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Hitting the mortgage wall

Mr.Montreal

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Jul 25, 2017
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Hello,

I own one rental property (its going great!) and I am about to buy a second one. However, I still pay rent for the house i live in(it belongs to my friend so I pay cheap rent).

Now, I believe that after I buy this second property, I will be at my limit in terms of borrowing money for another mortgage. Does this mean I will not be able to buy a property for myself to live in until I sell one of my rental properties? Is there a way around this? How can people own 5+ properties?

Any thoughts/suggestions will help.

Thank you,
 

Matt Crowley

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Dec 14, 2013
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This is a conversation to have with your broker who has your income, TDS, GDS, and debt information.

Ultimately, you will be tapped out for mortgage room. Some income will be accepted by the underwriters usually at some discount. Current price to rent ratios and yields paint the story though. It is pretty clear that SFH (single family home) investors are willing to accept ~4% cap rates and below. If rates are 2.15% with a 200bps required stress test, then the debt on your property is expected to make more money than the income from the property, so there is no way to continue buying SFH properties.

Moving up to multi or other types of real estate is an option.
 

Sherilynn

Real Estate Maven
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Oct 22, 2007
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Many people find the fourth property to be the most difficult to obtain because banks still expect your personal income to service your debt. To oversimplify: once you have at least four rentals, many banks look at your holdings as a self-sustaining portfolio and your personal income is not expected to service those debts.

A few tips:
  1. Get the longest possible amortization to keep required payments low, and then have the discipline to make extra payments to reduce your long-term interest costs. Lower required payments mean a more favorable DCR (debt coverage ratio).
  2. Eliminate all personal debt (also to maintain a better DCR). In this respect you are better to rent your personal residence than have a personal mortgage.
  3. Buy properties with excellent cashflow. Divide your gross rent by your basic expenses (mortgage, taxes, insurance, condo fees, and heat {banks vary in which expenses they use}). The minimum requirement is 1.1, but many banks require 1.2. If your number substantially higher, then banks will be more likely to throw money at you. We specialize in legally-suited houses (as well as lease option properties) because the cashflow is tremendous. Last time I checked, my number was 1.71 and I have never had an issue qualifying for a mortgage.
  4. In working with a broker, be sure to consult one with substantial experience with investors. Most brokers work with owner-occupiers and are steering you towards the best interest rate rather than considering the long-term impact of working with a certain bank at a certain time. For example, First National Financial is a great bank that works with clients with less than 4 properties. A good broker should point you in their direction before placing you with a bank with higher tolerances. Be sure your broker has insight into your long-term goals.
 

Matt Crowley

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Legally suited houses have a cap rate of <4.5%, with separately rented garage. The only way to get DCR of >1.2 is to have an LTV of <70%. There is no secret, just simple math. Operating expenses are fixed and single family owners pay more for income than anyone else. So will have worse LTV, by definition, than purpose built buildings, that is the economics.

Rent to own ie. options should be illegal. Takes advantage of tenants in a massive way, especially the most vulnerable. It charges usury level interest rates. Equal to buying a home on a credit card.
 

Thomas Beyer

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?..

Rent to own ie. options should be illegal. Takes advantage of tenants in a massive way, especially the most vulnerable. It charges usury level interest rates. Equal to buying a home on a credit card.

Why is that?

No one is forced to get a credit card at 22% or a payday loan at 38%, and similarly no one is forced to enter into an RTO deal with excessively large deposits, huge rent premiums and/or unattainable purchase prices 4 years hence.

Just because some operators are blood sharks doesn't mean all are, nor that this creative way to get into home ownership should be illegal.
 

Sherilynn

Real Estate Maven
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Wow, I'm starting to tire of defending rent to own against uneducated attacks, so I'm going to start copying and pasting the following response every time I see someone comment about the evils of RTO. (My apologies for hijacking the thread with this.)

1) RTO tenants are renting regardless of whether they rent a property they can buy or a property they can't. They often pay the same market rent they would be paying whether they had the option to buy or not. There is no interest involved and certainly no "usury level interest rates." Yes, a reasonable portion of option payments is non-refundable, but that usually doesn't cover the costs to the RTO company to repair and market the property to a new buyer if the tenant defaults. There is risk on both sides.

2) A responsible RTO company will only accept tenants with a good possibility of getting mortgages within the next 2 - 3 years. RTO is not meant for clients with low incomes or terrible credit and spending habits. RTO works for people who had blips in their past (usually due to either a divorce or a business failure or layoff), but are on the road to recovery. (Yes, there are companies preying on people with no hope to qualify, but they are the minority.)

3) RTO properties with conservative annual price increases can be a fantastic opportunity for tenants. We have had many tenants whose houses appraised for substantially higher than the agreed price. So they were able to live in their "forever homes" even before they could qualify for mortgages, they had the stability of knowing they wouldn't need to move their families again, and they got a good deal on the property rather than renting a regular rental and risking substantially higher prices in the open market when they were finally able to qualify.

4) Finally, if the appraisal doesn't quite work when it’s time to buy, a responsible and ethical RTO company will work with the tenant to determine a solution fair to both sides. After all, this is meant to be a fair business transaction and most RTO companies are not the vultures people sometimes make them out to be.
 

Thomas Beyer

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Wow, I'm starting to tire of defending rent to own against uneducated attacks, so I'm going to start copying and pasting the following response every time I see someone comment about the evils of RTO. (My apologies for hijacking the thread with this.)

1) RTO tenants are renting regardless of whether they rent a property they can buy or a property they can't. They often pay the same market rent they would be paying whether they had the option to buy or not. There is no interest involved and certainly no "usury level interest rates." Yes, a reasonable portion of option payments is non-refundable, but that usually doesn't cover the costs to the RTO company to repair and market the property to a new buyer if the tenant defaults. There is risk on both sides.

2) A responsible RTO company will only accept tenants with a good possibility of getting mortgages within the next 2 - 3 years. RTO is not meant for clients with low incomes or terrible credit and spending habits. RTO works for people who had blips in their past (usually due to either a divorce or a business failure or layoff), but are on the road to recovery. (Yes, there are companies preying on people with no hope to qualify, but they are the minority.)

3) RTO properties with conservative annual price increases can be a fantastic opportunity for tenants. We have had many tenants whose houses appraised for substantially higher than the agreed price. So they were able to live in their "forever homes" even before they could qualify for mortgages, they had the stability of knowing they wouldn't need to move their families again, and they got a good deal on the property rather than renting a regular rental and risking substantially higher prices in the open market when they were finally able to qualify.

4) Finally, if the appraisal doesn't quite work when it’s time to buy, a responsible and ethical RTO company will work with the tenant to determine a solution fair to both sides. After all, this is meant to be a fair business transaction and most RTO companies are not the vultures people sometimes make them out to be.

Well said. Like any business, be it painters, lawyers, property managers, lenders or vegetable sellers there are bad apples and honest people. Just because some vendor sold you a bad apple doesn't mean all apple vendors are bad.

The operator and her/his ethics matter !
 

Sherilynn

Real Estate Maven
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Oct 22, 2007
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Thanks, Thomas.

BTW, if anyone is interested in hearing more details about Rent to Own and Agreements for Sale (which often go hand in hand), I'll be presenting the topic at REIN's "ACRE" event in Edmonton on October 22nd. I'm always happy to answer questions about anything related to real estate, so be sure to catch me at the event.

Mr. Montreal, although there are no REIN events in Quebec (to the best of my knowledge), you can access a wealth of information by becoming an online member; or find a reputable real estate investment organization in your region. The benefit of leveraging the experience of others is immeasurable.
 

Carla Reis

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Aug 24, 2017
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Is getting harder and harder to access money from the banks.
We just had a meeting with our banker this week and is getting harder to even get into our 3rd property (solo) even knowing the first 2 are cash flowing into the 3 digits and our DCR is 2.45
 

Mr.Montreal

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Thank you all for the replies and tips! Sadly, REIN is not active in Montreal but I will come to REIN events in Ottawa which is close enough.
 

Tina Myrvang

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trevismcconaghy

Trevis McConaghy, REIA
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Nov 11, 2012
Messages
71
When I joined REIN in 2012, I heard about 'capping' out on properties. I never realized this was even as issue. I probably had 20 houses back then. When you keep adding one or 2 a month, you learn to play the game differently. Here are a few take- aways:
I basically have never dealt with Charter Banks. I like local Credit Unions.
Learn the rules of each Credit Union. I generally do 75% LTV, but some CU's will only do 65% in smaller markets.
Try to deal with medium to larger Credit Unions. I have ran a bank out of money.
Have all your ducks in line on day 1, in other words, your sophisticated investment binder needs to be complete with a copy for your bank. I have many years of T2s and T4s.
If you are buying a property, have all the purchase docs, appraisals etc that the bank needs. Be proactive vs. reactive. It will become second nature once you do 10 or 20 or 50.....
I recommend a company when you hit a certain point (but your power team can help you here). Inevitably, you will be dealing with commercial bankers, and paying higher interest rates as a commercial borrower. Its ok to pay a bit higher rate if the deal is good, if the terms are good, and so forth.
Ultimately, you need an impeccable relationship with your banker and you can easily buys another 50 homes. Experience has proven so.
 
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