage payment history before you can refinance a renovated property.
If you are looking to refinance in less than 6 months: you will need to finance the initial purchase with a trust company, using private funds or with your own cash; then you can refinance it at a lower rate with a bank or a lender that can offer a low long-term rate.
4. Buy and Hold
An ideal product for investors who purchase under this strategy is a re-advanceable mortgage product. This product allows the investor to tap into equity in a very efficient manner without having to go through the hassles of approvals, appraisals or incurring costs associated with accessing funds.
As investors pay down the principal on the mortgage, they get access to any paid-down principal in the form of a secured line of credit.
This allows investors to “recycle” equity to purchase more properties, renovate or lend funds privately.
Determine the investment strategy first.
Focus on getting the right product for your strategy before you worry about finding the best rate.
Speak with your lending advisor to determine the best lending product and the type of lender best suited to the strategy. Then, work with the lenders where your deal will get approved (given your credit, finances and property characteristics) and where the desired product is offered and negotiate the best rate with that lender
Always “Begin with the End in Mind “ ~ Stephen Covey: The 7 Habits of Highly Effective People
Written By Dalia Barsoum
Dalia is an MBA, Fellow Institute of the Canadian Bankers Association is a Best Selling Author of Canadian Real Estate Investor Financing- 7 Secrets to Getting All The Money You Want and winner of the 2014 Mortgage Broker of the Year by the Canadian Real Estate Wealth Magazine. Dalia’s Canada-wide investor-centered lending practice (www.StreetwiseMortgages.com | www.CanadianInvestorFinancing.com) helps investors develop and implement a financing strategy to grow their wealth in real estate.
Other Articles On Financing and Funding Your Investment Properties:
>> How to Buy 20 Real Estate Investment Properties
>> 5 Things Every Real Estate Investor Should Know About Money and Credit
>> No Money Down Deals – 3 Things You Need to Know
>> 7 Things to Know About Why You Can’t Get Financing at the Bank