Many investors might not be aware of the term cap space or even what it is, but you’ll quickly find out if you happen to reach it at your bank.
Even your account rep – the one who has been so helpful with your mortgage loans – may not even know about it. It’s the lending limit a bank puts on a borrower.
One day, you might go into your bank with another investment opportunity, but this time, much to your surprise and to the surprise of your account rep, your application is declined. Why?
You’ve reached your funding limit at that bank. Now what?
Another interesting factor to all this is if you ask what your cap space is, no one can tell you – it seems as though they only know when you’ve reached it.
It’s an amount determined by the bank’s risk department that takes into account a number of factors including down payment and cash flow.
First of all, you have to understand how a bank works. The bank looks only at each deal separately.
Because banks want to limit their exposure to a client from a dollar-owed perspective, any good investment plan will require the use of several lenders as your rental portfolio increases.
But before you go off running from bank to bank, if you own or want to own a large portfolio of residential rental properties, you need to have the right strategy and plan in place to ensure you meet your goals.
There is no magic number for how many properties an investor can own. The key to working with investors is the debt coverage ratio (DCR) and the cash flow of a rental property.
The DCR is a formula that factors the ratio between income and expense. So, when a bank is looking for a DCR of 1.10, it means they want to see $1.10 of income for every dollar of expense.
Also, when you’re making your application to the bank, full disclosure upfront of all properties, their incomes and expenses, will ensure you get a proper lending decision.
For instance, what happens if you already own five residential doors and you want five more? Well, if you own more than five doors your bank may not know what to do with you.
This is why most investors work with a mortgage broker to help manage and grow their portfolios. It’s all about planning. Mortgage brokers will have intimate knowledge of your goals and portfolio details, which makes it easier to grow your investments.
And because a broker works with a variety of lenders, including the banks, and understand the criteria for each, he or she can make sure you’re getting the best product and terms to meet your overall objectives.
An experienced mortgage broker can also leverage your relationships and mortgage loans with your banks more effectively. For example, the bank you have the best relationship with may not be your first choice for a mortgage.
By sending your mortgage business to a new lender, and reaching your funding limit there, you always have your regular bank to fall back on if you have a particularly challenging deal.
Devising a strategy to manage your cap space and having a properly managed portfolio are the keys that potentially save you thousands of dollars.
Also, by keeping your properties cash-flow positive, lenders will continue to provide the best pricing on your mortgages, which will lower your carrying costs.
With historical low interest rates, a more balanced real estate market and some renters staying on the sidelines until the dust clears, now would be a good time to consider investing in real estate. A mortgage broker should be considered an essential part of your team.