Multi-Prêts Hypothèques MR | Hypothèque Rapide
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Investment property financing

INVESTING IN REAL ESTATE

How does the financing of a plex work?

When you purchase a rental property, most commonly referred to as a plex, or an income 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.

All the more reason to turn to a Multi-Prêts MR advisor who will guide you throughout this entire process and help you reach your investment goals.

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Where necessary, you will also need to meet CHMC standards

Trust our experts to maximize the performance of your investment and your chances of securing the financing you need to reach your investment objectives.

The first thing you need to do is call Multi-Prêts Hypothèques MR where you will find a mortgage loan advisor who will guide you throughout the entire process.

This way, you will maximize the chances of having your mortgage loan approved and avoid paying unnecessary fees.

Maximum financing for a plex: 85% of the purchase price

In order to receive financing to purchase a plex, there must be a positive return on investment.

Before granting you a loan, your financial institution will calculate the profitability of the plex. 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 income (total rent paid by the tenants) 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:

Calculation of a plex’s profitability ratio

  • Building management fees: 11 apartments or less = 3 to 4% of gross income. Over 11 apartments = 5% of gross income. (This standard applies even if you plan on managing the building yourself)
  • Maintenance fees: 6 apartments or less = $100 per apartment. From 7 to 11 apartments = $140 per apartment. 12 apartments or more = $240 per apartment.
  • Repair costs: wood construction = $450 per year, per apartment; concrete construction = $600 per year per apartment.
  • Vacancy fund: 3% of the plex’s gross annual income.

Documents requested when asking for a mortgage loan to purchase a rental property (plex)

  • 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, where appropriate
  • 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 (where applicable)
  • Any other statement related to expenses for the plex
  • 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 (plex) 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.

Although this measure may seem discouraging, you should view it as an additional protection that will either confirm your investor’s instinct or prevent you from investing your hard earned cash in a money pit.

Expenses arising from the financing request

All the expenses arising from the financing request, including appraisal fees, inspection fees, environmental study fees, etc. must be paid by the borrower. When financing a plex, there are usually additional file review fees.

Lender’s letter of commitment

When they first meet, the Multi-Prêts Hypothèques MR advisor will ask the soon-to-be-investor a series of question 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 Multi-Prêts Hypothèques MR advisor will proceed to a preliminary review of the file before the client incurs any further expense to complete the loan request. This procedure will avoid any unnecessary expense to the client in a situation where a request would be automatically rejected and will allow the advisor and the client to make the necessary adjustments for challenging files.

Once the file is completed, the financial institution specialized in plex mortgage loans will evaluate, together with our partners, the mortgage profile for the request. If approved, the borrower will receive a letter of commitment stating the terms and conditions of the mortgage loan granted, including detailed loan conditions, interest rate, etc.

If the loan for the rental property (plex) 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 (lender’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, etc.).

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/she still wants to purchase the property. Otherwise, the buyer will have to start searching for another property with a price that matches the actual value and for which it will be possible to secure a mortgage loan without having to increase the down payment.

Environmental study

Phase 1

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.

Phase 2

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.

Conclusion

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 plex.

All you will have to do is find an insurance company for the building and send the documents to your notary.

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