Are the big banks punishing real estate investors?

While the industry continues to chime in about the interest rate cut and its impact on first-time investors, seasoned investors are finding themselves left out in the cold by the banks.

“Apparently, [the banks] believe the highest mortgage default rates are made by investors,” said Cindy Wennerstrom, an investor and president of Oro Properties.

“The banks only want to deal with the typical borrower – the first time or regular home purchaser. These deals are easier and less risky, according to the banks.”

For instance, Wennerstrom is currently having a difficult time getting a mortgage on a principle residence, despite the fact that she has a solid cash-flowing real estate portfolio.

“The problem is stated income,” she said. “The banks hate that. It's best to ensure you maintain and establish a good relationship at the branch level as you grow your portfolio.”

This is one way to try to avoid the exorbitant fees that alternative lenders, such as Equitable and Home Trust, charge – Wennerstrom was just offered 5.25 per cent plus 1.5 per cent lending fee.

“When you look at the cost to borrow as a self-employed real estate investor who cannot get funding from a regular bank, the Equitable and Home Trust products are not too bad,” she added.  

“They certainly are leaps and bounds higher than traditional financing, but when you’re purchasing an investment, as long as the numbers work (i.e. you can adequately cash flow with the higher interest), then this is considered a cost of doing business.

“These lenders take on greater risk by lending to investors with bigger portfolios and in turn they ask for a greater percentage rate and lending fee to ensure their profit. To them, we are more of an investment than a mortgage.”

So what is an investor with a strong portfolio to do when it is so difficult to get a reasonable mortgage?

Wennerstrom suggests looking to credit unions, which tend to have lending rates comparable to the big banks, though they do ask for a higher down payment. “Establishing a good relationship with them will definitely help you to be able to continue building your real estate investment portfolio,” she said.

Other suggestions include purchasing the properties using your own or borrowed line-of-credit money, and forming a joint-venture partnership with someone who is full-time employed and does not have a lot of investment properties.

“Put their name on the mortgage and stay off the title to avoid complicating the deal,” advised Wennerstrom. “Draw up a joint-venture agreement between the two of you and register it against the title of the property after closing via your lawyer.”

The big banks, including RBC and TD, declined to comment.

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COMMENTS

  • by 2015-02-26 3:42:44 PM

    I have never seen a JV agreement being able to register on title on a property, how does that work? Can you provide more info?

  • by investor 2015-02-27 2:21:03 PM

    The Joint venture would be in the form of a Numbered company that is owned by both parties in the J-V. After the sale the Title would then be changed from the one individual to the numbered company. Although you will have to weigh in the cost of capitol gains on the sale of any property due to the company owning the home as opposed to personally owned; after a year of it being your main residence you can rent without paying income tax on the gains of the Real Estate Portfolio.

  • by 2015-03-03 2:16:00 PM

    Holy Fraud!

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