I received the information below from a mortgage broker I was not aware of until today, and thought it relevant to those of you who are interested in investing in real estate.

Residential and Commercial Multi-Unit (Underwriting Guidelines)

The following issue of Financial Report will concentrate on commercial and residential multi-unit underwriting. I will show you what banks, trusts and CMHC look for in clients and properties before recommending deals for approval. This info will be of particular interest to you, if you work with investor clients who are looking to diversify their investmet portfolios by adding some real estate to it as well as additional source of passive income.

Underwiting Residential Investments (1-4 units)

• 1-2 units as low as 5% down – purchase (refinance – 95%)

• 3-4 units as low as 10% down – purchase (refinance -90%)

• Conventional deals start at 20% down

• Must be zoned Residential

• Usually lenders ask Retrofit Certificate and Legal Zoning

• Can be owner occupied or pure rental

• 80% of the rental income is used to qualify the deal in addition to applicants income

• Minimum Beacon scores are 600 to 650 – depending on circumstances

• Down Payment can be gifted or borrowed as long as applicants qualify. Also Down Payment can come from proceeds of refinance of other properties, including principle residence.

• Income coming from other properties can be used as well

• Some lenders use Rental Offset, which helps a lot in qualifying new purchase or refinance.

• General rule is – Property should be self-supporting.

• Debt-To-Coverage should be between 1.25/1.00 (CMHC) to 1.10/1.00 (Convential)

• Some lenders require rental spread-sheets to be completed some only consider existing rental agreements.

• 2 year financial history on the property is preferred

• Maximum Amortization is 35 years (Important for cash-flow)

Underwriting Commercial Investments (5+ Units)

• CMHC will consider Multi-Unit Properties with as low as 15% Down Payment

• Down Payment can be gifted or borrowed as long as applicants qualify. Also Down Payment can come from proceeds of refinance of other properties, including principle residence.

• Ideally, investors should have some experience in running residential type of investments

• CMHC requires that the borrower have a net worth equal to at least 25% of the loan amount, with a minimum of $100,000.

• Minimum Debt Coverage Ratio (DCR) based upon agreed amortization period and the contract interest rate (minimum five-year term)

• Rental properties with five to six units: 1.10, 1.20 (for refinance)

• Rental properties more than six units: 1.30 (term less than 10 years) 1.20 (term 10 years or more)

• Loan-to-Value Ratio:
Up to and including 80% – 3.50%
Up to and including 85% – 4.50%

• Conventional deals start at 75% Financing

• Vendor-Take-Backs may be considered subject to qualifications.

• Financial History and Statements of the building are required for at least 2 years (Some times up to 3 years, depending on the lender)

• Amortization can be higher or lower then 25 years depending on the useful life of the building and general property condition.

• Appraisal by an AACI accredited appraiser and Phase 1 Environmental Assessment as usually required. (CMHC and Conventional)

• Commercial Insurance Specialist will prepare an Insurance Binder in accordance with lending institutions requirements.

Approval Process:

1. Application with all applicable docs is submitted to the lender.

2. Letter of Interest is Issued outlining various conditions.

3. Once signed and all applicable conditions are met, application gets sent to CMHC or internal department for final approval – if conventional.

4. Once approval is granted, internal credit sends the file to its treasury department to lock-in the rate.

5. Instructions issued to the lawyer to register upon closing.

This is great information, and very useful to keep bookmarked in your browser, so you can get a solid idea of cash requirements, lender requirements, etc. For an even better idea, let’s sit down and invest an hour in discussing your thoughts and plans for investing in real estate anywhere in Ontario.

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• Commercial mortgage

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2010 Rent Increase Guideline

Over the last month or so, I’ve been asked this question by more people than at any other time in my career, so I thought I’d write about it here today, and then you can give me your feedback.

We are currently in an almost-perfect storm, as far as real estate investing is concerned; rates are crazy-low, prices are down, and there are lots of properties available in many areas. Combine this with the tougher qualifications to get a mortgage, and many would-be buyers are having to continue as renters. For investor financing, we can still get great mortgages, with only 5% downpayment.

These factors combine to make positive cash-flow an easy thing to accomplish.

Let’s look at one example property, a 7-unit plus 1 big apartment building in Kitchener. This property is offered for sale at $479,500, and has rental income of $3,375 per month if the big apartment is not owner-occupied. So, that’s $39,300 income from rents, and operating expenses of approximately $10,000 for insurance and utilities, leaving you $29,000 per year for debt service, vacancies, and repairs.

This property has had many major updates in last couple of years, including electrical panel, steel roof, asphalt, and new boiler, so there shouldn’t be any big-ticket items coming up in the near future.

On top of that, the tenants in this legal boarding house have been there for between 3 years and 35 years, so there is stability of income.

What would be the carrying costs with 5% down? Well, your mortgage payment will be approximately $2,138pm & property taxes will be $295 per month, for a total annual outlay of ($2,138 + $295) x 12 = $29,196. That’s a break-even opportunity!

If you put 10% down, you have a small positive cash flow every month.

OR, how about this one, in Cambridge:

6 apartments, 2 x 2-bedroom and 4 x 1-bedroom. Rental Income of $45,000; operating expenses of $9049 per year. Carrying costs are:

$1,663 mortgage, $350 property taxes = ($1,663 + $350) x 12 = $24,156 per year.

So, total carrying costs plus operating costs = $9,049 + $24,156 = $33,205.

Result = $11,795 positive cash flow per year.

I think it’s a good time to be a real estate investor. I do; will you?

For information on these, and lots of other excellent opportunities to put your money to work for you, give me a call at 905-208-7002 or send me an email to chris@chrisnewell.com

Smith Manoeuvre

• Is it time to lock in your mortgage?
• Confidence in housing market a ‘good sign’: economist
• U.S. house construction rises in May

This Week’s Quotation:

“The only limit to our realization of tomorrow will be our doubts of today.” – Franklin D. Roosevelt (1882 – 1945)

This Week’s Highlights:

• Housing starts perk up
• It was the worst of times
• Is the end in sight?

WEEKLY ARTICLES OF INTEREST

Is it time to lock in your mortgage?

One mortgage broker seems to think so. Here’s why

Jas Grewal’s reaction to the recent runup in interest rates was to abandon a sweetheart of a variable-rate mortgage in favour of a safer, but more expensive, fixed-rate mortgage. Mr. Grewal, you should know, is a mortgage broker. A mortgage broker who sees the potential for much higher rates in the future. “read more….”

OTTAWA — Despite a stream of negative economic news, most Canadians who’ve recently bought a home have confidence in their decision, according to a survey by the Canada Mortgage and Housing Corporation. A national consumer survey released Tuesday said 90% of recent home purchasers believed that a house is a good long-term investment. Almost 70% of respondents also said they felt that this is a good time to buy a home.“read more….”

Construction of new homes in the United States jumped in May by the largest amount in three months, providing an encouraging sign that the nation’s deep housing recession was beginning to bottom out. The Commerce Department said Tuesday that construction of new homes and apartments jumped 17.2 per cent last month to a seasonally adjusted annual rate of 532,000 units. That was better than the 500,000-unit pace that economists had expected and came after construction had fallen in April to a record low of 454,000 units. “read more….”

“THIS WEEK’S HIGHLIGHTS”

Housing starts perk up

Housing starts showed welcome signs of improvement in May, rising to 128,400 annualized from April’s 117,600. The increase was broadly based across building types. Both urban singles starts and urban multiples starts rose 11.1% to 60.900 annualized and 46,900, respectively. Rural starts remained unchanged at 20,600 annualized units. The improvement was reasonably broad-based, with all regions posting gains except British Colombia. Ontario enjoyed the largest percentage gain, up 22%, with gains in the Prairies posting a 16.8% increase. Quebec and Atlantic Canada enjoyed more muted gains of 3.3% and 7.3%, respectively. British Columbia suffered a 5% decline in urban starts during May. The pick-up in starts is broadly in line with the forecast of an improvement during the latter half of the year compared to the weakness in the first half. It is expected that Canadian housing starts will average 141,000 in 2009 overall. As growth in the economy picks up in 2010, starts should improve modestly to 173,000, although this represents activity well below levels seen earlier this decade.

It was the worst of times

To be sure, the data reported for the first quarter of 2009 was dismal. Canada’s recorded its largest output loss since 1991, the U.S. economy registered its third consecutive quarterly decline with activity in the European and U.K. economies also shrinking substantially. To top it off, Japan’s economy shrank at a 15.2% annualized rate. In spite of the rash of bad news, investors gravitated toward the better news being reported. U.S. housing statistics showed stability in the pace of sales, the pace of job cuts moderated and consumer confidence picked up. In Canada, confidence rose as did the pace of home sales making the first quarter’s slump feel like old news. U.K. house prices have increased in two of the past three months, auto incentives appear to have put a bottom on sales and confidence has improved. Eurozone data proved a mixed bag with the unemployment rate hitting a 10-year high, but business confidence improving and order books growing. Investors took these reports as a signal that it is the beginning of the end for the Great Recession of 2009.

Is the end in sight?

The consensus is that the global recession began to lose momentum in the second quarter but still expect another round of negative growth rates to be reported. The global manufacturing ISM index recorded its fourth consecutive monthly increase in May and the services index averaged 45.3 in April/May, well above the first quarter’s 40.4. The levels remain unimpressive but signal a turnaround in sentiment, suggesting that the pace of contraction will be slower in the second quarter and that, if this trend persists, the global economy will likely be expanding in the second half of this year.