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How to Finance Multiple Properties in Canada

If owning multiple rental investment properties is on your bucket list, there are a few essential factors to consider when determining how to finance multiple properties.  Owning multiple properties puts you at risk of being labeled a high-risk borrower. This label may limit your options to lenders who can finance rental properties or for finding a lender who is willing/able to offer mortgages for investors.

To mitigate the risk of being turned down – it’s important to consider what factors concern lenders, what formulas they use to calculate viability and to come armed with proof to stack the odds in your favour.

What qualifies you to finance multiple properties?

  1. What is your total net worth?

Most traditional lenders will consider the baseline net worth for an investment loan of $100,000. Proof of income with either a letter of employment, pay stubs, or income tax return is the validation they require.

2. Do you own other investment properties?

If so, how many do you have? Are they performing well? Can you provide a rental worksheet as verification of all costs (mortgage payments, taxes, utilities, vacancies, and maintenance) subtracted from the income? Do you have copies of all current lease agreements to present to the lenders?

Most traditional banks allow financing for up to four properties. Over four properties require a little legwork to uncover lenders specializing in multiple properties packages.

3. How much money have you saved for a down payment? Is your down payment saved or gifted?

If the down payment comes from your savings,

  • Owner-occupied down payments can be as low as 5% of the first $500,000
  • 10% of the balance up to a million
  • 20% and upwards for over a million

If you want to use your great aunt’s cash Christmas gift as a down payment, bear in mind that some lenders allow borrowed or gifted down payments, and others do not. All lenders require proof of funds and the source of the down payment.

4. Will you be living in the rental investment property?

Many real estate investors start building their empire by living in one of their rental units because owner-occupied rental investments require a lower down payment.

5. Does the property have multiple units?

A unit with one to four units falls under residential zoning and is like applying for a standard residential mortgage. Over four units require a commercial mortgage. For multiple units, lenders require proof of zoning (residential or commercial) and a copy of the Agreement or Purchase of Sale (POS).

When considering whether to finance multiple properties, lenders look at Loan-To-Value ratios (LTV), or the percentage of a property’s value dedicated to the loan. Acceptable LTV ratios vary depending on the type of loan. As an example, one to four units per property is typically zoned as residential and offers a loan to value (LTV) rate of up to 80%.

What calculations do lenders use?

Lenders may use any of four calculations; Total Debt Service Ratio, Rental Add Back, ROI of 1.1%, or the Rental Offset Rule.

Total Debt Service Ratio (TDSR)

TDSR is your total monthly expenses divided by your total monthly income from all sources. With this formula, lenders are in the driver’s seat because they decide how much of the rent can be used in the formula, which impacts the TDSR.

Rental Add Back

Rental Add Back is the most popular calculation because 50-100% of the rental income gets added to the TDSR calculation.

An ROI of 1.1%

If the lender is looking at a 1.1% ROI, they will use the Debt Coverage Ratio (DCR) formula, the net operating income divided by debt service.

Rental Offset Rule

With a Rental  Offset Rule, 50-80% of the rental income must offset the  Principal in Trust (PIT), with taxes, debt obligations on the property, and taxes added into the equation.

There are many ways to finance four or more properties,  numerous places to invest, and a variety of criteria lenders use to assess the feasibility of funding. Since most investors of multiple properties make a long-term commitment of 25-30 years, it is critical to take your time shopping for the right property and the right lenders who offer you the best options for your long-range goals and exit strategy.

How have you financed your rental properties? I’d love to hear about it [email protected]

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