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How to maximize your borrowing power to acquire a portfolio of properties – part 1

A man handing a woman a key to a house.

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.

Also, while lenders have taken a cautious posture to lending, costs of borrowing have generally gone down and interest rates are at historic lows.

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 this article, we discuss what to plan for from a financing standpoint to maximize your borrowing power and be in a strong position to make a move when the time is right for you.

  1. Plan and line up your investment capital upfront 

You need to think about where the money will come from to invest, way ahead of investing. Not just for your next property but for the next 3-5 moves.

Investors sometimes erroneously assume that as long as they have equity in their properties, they can come to those properties later in their investment journey and take money out at a low cost to raise their down payment capital for their next deal. Unfortunately, that is not always possible. Financing is a numbers game. As you grow your portfolio, your debt ratios go up (despite the rental income!). As a result, what you may have qualified for in terms of the amount of equity that you can take out from an existing property and in terms of costs may not necessarily hold after your debt load had increased.

This is why, in my view, it is important to always be ahead of the game and line up as much capital up front so that when you do not really need it not when you urgently need it!

I’m not talking here about increasing mortgage debt across your portfolio, but rather setting up secured lines of credits where possible.

Secured lines of credit give you access to capital without costing you on a principal and interest payment on a monthly basis.  Further, you pay as you go only when you use the funds, you can make a minimum interest only payment on the outstanding balance – which works better from a cash flow stand point –  and you can convert the revolving balance to a mortgage at any time so you can pay down the principal.

  1.  Clearing high impact debts

A common misconception with respect to debts is that lenders take into consideration (for mortgage approval purposes) the payment the client pays on those debts.

For example: a client may be paying zero interest on a promotional credit card with 30,000 that offers a six months’ interest free arrangement. While the client is paying nothing on that card for the promotional period, many lenders would factor a 3% of the outstanding balance into their calculations (i.e. $900 per month). Other types of loans that often adversely impact mortgage qualification (amount and rates the client qualifies for) are car or investment loans.

A car loan that has $10,000 balance remaining with a high monthly payment will negatively impact qualification despite the fact that the balance is small.

Depending on your investment plans , which lenders your next set of deals qualify with and investment time horizon relative to the maturity date of those loans; it may make sense to pay them down either through cash or the use of equity from refinancing a property.

 

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.

About the Author

Dalia Barsoum is the founder of Streetwise Wealth, a boutique real estate wealth advisory firm, and Streetwise Mortgages, a multi-award-winning brokerage specializing in income property financing. Streetwise Mortgages is known as Canada's #1 small markets broker (AKA rental markets) as ranked by Canadian Mortgage Professionals. The team at Streetwise Mortgages has funded over 1 billion dollars of mortgage volume and over 2700 mortgage transactions ranging from residential, multi-family, mixed-use, and other construction projects. Dalia is the best-selling author of Canadian Investor Financing: 7 Secrets to Getting All The Money You Want, a columnist for Canadian Real Estate Wealth magazine and has been recognized as a Global 100 mortgage professional, one of Canada’s top 10 brokers, and a woman of influence. Through strategic real estate financing advice, sophisticated deal structuring solutions, and access to an understanding of all the money tools and capital structures investors use to grow (private money, traditional mortgages, alternative mortgages, GP/LP structures, corporate capital structures, and joint ventures), Dalia and her team have helped thousands of Canadians kick start their real estate investment journey and take their portfolios to the next level while managing risk.

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