How to buy that third, fourth or even fifth property?

[bedult1]

Hello Everyone,



My name is Mike and I took the rental property investment plunge at the end of last year. I bought a triplex with some great cash flow and recently purchased another huge duplex a couple months ago. I'm using the equity (HELOC) in my house to purchase these houses and putting 20% down. Then I renovate them and refinance to pull the sweat equity back out to pay off the HELOC on my principal residence, thus increasing the mortgages on the rental properties but getting as much of my money back as I can.



My question is, how can I move forward without hitting the debt ratio ceiling? Is putting these houses in a corporation the answer? I know I could probably get away with one more rental property but after that I will not have any more borrowing power. Any feedback would be great as its the only thing I haven't quite figured out.



Thank you very much,



Mike

 

[Sherilynn]

Incorporation is almost never the answer to any private real estate investment question. In fact, incorporation can make it more difficult to qualify as some banks won't work with RE corporations.



I have always thought that the 4th rental property was the most difficult to buy. After 4, the banks tend to look at your personal income and debt separately from your RE income and debt. They start considering the RE portfolio as a business that should be self-sufficient.



Unfortunately, in the meantime your personal income is seen as servicing your RE debt. This can make the 4th property very difficult to buy for many people.



You may want to consider a Joint Venture for the next two (or more) properties. With a solid JV partner qualifying with you on the mortgage and paying some or all of the down payment, you could potentially buy a lot more properties. And once you pass the portfolio threshold, you may find it easier to qualify on your own again.



Or you could have the JV partner on mortgage and title alone. Some investors have huge portfolios without ever qualifying for a mortgage.

 

[bedult1]

Thank you very much for the response Sherilynn. I have a few people in mind that would make good JV partners.



Thanks!!



Mike

 

[ekisielewski]

Hello Sherilynn: If only Jv partner is on title and on mortgage; do you then register an interest on the property so that in practical terms you own your share? is this clean-cut for tax purposes?

I am thinking about doing this in Edmonton. Any lawyer familiar with this you could recommend?

Thank You

Elisabet K.

 

[Sherilynn]

Yes, normally a caveat would be registered on title.



Your bookkeeper will write all income and expenses into the T776. The only difference for a JV is that the co-venturer's name is entered at the top of the form, along with each person's percentage share.



We have enjoyed working with both Ritchie Mill Law Office and Lovatt LLP. Both firms have down-to-earth staff who speak English rather than just legalese.

• Ritchie Mill is who I recommend for investors still learning the process because they have great systems in place and provide detailed information on progress and requirements.
  Lovatt is who I use mainly now because we have tighter time frames with many of our Rent-to-Own deals, and Lovatt is able to accommodate.

 

[Thomas Beyer]

[quote user=bedult1]how can I move forward without hitting the debt ratio ceiling?
Three options:

• You switch asset classes, i.e. commercial or apartment buildings.
• Or you increase rents and/or reduce debt to the point where the DCR (debt coverage ratio) is acceptable to the bank.
  You bring in JV partners for cash and/or mortgage qualifiers only.

 

[bedult1]

Hi Thomas,



I can understand the second and third point but can you explain how changing asset classes can help?



Do banks look at commercial/apartment building debt different?



Thanks,



Mike

 

[Thomas Beyer]

[quote user=bedult1]Do banks look at commercial/apartment building debt different?
Yes. The asset qualifies for the loan. Not the individual or individuals owning the corporation that owns the asset.



Banks looks at LTV and DCR, with DCR being the most important one, it being over 1.2, 1.25 or 1.5 depending on asset class and location. On top there may be a personal guarantee by owner(s), usually if over 50% of LTV.

 

[RedlineBrett]

[quote user=ThomasBeyer]Not the individual or individuals owning the corporation that owns the asset.


FWIW I had to provide a personal net worth statement on both of my most recent commercial purchases, and a personal guarantee is almost always required.

 

[Thomas Beyer]

[quote user=RedlineBrett]FWIW I had to provide a personal net worth statement on both of my most recent commercial purchases, and a personal guarantee is almost always required.
yes, because you are likely over 50% LTV.



If you buy a $10M shopping center, office block or apartment building with $5M cash that may is not the case.

 

[nubiwan]

Mike - I have been doing exactly what you describe for about 6-7 years now. Use my primary residence heloc to finance a new home. I pay cash, no mortgage. It is usually a beater but I have spent a little more at times. I fix them up, then get refinanced. The 80% ltv mortgage usually pays out my heloc. I go back to step one, do it all over. If I can keep my purchase price plus Reno costs low, my rents cash flowing, and the refinance paying the entire heloc, then the bank hasn't stepped in and said no. Not yet.

One thing I have learned that my banker never told me, nor have I read anywhere on these boards, and that is this. If you use any unsecured credit (visa cards, other bank LOCs), then I'd advise you to pay them down, or pay them off even with secured credit before your refinance. In my case, I would have borrowed hard cash to zero them out had I known.

My recent occasion saw me with $30k in a couple of credit line, and $14k on a visa. I thought nothing of it. My refinance took care of paying out my heloc and all these liabilities. I use these LOCs and visa (for air miles) to buy materials etc. At the same time, i still had about $45k sitting in my step equity products at the bank, that I should have used to zero out these unsecured debts. I did not, and, as a result, the Bank gave me a little grief on my refinance. They don't care I am an investor. Each time they see me refinance a house, they treat it like a debt consolidation. Unsecured debt counts against your debt service ratio different than if it is secured debt. Same debt amount, just securely parked. Daft, but my bank was asking concessions for this oversight on my part. It will not happen next time.

Pay down any unsecured debt...

 

[bedult1]

Thank you everyone for all the great information. I'll keep everything mentioned in mind when its time for the next property.



Mike