Self-employed investors make up a fair amount of my business and are a group that’s generally full of questions when it comes to financing opportunities. Income is a primary factor in most mortgage deals, so it’s no wonder this particular cohort is especially curious about the options available to them. If you’re currently running your own business and wondering how that will impact your ability to purchase investment properties, hopefully this brief guide will prove useful.
If you own a business (incorporated or sole proprietorship) from which you derive your primary income, lenders will view your income as self-employment income regardless of how you pay yourself (salary, dividends, a combination of the two, commissions or through other means). That can be taken for granted, regardless of the property you have your eye on. Things change, however, depending on what kind of property you hope to buy.
If you’re self-employed and are looking to purchase or refinance a residential rental property (i.e. a property with up to four units), you have two options.
Option 1: Bank financing
Bank financing through the Big Six generally offers the best financing terms on rental properties, such as 30-year amortizations, 80% LTV, relatively low rates and enhanced products such as advanceable mortgages and secured lines of credit.
In order to qualify with this group of lenders from an income standpoint, you’ll have to have paid yourself enough from your business over the past two years. Banks will always look at your two most recent personal tax returns and use either the average income you paid yourself from the business (if the most recent year is higher than the previous year) or use the lower of the two figures if your income in the most recent year has declined.
Bank financing for self-employed clients, however, comes with a price. To save on the mortgage, you’ll likely pay more taxes on the income you must report to qualify. If you’re financing a long-term buy-and-hold, paying more on the tax side might make sense, given the interest savings and impact on cash flow over the life of the mortgage. If you are flipping a property or financing a rent-toown, where the mortgage savings are going to be short-lived, it would make more financial sense to focus on optimizing your taxes.
Your mortgage broker and accountant can collaborate with you to help you decide how much to pay yourself and whether it’s worth your while to do so from both a financing and a portfolio growth standpoint.
The banks also need a confirmation that you do not owe the Canada Revenue Agency on the personal side. If you’re on an instalment plan with the CRA, you’ll need to pay off the full remaining amount you owe before closing. It’s important to note that the banks won’t permit the use of refinance funds to pay off the CRA.
Option 2: Trust companies
Many investors confuse trust companies with private lenders. They aren’t the same thing. Trust companies – some of which are also chartered banks – are a great alternative for self-employed investors who don’t qualify for financing with the Big Six. Trust companies look beyond your personal tax returns. They rely primarily on the business bank account statements to support the income you pay yourself from the business.
Several trust companies offer 30-year amortizations, 20% down on rentals in major centres and are also accepting of rentals that will be owned by a corporation. Their rates, however, are higher than the banks’ by about 1%. They also charge 1% of the loan amount on closing.
Despite the higher cost of capital, this option is an excellent alternative for selfemployed clients who have a large rental portfolio or those who have not reported enough income on their personal tax returns for the two most recent years to qualify for cheaper financing. Under both options, the mortgage qualification stress test that came into effect in January applies.
If you’re looking to purchase or refinance a property that has five or more residential units or has a commercial component to it, lenders will make their decisions based primarily on the income that property generates, not the income you pay yourself from your business. There have been many instances where we have financed multiresidential properties at favourable terms for clients who were not employed or did not have sufficient income from their businesses.
That’s because the property is the applicant, not you. Generally speaking, if the rents the units are fetching are in line with market rents in the area, the property has no vacancies and you are not overpaying per unit, you can obtain 75% of the appraised value in a mortgage with a 25- year amortization, or up to 85% of the value with up to a 35-year amortization under a CMHC-insured mortgage.
Don’t think that just because you’re signing your own cheques, you’ll automatically be looked down upon by lenders. With a little help, the same hard work that allowed you to build your business can be used to build a winning portfolio as well.
DALIA BARSOUM is an award-winning mortgage broker and finance advisor with more than 20 years of experience in the banking sector. She is the winner of CREW’s 2017 Mortgage Broker of the Year
Award and is the best-selling author of Canadian Real Estate Investor Financing: 7 Secrets to Getting All the Money You Want. To develop the right financing plan for today’s shifting real estate and lending environments, contact her at firstname.lastname@example.org. To learn more about Streetwise Mortgages, visit streetwisemortgages.com.
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