Experts have indicated Canada will need to build millions more homes in the next 10 years to meet our growing needs. To the casual observer the problem is easy to solve: just build more homes. For those in the real estate development field, the problem is much more complicated than this.
As mortgage brokers specializing in income property financing, we receive hundreds of questions from investors across the country regarding various aspects relating to financing income properties.
In this series, we answer the common questions we come across.
QUESTION 1: what are the key differences between financing commercial and multi residential properties (5 units or more); and residential properties with 1 – 4 units?
The key difference between commercial and residential financing is who qualifies for the mortgage. If you are buying a dwelling with 1, 2, 3 or 4 units, the lenders require you to personally qualify for the mortgage based on your income, debt load and credit.
When purchasing a dwelling that has a commercial component or is all residential with 5 units or more, it is the property that qualifies for the mortgage based on its Net Operating Income, not you personally, which means that you can purchase a commercial / multi residential property even if you do not currently work or report any income at the personal level!
Having said that, there are a few caveats:
5 and 6 unit multi residential properties fall in the “grey” zone for a few lenders, where they can be financed under the residential guidelines offering clients better financing terms than those offered under the commercial rules, such as 20% down, 30-year amortization option, low rates and low cost of acquisition (i. e. no need for environmental or commercial appraisals).
Also, some lenders offer the option to finance a purely residential property (1 – 4 units) under the commercial guidelines by looking primarily at how much mortgage that property can carry based on its Net Operating Income. This method may work better for some investors who are buying/own legal duplex, Triplex or Four plexes and no longer qualify under the traditional residential financing rules.
Another key difference between the residential and commercial financing are the financing terms offered and the costs associated with arranging financing.
Under the residential guidelines:
Under the commercial guidelines:
As mortgage brokers specializing in income property financing, Streetwise Mortgages can help you design an optimal financing road map for your properties and given your investment goals.
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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