A few weeks ago I did a blog in regards to purchasing/refinancing rental properties up to 4 units. This week we are going to talk about rental properties that have over 4 units in them.
While there are still some lenders who will entertain financing for 5 and 6 unit buildings under their residential portfolio they are normally capped at 80% of purchase price or value whichever is the least.
For the sake of this blog we will be discussing properties with 5 or more units under the commercial lending programs.
Per my previous blog regarding rentals we know that we are only allowed to finance up to 80% of the purchase price or value (whichever is the least) when it comes to residential rentals. The beauty of the commercial program is we can go as high as 85% percent. This means you only require to have 15% down payment when purchasing these type of properties.
We will keep this as simple as possible as there is a lot involved with these type or purchases. You need to talk to a professional before deciding on going this route as there are out of pocket expenses to get the approval which is not guaranteed.
Lets say we are buying an 8 unit building at a cost of $300,000. The minimum down payment required will be $45000 or 15% of the purchase price. Since we are only putting 15% down we need to use CMHC who charges a premium of 4.5% onto the borrowed amount. This means you will be signing for a mortgage amount of $266,475 (300k less 15% or $255k plus the 4.5% premium for a total mortgage amount of $266,475). The payments based on an interest rate of 4.5% (rates are negotiated between the lender and borrower and are dependent on various factors. The rate used here is for illustrative purposes only) and an amortization of 25 years will be $1474.86/month not including the property taxes. The property taxes on this amount would be around $9850/year or roughly 821/month. Now if we use an average rent of $550/unit this would give us a gross income of $4400 per month. Now allow an estimate for monthly expenses of $500 for snow removal, maintenance etc and you can get a rough idea on your monthly net income. In this instance monthly net income could be around $1600 or about 19k/year.
There are certain criteria that CMHC requires in regards to these type of purchases. When we submit the deal to CMHC they will require a fee of $150/unit or in this case $1200 to underwrite the deal. If the deal is declined or client pulls away from the deal they will retain a portion of this fee dependent on the amount of work done. (min 10%). The lender/broker will also charge a fee but this is negotiable at the start of the application process. Depending on the broker and lender the fee (or a portion of) could be charged up front or at day of closing.
CMHC also requires a client to have a net worth of 25% of the loan amount to a minimum of $100,000. You are also required to have a strong credit rating.
The most important part of the transaction is the property itself. It has to debt cover at least 1.2 to proceed. This basically means taking the total expenses (mortgage payment, taxes and expenses) and dividing by the net income. In the above example this property would debt cover 2.08 and there fore meet one of the requirements.
You can put more money down to avoid CMHC but you need to do the calculation to see if this is worth your while. If the deal is insured the lenders normally offer a lower interest rate. There is a great example here that shows the figures on an insured deal and a non insured deal.
As you can see there is a lot to think about when looking to purchase these type of properties. A good broker will be able to go through the whole process with you upfront. They should be able to show you if the property is worth buying or if the lender and CMHC will even entertain the deal. By going through these steps up front you will know if it even makes sense before spending your hard earned money.
So if you are looking to purchase or refinance these type of properties then give me a call and we can spend the time going through the expenses etc and then present to the lender for the best possible deal out there. This small amount of time spent doing your homework could save you a lot of money and time. The best thing is you could end up with a great revenue stream and be on your way to becoming a real estate tycoon.
As always comments are appreciated and encouraged.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage specialist for TMG Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online.