CMHC and Bank possibly willing to over-mortgage MF property ... what to do?

[TangoWhiskey]

Hi, we own an 18 unit, tried to sell property last year, highest offer was 2.5 mill. Current total debt is 2.1 million. Rent roll is about 20500, almost always full, very lean operating costs for utilities on paper but high maintenance and insurance costs due to the fact it is 5 structures housing the 18 units and has exposure to strong winds. At least 50K of capital expenditures expected in next few years. At least, could be 100K.

Since then partner has been bought out and plan is to put 5 yr CMHC mortgage on it, hopefully pull out a little equity, and hold til the mortgage paydown has happened.

Just found out from broker his underwriting to CMHC is at 3.2 mill with possible mortgage as high as 2.6 mill. Pointed out to him we couldn't sell anywhere near 3 mill but the big numbers work for DCR and cashflow according to CMHC criteria and todays low cap rates.

So for you experienced folks out there - what is your opinion on overleveraging a property and holding a big cash reserve vs not taking all the cash available and holding a smaller reserve? From cashflow perspective the CMHC refinance lowers monthly mortgage cost from 14K to sub 11K even at high debt level. From cash in hand perspective, could net as much as 4-500K in hand from the refi, assuming CMHC approves a somewhat lower request than 2.6 mill mtg.

Tempted to take the money if it appears but nervous at the thought of a sale in 5 years where we might possibly have to write a cheque to exit the deal.

cheers

 

[Martin1968]

Hi, we own an 18 unit, tried to sell property last year, highest offer was 2.5 mill. Current total debt is 2.1 million. Rent roll is about 20500, almost always full, very lean operating costs for utilities on paper but high maintenance and insurance costs due to the fact it is 5 structures housing the 18 units and has exposure to strong winds. At least 50K of capital expenditures expected in next few years. At least, could be 100K.

Since then partner has been bought out and plan is to put 5 yr CMHC mortgage on it, hopefully pull out a little equity, and hold til the mortgage paydown has happened.

Just found out from broker his underwriting to CMHC is at 3.2 mill with possible mortgage as high as 2.6 mill. Pointed out to him we couldn't sell anywhere near 3 mill but the big numbers work for DCR and cashflow according to CMHC criteria and todays low cap rates.

So for you experienced folks out there - what is your opinion on overleveraging a property and holding a big cash reserve vs not taking all the cash available and holding a smaller reserve? From cashflow perspective the CMHC refinance lowers monthly mortgage cost from 14K to sub 11K even at high debt level. From cash in hand perspective, could net as much as 4-500K in hand from the refi, assuming CMHC approves a somewhat lower request than 2.6 mill mtg.

Tempted to take the money if it appears but nervous at the thought of a sale in 5 years where we might possibly have to write a cheque to exit the deal.

cheers

Always tough to comment on things without knowing all the details and numbers.
But why didn’t you take the 2.5 mill offer?
Frankly, trying to piece the numbers together, $20500 monthly revenue and 14K monthly mtg cost, and on top of that prop tax, high insurance (as you say) utilities, vacancy, and maintenance cost makes me highly doubtful
there is any cashflow at all. Even at refi?

Imo over leveraging is never a good thing, but I realize it’s a strategy that some real estate investors have. Suck out all the cash, go on to the next venture, live happily ever after (or so they think) and worry about the outcome later.

You seem to be very fond of the high LTV, CHMC deals, so refi at 2.2 mill at under 2% over 40 years if that’s available. The 100K pull out goes towards the needed capital expenditures as you mentioned, manage the heck out of the prop, try to improve your bottom line for better cashflow And sit on it for a minimum 10 Years. Then sell it. Seems like a decent exit strategy.

I wouldn’t have thought that anything would get you nervous tho.

 

[Thomas Beyer]

Take the cash AND as high a CMHC mortgage as you can assuming

A) rent is stable
B) asset carries debt by a decent margin
C) cash is invested conservatively ie not at risk as you may need it
D) you plan to hold at least ten years
E) you buy me dinner somewhere nice (SW France ok)

Enjoy !!

Btw: cash is king. Cash flow is (only) queen !!


Sent from my iPhone using myREINspace

 

[ChrisDavies]

If you're really concerned, take the cash, stick it somewhere with some yield as a hedge, but keep it available incase your loan gets clawed back or you have to sell and pay it down some. A big wad of cash somwhere sure makes the balance sheet look good.

 

[TangoWhiskey]

Always tough to comment on things without knowing all the details and numbers.
But why didn’t you take the 2.5 mill offer?
Frankly, trying to piece the numbers together, $20500 monthly revenue and 14K monthly mtg cost, and on top of that prop tax, high insurance (as you say) utilities, vacancy, and maintenance cost makes me highly doubtful
there is any cashflow at all. Even at refi?

Imo over leveraging is never a good thing, but I realize it’s a strategy that some real estate investors have. Suck out all the cash, go on to the next venture, live happily ever after (or so they think) and worry about the outcome later.

You seem to be very fond of the high LTV, CHMC deals, so refi at 2.2 mill at under 2% over 40 years if that’s available. The 100K pull out goes towards the needed capital expenditures as you mentioned, manage the heck out of the prop, try to improve your bottom line for better cashflow And sit on it for a minimum 10 Years. Then sell it. Seems like a decent exit strategy.

I wouldn’t have thought that anything would get you nervous tho.

thanks for the reply. It doesn't have cashflow and in fact we bought out our partner partly because we are experimenting with what appears to be the rest of Canada's experience in MF and RE generally that cashflow is not there at todays valuations. The other reason we bought him out was he was very liquid at a time we were not and he essentially forced us to. Liquidity liquidity. The problem is its a beautiful asset, feels like owning a boat - something you pour money into for personal reasons rather than practical.

 

[TangoWhiskey]

Take the cash AND as high a CMHC mortgage as you can assuming

A) rent is stable
B) asset carries debt by a decent margin
C) cash is invested conservatively ie not at risk as you may need it
D) you plan to hold at least ten years
E) you buy me dinner somewhere nice (SW France ok)

Enjoy !!

Btw: cash is king. Cash flow is (only) queen !!


Sent from my iPhone using myREINspace

That's a deal on dinner ... And as you know SW France and Costa Brava are awesome. Come hiking in the Pyrenees followed by beaches on the Med. God's country.

 

[Thomas Beyer]

That's a deal on dinner ... And as you know SW France and Costa Brava are awesome. Come hiking in the Pyrenees followed by beaches on the Med. God's country.

Why not. When allowed again by the current communist style governments. Maybe I get an orange pass which allows foreign three day visits as opposed to red one which doesn’t.

We shall see. Europe trip was planned for May. Maybe fall now .. or 2021 ., or never as burning fossil fuels on planes extra evil soon.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com

 

[Martin1968]

thanks for the reply. It doesn't have cashflow and in fact we bought out our partner partly because we are experimenting with what appears to be the rest of Canada's experience in MF and RE generally that cashflow is not there at todays valuations. The other reason we bought him out was he was very liquid at a time we were not and he essentially forced us to. Liquidity liquidity. The problem is its a beautiful asset, feels like owning a boat - something you pour money into for personal reasons rather than practical.

I appreciate your honesty. What to do......what to do!
Since you were asking for advice tho, and gotten some different opinions, please remember that cash take out is financed cash, in other words you are going to pay back your cash over an extended period of time.
Does that cash make the books look good? It wouldn’t be to bad if you roll that cash into a money producing asset, or into capital expenses to improve and enhance the prop in order to boost appreciation and revenue, however if the cash is used to fund a current lifestyle I’m not so sure it looks good in the books.

And besides, given the current situation, read Thomas‘ point nr 2. The answer to that is that it doesn’t. (Debt V decent margin) It’s possibly already costing money out of pocket to balance

From a personal perspective, I can’t stretch enough the importance of good to great cash flow. In my real estate investing I’m trying to apply the same principles as I did in operating the several businesses I started.
Money invested needs to produce a return. Good to great cash flow will determine the quality of the product(s) you offer, the people you can hire, giving back to the community the way you like too, rewarding yourself, and so on.....
When operating a business that doesn’t create cash flow or a minimal one, you will get frustrated with that pretty darn quick. And I talk from experience, been on both sides of the coin.

To me it’s the same in real estate, renting out a single family home with a monthly cashflow of $150 or a 24 unit apartment building with $100 cash flow per apartment is downright scary in the down times we are in at the moment. Hope your furnace doesn’t break down........

So, without picking apart the numbers, what I would do in your case is the following:
If indeed you can remortgage (not more then needed-don’t over-leverage) and bring your monthly down to $11K (despite a higher mtg amount) it would be a no brainer to me. Secondly, seeing you are not hands on and must pay a property manager (10% At $2150? ) and likely pay $500 or more per month for lawn maintenance and snow shovelling, I would fire the prop manager as soon as you can, hire and train a live in caretaker for showings, leases and the several maintenance jobs around the prop. You would pay this person the equivalent of one months rent (basically living for free) Simple calculations will give you a $3000 difference on the mortgage payment and a minimum $1500 savings on prop management and maintenance. (This could easily amount to an appr $2000 savings or more if it’s a true handyman and can do other small repairs as well. You now improved your bottom line by $4500 to $5000K
I think we all agree that holding the prop for as long as possible Is the right strategy

Simplistic solution maybe........but if you don’t, It’s Thomas that will have to buy you dinner instead......

 

[TangoWhiskey]

thks for thereply and time in - you're correct in your solution of letting PM go and finding and training live-in manager - but we tried repeatedly to do this and so far each late middle aged early retired guy we've tried has been a total failure (all of them ex govt employees on early pensions!).

We have had phenomenal success in another community with a lady in her 60's who now runs 70+ units for us there in 4 bldgs and financially she also does better than she ever has in her life, a real win win, she's gotten up to 5K bonuses for hitting rental targets for refis etc on top of her 4k per month base, 1 k per bldg. But we just have not yet so far been able to find that live-in super and manager and tried 3-4 times with different guys ... this 5th property is too far for her to be willing to manage it as well. She tried for a while and stopped.

So we have found a little prop mgmt company with 2 women who we pay the amazingly low rate of 800 $ per month incl tax plus leasing bonuses ... but for such little compensation they effectively text me when something goes wrong and I need to find the guy to fix it.... but they keep it full, collect all rents and I don't hear about things other than if a sump pump breaks etc, plus they manage our personal residence if we go overseas for a year and they rent that out for us at more normal pm charges of 7 % or 150 per month... so its fair and not too expensive.

I think we're just going to take the max cash, maybe put on a 10 yr term mortgage and hopefully plan to sell in 5 yrs if interest rates have started to rise and then a super low rate mortgage becomes an asset in its own rite. I don't think rents or values will drop as rates rise, rising rates will mean inflation and higher salaries and higher rents.

 

[Developer]

Curious where is this property?

 

[Rickson9]

thanks for the reply. It doesn't have cashflow and in fact we bought out our partner partly because we are experimenting with what appears to be the rest of Canada's experience in MF and RE generally that cashflow is not there at todays valuations. The other reason we bought him out was he was very liquid at a time we were not and he essentially forced us to. Liquidity liquidity. The problem is its a beautiful asset, feels like owning a boat - something you pour money into for personal reasons rather than practical.

Sorry to hear this. Sounds like a terrible investing philosophy
Enjoy the anchor... er I mean boat
Interest rates aren’t going anywhere in 5 years imo