There is no denial it is more challenging today to mortgage investment condos in Toronto. Some of the changes over the recent years are:
- The days of 5% downpayment and 40 years amortization are long gone
- Some lenders have a minimum square footage requirement
- Some lenders require more than 20% downpayment
- Some lenders require borrower pay for insurance premium above 65% loan to value
and the list goes on. But don't be discouraged. Here is mortgage underwriting 101 and a road map to help the investor mortgage 8 Toronto investment condos:
1. Start With The End Goal
The mortgage setup of each investment condo plays a critical role in helping or hindering the qualification of the next investment condo. Knowing what the investor's ultimate goal (8 condos or 3 condos) requires a different mortgage financing strategy. Some investors approach investment properties with "I'll buy another one" which is a problem in today's financing world. Over the years, I have come across many situations where the mortgage was setup with a short amortization period or the wrong mortgage product which restricted qualifying for another property.
2. Focus On Cash Flow
Setting up each condo to positive cash flow helps to qualify the next investment condo. There are 4 methods of cash flow analysis lenders would consider in mortgage qualification:
T776 Statement of Real Estate Rentals
Some lenders would use line 9946 to add to investor's income if the figure is positive. This is where many investors go wrong. They try to show a loss which reduces taxable income however it hinders qualifying for the next investment condo since the negative figure translates into a liability on the mortgage application. Showing a positive figure and paying some taxes is not a bad thing!
50% of Rental Income
This method is a deal killer. For example, assuming the investment condo is rented for $1600 per month, the lender would only use $800 as revenue then deduct 50% of condo fees and mortgage payment. Good luck getting a positive number without a large downpayment.
Rental Surplus Calculator
Lenders use the rental income generated by the condo and deduct mortgage payment, condo fees and 15% of the rental income figure.
The Wash Method
This is where the lender would look at the rental income being generated and as long as the rental income covers mortgage payment, condo fees and property taxes, the investment condo would not help or hinder in qualifying for a mortgage.
Stretching the amortization to 30 or 35 years and getting a variable mortgage would increase cash flow and help qualify the next investment condo. In real estate it is location, location, location and in the investment property mortgage world it is cash flow, cash flow, cash flow which sometimes means a greater than 20% downpayment.
Keep in mind today's qualification guidelines could be different next month. The mortgage financing landscape changes frequently based on government requirements and lenders' risk analysis. So what works today, might not work tomorrow!
Mortgage Broker or Bank
Most, not all, lenders have a cap of 4 investment properties per borrower. Understanding where the investor wants to be long term helps in structuring the mortgages appropriately and placing them with lenders who accept a portfolio of more than 4 investment condos. Choosing an experienced mortgage professional who knows where and how to place these mortgages can save the investor tens of thousands of dollars. No investor wants to be in a situation where they walk into the bank to finance their 5th investment condo and get "sorry, we can't help you since you are capped". Then what?
Looking to invest in Toronto condos or have an existing portfolio? Please contact Nawar to help you achieve your long term goals.
