A client who was recently introduced to us holds several cash-flowing properties in the Windsor market. He confidently put a firm offer on another Windsor property, assuming that he would be able to get the same type of financing he received in the past from his bank \u2013 20 percent down, 30-year amortization at reasonably low rates \u2013 as his bank had provided pre-approval.\u00a0 Based on that combination of financing assumptions and pre-approval, his cash flow was going to be around $700 dollars per month using student rental as a cash flow-intensive strategy.\u00a0\u00a0<\/p>\n
After taking the deal to his bank for financing, the deal was declined. The property was set to be rented by the room, and not too many banks are keen about lending on a student rental at attractive financing terms even if the client personally qualifies for a mortgage. Due to the potential for increased wear and tear, lenders may up the down payment requirement or charge higher rates to offset their risks of lending against such a property.\u00a0<\/p>\n
After we had assessed the client\u2019s portfolio, it became apparent that his student rental deal would only qualify at a higher cost of capital at 35% down at higher rates.\u00a0 As a result, the higher cost of capital ate away into his projected cash flow.\u00a0\u00a0\u00a0<\/p>\n
The key takeaway from this story is that while you may have a property or strategy that looks amazing on paper from a cash flow standpoint, if you do not plan ahead and validate the financing you are able to get on that particular deal then you run the risk of facing a higher cost of capital late in the game that will devour a large chunk of the cash flow you had planned for.\u00a0<\/p>\n
To be clear, a pre-approval is not what I am referring to here. A pre-approval is just a quick way for a bank to tell you what you qualify for, subject to a series of often long conditions that have be met before it firms up into an actual approval. This is often where investors get tangled up: basing their cash flow or ROI projections on financing assumptions rather than the approved financing.\u00a0<\/p>\n
To avoid the unpleasant surprises brought on by needing to pump in more capital, and to ensure that the projected cash flow from a property will in fact materialize, here are three areas worth concentrating on when it comes to financing:\u00a0<\/p>\n
Create a financing road map\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong> The more proactive you are in planning the above with your mortgage broker, the more accurate you will be in assessing the cash flow and the more prepared you will be in terms of how to structure the deal to get the best financing possible.\u00a0\u00a0<\/p>\n Condition and location matter \u2013 a lot\u00a0 <\/strong> An example: Based on her finances, an investor qualifies with a certain group of lenders, but those lenders do not lend in certain locations. The property she has in mind looks amazing on paper in terms of cash flow, but because of her lenders\u2019 predispositions and duty to protect their capital, the terms they propose may transform the deal from \u201cno brainer\u201d to \u201cno thank you\u201d.\u00a0\u00a0<\/p>\n Some properties\u2019 cash flow numbers may look attractive because of their condition, primarily when the investor is purchasing below market value. Financing for such properties may be drastically different from the 20 percent\/30-year package discussed earlier. Institutional lenders may shy away from such a property altogether, reduce their risk by asking the investor to inject a higher down payment or charge higher rates and fees. (On properties that are run down and\/or in remote non-GTA locations, it is best to put in a financing condition and not go firm on the offer.)\u00a0<\/p>\n It is crucial that you validate any financing assumptions associated with a property. Consult your mortgage advisor before you place an offer.\u00a0\u00a0<\/p>\n Consider your investment strategy\u00a0 <\/strong> A property that needs renovations will require a different type of mortgage than a property that is turnkey. A property that is rented on a per room basis, like student rentals or a rooming house, will have to go to select lenders and will demand different terms compared to a property rented to a family. A rent-to-own deal will always be looked at differently by lenders compared to a regular turnkey rental.<\/p>\n As an investor, there are few things you should take for granted. Financing should not be one of them.\u00a0\u00a0<\/p>\n Dalia Barsoum<\/a>, MBA Finance, is the\u202fpresident and principal broker at Streetwise Mortgages #12900.\u202f\u00a0A\u202fmulti award-winning mortgage broker, real estate investor and finance advisor with over 20 years\u2019\u202fexperience in the banking sector,\u202fDalia is also\u202fregular speaker and contributor on the topics of investing and financing. She is also\u202fthe best-selling author of Canada\u2019s #1 financing book:\u202fCanadian Real Estate Investor Financing: 7 Secrets to\u202fGetting All the Money You Want.\u202fGet in touch with Dalia\u202ffor a complimentary portfolio consultation,\u202for to discuss how to use RRSPs to invest, at\u202finfo@streetwisemortgages.com<\/a>. More information is available at\u202fwww.streetwisemortgages.com<\/a>\u202f\u00a0<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" A client who was recently introduced to us holds several cash-flowing properties in the Windsor market. He confidently put a firm offer on another Windsor property, assuming that he would be able to get the same type of financing he received in the past from his bank \u2013 20 percent down, 30-year amortization at reasonably […]<\/p>\n","protected":false},"author":11,"featured_media":22670,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[9],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/posts\/8733"}],"collection":[{"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/comments?post=8733"}],"version-history":[{"count":2,"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/posts\/8733\/revisions"}],"predecessor-version":[{"id":22669,"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/posts\/8733\/revisions\/22669"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/media\/22670"}],"wp:attachment":[{"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/media?parent=8733"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/categories?post=8733"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.canadianrealestatemagazine.ca\/wp-json\/wp\/v2\/tags?post=8733"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nPlanning financing goes beyond just getting a mortgage pre-approval. It entails speaking with your investor-friendly mortgage broker about all aspects relating to your finances and future deals and ironing out the following:\u00a0\u00a0<\/p>\n\n
\nInvestors often underestimate the role a property plays in a mortgage\u2019s approval and the mortgage terms they receive.\u00a0\u00a0<\/p>\n
\nAs per the earlier example, it is important for investors to be upfront with their mortgage broker regarding their plans for the property.\u00a0<\/p>\n