• I recently attended a real estate investment meeting and was contacted afterwards by somebody who is interested in investing in his first investment property. Being a mortgage agent and a real estate investor, I was happy to advise him.


    We started talking about what he was looking for, what his goals were and what type of property he was seeking.

    We spoke at length about how to analyze a property; we also spoke about which investments work best for cash flow, whether it be buy and hold, rent-to-own or multi-unit properties – it all comes down to what you as the investor wants out of the investment, what you are able to handle in terms of management and what your exit strategy is.

    Unfortunately he did not understand the basics of analysis and which cities make for good investing over others. He was just interested in spending his hard earned money on the first property he found on MLS.

    My advice to him was to slow down, meet with me so that I could run his numbers to see what he could afford and once we figure out what he could afford and what would cash flow – the analysis, he could then progress to shopping for that property. I also suggested he use a realtor, who is also an investor as they would guide his purchase with the parameters above in mind.

    What is important to understand is that when you apply for a mortgage for an owner-occupied residential property it is not the same as the requirements for a rental property. You might think you qualify because you have lots of money to spend but there are other factors to take into account – especially since the credit crisis of 2008-2009. Many people fail to understand that when they are getting into real estate investing, they pose a higher risk to the lender and thus they need to get it right the first time – to ensure that they can qualify for subsequent properties.

    So here are some other things you need to know:

    Down Payment: Gone are the days when you could qualify for less than 20% – now if you have a rental property, you need to have minimum 20% down and in some cities that are higher risk, such as Vancouver, you might need to put down another 5-10%. If you add condo’s into the mix, you might also incur an extra 5% – as condo’s are a risky investment for most lenders.

    Lenders: Not all lenders in the marketplace offer financing for rental properties – in fact, some outright don’t allow it – due to the risk factor. You need to make sure your mortgage professional knows which lender to approach over others. Most if not all, look at your debt servicing ratios (I wrote about this in depth in a previous blog article and you can find it here: http://renthouse2own.ca/blog/index.php/2013/06/20/do-you-know-your-gds-and-tds/).

    Your “total debt ratio” is generally your total monthly expenses divided by total monthly income from all sources, including rentals. Your rental income is capped at 50% allowable – so for example, if you get $1000/month in rental income – you are only allowed to add $500 as income. This cap can make it very difficult to qualify – as some lenders will allow only 40% and some up to 42% – that extra 2% can make the difference between qualifying for a mortgage and getting declined.

    Mortgage Professionals: As a real estate investor, you want to surround yourself with a mortgage/realtor team that work with other investors or are investors themselves as they know that when building your investment portfolio, you want to expend your resources with the tighter limits first and then go to the alternative lenders once that resource is tapped out so to speak. In other words, lenders with the best rates often have the tightest rules. If you want the best terms, you’ll want to use the more restrictive lenders early in your investment-building career and save the flexible ones for last. That ensures you don’t run out of competitive lenders when your portfolio gets bigger. This usually happens after an investor has four properties. A competent mortgage professional will be able to direct you in the correct way at the beginning and not the end when it sometimes too late or too difficult to get financing. Going with private lending is always an option as long as you can service the debt but the high interest rates can downright kill your cash-flow, so in the end can be moot point.

    The moral of this article is to get the right advice, do your proper analysis and homework and most importantly, don’t put the cart before the horse as it could be a very bumpy ride!

    To Your Wealth!

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