Financing Investment Properties
What’s a Multi-unit Residential Rental Property?
Definitions can vary. Most lending institutions classify buildings of 7 or more residential units in this category. Some allow a small commercial component as well.
How does Financing differ?
Lenders deal with single-family and small rental properties in their residential mortgage programs. Qualifying criteria, application process, due diligence, costs, mortgage rates and terms differ from those applicable to residential. Some of these differences are discussed in more detail below:
Qualifying criteria focus on the ability of the Real Estate security to service the mortgage debt. This is known as Debt Service Coverage (DSC). Example: Net Operating Income (NOI) $100,000 / annual payment $75,000 = DSC 1.33.
Note the NOI calculation and the DSC requirement can vary from lender to lender. A minimum of 1.3 is not unusual.
Application processes requires lender’s analysis of the real estate performance. Current rent roll and operating (income and expense) statement for the property, and usually 2 year’s history of operation are required.
If you are purchasing (as opposed to refinancing) the property, you should be verifying these in any case for your own benefit. Financial information regarding the individual(s) or company applying for financing will also be required. And be prepared to discuss your ability to personally manage the Real Estate, or your plans to engage professional management services.
Due diligence, in addition to the lender’s analysis, may include third party reports such as property appraisal, Environmental Risk Assessment (ESA) reporting, and Building Condition Assessment (BCA). In some cases a lender also requires that a lawyer acting solely on behalf of the lender be engaged. In others, the borrower’s lawyer may be allowed to act for both parties. In most cases all third party reports and legal fees are at the expense of the borrower.
Costs, rates, and terms are obviously of concern to the applicant. Establish early in the negotiation what lender and third party fees will apply and at what stage of the process they become payable.
Ask about the formula for establishing the interest rate and when it may be locked in. Terms such as portability and annual penalty-free prepayment privileges applicable to residential mortgages seldom apply to MUR mortgages. Be sure to understand the privileges your mortgage will include.
CMHC Insurance coverage makes it possible to borrow up to 85% of property value, vs. maximum 75% on a conventional (uninsured) loan. Even if you borrow 75% or less, you may wish to insure the loan because this could qualify you for a lower interest rate. Insurance premiums are graduated relative to the loan to value ratio, and can be added to the mortgage amount rather than paid “up front”. Ask your lender whether it is to your advantage to insure the mortgage.
Very important – choose a lending representative that is familiar with this type of financing. Specialists in MUR financing can keep you informed through the process, and greatly simplify and expedite the approval of your application. A lending institution generalist or a residential mortgage representative works only rarely on this type of file and may not provide the expertise and quality service you need and deserve. I have been an Ottawa mortgage lender since 1979 and have extensive MUR financing experience.
TD CANADA TRUST
MANAGER, COMMERCIAL AND RESIDENTIAL MORTGAGES
TEL: (613) 277-4365 FAX: (613) 599-6358
PAGER: (613) 780-8951 TOLL-FREE (800) 560-1593
email: [email protected]