When You Thought You Could Fly and Then... Got Stuck

When you thought you could fly
but then got stuck
and are really afraid!

Sometimes, the moment you think that you've figured out how to become financially free, the situation changes and you have to adjust your plan.

Approaching the Financing Wall

In the past five years, my strategy was to get a new property using expensive private money, renovate it, get a great tenant, then re-finance with more affordable money.

The refinance step is critical. It improves my cash flow. In addition, after the refinance, equity starts to build up within the asset because my mortgage is interest-plus-principal-paydown, rather than interest-only.

Without refinancing, holding on to the property is pointless. The property doesn't bring much positive cash flow. It doesn't accumulate equity over time either. The downpayment money is getting lazy. It's stuck inside of the property, not doing much.

This strategy worked for me five times.

With five different properties, I got a private interest-only loan to acquire a vacant asset. Renovated. Advertised. Got a great tenant. Enjoyed my skinny cash flow for a few months. Then, qualified for a traditional mortgage at a better rate. Refinanced.

Voila! Much better cash flow and principal paid down by my tenants. How nice!

The process worked like a clock. Over and over again. Until it failed.

Slammed Against The Financing Wall

At the end of 2017, I acquired three properties with private money. My plan was to replace the expensive interest-only loan with a more affordable conventional loan in a few months. Like previously, this would lead to improved cash flow and principal paid down by tenants.

Except, this time I couldn't qualify for a conventional mortgage!

The problem was that I no longer met the bank's underwriting criteria. In simple language, the lenders concluded that it was too much risk to give me another mortgage.

In the past, I had a job. My salary looked great from a lender standpoint.

Today, I am self-employed. My rental income is considered risky. Even though it is supported by 17 families working at 17 different jobs, lenders believe it's riskier than relying on my old one-woman paycheque.

In the past, I had one property. It looked great from a lender standpoint, as having a mortgage was so typical.

Today, I have a bunch of assets. Yet, most lenders don't approve more than five mortgages. They consider it risky because a borrower with more than five assets doesn't match their typical good borrower profile. Having more than five mortgages is not typical.

Investors call it the Financing Wall.

When you just gained the momentum, then slam - no more money for you!

Through and Beyond The Financing Wall

Long story short, let me jump to the conclusion of the story:

Don't give up when you don't qualify for a mortgage four times in a row. 

Don't give up when your credit score went from Excellent to Good to Fair. 

Don't give up when your situation doesn't fit a conventional good borrower profile.

Don't give up when your credit card payments give you creeps.

Instead:

• Make sure your mortgage broker is as awesome as mine! See their contact info below
• Eliminate liabilities! read through my prior blog post on how eliminating liabilities can decrease the burden of expenses and expedite your financial freedom
• Make sure you have Plan A, Plan B, and Plan C and you do just fine with or without better financing
• If your profile doesn't match the characteristics of a good borrower, learn what those characteristics look like and tweak your profile to change your financial future, so you can qualify down the road. Here is a link to an Excel template that I use to help me stay as organized as possible and make a very good impression on potential lenders
• Keep learning, so you can adjust your strategy or start using new strategies! There are infinite number of different ways to accomplish a goal.
• Ask! What I didn't realize far too long is that no matter what your situation is, chances are someone has been there and will gladly help you find a way out. Email me at ask@50doors.com

Here's the info for my broker, who has helped me with financing many-many times when I doubted there was a path forward. In fact, he shared this quotes with me when we broke through the Financial Wall after a few unsuccessful attempts:

"Never give in. Never, never, never, never--in nothing, great or small, large or petty--never give in, except to convictions of honour and good sense." 

-- Winston Churchill

If you need a mortgage in GTA, check out these guys

PS Did you know that a $300,000 mortgage with 3% rate will cost upwards of $575,000.00 and you could save 10 years and $90,000 of interest if you were to pay just $200 more per month? Here's an Excel tool that I use to do all my numbers when it comes to planning accelerated mortgage pay down and tracking my results

Can't Afford Financial Freedom? Start with these THREE Steps

Overcoming the No Money Hurdle.
This is how I feel when I need to finance a new deal.

I recently sent out a 2-minute survey about financial freedom. If you haven't responded, feel free to  fill it out HERE -  it's fun, super-quick, and your response will help me understand what's important to you.

It'll also give you a moment to think about your personal financial goals.

One of the survey questions was:

"What's holding you back from reaching financial freedom?"

So far, the top-most response with 58% vote is:

"I can't afford it. Not enough money" 

I thought it would be helpful if I gave you the exact steps I followed to finance my real estate assets. This approach worked for me over a dozen times.

Step 1: Acquire an Asset not a Liability 

An asset puts money in your pocket. A liability takes money away from you. 

Assets are easier to finance than liabilities. 

By definition, assets make money and, hence, provide a less risky security for a prospective lender.

A typical A or B lender always makes money, no matter if you pay your mortgage or not:

• If you pay mortgage, they make a LOT of money (see my previous blog post - Mortgage Free by 2023).

• If you stop paying your mortgage, the lender can collect the rent instead of you. This is why many lenders require a current lease agreement, so that they have a way to verify how much income you collect from the asset. This gives them a method to make money, even in the worst case.

• In case of default, the lender can choose to sell your property. If your property makes money and is priced under market, there will be lots of buyers - the sale will be quick and easy. This is why most lenders will also require that an appraiser they approve off, provides a current market assessment and confirms the market value of the property. The bank will only finance up to 65-80% of the value. 

On the flip side, all your liabilities add up and play against you. You may be able to get financing for the first few real estate properties, which are not cash positive, if your personal income can support paying for them. However,

• Most traditional lenders will turn you down, if your debt service ratio is worse than 44%. This means that at the most, 44% of your income has to be enough to cover all your interest, tax, and heating payments. 

• When you go after liabilities, you reach this 44% ratio very fast. As soon as that happens, most traditional lenders stop giving you money. Your strategy becomes too risky for them.

Keep in mind that you can usually find more creative ways to finance the deal. However, in my experience, creativity usually is expensive. You have to get more expensive money from lenders who don't mind extra risk or trade equity for money. Either way, mathematically there is a point at which financing cost turns your property from an asset into a liability - you start losing money.

Long story short - getting financing for assets is a LOT easier and more affordable than getting financing for liabilities. 

My recommendation is to focus only on assets and stay away from liabilities. 

Step 2: Play by Lenders' Rules 

There are numerous lenders out there. Each lender has their unique underwriting rules and procedures. These are similar on a high level, yet minor nuances sometimes make a big difference. You might not qualify with some of the lenders, but be a perfect candidate with others.

Underwriting is the process by which a lender determines whether you qualify for a mortgage or a loan with them. Knowing how the underwriting process works is half the battle.

Hence, it's beneficial to work with an expert who knows this process inside out and can help you navigate through the mortgage application, and position you properly with the lenders, where you have the most chance. It's similar to resume writing and interview process - a good mortgage broker can help you with your money resume and your money application.

If you don't qualify at the moment, an expert mortgage broker can explain to you what may be missing. This way, you can plan your next step and work your way to your next deal. Alternatively, knowing what is missing, you can find ways to partner with friends, family, or third parties to fill in the blanks and make the deal work. Understanding lenders' rules gives you a chance to structure your deal correctly and make things work.

Financing is a repetitive task. At the minimum, you have to review financing for each asset every 5 years. When you build your portfolio aggressively, financing becomes a never-ending ongoing task.

You are always looking for money. You are always looking for ways to replace expensive money with more affordable money. Every time you find cheaper money, your cash flow goes up. 

Financing mistakes are costly. In my experience, each finance/re-finance transaction ends up costing at least $7,000 on a small residential deal. On an ongoing basis, my regular mortgage payment is often just under 50% of gross rent.

It makes sense to have a good partner on financing side of things. The last three transactions that I completed were possible thanks to the help I got from the Loan Central team. 

If you are in GTA and access to money is your biggest hurdle, give Loan Central a call! It doesn't cost you anything to ask the question. You could also drop in and attend one of their weekly meet ups. I've attended several and found lots of great FREE information and connected with a few like-minded people.

Here's Loan Central's contact info. They helped me multiple times.
If you have financing related questions, ask them!

Step 3: Be Extremely Organized 

No matter how many assets you plan to acquire - one, two, ten, 50, or a 100, stay organized.

On many occasions, lenders, mortgage brokers, and money partners complimented me on giving them the information they needed quickly and in the format that was easy for them to follow.

Lenders typically need a lot of information to complete their underwriting process and determine whether you qualify for a loan with them.

The way you present the information and its accuracy makes it easier or harder for lenders to make the decision.

It's in your best interest to make your application to be as easy to evaluate as possible.

• Provide complete accurate information 
• Double check all numbers against supporting documents before you submit information
• Make it a rule to keep track of information on a regular basis - after all, making money is what you are after. 

You will make MORE MONEY, if you keep track of it.

This is how I feel
EVERY TIME
when I finalize financing for a new deal

Here is a link to download my Excel tracking template. If you'd like it FREE, please email me and ask me to email my sample Excel portfolio template back to you. I'll respond as quickly as I can.

Here's an old blog post on what sort of documents you'd typically be asked to provide when you apply for a mortgage.

Hope you find this blog post helpful. If you have any comments or questions about money, please leave me a comment below.

PS You also might be wondering how you can come up with a down payment. That'll be in one of my future blog posts. Please stay tuned.

What?! Seven grand for life insurance!!!

As I'm building my portfolio of 50 Doors, I can't help but wonder what happens if I die yesterday.

Initially, just the thought of leaving a gigantic pile of debt behind for my kids to deal with, upon my passing, was giving me goosebumps.

Even though, the kids are older now, they are definitely not prepared to chase rent checks, fix toilets, make sure mortgage payments go through without hiccups, etc. Their current focus is studying and finishing their education.

Since I was freaking out a lot about all the debt I took on, I decided to get some quotes for life insurance. The quote came back at $579 / month, which is almost

SEVEN THOUSAND DOLLARS a year!!!

I was shocked! My husband and I didn't have to think very long to decide that this price is definitely not in our budget. We've been chasing assets, which on average make $200 dollars a month, and are not in a position to set three assets aside to pay for the life insurance. It's just too expensive!

Dangers of Self-Diagnostics: Hire a Professional

Several weeks later, I met an outstanding financial advisor. I attended his talk, read his book, and scheduled a one-on-one consultation. It turned out that I was looking at insurance completely backwards!

Instead of consulting someone knowledgeable and experienced and letting them guide me, I rushed to a decision. I had self-diagnosed my insurance problems and self-assigned a cure: that I must buy a huge coverage policy to pay off all my debt immediately, the moment something happens to me or my husband. Then I discovered that the huge policy was too expensive and left myself and my family in the same risky situation of not having a contingency plan in place.

Only after I talked to a real guru, I realized how much difference knowledge makes. There's a reason we have professionals who know exactly what they are doing! It's a shame I thought for a brief moment, I knew anything about insurance.

Lessons Learned

1) Start by Educating Yourself and/or Hire a Professional

Whenever you do anything for the very first time, it pays off to spend time on education and find experienced professionals who specialize in the field. 

Having read the book by my advisor, I got a good initial understanding of key terminology and common problems, solutions, and use cases around insurance. This helped me ask good questions  during my one-on-one consultation and discover what my personal insurance needs are.

2) Understand Your Own Needs

Surprise, surprise! After understanding how insurance works and what options would be suitable in my situation, I discovered that I don't need a huge policy to cover all my debt. It just doesn't make any sense. No wonder that would cost a fortune!

Instead, I realized that my needs are completely different. For example:

• Be able to stay home for a few months, if one of our family members gets sick
• Survive a sudden income interruption, in case my husband has to take a break from work
• Have a sufficient emergency fund to avoid a fire-sale of one or more assets
• Ensure that our kids finish their education, no matter what
• Establish a detailed plan for our executors and get their agreement on this.

What I realized is that insurance is NOT a lottery. There's no need to buy millions of dollars of insurance. All you need is sufficient to go through a life change without sacrificing your future financial and emotional stability. 

Make sure you have enough for you and the rest of the family to still have your lives, businesses, and routine to come back to, after the storm is over, and carry on from where you've left off.

3) Understand Your Family Needs

It was interesting to me to work with my husband. During needs analysis, we drafted his and my estates. This means that we looked at:

• what my husband will need, should I become disabled or die; and 
• what I'll need in case he dies or gets sick.

It turned out that our two estates are drastically different.  

I'm actually a lot more demanding aka vulnerable at the moment, because my husband covers most of our day-to-day bills, while I work on building our future wealth. 

In other words, a brief interruption to my husband's work schedule, would cause a sudden financial shock to the family. While if I am out of pocket for a few months, no major collapse would happen. In this case, we'd just need to adjust our long term strategy.

With this in mind, as of now, my estate needs to be insured at a lower amount, compared to my husband's. 

Being Prepared Feels Great!

Even though it sounds very creepy to be discussing in so much detail what will happen when one of us gets sick or dies, I feel great having gone through this discussion! 

Here are some of my take aways:

• Statistically, the chances of being out of pocket are pretty high! 
• Basically, almost everyone will be sick in the next 10-20 years. So it helps to plan ahead how to afford to stay home while you recover and/or stay home with a sick relative.
• Dying is easier than being sick. Sickness is hard on the person recovering and those who take care of him or her.
• If you plan your insurance coverage well, you'll have a much higher chance to weather a storm and reach your long term goals after it.

Being prepared feels great! If you'd like a referral to the awesome financial advisor I'm working with, ping me and I'll connect you. No obligations and no referral bonuses for me! I honestly think it's super helpful to know more about this stuff and make educated decisions about how to best protect yourself and your loved ones.

A day in life - Investor / Landlord / Parent

Spring is here! I can’t believe a quarter of the year has already gone by. Since the beginning of the year I started a few things but it doesn't feel like I finished a lot. Today was a productive day and I’m optimistic. I am sure things will start coming together soon. So here is a scoop of the day.

Morning at the LTB Hearing 

Getting to LTB hearing!

Mornings are easy when you work from home. Basically, on most days no one sees me. This is why there is zero pressure to look decent. But today was different because I had a Landlord and Tenant Board (LTB) hearing at 9 AM in Barrie, which is about an hour away from my home.

I was lazy yesterday, Sunday night, and didn't print and fill out the L1/L9 update form. So I had to run around like a headless chicken to get everything done - shower, get dressed, make lunches for kids, print the forms, fill in the forms, and leave the house. I had planned to leave by 7:15 AM, so I could have plenty of time in case of traffic. Well, I left at 7:59 AM. Sounds pretty bad, I know, but surprisingly I still made it on time to the hearing.

LTB Hearing Topic - Application to Evict a Tenant for Rent Non-Payment 

The reason I went to the hearing was eviction for rent non-payment. A tenant lost her job a couple of months ago. As a result, the family is going through some financial difficulties and fell behind on rent. 

Unfortunately, it’s part of my job to take action on rent non-payment. I sent N-4 form on Jan 24th because I haven't received January rent in full. I was optimistic about the delay and knew tenant would catch up - and they did. Unfortunately, once you start falling behind, it is very hard to get back on track and start paying on time. January rent was paid in full, but of course, it was practically impossible for the family to pay Feb rent by the 1st. So the vicious cycle of rent being late continued.

I filed an application to the board on Feb 14th and the hearing day is today - March 26th.

The tenant didn't attend the hearing. This was good for two reasons. First, it is emotionally difficult for me to negotiate with a tenant because I feel bad for them and understand how hard it is to survive. In the past, I used to always end up giving them an extension, which unfortunately didn't help anyone - the tenant still lived beyond their means and kept digging themselves deeper into debt while I kept losing money.

Second, cases with only one party present (as well as all cases when parties agreed on a repayment schedule) are heard at the very beginning of the day. So my case went second and I left LTB at 10 AM.

Key Take Away - Don't be Creative, Follow the Rules 

The Hearing Officer asked me several questions. One of them was about the method that I served N4 with. I stated on my forms that I emailed N4 to the tenant. Email isn't one of the acceptable methods according to LTB rules. Unfortunately, I did not have a written response back from my tenant, but I let the Officer know that the tenant and I spoke over the phone.

Lesson learned: Don't be creative! follow the rules and hand deliver or mail the N4!

Also, get a written confirmation of all your communications with the tenant. I should have emailed the tenant a summary of our phone conversation after we talked.

Precious Coffee

In addition, I got scolded by the security official for non-compliance with the HUGE sign on the wall that said that there was no food or drinks allowed. I have to admit that I saw the ginormous sign and consciously made a decision to hide my drink under my chair (which the officer spotted).

Lately, I've become so frugal that I didn't want to waste the coffee that I just got on my coffee points, thinking that the risk of being kicked out from the hearing room was low.  Luckily, the security officer was kind and let me keep my precious drink and asked me to wait for my turn in the waiting room, rather than inside the big court room.

My luck continued and the hearing officer was lenient as well. She made a decision to proceed with the order even though I used incorrect N4 delivery method. In a few days, my tenant and I will be getting the order in the mail. It will require the tenant to pay remainder of past due March rent and April rent within two weeks. In case of non-payment, I will have the right to request an eviction at the Sheriff's office. 

I truly hope that the tenant will figure out how to fully catch up and get back on schedule with rent payments.

Even though many of my fellow investors think that LTB rules are strongly in favour of the tenant and it is a bad thing, I believe that the system is fair and reflects the fact that Canada is one of the Happiest countries - in fact we are 7th in the World! There is a great responsibility on the landlord to find a suitable tenant and follow all protocols to make sure both landlord and tenant have an effective partnership.

Spent Afternoon Submitting Mortgage Application

Getting Mortgages requires LOTS of Docs and Info!!!

I got back home without much traffic as well.  I spent about an hour gathering up supporting documentation to send to a mortgage broker who is helping me refinance two of the properties. 

The purpose of the refinance is to pull out equity that has built up over the last three years. If all goes well and as per my initial calculations, my cash flow will still be $200 per property AND I should be able to get my down payment and renovation money back. Isn’t this amazing?!

This means that I’ll have the same money that I started with just over three years ago back in my pocket plus two properties that will continue to generate some cash flow. I’ll be able to re-use the same money and acquire new assets. My first properties will literally pay for a future new property. Neat! This is probably what the saying "money working for you" refers to.

Honestly speaking, this is the first time when I am trying to get my money back, so my knowledge is strictly theoretical at the moment. Let’s hope things will conclude as planned.

On a positive side, I was very proud last week when the mortgage broker complemented me on my AMAZING spreadsheet. It covers my portfolio and every bit of information that a mortgage broker might want to ask for.  In the last 4 years, I got 12 mortgages and 4 refinances done. No wonder, I am now a pro at predicting what questions a mortgage broker would ask.

Side Hassle - Networking Works!

A few weeks ago I started a side business hassle. It’s a small business that my friend and I are starting together. I had to do some work for it at the end of the day.

The interesting thing is that everyone who supports me on this side hassle are fellow investors and entrepreneurs who I've met at various real estate meet ups.

I’ve never been a networking fan, so every time when someone who I've met at a meet up helps me out, I’m super thrilled and excited. I have to agree that networking IS TRULY a great way of expanding your reach and range of possibilities. I am very grateful to my newly acquired partners, mentors, and like-minded people who share their thoughts and give me their honest opinions and feedback. 

Wrap Up - Kids and Karate

Now, changing hats and bragging a little bit on personal side.

My oldest son came back from school with a medal - 2nd place in a robotics competition. 

My youngest son scored in top 5 of 1,000 kids his age on a test. I am very proud of him. Also, I am happy because I no longer feel guilty about our policy on YouTube - kids basically have unlimited YouTube. As long as they do well at school and in their after school activities, they can spend all their free time as they please including being permanently glued to screens. 

Looks a lot more romantic than me sweating
in all the super-fat safety gear :)

And my middle son told me he wants to get a programming job. Can you believe it? That's purely his own initiative without any nagging from me or my husband :) He started putting a resume together!

I wrapped up the day by drafting this post and attending karate dojo. It was a sparing day! FUN!!

10 Ways To Improve Your Credit Rating

In the blog post yesterday, I posted a couple of free ways to get your credit rating.

Today, I’d like to share ten tips I learnt from a very experienced mortgage broker who specializes in getting financing for serial investors. These strategies will help you improve your credit rating.

Restructure Debts 

1. Reduce your unsecured debt (i.e. credit cards and lines of credit (LOC) not secured by an asset)
2. Eliminate car loans and car interest payments
3. Reduce secured large revolving LOC debt (i.e. line of credit that is always full)

Boost Your Income

4. Report all of your rental income
5. Plan and report sufficient income (if self-employed)

Manage Mortgage Payments

6. Slow down accelerated or double payments
7. Re-amortize loans to reduce monthly obligation
8. Avoid approvals with 25-year amortization. Always aim for 30-year amortization instead.

Plan Ahead 

9. Review your investing strategy with an experienced mortgage professional
10. Implement their suggestions

Use Your Free Credit Report to Invest with Confidence

Lender's Point of View

Think of your credit report as your financial resume and references. Lenders and mortgage professionals look at your credit history and credit rating as an indication of your ability to meet your current debt obligations and borrow new funds.

Unfortunately, there are many situations when borrowers default on their loans. Understandably, lenders have to evaluate the risk before lending you some of their money for your deals. This is why lender evaluation of your credit report is an essential part of your credit application review.

As an investor, you have to do your best to maintain trustworthy image with solid financial reputation.

For Your Own Good

Credit rating and report are super helpful for your personal good. Let me explain.

As I grow my investing portfolio on the way to my 50 doors goal, I have to be careful about the risk of over leverage. Over leverage means that I've put myself at risk of going down because I can't pay interest on the money I borrowed to grow my portfolio. If I borrow too much, I will not reach my goal and most likely will have to start over.

Luckily, I don't have to re-invent the wheel every time. Credit bureaus have the tools for me to do my self-assessment. I know how risky / trustworthy I look in the eyes of lenders based on my credit rating and my score trending down or up.

If I have a low score or my score is trending down, I know that I should slow down, stop borrowing, and fine tune my investing strategy in order to avoid the risk of over-leveraging. And vice versa, when my credit rating is high and trending up, I can speed up, look for new great opportunities, finance them and grow my portfolio with little over-leverage risk.

Two Free Ways To Check Your Credit Rating

1) Mogo

I use Mogo app on my phone to check my credit rating. The app sends me a monthly nudge when my credit rating is updated. I login to take a look at the trend of my credit score going up or down over time. Then, I think back on what changes might have happened over the last couple of months that affected my credit rating and plan my next steps to improve my future score. Mogo is super easy to sign up for and it's free. It takes 2 seconds a month to keep an eye on your credit score.  

2) Royal Bank of Canada

If you are a RBC customer, login to your online banking account and click on "View Your Credit Score" in the right-hand side menu under "My Services". This will take you to your TransUnion credit rating dashboard, full credit report with all the details and credit education tab with lots of info on how to read your report. Study all three sections carefully to get a good understanding of your current credit report and rating. Plan how you can improve your score in the future. Re-visit this report every several months to stay on top of your financial resume.

Did this help? Post a Comment Pls :)

PS I hope you find this blog post helpful. If you have a question or comment, please don't hesitate to post it below.

PPS I had my first comment ever on one of my previous blog posts about Our First Rental Income Property. This was super exciting and I can't wait to see more feedback! 

Why Jan 2018 Mortgage Stress Test Will Have Minimal Effect on Investors

No Need to Panic Because of New Mortgage Rules

Starting January 1st 2018, all Canadians looking for a mortgage will have to undergo a stress test. No matter how much down payment you put in, your lender will apply the stress test criteria to check that you will be able to pay interest even if interest rates were to go up.

Stress test rate is the higher of:

• the rate that you are approved for plus 2%, or 
• current Bank of Canada (BoC) 5-year conventional mortgage rate.

As of Nov. 25th, 5-year BoC rate is 4.99%. 

Fixed Rate Mortgage Qualification Example

Suppose you are applying for a 5-year fixed 3.29% conventional mortgage with 20% down payment.

Currently, the lender verifies that you meet their borrowing criteria at the contract rate of 3.29%. Let's say that based on your income, borrowing, etc., they determine that you qualify for up to $400,000 mortgage. Thus, you can afford a house up to $500,000.

Come January 1st 2018, the lender will check that you meet their borrowing criteria at 5.29% interest rate instead of the contract rate of 3.29%. This is because 3.29 + 2 = 5.29% and 5.29% is higher than the 5-year BoC rate of 4.99%. Based on this test, the maximum mortgage amount you will qualify for will be $328,000. Thus, you will be able to afford a house up to $410,000.

Variable Mortgage / Line of Credit (LOC) Qualification Example

Suppose you are applying for a variable 3.00% interest rate mortgage or a line of credit.

Currently, the lender uses Bank of Canada's 5-year conventional mortgage rate as their qualification rate for such applications. Say, you qualify for a variable mortgage up to $337,000.

Under the new rules, the lender will use 5% as qualification rate because 3.00 + 2 = 5% and 5% is higher than 4.99%.

Given that 4.99% is very close to 5%, you will not notice much difference and will still qualify up to $337,000 variable mortgage.

Qualification Summary Chart

	Current Criteria Down Payment 20% or more	New Criteria Any Down Payment
House Price	$500,000	$500,000
Approved Rate	Fixed: 3.29 VRM: 3.00 (prime - 0.2)	Fixed: 3.29 VRM: 3.00 (prime - 0.2)
Qualification Rate	Fixed: 3.29  VRM: 4.99%	Fixed: 5.29 VRM: 5%
Approved Mortgage	Fixed: $400,000 VRM: $337,000	Fixed: $328,000 VRM: $337,000

Minimal Implications for Investors

At a recent Real Estate MeetUp, a survey of real estate investors showed that most of them did apply and were approved for a line of credit or a variable mortgage in the past 12-18 months. 

This means that the majority of investors already met the more strict qualification criteria, such as 5% test in the example above.

This tells us that for all the investors who have recently qualified for a variable rate mortgage or a line of credit (i.e. most investors), the new stress test will not make a substantial difference.

Useful Tools

Here are some tools you might find useful:

• Mortgage Affordability Calculator
• Bank of Canada 5-year Conventional Mortgage Interest Rate

Overcoming Hurdles with New Rentals

I am working towards closing 5 new doors at the beginning of December. So far, transaction isn’t going very smoothly.

On financing side, our application is being reviewed by the lender. It’s been several weeks since we applied and the process is going very slowly. I worry that we will run out of time. My back up plan is private money. This option will consume most of the cash flow and is not ideal. But even with private money the opportunity is still worth going for.

Today I learned from my insurance adviser that we will have to look at sub standard market insurance providers. Standard market insurance companies don’t want to take on the properties since the properties don’t meet their “best in class” underwriting guidelines. This is expected. There are a couple of things that need to be fixed per inspection. The plan is to obtain a short term insurance policy with a sub market vendor, make improvements upon closing to bring the properties to “best in class” level, and switch to a primary insurance provider. 

Keeping fingers crossed. I am grateful for all the help from our mortgage and insurance advisers. 

New Income Propery

Giving Myself a 2K Raise

Last year we came across a free hold town house in Barrie. We already had several rental properties in the neighborhood and were intimately familiar with the market. We realized this was a great opportunity because the house was about 50K below market and could be brought to market with 10-15K investment.

Financing was promising to be problematic. So we found three tentative options and ran our numbers:

Plan A

2.99% interest rate with 40% down payment resulted in $18/month cash flow with additional $250 of principal paid by the tenant during the first year. $268 cash flow per month is more than our goal of $200 per door per month.

Plan B

With 4.99% interest rate and 25% down, we'd be losing $210 dollars per month. But again after taking principal pay down into account, the cash flow is positive $15.

Plan C

In the worst case scenario of 7% interest only financing, we'd be losing $278 every month. This is a type of deal we don't want to get.

Decision

Before making the final decision and waiving financing condition, we confirmed with our mortgage broker that Plan A and B looked doable. We also negotiated a $200 / month increase in rent 3 months after purchase with the existing tenant. With this rent increase, even in the worst case of Plan C our loss would be $78 per month. We decided that we could live with this loss temporarily for 6-12 months, while securing a better financing option.   

Result

We qualified for Plan B and went with a 1-year term. 

During the first year, we averaged $164 cash flow per month plus principal pay down. 

At the end of the year, we re-financed and got 2.84% interest rate, which is $155 cash saving per month. In addition, we increased rent by $21. Lastly, we reviewed insurance with our insurance broker and removed flooding and earthquake, since the house is on top of a hill and earthquakes never happened in Barrie before. This saved another $5.

Overall, cash flow after the first year increased from $164 to $340. This means I gave myself a 2K raise.

How to Become a Real Estate Investor with No Money and Infinite Returns

Here are three easy ways to become a real estate investor with no money:

1. Win lottery
2. Get an inheritance
3. Rob a bank

Just kidding... The truth is that investing with no money is tricky and I haven't personally done it yet. What I have done is "investing in real estate with no money of my own", which I think is good enough and counts.

Money Sources

• Your primary home - If you own your primary residence and have not refinanced it in the last few years, there is a high likelihood that you have some equity in your home that you can swap for money and use. In Canada, this is known as HELOC. Contact your mortgage provider or mortgage broker and ask them about a home equity line of credit (HELOC). Depending on your financial situation and credit score, you should be able to get a line of credit up to 65% of the current assessed value of your primary residence. This line of credit will be secured by your home and will not negatively affect your credit rating. Please remember to account for the interest on your HELOC, when you analyse potential investment properties and make offers.

• Your family and friends - If you are lucky like me, you might be able to talk some of your friends or family into letting you use their money or home equity.  This approach puts a lot more responsibility on your shoulders. In my case, my family gave me a boost. I am grateful for their trust. In our example, in return for 50% of investment capital, my family receives 50% of cash flow and 50% of equity gains. They are "silent partners" meaning that they trust me with all the decision making regarding selection and management of our investment properties. Take a look at my Joint Venture (JV) post with some more insights on using other people's money.
• Your reputation with your banks - At one point in my life, my husband and I were both between jobs. We started using credit cards for ongoing bills and have gotten to a point when we couldn't pay interest. We started skipping minimal payments. Very quickly and much faster than I thought it possible, lenders cut down our credit limits demanding accelerated debt repayment. Luckily, we did find jobs and got back on track. On the flip side, once we started treating our credit history and financial reputation as the most precious thing on earth and put in effort into decreasing bad debt and increasing assets, the opposite happened. We started getting offers for more and more credit from various lenders. On several occasions, we received 0% interest offers and were able to use the banks' money at 0% as a down payment for rental properties.

Infinite Returns 

The formula for return on investment (ROI) is Net Profit / Cost of Investment.

When you invest almost no money of your own, your cost of investment is approaching zero. In this case, your ROI is infinity:

PS Gotcha

The only gotcha in this formula is that you HAVE TO make sure, you get into a cash positive deal. If "Profit" is below zero, you'd be converging towards negative infinity and might not last very long in real estate investor capacity.

~~~

I hope you find this post helpful. Please leave me a comment, if you have any questions or suggestions. I look forward to receiving your feedback.

Proven Way to Get into Real Estate Investing: Put 154K in Your Pocket

How to get into real estate investing?

At a Real Estate Investment Group MeetUp earlier this week, the host asked the group how many were new and how many had some deals already.

It turned out the ratio was about 50/50. The presentation was on secondary suites. Lots of discussion and questions followed because both types of attendees found the topic interesting.

Everyone learned something for their first or next deal.

Here's what I learned. Hope it will help you as well! Especially if you are just looking for various strategies on how to get into real estate investing.

Secondary Suite Investment Strategy

Definition

Secondary suite is a self-contained residential apartment with its own kitchen, bathroom, and bedroom(s). 

Secondary suites also go by second units, basement apartments, accessory apartments, granny flats, in-law suites, nanny suites or garden house. Read more at CMHC website.

Legality

Please check your local legislation for second suites legal requirements.

In Ontario, Canada, The Strong Communities through Affordable Housing Act, 2011, amended the Planning Act to require that all municipalities authorize second units in their official plans and zoning by-laws. 

Each municipality has its own rules & restrictions that you should comply with in your investment. There are areas where second suites are not allowed. There are some specific characteristics of a property that make it a good fit for an economical addition of a legal second suite. Verify what these parameters are in your area before you purchase a house.

How The Strategy Works

1. Confirm second suite and property requirements in your area
2. Purchase a property that has no legal second suite, but is appropriate for adding one in
3. Apply for and obtain a permit for adding a second suite
4. Engage & manage contractors who will do the work
5. Rent out main suite 
6. Complete adding a legal second suite
7. Rent out second suite
8. Re-finance the property
9. Repeat.

Benefits of Secondary Suites Investment Strategy

There are numerous ways to invest in real estate. Secondary Suites is one of them. It became very popular around here in GTA, ON Canada. Here are the main reasons:

Demand - Secondary suites strategy is widely supported by the government in many municipalities because it helps to increase supply of rental units where demand exceeds available inventory. Ontario, Canada, for example, made it required that all municipalities allow legal second suites to boost their creation.

Cash Flow - Rental income from the second unit increases cash flow considerably. For example, in Barrie, ON, a 3-bedroom house can be rented for about $2,100 / month. If you rent the second unit, for an additional $900, your gross rental revenue will increase from $25,200 to $36,000 per year (42% increase) and result in better cash flow.

Value of Property - Investment property is a business. The value of this business strictly ties to the income that it produces. Second suite increases the income of the property and, therefore, increases its value.

Flexible Investment Product - Secondary suites work well for many types of renters (young couples, single people, retirees, students,  travelers, etc.). They also allow flexibility on investor side. In many cases, entrepreneurial home owners use a second suite to off-set their own mortgage payment.

Higher tenant quality - Many tenants are interested in living in high density residential areas within great communities with good schools, established infrastructure, and safe neighbourhoods. This allows for highly selective tenant search and qualification process, resulting in higher quality of tenants.

What are the Cons?

Here are some of the cons you should be aware of. 

Size of Initial Investment - In order to pursue this strategy, you will typically need 20% down payment plus 50-70K budget for adding a second suite. 

Project Management - Coordinating the project to add a legal second suite may be a lot of work, especially when you do it for the first time. 

Compliance - Requirement to comply with Ontario Building Code, the Fire Code and municipal property standards by-laws adds complexity. Please conduct thorough research and select all sub-contractors carefully.

How to do it right?

The presenter at the MeetUp specializes in second suite design, communications with municipalities, obtaining, engaging with reliable sub-contractors throughout GTA, and overseeing the project start to finish. His company already completed over 50 units.

Here are some of tips on how to do it right:

• Ensure accurate documentation 
• Obtain all required permits
• Before you purchase, confirm critical legal second suite requirements in your area. For example, 
• Parking 
• Ceiling height
• Square footage
• Windows/exists 
• As you design and build the unit, plan for most optimal layout, some important aspects are:
• Acoustics - it often helps to mirror top unit 
• Heating & cooling
• Plumbing
• Dry living space.
• Like with any investment, do thorough due diligence and validate all numbers.

Step 1 - Increase Property Value 

Suppose you purchase a property for 500K.

Now, let's assume:

• Initially: rental income = $25,200 and Expenses = $8,500
• With second suite: rental income = $36,000 and Expenses = $14,875
• Market remains unchanged with Cap Rate = 3.3%

Then, the value of the property with the second unit, is $21K / 3.3% = 632K.

The property now is worth ~25% more, compared to the original purchase price.

Example: Increase property value from 500K to 632K by adding a second suite

Step 2 - Refinance the Property to Pay Build Costs

Let's assume, total costs so far are as follows:

• Closing costs were = 10K
• Second suite cost = 50K
• Interest on short-term construction loan = 10K
• Refinancing cost = 3K
• Total = 73K.

If you re-finance the property to 80% of the new value of $632.5K (see Example 1 above), you will receive 33K back (632.5K * 80% - 400K original loan - 73K).

To continue this sample scenario, I assume that we do not pull the remaining cash out. Instead, we use it to decrease our mortgage to 473K (632.5 * 80% - 33K extra cash).

Refinance property and pay off the cost of adding the secondary suite

Step 3 - Put 154K in Your Pocket 

Five-Year Cash Flow Projection

Let's assume, during the next 5 years: 

• Rents increase by 2% every year
• Costs increase by 2% every year
• You hold a 3% fixed interest mortgage with 30 year amortization
• Property is doing fine and you spend about 25K on any cap-ex expenses, vacancy and small fixes
• Real estate appreciates at 5% rate in the area.

Unfortunately, my dummy example leads to negative operating cash flow and you invest another 9.4K into your rental.

This is because principal re-payment doesn't go straight into your pocket until you sell or re-finance the house at the end of the 5-year term. 

Notice that at the end of the term, the investment results into a positive outcome:

154K goes into your pocket.

Return on Investment (ROI)

In our sample secondary suite project, initial investment was 100K down payment plus 33K to reduce mortgage after the first refinance, total of 133K.

Therefore, ROI =154K / 133K = 116% over five year period; or

ROI = 23% annually on average.

THANK YOU & PLEASE LEAVE ME A COMMENT

Thanks for reading my blog. I hope you find the example helpful.

If you have any questions or notice anything that I should add or adjust, please let me know in the comments below.

Please also let me know what posts will be helpful for you to see in the future. I will really appreciate all your feedback!

PS I am very curious to know what you think. Please click on the pencil icon below and leave a comment!

Cash Flow Basics

This Image belongs to Rich Dad company

Ever played Cash Flow game by RichDad? 

I love it. It covers all the cash flow and investment fundamentals and it's fun! "Investment and cash flow fundamentals is fun???" you'd ask.

Well, yeah... The reason I play the game so much is because my 7 year-old loves playing it and thinks it's fun.

He gives me two choices "Minecraft" or "Cash Flow". I am really bad at Minecraft... so we play cash flow.

After a while, you start following the game rules in real life making better money decisions with real life deals. Let me give you an example.

Assets

One of the key definitions in the game is that of an Asset.

Asset is something that puts money in your pocket. In the game, you come across various examples of assets in three main categories: Small business, Stocks and Real estate.

Stocks

One of my early mentors retired early, at about 45. His retirement strategy was based primarily on dividend paying stocks. 

Stocks represent pieces of corporations. So, if you own a stock, you own a small piece of a corporation (aka a business). In Canada, there are many great corporations that pay dividends regularly and consistently. This means that for every stock you own, you get paid every quarter. 

Speaking in cash flow game terms, buy a dividend paying stock and you got yourself an asset that will put money in your pocket.

Key Benefits

Low Risk 

For example, each of Canada's top 5 banks has been paying dividends for over 100 years. Shares of these banks are very reliable and low risk assets. There's a great article about it on dividend.com.

Each RBC share currently pays $3.64 per year in total. So 100 shares would pay you $364. 

Tax Free

If you open a TFSA account (Tax Free Savings Account) to hold your stocks, your dividend income will be tax free. In our example, if you made $364 at work and your average tax rate is 30%, you'd only have a net of $254 in your pocket. With TFSA, you'd keep all of the profit, 100%.

Growing Like a Weed

In addition, you can set up an automatic re-investment of your dividend payment. This service is free and has no commission or transaction cost. Meaning your $364 would automatically turn into two more RBC stocks plus change. This way your wealth will be growing on its own. You can stop this process whenever you like. But it's really awesome to have this option, especially for busy people.

Bonus for Real Estate Investors 

Suppose real estate is the primary asset of your choice. As you continue to invest in real estate and look for financing for new deals, some lenders will ask you to show a certain level of liquidity in addition to down payment. For example, a bank can have a liquidity requirement of 100K plus down payment.  

Lenders consider funds on a TFSA account liquid. This is because you can quickly turn your TFSA into cash, if you need. So the bank will accept your TFSA account statement as a proof of required liquidity. 

At the same time, your money is not just sitting. It's working very hard for you, with great returns.

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.

Refinancing Transaction

On Friday, we closed a refinancing transaction.

The purpose of this transaction was to move from high interest-only mortgage payments to lower interest rate fully-amortized mortgage payments. The new monthly Principal + Interest payment is about $300 lower than the previous interest-only amount.

This means that I now get an extra $300 bucks in my pocket every month and on top of it, tenant is paying off the principal bit by bit.

Couple of lessons learned:

• I should have started working with the new lender a lot earlier. CIBC let me know that for my portfolio of 6 properties, they require at least 45 days to do the underwriting. 
• I have to learn how to simplify the structure of future deals. Each of the shareholders had to provide personal guarantee on the mortgage and obtain Individual Legal Advice (ILA) from an independent lawyer. In our case, this entailed a quadruple lawyer cost plus a ton of paperwork had to be sent to the bank. 

All in all, this refinancing transaction is an achievement. So I had a Martini to celebrate :)