The First 3

[pamb]

Hi Everyone,

From`s Don`s books we understand that we need ~3+ investment properties before the banks will lend us endless amounts (if we respect the 1.1 rule for every property that is). With that said we are limited by our income for the first 3 properties and are finding that in order to get 3 that generate positive cash flow we can`t get anything in a place where the economic fundementals are at work.

Our thoughts are "just get the first 3, with positive cash flow, and THEN, because we`re no longer restricted for financing, start buying only if the economic fundementals are in place."

What do the experts think? Any help will be greatly appreciated.

 

[DaveToynbee]

I think you may have misunderstood a little about how the 1.1 rule works?
For banks that use... or used the 1.1 rule, It only helps you in that the bank will not even consider the properties in your portfolio for use in your debt servicing calcs if the rental income is 110% of expenses after 3 properties (since they are considered self servicing. They will only look at your job income and personal expenses). They would still not just neglect negative cashflow properties in your portfolio after you get 3+ properties at 110% though.... the banks will ever give you endless amounts of money and they will always take into account all of your properties cashflow performances in you total debt servicing. Be aware that that the banks rules and guidlines change frequently.
Since you wouldn`t have any greater ability to get negative cashflow properties after buying three 1.1 properties that are in bad areas anyways, I can`t see any reason to buy them.
After you figure out your long term goals that you want real estate to provide you, I would sit down with an experienced mortgage broker (who invests in real estate himself), and discuss with him what you are wanting to do. They will let you know the best avenues for financing and property selections with your long term goals in mind.

Good luck!

 

[RobMacdonald]

Hi there,

The above post is exactly correct. The 1.1 rule actually only applies to Firstline Mortages, and is used when a client wants to waive the gds component of the qualification process. In other words, wants to arrange a new mortgage on the performance of the portfolio. Your portfolio must have a 1.1 DCR, and the subject property must have a 1.1 DCR.

Every other bank uses their own formula to calculate the offset of the portfolio. If you have good personal income, you may be able to buy several negative cash flow porperties, not that it`s a good strategy, but your goals will determine your plan.

Being able to understand how the impact of cashflow will affect you overall qualification is something your broker, or banker will understand. Increasing/decreasing your personal income, or increasing/decreasing your portfolio dcr is a direct relationship which should be considered on every transaction.

Rob Macdonald
General Manager

 

[pamb]

Thank you so much for trying to help us. We appreciate it very much!

I did a very poor job writing the original post. I`ll try to clarify a bit and see if you still feel the same way

We only plan to buy positive cash flow properties. Because we must have several places before the banks will consider them self serving and therefore lend us more (for more positive cf properties) we thought we`d spend our $300K on several places in Winnipeg that generate very good positive cash flow. After that we only buy positive cash flow properties that met the economic criteria that Don`s books advocate.

In other words we don`t want to spend the entire $300 on 1 or 2 positive cash flow places and not be able to borrow more for more positive cash flow places.

Thanks again for your help.

 

[DaveToynbee]

I would still pass this by your broker. If you play your cards right, whether having 2 or ten properties, as long as they service and you are selecting cashflowing properties on all investments, you shouldn`t hit any walls. That being the case, you`d be better off with two properties right now that are poised to appreciate long term as oppossed to 4 that only cashflow. A good broker will position you to get financing after two properties. I`d reccommend calling the guy above

Dave

 

[pamb]

Dave...sounds like a good idea. Thanks for your help!