An experienced broker is your best ally when looking for purchase financing
Investing in real estate
When you purchase an apartment building, also commonly referred to as a multi-family, rental, investment, income or multi-unit residential property, you are subject to a set of rules that are different from those that apply to the mortgage of a single-family house. Documentation, profitability, value of the guarantee, cash flow of the building, and (for an investor who owns several buildings) cash flow of the entire real estate portfolio are all aspects that need to be taken into consideration when asking for a mortgage loan on an investment property. The lender will also consider other aspects that are specific to the building: location, income and expenses, environmental study, etc.
Maximum financing for a multi-unit residential property:
85% loan to value
Your consultation costs nothing and there is never any obligation to use my services. By consulting a commercial mortgage broker, you will maximize the chances of having your mortgage loan approved and avoid paying unnecessary fees.
In order to receive financing, there must be a positive return on investment
Before granting you a loan, your financial institution will calculate the profitability of the property. The minimum profitability rate required will vary according to the type of loan requested: a conventional loan or a loan insured by the CMHC.
For a loan to be granted there is more to consider than simply having the revenues to cover the expenses of the building, including the mortgage payment. The lender will also have to make sure the debt coverage ratios and the return on investment are positive.
Here are the elements that will be calculated by your financial institution before granting a loan for the purchase of an income property:
|Building management fees*|
|11 apartments or less||3-4% of gross income|
|Over 11 apartments||5% of gross income|
|*This standard applies even if you plan on managing the building yourself|
|6 apartments or less||$100/apartment|
|From 7 to 11 apartments||$140/apartment|
|12 apartments or more||$240/apartment|
|Vacancy Fund||3% of the gross annual revenues|
Documents for application
The following documents will be requested when asking for a mortgage loan to purchase a multi-unit residential property:
- Mortgage application
- Accepted offer to purchase
- Copy of the leases and renewal notices for each apartment
- Financial statements of the building
- Income and expense statements for the building
- Financial statements for the entire real estate portfolio of the buyer (If applicable)
- Details regarding the buyer’s financial situation
- Property and school tax statements for the building
- Photocopies of energy bills
- Photocopies of the subcontractors’ invoices for the building (snow removal, lawn mowing, etc.)
- Photocopies of heating bills (If applicable)
- Any other statement related to expenses for the building
- Appraisal report for the building
- Inspection report for the building
- Environmental study
At some point during the mortgage application process, the Canadian Mortgage and Housing Corporation (CMHC) will carry its own inspection and appraisal on the building for which you filed a mortgage application. The goal is to ensure you are about to make a sound investment. If the CMHC deems the value/price ratio insufficient, it will refuse to insure the loan, which will consequently be denied.
Expenses arising from the financing request
All the expenses arising from the financing request, including file review fees, appraisal fees, inspection fees, environmental study fees, etc. must be paid by the borrower.
Lender’s letter of intent
When they first meet, the commercial mortgage broker will ask the investor a series of questions to gather as much information as possible on the building for which the mortgage request is filed and on the financial situation of the borrower. With this information in hand, the broker will proceed to a preliminary review of the file before the client incurs any further expense to complete the loan request.
If the financial institution accepts the application, the borrower will receive a letter of intent stating the terms and conditions of the mortgage loan granted, including loan conditions, interest rate, etc.This means that the lender is interested,but not committed.
If the loan is insured by the CMHC, the borrower will have to give the Canadian Mortgage and Housing Corporation a cheque for a total equivalent to $150 per apartment.
Financial institution’s inspection
The lender will ask a team of professional appraisers to determine the value of the loan guarantee. They will use various techniques and methods to estimate how much the guarantee should amount to (reconstruction cost analysis, comparison of income and comparables on the market).
If the loan needs to be insured by the Canadian Mortgage and Housing Corporation, the CMHC will appraise the value of the income property and estimate the value of the guarantee. The building appraisal will determine the maximum mortgage loan the borrower will be entitled to have for the property if all the other requirements of the financial institution are met.
Because the appraised value of the building may be less than the purchase cost, it is very important that the buyer of an income property have enough money available to increase the down payment and bridge the gap between the purchase price and the appraised value if he still wants to purchase the property.
The first step consists of a visual inspection and an assessment of the ground to verify if any gas or fuel-oil were spilled on the property’s land. Once the land and immediate surroundings of the income property have been inspected, the inspector will review the documents regarding the history of the property in the city archives. Normally, this first phase – which should cost around $1,200 – should be sufficient for your institution.
If the inspector has sufficient reasons to believe that toxic substances or products harmful to the environment have been spilled, or that a gas or fuel-oil tank is located in the immediate surroundings of the rental property, the ground will have to be tested to assess the level of contamination. The costs for the analysis and eventual decontamination of the ground will vary depending on the complexity of the case and the number of tests required.
Once the environmental study is completed, the lending institution will send you a letter of commitment or a mortgage agreement listing the details of the loan granted for the building.At this time, you will have to find an insurance company for the building and forward all the documents to the notary.