While the pandemic has slowed down some clients’ plans to invest or continue to invest in income property due to the concerns about the economic outlook, Job loss and impact to finances and/or shortage of property supply in many markets; the sentiment for income property investing as a vehicle for building wealth and cash flow remains unchanged.
If you have future plans to invest in your first property or continue to grow your portfolio, this is a great time to plan your finances and pave the way for the future.
In part 1 of this article we discussed two financing strategies that will help you maximize your borrowing power and be in a strong position to make a move when the time is right for you. Those included: Planning and lining up your investment capital upfront and clearing high impact debts. In this article, we discuss two additional strategies.
- Planning your income
If you are a self-employed client who has a sole proprietorship or incorporated business, the income you declare on your personal tax returns plays a hug role in helping you qualify for a mortgage with the “A” lenders (i.e. the lenders that offer the most attractive financing terms).
If you are sole proprietor, the “A” lenders go by your net (not gross) income for the two most recent tax years. If you have an incorporated business, the A lender will also go by your two most recent tax returns and will look into how much you paid yourself from the business in the form of T4 income and dividends.
If you know that you want to acquire say 3 properties in a particular market in 2021, we recommend that you proactively plan and report the income needed to qualify you for the loan amount needed. Working with the client’s accountant, we have guided many report the optimal income that would work from a financing standpoint with the least tax implications.
- Strategically turning revolving debt to amortized debt
Many investors rely on equity in their properties as a source of capital to grow a portfolio.
If you have multiple properties and have used leverage to grow, you likely have a line of credit with a large revolving balance. Depending on the number of properties you have and your debt to income ratios, there comes a point where a large outstanding balance on your lines of credit stands in the way of getting a mortgage approved with an A lender.
As previously mentioned, while you may be paying an interest only payment on the line, the “A” lenders in particular take a different payment into consideration. For example: if you have $400,000 outstanding on your secured lines of credit and you are paying an interest only payment at prime (currently 2.45), your monthly interest only payment would be $204; while in the eyes of the “A” lenders, you are paying a monthly payment of $2,369.87 as the lenders calculate the payment based on the Bank of Canada Rate (a much higher rate than the 2.45) using a 25 year amortization.
To address this issue, we recommend converting a portion or all of the line into a mortgage. While your monthly payment would be higher as you would be paying down principal, in the “A” lenders’ eyes: your monthly payment is actually lower than the $2,369.87 because in that case they would go by the actual mortgage payment. For example: if we were to convert the full $400,000 into a mortgage at today’s rate of 2% at 30 year amortization, the resulting monthly payment would be $1476.82.
If you have an advanceable line of credit, you can easily convert portions of it into a mortgage. If you do not, then you would likely need to refinance to do so.
It is important to note that converting a line to a mortgage has to be done in a strategic fashion and after speaking with your mortgage advisor to discuss where it makes sense to do so.
Dalia Barsoum is president and principal broker at Streetwise Mortgages and a regular columnist for Canadian Real Estate Wealth. She leads an award-winning team of mortgage advisors offering strategic income property and portfolio advice to Real Estate investors across Ontario.
Click here to set up a complimentary planning session with Dalia or Streetwise Mortgage Advisor.
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