Investors’ Top Income Property Financing Questions – Part 2: self-employment

by Dalia Barsoum22 Jul 2020

As mortgage brokers specializing in income property financing, we receive hundreds of questions from investors across the country in regards to various aspects relating to financing income properties.

In this series, we answer the common questions we come across:

QUESTION 2: If I am self-employed: what type of financing can I expect for income properties?

As a self-employed client who is looking to invest in Real Estate, you have options; even if your business (Corporation or sole proprietorship) has been around for less than 2 years.

If you are financing a residential property (1 – 4 units):

  • The first route is with the banks.  In order for the banks to use income from self-employment, they need to see that you have been in business for a minimum of two years.

If you meet that criterion, then what you paid yourself from the business over the two years of operations in the forms of dividends / T4 / Shareholder loans (or a combination of) will determine what you qualify for.

Some banks consider 5 and 6 unit properties as residential and will also apply such rule.

Some banks offer business for self-programs for incorporated businesses, where they would supplement the income you paid yourself from the business with some income from the corporation if the corporation reported a profit over a two years’ period.

If you qualify under these programs then, you can purchase or refinance a rental at 80% loan to value, 30-year amortization at low rates.

It is also worth mentioning that in order to fund a deal with a bank as a self-employed client: you must pay all personal taxes owing to CRA before closing. No installment payments are permitted and you cannot use funds from refinancing with the bank to pay CRA.

  • If the first bank route is not workable, then an alternative (“B”) lender route is an option for you. A “B” lender is not a private lender.

What is cool with alternative lenders is:

  1. They will consider self-employment income with as little as three months in business
  2. They do not care what you report on your personal tax returns from your business, whether or not you filed taxes and whether or not you owe taxes to CRA.
  3. They calculate your income by annualizing the deposits you are making in your business account and deducting some reasonable expenses given the line of business you are in. This method is referred to as “The Stated Income Method”

B lenders are generally a lot more particular about the location of the property compared to a bank (A) lender.

1 – 4 unit properties qualify with the B lenders generally at 75% loan to value but can go up to 80% loan to value in major markets. 30-year amortization is also offered on rental properties.

The rates are about 1% higher than the banks and the B lenders charge a lender fee (on closing as a lump sum) , equal to 1% of the mortgage amount.

Despite the higher cost of borrowing: B lenders are a great alternative for self-employed clients who do not pay themselves enough income at the personal level from the business to qualify with the banks.

  • The third route for self-employed clients is a commercial route, which entails working with lenders that focus primarily on the property being financed without consideration to the client’s personal or business income and with or without considering the rental income from other properties the client holds. Under such an option, the property / portfolio qualifies for the loan based on the property and/or portfolio Rental income and expenses and you can expect a 25-year amortization and higher costs in regards to arranging a loan, including higher appraisal costs and lender / broker fees; which vary on a deal by deal case.

As qualified mortgage brokers specializing in income property financing and in self-employed mortgages, Streetwise Mortgages can help you plan the optimal amount of income to pay yourself from your business to qualify for the best financing given your investment plans.

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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