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.