110% rule. What is included in total expenses?

[kmccormack]

I am a little confused with what are considered "expenses" on the 110% rule to show a property is cash flow positve? Is it:

Monthly rental income less mortgage principal + interest + property taxes only

or

Monthly rental income less all costs assosiated with the property i.e. the above plus insurance R & M, advertising, utilities etc.

Does each lender have their own rule?
Which lenders will recognise this rule?

If anyone could please clarify this I would appreciate it.
Thanks.

 

[RobMacdonald]

Every lender has their own rule. Firstline uses the 1.1 DCR program, which can work reall well for a self employed investor. The program has recently been tightened up with a net worth requirement and the subject property must have a 1.1 DCR based on a 25 year amortization.

The costs are different on strata versus non-strata, and just percentages are use for expenses, not actual costs.

The formula is: (Rent - expenses - taxes - 5% Vacancy)/ mortgage P+I (Note: Expenses are 5% each for Management, Maintenance and Insurance)

For a Condo, insert the strata payment in place of expenses in the formula.

I hope that helps.

 

[Thomas Beyer]

Rule of thumb: expenses = 50% of rent before mortgage payments !

Expenses include: taxes, condo fees, R&M, insurance, property management, possibly utilities, accounting

 

[GarthChapman]

QUOTE (thomasbeyer2000 @ Apr 8 2009, 10:06 PM) Rule of thumb: expenses = 50% of rent before mortgage payments !

Expenses include: taxes, condo fees, R&M, insurance, property management, possibly utilities, accounting

Thomas, do you include capital expenses as well, and for rent do you mean scheduled rents?

 

[kmccormack]

Thank you for your comments. I am preparing some numbers so I can bring to a mortgage broker next week. Does the bank want to see a minimum 110% or will they take into consideration a slightly lower per cent and work with that? or If one of the properties is lower but the average of all 3 is 110% would that be o.k.? I presume a good mortgage broker can help me present my portfolio in the right way? Thanks.

 

[GarthChapman]

More lenders use a rent offset calculation rather than the DCR calculation that you are referring to. TD and CIBC use the DCR and both now require 1.1 income to expenses ratios, although they calculate them differently. Some others use 50% of the rent and add back the mortgage payment to your income. The rules and ratios are changing very frequently these days as lenders are adjusting to changing economic conditions.

A mortgage broker experienced with rental properties will be able to help you make a good borrowing decision.

 

[Thomas Beyer]

QUOTE (GarthChapman @ Apr 9 2009, 10:45 AM) Thomas, do you include capital expenses as well, and for rent do you mean scheduled rents?
R&M includes minor repairs, such as carpets, paint, new door locks etc. ... but not new roof, new windows, .. but this is s.th. you WILL be paying for in time .. and as such expenses usually BY FAR EXCEED 50% on an older property that is being upgraded !

rent is rent, i.e. achievable rent if vacant.

 

[RobMacdonald]

Once you have 3 properties, Firstline applies the DCR rule. Under the current guidelines, all properties must meet the DCR 1.1 and the subject property must also be 1.1, using a 25 year amortization. It is a very tight program now.

If you have verifiable income, you will most likely not need the dcr rule, and can use the rental offset to cover the portfolio, and hopefully your verifiable income can service your existing monthly expenses.

If you work with a good broker, you do not need to underwrite your own application. Just find the right property, and let the broker do the rest of the work.

 

[GarthChapman]

QUOTE (thomasbeyer2000 @ Apr 10 2009, 04:31 PM) R&M includes minor repairs, such as carpets, paint, new door locks etc. ... but not new roof, new windows, .. but this is s.th. you WILL be paying for in time .. and as such expenses usually BY FAR EXCEED 50% on an older property that is being upgraded !

Agreed. We count all capital expenses made after all the deferred maintenance items as at time of purchase have been looked after, as we consider them part of the true cost of acquisition.

So in reporting our expenses as 42% of scheduled rents we are calculating as described above.

 

[EdLam]

QUOTE (GarthChapman @ Apr 10 2009, 10:31 AM) More lenders use a rent offset calculation rather than the DCR calculation that you are referring to. TD and CIBC use the DCR and both now require 1.1 income to expenses ratios, although they calculate them differently. Some others use 50% of the rent and add back the mortgage payment to your income. The rules and ratios are changing very frequently these days as lenders are adjusting to changing economic conditions.

A mortgage broker experienced with rental properties will be able to help you make a good borrowing decision.


Do the lenders typically calculate 1.1 on a portfolio of 3 properties or more or do they do it on each property? Is this something the mortgage applicant needs to bring to attention of the lender? I am closing my 3rd property next month but I would like to know what to expect when I apply for my 4th mortgage.

Currently all 3 of my mortgages are from the same lender and they use 70% of rent in their calculations.


Thanks,

Eddy

 

[Nir]

QUOTE (RobMacdonaldCMT @ Apr 8 2009, 12:48 AM) Every lender has their own rule. Firstline uses the 1.1 DCR program, which can work reall well for a self employed investor. The program has recently been tightened up with a net worth requirement and the subject property must have a 1.1 DCR based on a 25 year amortization.

The costs are different on strata versus non-strata, and just percentages are use for expenses, not actual costs.

The formula is: (Rent - expenses - taxes - 5% Vacancy)/ mortgage P+I (Note: Expenses are 5% each for Management, Maintenance and Insurance)

For a Condo, insert the strata payment in place of expenses in the formula.

I hope that helps.

Hi Rob et al,

I think there is some basic confusion regarding the 1.1 DCR rule:

Does meeting the 1.1 ratio allow you to qualify for a mortgage ,period. meaning yes, you qualify but you may still have to put 35% down if you are self employed!

OR

does meeting the 1.1 ratio allow you to put MUCH less down, like 10% or 15% instead of 35% even as self employed?

BIG DIFFERENE.

I think almost any bank will approve a mortgage as long as you put 35% so if this is case what`s the big deal!? However if with certain banks by using the rule you can put much less while being self employed then yes that`s pretty amazing!

Also, can you be a little more specific regarding Firstline`s net worth requirement. what is the net worth required?

Thanks,
Neil

 

[RobMacdonald]

Hi Neil,

If your property and your portfolio meet the 1.1 rule with Firstline, then they will allow you to `state` your peronsal income. Therefore, for the self employed real estate investor, it can allow you to essentially qualify for another mortgage on the merits of your portfolio, rather than personal debt service ratio.

If your subject property can meet the 1.1 requirement at 25 year amortization, you can borrow up to 80%. If it doesn`t, then you may have to reduce the amount of the mortgage ot 75%, 65% etc.

And even with Firstline, just putting down 35% doesn`t get you a mortgage these days. Regardless if you put 35% down or 50%, every lender will scrutinize your application on every condition. There is no such thing as equity lending in this marketplace today.

 

[RobMacdonald]

QUOTE (Eddy8899 @ Apr 15 2009, 06:06 PM) Do the lenders typically calculate 1.1 on a portfolio of 3 properties or more or do they do it on each property? Is this something the mortgage applicant needs to bring to attention of the lender? I am closing my 3rd property next month but I would like to know what to expect when I apply for my 4th mortgage.

Currently all 3 of my mortgages are from the same lender and they use 70% of rent in their calculations.


Thanks,

Eddy

Hi Eddy,

When you apply for your fourth mortgage, your application will depend on the lender you use. If your personal income covers your personal expenses at a 40% tds, and if your property is positive cashflow, then you will have some options. What you need to consider is not `wearing out your welcome` with one lender. If your application fits, it would be worthwhile to consider a Merix or First National. They have a tighter rental policy, but this will allow you to save the better portfolio lenders for the 7th, 8th and 9th........

Cheers!

 

[Nir]

QUOTE (RobMacdonaldCMT @ Apr 15 2009, 08:33 PM) Hi Neil,

If your property and your portfolio meet the 1.1 rule with Firstline, then they will allow you to `state` your peronsal income. Therefore, for the self employed real estate investor, it can allow you to essentially qualify for another mortgage on the merits of your portfolio, rather than personal debt service ratio.

If your subject property can meet the 1.1 requirement at 25 year amortization, you can borrow up to 80%. If it doesn`t, then you may have to reduce the amount of the mortgage ot 75%, 65% etc.

And even with Firstline, just putting down 35% doesn`t get you a mortgage these days. Regardless if you put 35% down or 50%, every lender will scrutinize your application on every condition. There is no such thing as equity lending in this marketplace today.

Thank You Rob for the quick response providing valuable information. can it get better than 80% if a self employed applicant has a superb DCR ratio of 3.0 for example or is 20% down payment the best you can get as self employed, stated income with 3 properties?
you mentioned a net worth requirement. is 100K net worth sufficient or is it more like 250K that they want to see for that purpose..approximately?

 

[RobMacdonald]

QUOTE (investmart @ Apr 15 2009, 08:46 PM) Thank You Rob for the quick response providing valuable information. can it get better than 80% if a self employed applicant has a superb DCR ratio of 3.0 for example or is 20% down payment the best you can get as self employed, stated income with 3 properties?
you mentioned a net worth requirement. is 100K net worth sufficient or is it more like 250K that they want to see for that purpose..approximately?

You can`t get any better then 80% because you will need CMHC insurance. CMHC applicants must be qualified with verifiable income.

Regarding the net worth, here is the information from Firstline.

For 3 or more rentals:

[list type=decimal][list type=decimal][*]Minimum $100,000 verified tangible net worth, excluding required down payment and excluding real estate (stated in application)

For more than 5 rentals: [*]For every property over 5 rentals, an additional $10k is required; verified tangible assets only[/list type=decimal][/list type=decimal]

 

[Nir]

"excluding real estate" - so if one has 200K equity in real estate (i.e. 400K appraised property value with only 200K mortgage) it DOES NOT count? weird. thanks

 

[GarthChapman]

QUOTE (Eddy8899 @ Apr 15 2009, 06:06 PM) Do the lenders typically calculate 1.1 on a portfolio of 3 properties or more or do they do it on each property? Is this something the mortgage applicant needs to bring to attention of the lender? I am closing my 3rd property next month but I would like to know what to expect when I apply for my 4th mortgage.

Currently all 3 of my mortgages are from the same lender and they use 70% of rent in their calculations.


Thanks,

Eddy

The 3 properties rule is a Firstline rule only. An experienced mortgage broker will know what the options are for each lender.