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7 Things to Know About Why You Can’t Get Financing at the Bank

April 17, 2020April 21, 2015 by Karysa

If you are investor who owns several properties or planning on building a portfolio of investment properties, you must have heard about the “financing wall”.

What is “the wall”?

Is there really one?

If there is one, how can you avoid hitting it?

If you hit it or believe you are about to hit it, what can you do?

The wall simply refers to the maximum number of properties you can finance as an investor.

Most investors are under the impression that once their portfolio reaches five properties; they will no longer be able to grow their portfolio. Others have heard you can finance up to sixteen.

I can tell you that the maximum is not 5, 16 or anything in between. There is actually NO LIMIT.

The only thing that can limit us at times is our personal belief and ceilings around what we can or cannot achieve.

From a financing point of view, you can keep your portfolio going using three techniques:

1. Planning portfolio financing in advance, prior to going shopping for your rental property.

2. Working with the right lending advisor – one who specializes in Real Estate portfolio financing, who has strong relationships with investor-friendly lenders and knows how to place and package your deals in the right sequence with lenders to keep the approvals coming.

3. Shopping for the right lender for the deal – who will approve your deal, get you a step closer to your goal and also offers a good rate.

Planning Portfolio Financing in Advance

It is important to understand what happens behind the scene when you submit an application in for approval. Many investors just chase rates and that is the primary criteria for choosing a particular lender.

This approach increases the chances of a decline and decreases the chances of financing more properties down the road because they may have placed the current deal – without knowing it – with a lender, where the numbers may not continue to work well down the road as the portfolio grows.

There are 3 broad group of lenders in the market today A, B and P ( private) ; with A offering the best rates, B’s offering mid-range rates and Privates being the most expensive.

When lenders review your application, they look at many factors including:

Your credit,
The amount of down payment you have,
The type of property you are buying,
The rental income the property will generate (and how much of it they will include),
How you derive your income (as employed or self employed)
The investment structure ( i.e. whether you are buying personally, under a corporation, or with a JV partner).

Unless you are in the lending business on a day to day basis, it is impossible to learn and keep up with the continually changing rules. An advisor who knows the rules for portfolio financing can advise you of what you need to do with respect to each criteria to keep the approvals coming.

The earlier you plan your portfolio in your investment career, the higher are your chances to get your deals approved with A lenders at great rates, best amortization terms and lowest down payment.

During the planning session your advisor can review your situation and make recommendations that can help squeeze as many properties as possible with the A lenders before starting to look into more expensive financing options.

Some of the things your financial advisor will look at (and you need to be aware of) when you are ready to finance your investment properties include:

1. Tax planning of personal and rental income:

Personal Income: When you’re self employed it’s really appealing to reduce your net income to minimize taxes. However, showing a higher net income on your tax returns could be a much bigger advantage to you in growing your portfolio. In this case, your advisor can help you weigh the pros and cons associated with paying more taxes on your income in return for getting your deals approved with A lenders

Rental Income: At some point it’s very likely you’ll be looking to finance your deal with A lenders that rely on the rental income reported on your tax returns for an approval. If that is the case, it is important to plan ahead of time and consider carefully the amount of property-related expenses that you should deduct.

2. Improving your Portfolio Debt Coverage Ratio (DCR):

The DCR ratio is calculated by taking the amount of rental income you receive from your properties and comparing it to the debts and expenses your portfolio has. Lenders like to see this ratio at 1.2. As your portfolio grows this is a common way A lenders will look at and approve your financing request. Knowing this and doing some critical number crunching early in the game plays a big role. You also should be aware of the impact that refinancing a property or buying a new property will have on your portfolio DCR . If you don’t know how to calculate this yourself, your financial advisor can take a look at the numbers and help you figure it out.

3. Increasing the down payment:

Most investors want to minimize the amount of capital they put into an investment property but sometimes the best way to get the most attractive financing options is to increase your down payment. Locking more capital into an investment property can however work out in the long run so that you get more favourable terms on this and future mortgages.

4. The parties on the deal:

One of the considerations is who is on title is who will be qualifying for financing. Buying under a corporation may result in different financing terms compared to buying under your personal name. Multiple people on the purchase agreement (And title) is not necessary either. The important thing is that the the individual (or corporate entity) from a credit, income and networth point of view can support the loan and the lender is best protected.

Dave tackled the topic of whether you should have a corporation as a real estate investor in this video:

5. Improving your credit:

Your credit score is pretty important as a real estate investor. Your goal should be to improve it and take measures to protect it. But, what is a good score? Anything above 600 is considered good and anything above 750 is excellent. Most banks are going to be very happy with any score above 700.

If you have poor credit then your advisor can help you determine why and that will help you to know what to do so you can fix it. But, the big things are always paying your debts back consistently and not maxing out the debt you do have. Maxed out lines of credit or credit cards will reduce the score you have.

6. A Joint Venture Agreement

If you’re not able to qualify for financing for any of the above reasons then bringing a joint venture partner could be an option. The person you JV with must strengthen the deal in areas that hindered a successful approval in the first place. For example: if credit was the reason to why a deal was declined and the lender requested a higher down payment that you did not have; then a Joint Venture partner with sufficient down payment, credit and income can help facilitate the approval. <More about joint ventures>

You definitely do not want to find out that you need a joint venture partner in the mist of a deal! This is where planning comes in.

Working With the Right Lending Adviser

Many factors drive the approval of your deal and the rules do change on a regular basis. You will get a bank’s financing if you meet the lender’s criteria and if the numbers work for that particular lender.

When you look for someone to work with to help you finance your deals, I recommend that you find someone who:

1. Is well-versed and up to date with all the rental property rules in Canada.
2. Has a strong relationship with investor-friendly lenders.
3. Is able to finance not only the property at hand but also understand the short and long term implications ( if any ) on your future portfolio financing.
4. Is able to provide you with proactive guidance on how to plan your financing versus speaking with you only at the time of the approval.
5. Ideally is an investor themselves with personal experience using creative and traditional financing methods for investment properties

Forming a long-term relationship with the right financing advisor will have a direct impact on the number of properties you can buy.

Shifting Your Mindset

While interest rate is a very important component of your financing strategy, it should not be the primary driver of how you shop and fund your deals.

Chasing the rate alone does not guarantee approval as you may not meet the lender’s guidelines in the first place and when you do, it is important to discuss with your lending advisor any implications to your long-term financing.

We have seen investor’s chase a 2.99 rate at 25 years amortization only to find out at their 4th property that they no longer qualified with the banks. Had they taken a slightly higher rate with a different lender, they would have had the opportunity to finance 2 more deals with the A lenders.

It is about taking the deal to the right lender who will also offer you a great rate given your finances and where you are in your investment career and will get you a step closer to your goals.

There isn’t really a financing wall that will stop you from growing your portfolio if you do some planning, get the right people on your team and are willing to be flexible with the financing options you take for each of the properties you buy.

Dalia Barsoum is a Portfolio Financing Strategist, a Best Selling Author of “Canadian Real Estate Investor Financing: 7 Secrets to Getting All the Money You Want” and is a recipient of the 2014 Mortgage Broker of the Year Award by the Canadian Real Estate Wealth Magazine. Dalia’s Canada-wide lending practice (CENTUM Streetwise Mortgages), focuses on strategically positioning investment portfolios for growth and success using traditional and creative financing techniques and products. Dalia holds an MBA in Finance and is a Fellow of the Canadian Bankers Association. For questions, contact Dalia at info@CanadianInvestorFinancing.com

Wondering how to set up your bank accounts? Here’s a great video discussing how to set up your bank accounts as a real estate investor:

1st Image Credit: © Tagstiles | Dreamstime.com

2nd Image Credit: Dalia Barsoum

The Ultimate Guide to Creating a Real Estate Investment Deal Summary

April 17, 2020January 6, 2015 by Julie Broad

Are you planning on raising money in a joint venture or from a private lender? Are you ready to have conversations to get the cash? Let’s just see …

Imagine you have $100,000 to invest in a deal. Who are you going to work with?

Meek Megan, who has slouched shoulders and lowered eyes, looking away from you frequently, saying:

“I know you’re busy so I want to thank you for taking time out of your day to meet with me. I would like to talk with you about borrowing $50,000. It’s for this deal I am working on. I think it’s probably a good deal. You know my realtor said it is probably worth about $300,000 and I am buying it for $275,000. I have tried everything to come up with the money. The bank says they will finance me if I can put down 25% so I have to raise that money. I know real estate isn’t your thing but it would be such a big favor to me if you loaned me the money for the deal.”

Or, Confident Courtney, who looks you in the eye, holds her head high with her shoulders back and says:

“I am so glad I had time to meet with you today. Thanks for your interest. This deal I am working on is pretty cool. I have an accepted offer on it for $275,000 and it’s worth $300,000. After a paint job and some landscaping which will cost less than $5,000 I believe we’ll get $2,000/month rent for it. It’s in a really great area and I already have a few tenants interested in it. I’ve got a lender lined up, I just have to bring in a partner who can qualify for financing and put in the initial $60,000 required for a down payment. I can’t make any guarantees, but based on mortgage pay down and cash flow, even if the property doesn’t go up in value a cent, the person I work with to fund the deal should make at least 10% a year on the deal each year, probably more.”

Clearly, Courtney is getting the money.

But, Megan and Courtney had the same deal to offer so what was the difference?

Coming into any conversation confidently is trickier than it sounds. Few people can fake confidence, so you have to build it from within.

I’ve always found that if you’re worried that someone is going to object to something or think you’re not experienced enough, that is the VERY thing they will say or think.

You have to believe in you and what you’re offering before anyone else will.

This has next to nothing to do with having the right documentation and everything to do with you, your expertise and your ability to communicate the offering. The right paperwork and marketing materials really aren’t part of a successful conversation, except to make you feel like a prepared professional. If you’ve taken the time to develop an extensive deal summary, or business plan for your investment property, you’ll have thought through what you’re offering and will feel like you are bringing a lot of value to the table.

So what do you need in a deal summary?

The first thing to prepare for any conversation are your answers to the 5 Why’s. These are the key points you’re going to cover in your presentation. And, they are the things you’ll figure out the answers to when you create your deal summary.

Those questions are :

1. WHY YOU?

2. WHY NOW?

3. WHY YOUR MARKET AREA?

4. WHY THIS DEAL?

5. WHY THIS STRATEGY?

This video walks you through these questions and explains, briefly, what each means:

Your deal summary, which is pretty much a business plan for an investment property, addresses these questions. Creating the deal summary is less for your prospective partner than it is for you!

<NOTE: You should never SEND this deal summary to a potential investor via email before you meet with them. It’s probably more beneficial to send it to a space station than it is to send it to a potential investor in advance. Emailing a deal summary – no matter how beautiful or comprehensive it is – does not raise money or uncover partners.>

You might expect that a business plan is important as a presentation tool but the reality is that the business plan is critical for you! You should rarely, if ever, actually use it during the course of a presentation. It’s great follow up material. It’s nice to mention in the conversation, but pulling it out in the middle of a conversation, will completing change the focus of the presentation. Try it … when it doesn’t work, go back to keeping it in your bag for the end.

We no longer create a deal summary for each of our deals. We don’t need to. We know what to say and we don’t even give a copy to our investors so it’s not necessary anymore. We have past deal summaries to show them as examples and we ALWAYS prepare an executive summary (1 page document with a picture and key numbers of each deal). But, when you’re first raising money, the deal summary is a CRITICAL piece of your preparation.

Doing the work to create one forces you to spend time thinking about each of these key questions. You will have to do research for your specific market area and deal types. When you carefully think through a business plan you will identify gaps in your plan, work to correct them and this process will build your expertise and confidence. When you write the deal summary you will also be crafting the answers to questions that will come up from partners and lenders.

Well thought out answers to questions demonstrates that you are a professional and have considered all the elements.

With that in mind, here’s a quick review of all the main sections that should be in your Deal Summary:

1. Introduction:
This should be no more than 1 or 2 pages and is a quick overview of who you are, what you are trying to accomplish, and what’s in it for the Partner (quick overview of the five WHY’s).

2. The Management Team:
Who are you? Who is on your Team? Why would I want to partner with you (vs. the competition)? “Money follows Management” so if you are light on experience, you have to be very strong in at least one other area (market area expert, huge network, relevant trade expertise, etc.). Then support that with a team that you can confidently boast about. For instance when you reference your team, you could say my realtor is the #1 investment property specialist in the city, my accountant owns over 10 investment properties himself so understands our investing strategy, or my brother has been a licensed carpenter for over 10 years and specializes in low cost renovations. Your prospective Partner is always most concerned with “what’s in it for them?” They want to work with someone who is confident, capable and has a great team (WHY YOU!).

3. The Opportunity:
Where are you investing? What are you investing in? And most importantly, WHY are you investing there? This section is where it’s imperative that you have done your market research. (Please note: we do not teach you how to properly conduct your market research in this program. If you wish to learn how to do your due diligence on a market, please contact us at info@revnyou.com for a special offer on our program.). Again, your Partner will want to know the What, Where, and Why of your opportunity. This section should include enough details to give your Partner an idea of where their resource (money, time, expertise) will be going without overwhelming them with pages and pages and pages of data. (WHY NOW? WHY THIS MARKET AREA?)

We have a Properties with a Cause Model that we follow and always discuss.

4. The Investment Analysis:
The “numbers” are not as important as you might think. Most investors just want to feel confident that you’ve done them. This section ensures that you have run the numbers carefully and have thought through the strategy. (WHY THIS DEAL? WHY THIS STRATEGY?)

You might be focused on how much your investor can gain but most investors are more worried about ensuring they don’t lose their money. Most people react to fear of loss or the threat of pain more strongly than they do the potential for gain. You need to show them that you’ve thought through the risks and are taking care to mitigate them where you can.

Once a potential investor has a basic understanding of what they can gain, they typically turn their attention to all the ways they can lose their money in this deal. The “numbers” in this section will demonstrate that you have covered all the bases of this investment opportunity. Include enough detail and clarity that the person can follow along and understand “what’s in it for me” from their perspective.

Also see, how to analyze your deals, and why you’re the only one that can.

5. The Joint Venture Structure:
This part of the summary clearly identifies each persons roles and responsibilities are for the duration of the joint venture. This article discusses JV Structure.

6. Exit Strategy:
When will I get my money back? How do I know this will work? Why are you using this strategy? What happens if it doesn’t sell?….we can’t rent it?….the market crashes? This section should be focused on answering these questions. Your investor really just wants to know that they and their money/credit/resources are protected (WHY THIS DEAL? WHY THIS STRATEGY?). This section really becomes a lot of the material you’ll use when you handle objections in a conversation (although, the more confident you are with your strategy and what you offer, the fewer challenges you’ll face from potential investors).

7. Appendices:
This is the last section of the Deal Summary and is not always necessary. We use this section to demonstrate our expertise and market area knowledge. It really supports what you’ve already demonstrated in the other sections. Here’s where you can include articles you’ve been featured in, references to awards you’ve won, key references in the media to your market area or your strategy, and anything else that would be useful to reference regarding the deal. Testimonials from other happy partners or investors are also a nice touch for this section. If you’re a renovator, before and after pictures can be a great piece to add here as well.

For us, if a potential investor goes through the Appendices in detail, it’s a good sign they are probably not our ideal investor. Most people will just flip through it to see if anything catches their eye.

The Appendix, for us, is a good place to keep really important credibility boosting pieces or high value articles, that you might want to reference in the future. can really have anything you want in it but please check out the sample deal summaries we have included to get a sense of what we use. Make it your own and of course, make it useful!

Nothing replaces the face to face part of raising money. You have to have a lot of conversations to get cash for doing multiple deals. Having a high quality and well thought out deal summary will boost your confidence and reassure an investor, so it’s important if you’re new to raising money or investing, but it’s not the most important thing you can do. The most important thing you can do is become an area expert, have a great team, master your strategy and learn how to have a compelling conversation that you control.

If you need help with any of that … April 25th & 26th, 2015 we’re holding our final workshop on Funding Your Deals in 49 Days – the ultimate workshop for learning how to have conversations that you can use to have people ASK YOU about investing in your deals. You just might want to mark your calendar and plan to be there. Details coming soon.

Joint Ventures with International Investors

April 17, 2020November 4, 2014 by Karysa

You already know real estate joint ventures are one of the best ways to grow your real estate portfolio when you need additional resources. It’s a fairly straightforward process if you’re working with a fellow Canadian, but what if your money is coming from someone in a different country? How does a joint venture work with international investors, and what are the tax implications you should consider before you move forward? We asked George E. Dube, an accountant in the Toronto area who specializes in working with real estate investors, for advice to help you out!

What happens when you have a joint venture with a non-resident of Canada? International investors can be a great source of joint venture capital, but you have to understand the added complexities of holding, or selling, real estate in which a non-resident is involved.

Non-resident joint ventures

First off, we are talking about joint ventures that are not partnerships. Generally speaking the joint holding of rental real estate is considered a joint venture and not a partnership. Why is this important? In the case of partnerships with non-resident partners, the withholding tax rules are far more onerous and can impact all partners. So, you must have the proper joint venture agreement.

In a joint venture, each co-venturer:

Separately reports his or her share of the gross income and expenses from the property.
Claims capital cost allowance on his or her cost share of the depreciable assets without regard to what other co-venturers are claiming.

Therefore, the special rules that apply to non-residents (i.e. your international investor) only apply to the non-resident’s share of the joint venture.

Example
You: 50% ownership
Jathan (non-resident): 50% ownership

The non-resident reporting rules only apply to Jathan’s 50%. Technically, you may have no responsibility for the non-resident’s withholding and reporting requirements –although as a good co-venturer, you are likely going to be coordinating this as the non-resident’s Canadian agent.

Canadian agents

International investors normally have a Canadian agent who acts on their behalf making tax remittances and withholdings, for example. The CRA will hold the Canadian agent responsible for paying taxes, and filing tax returns, for the non-resident. To protect yourself, consider as a requirement of the JV that your accountant files tax returns and annually provides you a letter confirming the return has been filed.

(Note that if you have a property manager, it’s often the property manager that acts as the Canadian agent for the tax withholdings.)

What paperwork do you need to file?

Withholding taxes

If a non-resident holds Canadian rental real estate, a 25% Canadian withholding tax is generally applied on the gross rents. If you are paying the rents to the non-resident, you must remit this tax to the CRA on or before the 15th day of the month following the month the rental income is paid or credited to the non-resident. Otherwise, it will be your property manager that does this.

Gross rents vs. net rents

The Canadian agent, the person responsible for remitting the withholding tax, must file an annual NR4 Return. This return identifies the amounts withheld from the gross rents and remitted to the CRA.

Alternatively, your international investor can elect to have tax withheld on the net rental amount instead of on the gross rent. This involves filing an NR6 Form.

Generally speaking, you prepare an estimate of the expected gross rental income, expenses and net income for each rental property on your investor’s behalf, then include the estimate with the NR6 Form.

If the CRA approves the NR6 Form, the Canadian agent collecting the rents on behalf of the non-resident can then withhold tax on the net rental income of each property identified in the calculation instead of on the gross income. Until the form is filed and accepted by the CRA, however, the agent must withhold tax on the gross rents, and then file a Section 216 Return.

Annual filings for CRA

Annually, the non-resident can file a Section 216 Return within six months of the calendar year-end (i. e. by June 30). This is basically a personal income tax return, but used to report only the net rental income relating to the Canadian rental properties. The net rental income is subject to tax at the graduated rates applicable to Canadian residents. However, the tax owing is reduced by the previously remitted 25% withholding tax on the gross or net rents. Excess withholding tax is refunded through this return. This return is, in theory, but practically must be filed if taxes are being withheld at the net rent.

What about when you decide to sell?

Selling Canadian real estate where one of the owners of the properties is a non-resident is a little more complex, and involves more paperwork for Revenue Canada, than your standard sale. When selling a property, non-residents must apply for a clearance certificate from the Canadian Revenue Agency by filing Form T2062, and Form T2062A. (These forms generally are prepared by the non-resident’s Canadian accountant.) The CRA must then approve the forms and issue a Clearance Certificate. Without these forms, the purchaser of the property is required to withhold 25% tax on the gross sale proceeds (50% in the case of depreciable property). If the CRA issues a clearance certificate which is provided to the purchaser, tax is withheld on the gain and on any recapture, instead of on the gross selling price.

More paperwork…

Any net rental income generated in the year of disposal is reported on a Section 216 Return and the disposal of the rental property is reported on a different non-resident return. Any withholding tax paid, as calculated on the T2062A form, is credited on the Section 216 Return and any withholding tax paid, as calculated on the T2062 form, is credited on the non-resident return, to be offset against any tax otherwise payable on the respective returns.

Failing to follow these procedures can mean significant adverse tax consequences depending on the situation. These are general descriptions to give you an idea of what is involved. Be careful of the strict reporting requirements and deadlines.

Many of our clients have successful joint ventures with non-residents. The key from a tax perspective is ensuring you follow the reporting requirements for tax purposes, in both Canada and the home country. Many choose to use Canadian corporations to own real estate to avoid many of the reporting requirements. However, there are still catches for you and your investors to consider, and the best advice is to talk with an advisor experienced with non-resident issues.

By George E. Dube, CPA, CA, LPA

George is a veteran real estate investor and accountant (CPA). He has spoken, written various articles, and co-authored two books on real estate accounting. Connect with him on Twitter: @georgeEdube. You can also email him directly.