Looking for some advice

[tbarcier]

Hi, I`m a new investor. I just purchased a side by side duplex for 169,000 (listed at 185,000). I am currently living in one side. I have the opportunity to purchase a 3bdrm 2 story older home in a rapidly improving area for 130,000 (apprased at 149,000). I would like to move to the bigger home, the bank wants 20% down, and I already put 17,000 down on my duplex. I guess because my credit is new but good. So after that I will pretty much be out of cash. How can I purchase another duplex or triplex after that? I am really interested in 3 townhomes in a row to are listed at 124,000 and one at 139,900. These are renting for 1100 per mth and 1200 per mth plus utilites. What to do, what to do?

 

[RobMacdonald]

Hi,

You most likely need to speak with a mortgage broker that is well experienced in working with real estate investors. Your challenges are always one of 2 things. Either downpayment or debt servicing. Several lenders offer very attractive programs, including low money down products that can be very beneficial to a new investor. Financing will be a key component to your success.

 

[Nir]

I agree with everything Rob mentioned and just wanted to add I strongly recommend you do not put more than 10% down on your first purchases.

 

[tbarcier]

QUOTE (investmart @ Feb 15 2008, 07:22 PM) I agree with everything Rob mentioned and just wanted to add I strongly recommend you do not put more than 10% down on your first purchases.

I don`t want to either. I was hoping I could get a few properties with nothing down at all, I guess I do need to talk to a broker who understands the investing side. These properties have more than enough positive cash flow to carry themselves.

 

[PaulPoulsen]

Hopefully Rob will correct me if I`m way off base but I think it`s very important to have a long-term plan in mind when you`re looking for financing.

If you`re looking to buy one or two properties, the low down payment option may work very well for you. But, if in the back of your head you think you would like to own a larger portfolio, be aware of the possible implications of having a bunch of revenue property with high-ratio mortgages. Things like rental offsets start to come into play and that can have a huge effect on whether or not you`ll get financing for that next property.

 

[EdRenkema]

Hi Paul,

What do you mean by rental offsets? My personal strategy is to use 20% down to avoid CMHC ins fees and use conventional financing. Using a larger dn pmt will not necessarily make the property cashflow since I`m using a HELOC for the funds and that effectively increases the interest carrying costs. Using a smaller dn pmt also increases other costs. I`m allergic to negative cashflow so I don`t want to go there!

Ed R

 

[tbarcier]

Now correct me if I`m wrong. Rental offset is how much of the rental income the bank will use in determining you overall income. My bank for example will only use 50% of rent, others I am told will go as high as 80%. I don`t have enough money lying around to put 20% down on my purchases therefore I am very selective. For example one of these townhouses, asking price is 124,000 if I go 100% the premium is 3.1 I think. Brings it to 127,844 at 5.7% payment is $795.30 taxes are $121 per month and tenants pay the utilities. This unit rents for $1200 per month minus payment and taxes the positive cash flow is $283.70. Why would I want to use my own money to avoid fees in a situation like this. Where I get stuck is the bank will only consider $600 per month of income here.

 

[PaulPoulsen]

QUOTE (EdRenkema @ Feb 16 2008, 10:28 AM) Hi Paul,

What do you mean by rental offsets? My personal strategy is to use 20% down to avoid CMHC ins fees and use conventional financing. Using a larger dn pmt will not necessarily make the property cashflow since I`m using a HELOC for the funds and that effectively increases the interest carrying costs. Using a smaller dn pmt also increases other costs. I`m allergic to negative cashflow so I don`t want to go there!

Ed R

Hi Ed;

I`m in total agreement with you. As you do, we always put a minimum of 20% down to avoid CMHC fees and avoiding CMHC fees means we don`t have to deal with any rental offset - ie: every dollar we collect in rent counts towards our income.

 

[PaulPoulsen]

QUOTE (tbarcier @ Feb 16 2008, 12:44 PM) Now correct me if I`m wrong. Rental offset is how much of the rental income the bank will use in determining you overall income. My bank for example will only use 50% of rent, others I am told will go as high as 80%. I don`t have enough money lying around to put 20% down on my purchases therefore I am very selective. For example one of these townhouses, asking price is 124,000 if I go 100% the premium is 3.1 I think. Brings it to 127,844 at 5.7% payment is $795.30 taxes are $121 per month and tenants pay the utilities. This unit rents for $1200 per month minus payment and taxes the positive cash flow is $283.70. Why would I want to use my own money to avoid fees in a situation like this. Where I get stuck is the bank will only consider $600 per month of income here.

I`m not saying to use a 20% downpayment to avoid CMHC fees. I`m suggesting that, depending on your personal financial situation and long-term real estate goals, you may want to use a 20% downpayment to avoid rental offsets.

It looks like the above property is going to put a nice chunk of change into your pocket every month but, as you pointed out, the bank will only count $600 of that $1200 as income. That means when you go to apply for your next mortgage, the bank applies its rental offset of 50% and in their eyes, you`re roughly $300 in the toilet every month. This typically isn`t condusive to getting approved for multiple mortgages.

It`s not that I`m trying to talk you out of zero down or 5% down. I think these are great products and, depending on the investor`s long-term goals, they may be very appropriate.

My advice is simply to know how a high-ratio mortgage will impact future purchases.

 

[Thomas Beyer]

QUOTE (tbarcier @ Feb 15 2008, 08:09 AM) Hi, I`m a new investor. .. How can I purchase another duplex or triplex after that? ...


find a JV partner, or better: several !!

take 50% of 20 (or 100) properties than 100% of 2 or 3 !!

 

[PeterKinchMortgageTeam]

QUOTE (PaulPoulsen @ Feb 16 2008, 08:02 PM) I`m not saying to use a 20% downpayment to avoid CMHC fees. I`m suggesting that, depending on your personal financial situation and long-term real estate goals, you may want to use a 20% downpayment to avoid rental offsets.

It looks like the above property is going to put a nice chunk of change into your pocket every month but, as you pointed out, the bank will only count $600 of that $1200 as income. That means when you go to apply for your next mortgage, the bank applies its rental offset of 50% and in their eyes, you`re roughly $300 in the toilet every month. This typically isn`t condusive to getting approved for multiple mortgages.

It`s not that I`m trying to talk you out of zero down or 5% down. I think these are great products and, depending on the investor`s long-term goals, they may be very appropriate.

My advice is simply to know how a high-ratio mortgage will impact future purchases.

A rental offset is a way of using rental incomes to help applicants qualify for financing. CMHC now has one of the most generous rental offset policies out there now as they are using 80%. Conventionally, only one or two other lenders are better. In some cases, with some applicants, insuring a conventional deal opens up doors with new lenders.

Yes, you are paying a premium on the borrowed funds (though at 75% or 80%, its pretty miniumal), but you may be getting a fully discounted rate, in lieu of a loan from a B lender. Talk to your broker or banker about your options - if your plan is to build a large portfolio, or you already have a rental portfolio, insured conventional loans may very wall fit into that plan.

 

[tbarcier]

Wow you guys are great! I`m so glad I found you. In my situation, I would like to own multiple properties, however I only have about 50,000 in cash. I put 17,000 into the duplex I am currently living in so as far as 20% goes that doesn`t get me much. Now what if I have my duplex appraised when my 6mth term is up, and if there is enough equity should I get a HELOC and use that for down?