Nova Scotia, Canada. 5-Unit Rental for No $ down.

[Paul MacInnis]

Hi, I've just joined BP and am loving the site! I'm intrigued by many stories and wanted to share one of mine. I am currently attempting to purchase a 5-unit building with no money down. This is not my first property and I am required to put 20% down (175 purchase = 35k down). My plan is to use 35k to secure the property and then immediately refinance the property. The home is worth quite a bit more than purchase price - BUT I'm waiting for an appraiser to come up with the figure. The refinancing can be for 80% of the appraisal, I'm hoping for it to be 220-225k. That would give me a new mortgage of 176-180k and be able to take back the original 35k downpayment (as there would be 36-50k in equity pulled out). I will still have to pay the various transaction fees associated with the deal - legal, etc but I am still hopeful to get the property for $0! I should know about the appraisal by the end of next week - it's been slow to get going through the holiday season.

[Roy N.]

@Paul MacInnis

A 5-unit building will be considered a commercial property and it should be appraised using the income capitalization approach (based upon cashflow) and not using comparative sales.

It also means you are technically dealing with a commercial mortgage, but the property is in no-man's land as the deal size is too small to be of interest to most commercial lenders. However, if you have fewer than 5-mortgages in your name, RBC will underwrite a 5-6 unit property using a residential mortgage {TD may also be doing this now}.

With that on the table, I'm not quite following your refinance plan. In order to refinance a property, you must already own it. In this case, that would mean purchasing the property with cash or with a mortgage, and at some point in the future approaching a lender to (re)finance the property. The other thing to keep in mind is that you will most probably only be able to refinance a property to an LTV of 70% - most conventional lenders will not go beyond 65 - 70% on a refinance.

Now, if you are purchasing a property, for 175K and the lender ordered appraisal comes back at 225K, the bank is going to underwrite at the lower of the purchase price or the appraisal - so $175K in this instance.   If the appraisal came back at 165K, the lender will underwrite to that value and you would need to add an additional 10K to your deposit.

Now, if you buy the property at 175 and then a few months down the road refinance it at an appraisal of $225K, you most certainly can do that.  If this is your plan, then your mortgage at purchase should be an open mortgage (higher rate, but no prepayment penalty) or, at the very least, a fixed-term, variable rate mortgage (penalty of 3-months interest) and not a fixed-rate, fixed term mortgage (penalty: interest rate differential).

If you would like a second set of eyes to review your strategy, feel free to PM me.