How do you scale this?

Question

Hi all,

I'm new here so please excuse me. I'm sure this may have been asked before but I'm having trouble finding the references.

I currently own a side-by-side triplex income property in the Toronto area. It has good cash flow and should have great appreciation as well thanks to the local market.

I'm on the look out for another property but I'll have to finance the downpayment from a LOC. It hurts the cash flow financing this way that's fine for property #2. My question is, how can I go about securing #3 afterwards? My home's equity will be pretty maxed out at that point and the equity build in the rentals won't be enough to leverage for another down payment. Is there a better way to finance #2 to set up buying #3 (or 4, 5, 6 ...37?)

I'm trying to figure out how to scale this and I'm running out of ideas. The 'cheap' houses around the Toronto market go for around $400-500k. Am I better off to stop scaling buy and hold and try something like flipping houses bought off tender to get another lump sum for a downpayment and lessen the leverage?

Any advise (particularly those with a Canadian perspective) is welcome.

Thanks all,

Mike

Dawn Vacek · Answer

Welcome- The first few properties are the hardest.  I usually buy new properties with equity from other investments.  As you prove yourself to be a reliable owner/manager you will find the money comes easier.  If you identify a great property, the money will come.  If not from banks there are many ways including owner financing, private money, outside investors and many more.  Buy #2 and get it stable and when you find #3 look for the financing with some track record behind you.  I have over the years managed to develop a relationship with a small savings and loan and it is literally a phone call for me to get a mortgage.  I take a little from an existing property and voila-I bought something new with no cas from my pocket.  It's a wonderful life.  Play smart, plan to work hard, and love learning.  Always enjoy today!!

Roy N. · Answer

Jennifer:

Down payments of 10-15% are possible on multi-units with CMHC insurance and/or a vendor carry.

Felipe A. · Answer

@Roy N.Duly noted!  Thanks for clearing that up!

Roy N. · Answer

Felipe

The current thread is discussing financing in Canada.  Portfolio loans on residential properties are near - if not - extinct in Canada at this time ... at least I haven't seen one offered in some time.   Commercial lending is another story and portfolio (or blanket) financing is possible.

The sub 3% being referred to above is the interest rate on the mortgage note.  The bank prime rate in Canada is 2.85% at the moment and good borrowers can get even lower (we just renewed a mortgage at 2.4%).

Jennifer Pereira · Answer

@Felipe A.

It's with a 20% downpayment. I'm not aware of any Canadian banks that allow mortgages on investment properties with less than 20% down (unless it's a 2-4 unit and the owner occupies one).

Felipe A. · Answer

Ahh, understood.  Jennifer, what DP requirement are you getting with that sub-3%?

Thanks in advance, all!  Great thread.

Mike Basden · Answer

I think she meant sub 3% lending rates, not down.

Felipe A. · Answer

@Jennifer Pereira, et al:

If you're securing portfolio loans for sub 3% down, how do you get a positive cash flow?  I have a model that looks at a portfolio 3% DP loan assumption and even after 1.4% rent to purchase price ratio and the 50% rule, my cash flow is REAL slim per month.  I understand getting in with a cheap loan and little money down but how do you offset the higher mortgage payment?

Jennifer Pereira · Answer

We started off with a broker, found it was useless.  He was quoting us 5%+ for 3-5 year variable mortgages and a 50% haircut on the rents in the debt-to-income ratio forever.  We have 5-year fixed ones at sub-3% with NBC.  Shop around.

Mike Basden · Answer

Thanks for the correction Roy. You're right. A maximum LTV of 80% is all you can get on a non-owner-occupied, 1-4 unit rental property.  Sorry about that.  I was going from my faulty memory.

We've been working with a broker for both purchases so far. The first was 20% down and we claimed a unit was owner occupied, the second we were told required 30% down because it wasn't owner occupied. I haven't been a fan of this broker from day one, but she is in my wife's business network. Sound like it's time to dump her and find someone else...the broker, that is... not my wife.  :)

Thanks for the tip on National Bank, Jennifer.  The core of the Toronto market is skyrocketing as are the burbs. Our most recent purchase is actually in Barrie since we're practically priced out of the central market. Barrie is a tough market for renters. Good places at reasonable prices are hard to find. We were able to show the units before the sale closed (and while still staged). We did it open-house style and had over 40 different renters come through over two days. Secured tenants for both upper and lower units that weekend; solid credit and references. Our next rental will probably be there as well.

How do you scale this?

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