Using RRSP Or HELOC for Downpayment for investment property

[vnwind]

I would like some feedback concerning the possibility of using my RRSP or HELOC as down payment for purchasing a rental property.



My current RRSP is around 70K & my HELOC is 140K and I have probably 40K in my saving. I am looking to buy a property in range of 300 - 400K and already got preapproved as long I can come up with 20% downpayment at closing. So I am kind of short of 40K for downpayment. My current marginal income tax rate is at 36%.



I am looking for feedback from anybody who has tried this or may have consider this scheme but decided against it.



Should i withdraw the RRSP or HELOC for downpayment or is there a better way of doing it?

t-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; widows: auto; word-spacing: 0px; -webkit-text-stroke-width: 0px; background-color: #fafafa;" />
Thanks in advance for your input.



Cheers

 

[Matt Crowley]

HELOC is as good as cash. Savings + HELOC should meet the requirement.



Matrix mortgage may be worth considering if you haven't set it up already.



To use RRSPs to invest in private real estate you have to be arm's length away. You can liquidate your RRSP's today but they will be taxed heavily. There is no way to "point" your own RRSP's to invest in your own investment property (as far as I know).



Congrats on qualifying! There are some pretty amazing rates out there right now...I saw TD advertising 2.46% on a 2-year fixed...unbelievable.

 

[vnwind]

Thanks SweetZone for your input. After google and reading a few online articles, it seems like HELOC is the way to go for me.



However, the catch is I must have the 40K withdraw from HELOC sitting on my bank account for 90 days before I can close the deal which is kind of road block when putting in an any offer for a good deal.



Any other thoughts? or should i change the mortgage broker that I am dealing with who said I have to have my down payment money in my bank for 3 months before I can closed the deal and get approved for the loan. OR i just have to wait for 2 months waiting periods?

 

[Thomas Beyer]

Invest RRSP with others or in public equities.



use LOC for down payment. Some banks require it to be "cash" ie in your bank account for 3 month before they approve a mortgage. Others don;t care and as long as your lawyer on closing day has the required cash in his trust account they will fund the mortgage.



Out of curiosity, where do you envision placing $400,000 in a single asset and what kind of rent do you envision here to carry that asset for 5-15 years ?

 

[Matt Crowley]

[quote user=vnwind]should i change the mortgage broker that I am dealing with



I would.



If you are in Alberta, David Niven at Collin Bruce Mortgage has been great for us. 1-877-436-2511 extension 132.



I like the strategy to go get pre-approval (rate hold) first and then go house shopping.



For anyone who is buying their first property or is in a hot market this is a great strategy. It opens up more time to perform the proper due diligence and controls a few more variables during the purchase.

 

[Cory Sperle]

I also agree with the LOC/Savings for down payment. Two things for you to be proud of, first you have 40 in savings, and a large 'untapped' HELOC that you likely set up a while ago to accumulate that much equity. The heloc funds may only cost $100 per month but factor in a potential interest rate rise, closing cost, and reserve. As long as your primary income source is sufficient to handle the heloc payments, you will do well as long as you buy a quality asset.

 

[vnwind]

Thanks again for everyone's input. I really hope somedays I will have a chance to meet everyone in real life.



SweetZone, about the rate hold. I don't think any mortgage broker will hold the rate any more because they said it cost too much for bank to do pre-approve like they use to do, my mortgage broker only look at my porfolio and see it fits with bank guidlines for the loan. They also told me that there are very few select lenders that do allow a down payment to come from a HELOC. However without having a property purchased yet they cannot tell whether or not I would fit within their bank guidelines so I am preparing myself for the worst scenario



I am going to transfer Heloc money today into my chequeing account and if I found a house before 3 months close date, if they don't approve it then i guess i have to withdraw from my RRSP but really hope I don't have to go down this road.



Thomas, I have been shopped and researched areas that I want to buy for 3 months now and put in offers for couples but nothing yet, but I am kind of narrow down what I am looking for. I am happy to share my envision with you



My first priority is to able to find a house in range of 300 - 320 K (half duplex) with 3 bedrooms and 2 bath that I can rent out from 1800 to 2000 for single family. With 8% less vacancy, I will able to cash flow around 88 dollars per month. Reason I want this because as my first property investment, I would like to keep it small and deal with 1 tenant so I can learn how to be landlord and such.



My second choice would be to find a house in range of 400-410 with 3 bedrooms / 2 bath ups and 2 bedroom/1 bath down with separate entrance that I can rent out for 2 families for 2800 per month. This will give me a cash flow of 344 per month. However, with my price budget I will have to settle with illegal suite which I really don't want to get myself in that is why it is not my first priority.



I would like to hold this property over 5 years or longer and assume that appreciation value is flat, after 5 years my Return on investment is 74%.



Please share me your thoughts. The Area i am looking for is in NW and SW of Calgary. I was able to find one duplex in nice neighbourhood but lost it to the bidding war. However, looking back my mistake was not being ready to pay full price when a good deal comes by. So lesson learned: why not if the maths works



Cheers

 

[Matt Crowley]

[quote user=vnwind]

SweetZone, about the rate hold. I don't think any mortgage broker will hold the rate any more because they said it cost too much for bank to do pre-approve like they use to do, my mortgage broker only look at my porfolio and see it fits with bank guidlines for the loan.


Hi VNWind,



I got a rate hold less than 2 weeks ago from Street Capital Financial Corporation good until December 2014. My business partner got a rate hold about a week ago for another mortgage so they are still out there.



Having a plan B is a good idea in any case.



Right now, everything in Calgary is "illegal" suite...as far as I know there is no legal suite standard. The city is actively looking into creating standards but don't have anything in place right now.



Dealing with two tenants at the same property is really not much more difficult than dealing with one as both share the same structure and utility services. It lowers the risk of vacancy and allows for a bit more income to be created from utilities, in my opinion.



Is $2,800 for the house before or after utilities?



I definitely understand the desire to develop legal suites - I think that is the way to go and it is our specialty.



We are finding houses in the Mill Woods area of Edmonton (SE) in the $350k range needing $25k renos to achieve legal suites. $2650 before utilities is our target and it has been very achievable. I'd be happy to talk more about that option if you are interested.

 

[vnwind]

Hi SweetZone,

I hope for 2800 before utilities. 1600 up and 12 down. Do you mind to share what interest and term you got from Street Capital Financial Corporation? I will contact that and have a plan B is always a good deal Thanks

 

[Matt Crowley]

[quote user=vnwind]I hope for 2800 before utilities. 1600 up and 12 down


Well done. A strategy I use to get the high rent upstairs with the garage is to advertise the suite (in your case) for $1,400 and with the option to rent the garage for $200 (regularly $250). In a hot market with low vacancy, so many people will want the garage I've found it is easier to sell it as a bonus they get with the lease. With so many candidates searching right now, I don't even look at the applicants who want the house-only.



2.99%, 25 yr am.

 

[Matt Crowley]

[quote user=vnwind]The Area i am looking for is in NW and SW of Calgary
[quote user=vnwind]However, with my price budget I will have to settle with illegal suite which I really don't want to get myself in that is why it is not my first priority.




As a side note, the REIN Team posted an article today regarding the development of Legal Secondary Suite standards for Calgary. One counselor has swayed recently in favor of developing legal standards. However, council still hasn't voted to allow the legal suites in the city. Just another reason to invest in Edmonton



To read the article from the Calgary Sun click here.

 

[vnwind]

Hi SweetZone,

Thanks for all your advices, I understand Edmonton is better place to invest than Calgary right now. However, with full time job so I prefer my first one is something close by and to learn much experience from it as landlord.



So my hunting for Calgary continue

 

[tkjca]

Hi Vnwind:



I felt the need to jump in as something about the math seemed off.



I do not think you needed to do any transfers from your HELOC. I had $50K in my RRSP three years ago and my mortgage broker just wanted to see that it was in there for more than 3 months and used that to get me qualified. If I used my RRSP or my LOC on closing, was my business. I ended up using the LOC. My LOC was unsecured (not backed by any real estate) so no "Home Equity" in my "Line Of Credit"; so no HELOC, just a LOC.



I did the same thing two months ago with another purchase. I showed balances in my RRSP, the investor's RRSP and we closed using HELOC and LOC money.



I don't like when people get bad financial advise. And it appears that you got bad financial advise from this mortgage broker of yours. Change them asap and save yourself the trouble of doing this all wrong. If there is a better way to do it, and there is, then any other way is just wrong.



As long as you can show that you have $70K in your RRSP for 90 days, and $40K in savings for 90 days, you are fine. I would use your saving, and the balance from your HELOC on closing. The interest expense on the HELOC will be tax deductible against rental income, and you will be well on your way to creating a very profitable real estate portfolio.



If you are interested in doing business in Ontario, we have some more affordable properties out here and I would be happy to get you your next property.

 

[vnwind]

Thanks Trevor for your advice, I will definitely seek more mortgage broker and see what my best option is.



Matt, among Matrix Mortgages, Street Capital Financial Corporation and Collin Bruce Mortgage, which one do you recommend and best suit with my scenario? Thanks

 

[Matt Crowley]

[quote user=vnwind]Matt, among Matrix Mortgages, Street Capital Financial Corporation and Collin Bruce Mortgage, which one do you recommend and best suit with my scenario?


Sorry for the confusion...I always deal with David Niven from Colin Bruce Mortgage. He finds the lenders for me. This time we went with a lender from Street Capital Financial Corporation.



A matrix mortgage is an advancable line of credit that you can set up that works alongside your existing mortgage (on your personal residence). Every time you make a monthly payment, the capital you can access in your home increases. This makes the cash very readily available.



HELOC + savings is definitely the way to go. You should be able to get a rate hold provided you have the income space. My business partner has a matrix mortgage set up on his home and can access the capital by just writing a cheque. Money on demand. It's great for down payments (when the lender will allow it).



If you are going turnkey investment like a townhouse, you can probably settle for a bit smaller of a reserve fund. This is some money you keep in the bank account to deal with problems that may come up on the property. If you are going for a secondary suite you will need a larger cash buffer - there are 2x as many appliances and these properties take a bit more effort to normalize. For the cash on hand, I would probably use the savings money and draw a bit more from the HELOC to fund the down payment.

 

[vnwind]

Thanks Matt, I contact David and tell him you refer me so let see how it goes. Can you set up matrix mortgage on the investment property?



I am grateful that I got answers for my question and hopefully someday I will able to join REIN because I can start to see of so much potential to do great things when surrounded with great minds and people.

 

[Matt Crowley]

No problem!



REIN has a lot of value to offer. The ACRE event is worth checking out if you have never attended before. It's a really solid introduction to private real estate investing.



[quote user=vnwind]Can you set up matrix mortgage on the investment property?





In the past you have been able to: "One major bonus this product has is that you can also get a Matrix mortgage on an investment property in addition to the initial one on your principal residence if you have at least 20% equity in the investment property." Source (http://www.whichmortgage.ca/article/the-top-3-readvanceable-products-for-real-estate-investors-118704.aspx)



This is a better question for David. Scotiabank and National Bank used to have competing products as well.

 

[vnwind]

Hi Matt



So i got back from David and i only got approve for 200K which does not make sense to me at all or maybe they have different risk tolerance level comparing to my other 2 mortgage brokers.



What does not make sense is that I only got approved for 200K which not much different if I just empty my HELOC (160K) + saving (40K)



I got "preapprove" for 350 and 400K from my other 2 mortgage brokers but I need to have my heloc in my account for 90 days.



I was on a high note yesterday and now I am confused and frustrated. Just pulled my credit report from equifax today and my score is 779. I don't understand why there such a huge gap in the loan amount



Please share your thoughts

 

[Matt Crowley]

[quote user=vnwind]So i got back from David and i only got approve for 200K which does not make sense to me at all or maybe they have different risk tolerance level comparing to my other 2 mortgage brokers.





Most likely the mortgage brokers are not using the same information. That's a huge gap.



I know a little bit about this but I'm not a mortgage broker. I'll do what I can but having a frank discussion with David will be the best way to resolve this.



Did David explain to you why you qualified for less than with the other rate holds? Have you checked your credit report itself? (The consumer report version from Equifax or Transunion is quite easy to read). Is it possible you made a large purchase recently like a truck / expensive durable good? Did he include all sources of income? Did you have an unusually high balance on a revolving credit line when he pulled your application?



That's where I would start.

 

[vnwind]

I just pulled my credit score today from equifax and there is no big purchase recently, my score is 779 which i think it is ok.



This is what i got from him



"We have to keep all of your monthly payments under 42% of your monthly income. At $88,000, 42% of that monthly is $3,080. With 2,200 going to the current mortgage, 191 to your property taxes and 100 to your heating it leaves $589 left a month to cover the payment on the HELOC on your owner occupied home, the new rentals property taxes, heating and mortgage payment."


so the max they can can get for me is 200K for rental purchase. :-(



Oh well, i will try different broker and see but does it hurt my credit score as i have already 3 mortgage broker pull my credits history within 2 months so far on my equifax report ?