Monday, October 9, 2017

How I financed the first few deals

I recently attended a MeetUp with a very helpful presentation on financing. I learned that it is crucial to have a solid plan on how to finance deals without hitting a 'financing wall' before I reach my 50-doors goal. It is also cost effective and bullet proof to work with a good knowledgeable mortgage broker.

My approach so far was to apply for one mortgage at a time directly with lenders. Now I know this wasn't the smartest way, but hey, it got me through the first few deals and I hope I haven't messed up my financing profile too badly so far. I am starting to work with an amazing broker and will post notes on this process soon.

Below are my notes on how I qualified in the past, directly with A and B lenders.

  • Down payment - You have to show where the down payment will be coming from. For example, I show a TFSA statement as a proof of down payment. Gift letter can work as well in some cases.
  • Down Payment Available Over 3 Months - Lender will likely ask you for 3 months of bank statements and will want to see that the down payment has been sitting on your account over this time. Depending on your debt to equity ratio, you might have to provide up to 30% down.
  • Proof of Income - You'll be asked for a proof of income for the last two years (ex., T1, notice of assessment, pay stubs or all of the above). 
  • Proof of Rental Income - You'll have to show current lease agreements with each of your tenants and/or tenant acknowledgement letters. If you are buying an owner occupied property and don't have a lease yet, you will not qualify with some lenders. 
  • Latest Tax Bills - You'll have to provide latest tax bill for each of the properties you own and purchasing.
  • MPAC - Some lenders ask for an MPAC statement for each of your properties. In this case, they use MPAC assessment as the market value of your rentals. 
  • Market Value - Some lenders ask you to provide an estimate of the current market value of your rental properties and use your numbers instead of MPAC.
  • MLS listing - You'll have to provide the MLS listing for the new property you are purchasing.
  • Signed Purchase and Sale Agreement - You'll have to provide the signed and accepted offer letter (aka Purchase and Sale Agreement).
  • Liquid Assets - Some banks might ask you to provide a proof of liquid assets (i.e. TFSA or cash on a bank account in your name). The amount of liquidity you need will depend on your financial ratios. For example, CIBC requires 100K plus 10K for every rental property you own.
  • No Outstanding Tax Balance - You might have to provide a proof of payment of your personal taxes and/or tax balances for your properties.
  • Lender Application Form - You'll have to fill out lender application form and provide a summary of your existing assets / liabilities. In addition, you'll have to sign permission for a credit check. 
  • Assessment - Lender will require an appraiser to assess the property you are buying at your own expense. The selected appraiser must be on the lender's approved appraisers list. The lower of the appraised value and purchase price will be used to calculate the value of the mortgage you qualify for.
  • Corporate Documents - If you are buying a property in corporate name, you will have to provide 
    • Articles of Incorporation, 
    • two years of financial statements, 
    • two latest tax returns,
    • shareholder structure, 
    • list of directors, 
    • Bi-Laws 1 and 2 (i.e. borrowing bi-laws). 
    • In addition, all shareholders may be asked to be guarantors, in which case they will have to provide all of the supporting documentation listed above for themselves and their properties. 
    • In some cases, each shareholder is also required to get Independent Legal Advice (ILA) from a lawyer, who doesn't work with any other shareholder of the corporation. 
  • Insurance - You have to provide insurance binder for the new property before closing, with the lender being listed on it as the first beneficiary. Fire insurance is a must.
  • Checking Account - The lender might ask you to open a checking account at one of their branches before closing.
  • 6-plex and more - Multi-unit rental income property with more than 5 units (i.e. 6-plex and more) is considered a commercial property. Commercial mortgages have different approval process and higher interest rates.
  • Verbal approval - Doesn't mean anything. Have a plan B always for every deal and make sure your numbers work even if you have to go for a private financing at a high interest rate.
  • Additional approvals - Once you get approval with an A lender, the same lender can potentially finance up to 5 rental income properties for you, assuming you still qualify based on your personal financial situation and performance of your existing properties and the ones you are purchasing. If you purchase properties one after the other, some lenders will use previously provided documentation and some will ask you to re-submit all of the above over again.
  • Timing - Most lenders require minimum 45 days between initial contact and closing to process your application.
  • Avoid Credit Checks - Since credit checks reflect poorly on your credit rating, it's important to work with the lender to pre-qualify before they go ahead and run your actual check. Some lenders will tell you right away that you don't qualify based on their criteria.