Residential financing refers to the purchase of regular
residential homes with no commercial component from a single family home, to
duplexes, triplexes and four plexes. In
some circumstances a five and six plex can be financed using residential
guidelines but there are only a few lenders that do that so we tend to place
them under commercial guidelines as detailed below. You might be purchasing these types of
properties with the following investment strategies in mind:
ü Buy, Rent
and Hold Single Family Properties up to a 4 to 6 Plex
ü Buy for
Rent to Own (short term hold)
ü Sandwich Lease Options with Investors
ü Buy,
Renovate, Refinance and Hold
ü Buy,
Renovate, Flip
ü Wholesale and/or Assign Deals
ü Joint Venture Partners
So almost all lenders, with the exception of
private, joint venture or hard money lenders, review two key areas in priority
order below:
Firstly, you the
borrower: Is there
sufficient income to pay your own existing financial obligations (mortgage,
credit card balances, car payments etc.), good credit, and income to
qualify. Is it a corporation or
personal? Do you have liquid assets and
a net worth?
Secondly, the
Rental Property: Does the property have a positive cash flow? (rental
income less mortgage, taxes and expenses result in excess cash) Is the property marketable? The lenders are always thinking about what
will happen when you default and they are left holding and/or selling the
property? Most lenders do NOT
want to own property… they are in the business of loaning money not property
acquisition or management.
Types of Lenders and Financing Options
Below is a breakdown, in order of preference, the financing
options available for Residential properties as outlined earlier.
Major Banks & Financial Institutions
These are of
course the major banks and financial institutions such as credit unions etc.,
which will provide you with the best rates and terms. They are focused on both you the borrower and the
property equally. You will be required
to have good credit, excellent provable income, debt service ratios well in
line, down payment from your own resources and purchase a property in a major
centre in good condition. Your down payment can come from borrowing
against a secured line of credit on an exception basis and if it means your
debt service ratios are still in line. Some
major banks and financial institutions will start to “cap” the amount of
properties in your portfolio that they are willing to finance to 4 or 5. Many
will also not allow the property to be in a corporate name unless it is a
commercial property.
Alternative Mortgage Lenders
These are
financial institutions such as smaller credit union, trust company and monoline
lenders that offer mortgages that will provide you with the best rates and
terms. However, they may add a default
insurance premium (CMHC, Genworth or Canada Guaranty) to the mortgage or
require a larger down payment. Just like
the major banks above, they are focused on both you the borrower and the
property equally. You will be required
to have good credit, excellent provable income, debt service ratios well in
line, down payment from your own resources and purchase a property in a major
centre in good condition. Your down payment can come from borrowing
against a secured line of credit on an exception basis and if it means your
debt service ratios are still in line. Some
of these lenders have no limits to the amount of properties you can purchase or
have in your portfolio. These lenders
are often very flexible with the property being in a corporate name.
Non-Traditional (Sub Prime/Equity) Lenders
These are alternative trust companies and
other approved lenders that offer mortgages that are much more flexible in
qualifying but in turn may have higher interest rates, lender fees and not as
many terms available. These lenders
have no problem with financing investors with large portfolios and are flexible
in overall qualifying. Such areas as
those with weaker credit ratings, self-employed borrowers with very low
“taxable or provable” income, corporate names, borrowed down payment, etc. In most cases they do require that the
property be located in a desirable area and major centre but there is some
flexibility although they may decrease the amount of funds they will offer you.
Private Lenders / Joint Venture Partners
These can
range from an individual that has funds to lend to large companies that have
billions in funds that they manage and wish to lend to real estate
investors. These could even be your
friends and family that you have asked if they want to be a “money” partner in
your real estate portfolio. Private
lenders and joint venture partners are usually extremely flexible and focused
on mostly the property and their fees &
interest rate return. The acquisition
strategy is going to be key along with how and when are they going to get their
money back: the exit strategy. These
types of lenders are extremely flexible on their terms and qualifying but in
return are taking a much higher risk, so demand a much higher return on their
money. For example, in a buy, rehab and
sell scenario, it might not be just about an interest rate return, but also a
percentage of the profit when the property is sold. Each deal is analysed on its own merits and
so the range of financing options, terms, rates, fees etc., can differ greatly
and negotiated. The private lenders
will be registering a lien and/or mortgage charge on the property to be used as
collateral. Joint venture partners may
or may not register a lien and/or mortgage charge on title, however they may
also require a General Securities Agreement to be signed by you personally. Often joint venture partners are used for
their capital injection into the property or your company.
Hard Money Lenders
There is
sometimes some overlap between joint venture partners and hard money lenders
because they can also range from an individual that has funds to lend to a
larger group that has millions in funds.
Again, these could even be your friends and family that you have asked
if they want to be a “money” partner in your real estate portfolio. Hard money lenders are the most flexible and are often used for
short term flips and may be financing not just the property acquisition but
also the rehab and renovations costs as well.
Their fees, interest rate return and portion of the profit will differ
with each deal but they will expect a much higher return on their money for the
higher risk. They are often financing
more than 100% of the current value of a property. They will expect to see a very clear plan on
how they are going to get their funds and profit back. Hard money lenders may or may not
register a lien and/or mortgage charge on title, however they will most likely require
a General Securities Agreement to be signed by you personally. They may also require shares in your
corporation.
