How to Match Your Financing to Your Investment Strategy

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Match Financing to Investment StrategyThe 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:

  1. Variable rates are currently lower than fixed rates,
  2. You can lock in at any point – if you need to,
  3. 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.

Rent to Own Financing TipFinancing 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.

In summary:
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

Dalia BarsoumWritten 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

>> 5 Ways to Finance All Your Real Estate Deals

5 Ways to Finance All Your Real Estate Deals

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Imagine your company has one week to live unless you’re able to get a huge capital infusion.

You’ve already sunk a gigantic sum of money into the company.

You have about $40 million dollars you could invest, but to do that is to put your last dollar into a company few people believe in.

Bank financing is certainly not an option. Private funds aren’t an option either. Most people really think you’re crazy for pursuing this dream. Nobody will throw money into a venture they think is going to fail.

It’s not even a choice really. Not if you’re Elon Musk.

You put every last dollar you have in to the company.

If you’re not familiar with Elon Musk and his entrepreneurial and innovative journey to creating SpaceX and Tesla, I have posted a few of my favourite interviews with him below. He’s an inspiring and interesting guy who is changing our world.

He’s also the kind of person who finds a way to get things done even when everyone says it can’t be done.

It’s unlikely though that you’ll face anything quite like taking on the big car companies or NASA, but you might need to channel a bit of Elon Musk when it comes to getting your real estate deals financed.

There will be a lot of people who will tell you NO. There will be many who don’t believe it can be done. It’s up to you to persevere and find a way.

But sometimes you don’t know where to start, which is why I have pulled together 5 ways to finance your real estate deals:

1. Traditional Bank Financing:

Your own cash for the down payment (usually 20% or 25% of the purchase price) and a bank or credit union finances the rest. This usually offers you the best possible interest rate, but it’s also the hardest to qualify for. You need to have a good and stable income, minimal debt, patience to pull together all the paperwork and a great credit score.

2. High Ratio Financing:

If you are moving into the property, this is an option. It has even more restrictions than the traditional bank financing option (because it’s insured by a company like Genworth or CMHC), but it allows you to get into the deal with as little as 5, 10 or 15% down.

This is an excellent option for a brand new investor. You can put less down on a home with a suite, move in, and get your feet wet as an investor while you rent out the suite. You also will typically get the best possible interest rate available since you’ll be living there (the banks sees that as a lower risk than if you’re buying it for an investment).

In a few years, you can move out, keep this property as an investment, and do it again for your next one (NOTE: the rules are changing a bit on this so speak with a mortgage broker if this is your plan).

3. Equity in Your Home or one of your investment properties:

You might find yourself able to qualify for financing but short of down payment funds. In that situation you just have to find the down payment money to get your deal financed.

The simplest option is to access equity in your home or property via refinancing or a home equity line of credit.

You need to have a lot of equity in your property to do that though. You’ll need to speak with the bank that holds your mortgage to see what Line of Credit or refinancing options are available to you.

Most refinancing options will not allow you to go past 80% of the value of the home. You can also encounter snags in refinancing if your property assessment is low (the assessment is what your local city assesses the value of the property to calculate the annual property tax. It’s rarely an accurate valuation of your property but the banks still use it as a measure of value for refinancing).

We tried to refinance a property this year to renovate. The assessment value of the property is $260,000 but the real value of the home is closer to $350,000. The bank will only refinance to 80% of the assessment value so we weren’t able to refinance.

Think carefully before you use your own home to fund your real estate deals. I prefer not to lever everything I own just to buy more – especially when it’s the roof that is over my own head. Also, whatever you finance, be sure the cashflow on your new property is more than enough to cover the financing costs and it’s expenses.

4. VTB, RRSP or Private Mortgage:

If you don’t have 20% down, or you can’t qualify for bank financing private money sources are a good option. Private money sources includes VTBs, RRSP mortgages and private mortgages.

A VTB (Vendor Take Back) mortgage is when the seller gives you financing. An RRSP mortgage is when someone moves their RRSP funds into a self-directed RRSP account and then loans you money just like the bank. You can learn more about RRSP mortgages here. Private mortgages are just what they sound like, money from a private individual.These options have a lot more flexibility in terms of the amount you’ll need to put down, the repayment terms and the qualification criteria. In fact, a lot of these details are up to you to negotiate and set up. One of our clients, has funded 100% of the purchase price of more than a dozen deals using private lenders who hold mortgages for up to 15 years. It’s all in finding the person who is a fit the for the deals you want to do.

You can use VTB, RRSP or Private Second Mortgage in first or second position mortgages. First and second position simply refers to the order in which a lender will be repaid in the event the property is foreclosed on. Because the first position mortgage gets paid first, the risk is lower for that mortgage holder therefore you’ll usually pay them a much lower interest rate than you will a second position mortgage holder. If you have bank financing for 65%, for example, you may want to find some secondary financing to get you up to 80%. That’s where you might be able to put a second mortgage on the property using the seller as a lender or an RRSP or private lender.

It’s important to note that most banks will not qualify you for financing if you can’t show you have the whole down payment yourself. They will not accept secondary financing as proof of your down payment. This means you will need to have the money somewhere even if you’re not using it for the down payment (if you aren’t sure what would work as proof, discuss it with your mortgage broker).

Many mortgage agreements also contain a clause saying you can’t ever put secondary financing on the property at all so read your agreement carefully before you do this to raise the funds for your down payment.

If you pursue secondary financing or a higher ratio financing option, it’s also important to stress test your portfolio to see what happens if interest rates rise quickly or values dropped overnight. Where will that leave your cashflow and your overall portfolio equity?

5. Joint Venture Deals (JVs):

When you lack the funds for a down payment and you do not qualify for financing with the bank, joint venture deals are a fabulous option. A joint venture agreement is basically where you and another party come together to pool your resources. There are many potential joint venture structures. In our case, we do the work, find the deals, and bring the expertise while our partner will bring the finance-ability and the down payment capital required.

Our first two deals in 2001 were versions of option #2 – high ratio deals on our own properties that eventually became rental properties.

In 2002 we sought out a lot of creative strategies, with a few VTBs and Private Mortgages to get the money for our deals. In 2003 we started to do Joint Venture Deals (JVs). From there, we’ve done just about every combination of the above that you can think of. The majority of the last 25 deals we’ve done, however, have been joint ventures. It was the simplest way to add great properties in good areas at the best financing rates available on the market.

There are a lot of options to fund your deals and grow your portfolio. No matter what strategies you use, there is no replacing your own hard work and diligence in saving money for down payments, taking care of your credit score and being good about the debt you take on (see 5 things every real estate investor should know about money and credit).

These steps will make you more appealing to banks, private lenders and even sellers who may give you financing.

Every choice has risks and costs to consider. Make sure every rental property you buy has strong positive cashflow, is well positioned to attract good tenants and has multiple exit options. There are also costs beyond cash flow, interest rates, repayment terms and leverage ratios to consider as well.

Elon Musk’s ‘All In’ approach to business takes guts, determination and belief. His high I.Q. and photographic memory probably don’t hurt either.

You don’t have to be just like Elon Musk to access capital for your deals. You just need to have some dedication and belief that there is a way to do what you want to do. Even when the banks are saying no – you have options. And, just because one person or bank says no, doesn’t mean someone else won’t say yes. The money is out there – now, go and get it.

Elon Musk: How I Became the Real Iron Man 

Real Estate Investing is Not Easy

Real Estate Investing is Simple but not EasyAs I watched Dave race up one of the many hills in St. John’s en route to Ryan Mansion where we were staying I wished I had our Flip camera handy. It felt like we were on our very own episode of Amazing Race: The Real Estate Investing version.

After months of research, property tours, and more research we had uncovered two real estate gems. One is a duplex and the other a single family home. Neither property was distressed but they were both very solid deals.

So… we decided to buy them both. Everything was going along just fine until we encountered a little glitch with our partner.

No problem – we’ll just find a couple of new partners. Except the people we were contacting had less than 48 hours to make their decision. When you’re asking people for $50,000 they generally want more than 48 hours to think about it… even when the deals are compelling – which they were!

We worked the phones for two solid days determined to find people to join us on these two deals. And… with only a few days to spare before we had to remove any conditions we found two new partners!

Now we had to start arranging financing.

With a family doctor on one deal and a very successful veterinarian on the other you’d think financing would be easy – but it wasn’t! In fact, we were flat out rejected by bank after bank!

We have said it before – and I will say it again:

Real estate investing is simple but it’s NOT easy.

I continue to shake my head in frustration at program after program that declares you’ll be a millionaire in minutes and that it’s “all done for you”. I do not understand how they can make such bold claims.

We still spend a lot of money educating ourselves, but we no longer run around signing up for every course on the market that promises us fast riches. We are now very careful and selective about the real estate programs and conferences that we attend. We only take courses or attend conferences that are moving us closer to our goals. And thankfully there are many fantastic real estate programs out there … you just have to look beyond late night television and pushy radio ads trying to convince you to attend a free seminar at a hotel meeting room near you.

But, let me get back to my story about our two deals … Dave was running up the hill in a race against the clock. You see, after we finally found two new partners to join with us on the deals, we then began our ‘vacation’ with the problem that these two people didn’t qualify for financing on either property! We had to extend one of the deals by 4 days and frantically set to work calling all our friends, family and colleagues once again … this time in search of financing!

Financing for a Property You Buy in a Corporation

PART 3 of the Rev N You with Real Estate Series on the Mortgage Market in Canada

Recorded October 18th, 2008: 2 minutes 51 seconds

Financing real estate investments is one of the biggest challenges we’ve faced in our investment adventures. And, it’s even more difficult if you are trying to limit your liability by purchasing that property in a corporation. Since every real estate guru course we’ve attended suggests the first thing you should do before you buy a property is set up a corporation we decided to find out if anybody is actually able to make it work for a residential real estate investment.

Listen as Dave Peniuk (of Rev N You) asks Cindy Faulkner of Meridian Coastal Mortgages if anyone is able to buy residential real estate investments in a corporation… we know we haven’t been able to.

Thanks for stopping by and getting the facts on what is happening in the market today! This is the third in a series of five podcasts on the mortgage market in Canada. We’ve got some big plans for more experts to join us on Rev N You, so make sure you’re signed up for our Rev N You with Real Estate newsletter to be certain you don’t miss any of the important market updates!



Cindy Faulkner owns and runs Meridian Coastal Mortgages. An active real estate investor, with 17 years of experience in the residential real estate market, Cindy and her team are our first call when it comes to financing for our properties. They are always happy to chat about scenarios or discuss the market, so give them a call at            604-588-4466      .

Read more:https://revnyou.com/Buy_Property_in_a_Corporation.html#ixzz1qMwAL0an

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