buy with cash and then refinance, or just finance right away?

Question

which is the better option, assuming you have the cash? what advantages do you get from buying with cash and then refinancing after?

i'm mainly interested in this approach because, from what i've read, it allows you to refinance based on proven income from the property rather than your own personal income to debt ratio. this will allow you to grow your portfolio more rapidly, because you can get more loans. is this true in canada? it seems to me that you should be able to use income from the property regardless of whether you own it or not, at least, the mortgage broker should not care about whether you actually own the property already when considering its income.

are there any other options to going the cash -> refinance route? what are some major drawbacks of this approach? (anything specific to canada would be very helpful as well!)

thanks,

Russell

Chris Mason · Answer

I feel like this question comes up 3x a week. Answer isn't changed, except I'll leave off US-specific mortgage guideline stuff.

Always be a cash buyer if you can. You will get your pick of the litter of houses and can expect to get a slight discount on the purchase price, even more so if you hunt for desperate motivated sellers that need to sell fast.

Then, if you want the leverage that comes with mortgages, slap a mortgage on it after the fact.

Best of both worlds.

Ken Didychuk · Answer

I believe the refinance of a property at 70% of it's value is more common in the US. Up here you should be able to get 80% depending on your personal finances. If, as you say, you have the cash to buy a property, I can't see why this would be an issue. Regardless, if you aren't planning on doing any renovations/improvements to the property, re-financing won't be necessary anyways. Use your cash to put 20% down on a property and mortgage the rest using traditional lending which will give you the lowest interest rate. This keeps the most amount of your cash on hand to purchase another property, or to use as a buffer for repairs/future renovations/considerations. The interest paid on this mortgage is tax deductable because it is an income property. If your "cash" is leveraged out of a HELOC, then the interest you pay on the HELOC is also tax deductable. There are some stipulations and rules surrounding this, so correspond with your accountant on the matter (segmenting the HELOC for rental property purposes only, etc.) .

Audrey Théberge · Answer

Account Closed : Ask your bank directly how they calculate their financing. Banks calculate it differently than the Caisse Desjardins, for example. Seems to have more power on their decisions because they are not governed by the same rules not being a "real bank"

Julie Toh · Answer

Account Closed I'd pay for the property in cash, then refinance and use the cash to purchase a cash flow rental property.  When you borrow money for the purpose of earning income from a business or property, the interest generated is tax-deductible. Look up CRA Income Tax Act S. 20(1)(c) or ask your CPA.

Full disclosure: I'm a mortgage broker in Vancouver

Steve Vaughan · Answer

This. Especially if the house initially can't be financed and/or you're going to add value then refi like a BRRRR scenario. Save the financing costs.  My last one saved me $4k buying with cash. I literally only paid $417 for my half of escrow fees.

I like odd and non-bankable properties.  Then make them bankable. Sometimes it's taking care of peeling paint and slapping water heater straps on and installing a CO detector. Know what gets your property to appraise.

Brit Zamoyta · Answer

This is a US based Process however, maybe good questions to ask your bank or read up on.

to answer your questions above.......

it depends on the asset, buyer and Seller. A residential asset banks underwrite by the personal income approach where as in a commercial asset, they will underwrite to the income producing  asset.

when it comes to a commercial asset there are a few things to look into.  Income VS  Expense. ideally you would like to see your expense about ~  35% of your income. Revenue from rents( income) Minus (-) Property Tax, insurance, Water, Sewer, Gas, Electric, Repairs and Maintenance, Property management( expenses) .

i think they both Cash VS Financing  have their Pros and Cons. Typically what i see is the following:

Cash Pros:

Fast Close (30 days)

Purchase Price Negation- Cash is King.

Close all cash to work price and in parallel start refinance process with a local lender, or national lender.

Cash Cons :- you will only get 70% of Purchase Price within less than a year. anything after or around a year, or start the process in month 9, banks will give you 70%-75% of  Appraised Value.

- Capital Capital is tied up

Financing Pros:

- Money is cheap right now, leverage banks Capital

-Starts banking relationship.

-Banks often run quarterly incentives, your property maybe in a program that the bank is trying to add to their bucket.

-Keeps capital ready to deploy.

- Make local banks compete for the product.

- Close in an LLC VS Personal Name-  Pros and cons to both, Financing Cons:

- 60 day process

- Bank Underwriting( Vacancy and Reserve. amortization )

- Re trading on terms

- Money costs Money- Bank Fee, Appraisal, Phase 1, Legal, Title.

Kris Bucci · Answer

Tough call and look forward to further posts on this.  I’d say if you are bank friendly (Big problem today in Canada) then use financing whenever you can... keep going until you can’t get past one of the many new rules... then use cash... if your still keen and rocking it, then it’s time to use other people’s money!!! Joint Ventures!!!

Andrew Flora · Answer

It depends on 2 things.

1. Do you plan to add significant value?  If so, you may be able to actually gain tax free cash by refinancing later.

2. Do you want to use your available cash to buy one property or multiple?  If you only want 1 property just buy it cash and you will still have the ability to refinance later if you change your mind.  Otherwise If you have the ability to use bank financing from the start you will likely get better terms and you can lock in a low rate on several homes.

Julie Toh · Answer

Account Closed

The way the rental income is treated is what will make a huge difference when trying to obtain multiple mortgages.

Lenders sometimes use a 'debt coverage ratio' or DCR: (rental expense / rental income) .  Keep it above 1.1,  a safer bet is 1.2.  Usually these calculations are done on a spreadsheet provided by the lender with their specific formulas programmed into the sheet, there are some variations between lenders. Another way some lenders count rental income is simply looking at the 'net rental income' reported on your T1 General.

Some lenders will take 50% of the rental income and add it to your annual income and then include the full carrying costs of the new mortgage into your debt.

Other lenders will use what is called an 80% rental offset. Using this method, the carrying costs are reduced by 80% of the rental income.

The most critical thing when it comes examining how the addback and offset may affect you is to speak with a mortgage professional who is well versed on the dynamics. It could mean the difference between going with a lender who offers a full offset, or one who sticks to the 50 per cent addback.

Account Closed · Answer

thanks for all the replies. my plan is to start with one property and then scale up. my overall goal is to own 20 doors in the next 2-3 years. (4 quintuplexes or 5 quads, etc), depending of course on the deals available in my area.

@Andrew Flora i'm not planning on carrying out significant work on the properties i buy, but in some cases i might, if the numbers are great. when you say i should finance from the start if i'm planning on acquiring multiple properties, why would i get better terms if i buy the property using financing rather than financing later after paying cash?

@Julie Toh intersting point about the interest being tax deductible. that should definitely boost the ROI, and seems like a good reason to use financing. i'm just trying to keep the bigger picture in mind (ie, acquiring multiple properties long-term) ... how do you see people managing this in your area? moving to commercial after they've maxed out their personal leverage? how does a mortgage broker take income from other properties into account when calculating how much money they can lend?

@Chris Mason yeah thats essentially what i thought, was just wondering if there were other opinions out there. also, this is the first time i'll be doing a deal by myself and going all cash makes me a bit nervous, ie what if i can't get a loan after the fact for whatever reason, that money i had in equities earning 8-12% per year is now tied up earning like 5-6% in rent :(

@Brit Zamoyta thanks for the comprehensive list...i'm definitely going to be starting off in residential (Quads, etc). its good to know you can only get 70% of purchase price if you refinance immediately after closing. i guess the other option is to just wait 9 months and then get a 75% loan on appraised value (hopefully after increasing the value somewhat).

buy with cash and then refinance, or just finance right away?

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