In a Buyer’s market where prices are coming down more people are thinking about buying rental properties. If you are one of those people you will be one of the elite! In fact only about 4 percent of Canadians decide to buy rental properties as part of their investment portfolio.
One of the herdles that investors have to get over to begin buying rental properties is finding down payments! Here are 7 options for you to consider to get those funds:
- 1. Liquid Assets
You can sell off some stocks, sell your car, your coin collection, or rare doll collection etc.
- 2. Real Estate equity
Properties tend to appreciate over time you can now take up to 85 percent (as of March 2011) of your equity out of one of your other properties! You usually have two options take out a mortgage for the full amount of equity (usually at lower interest rate or get a line of credit (LOC) for the amount. By getting a LOC you don’t have to borrow the full equity amount. You bank might offer a ‘re-advanceable mortgage/LOC’ combination where every time you make a principal and interest payment on your mortgage, the amount of principal that is reduced in the mortgage is automatically available to you on your LOC.
- 3. High-ratio insured Mortgages
Put less money down on a property. This is a very difficult option in the present market conditions, as described below:
Up until 2006 The Canada Mortgage and Housing Corporation (CMHC) was the only mortgage insurer who would insure rental properties. AIG United Guaranty entered this market in late 2006 and targeted the residential market coming up with 90% financing for investment properties. As well GE Financial entered the market and matched any service AIG would offer. Then in August of 2007 a rumbling from a hedge fund in France led to an avalanche called the “sub-prime crisis.” As a result GE and AIG both withdrew from the market of residential rental properties in Canada even though Canada was relatively impervious to the sub-prime crisis.
In April 2010 bowing to the concerns that the Canadian housing market had not only recovered from the recession, but was in fact getting overheated once again, the government stepped in and annouced further changes. They simply eliminated any CMHC-insured high-ratio mortgages for real estate investors with less than 20% down.
- 4. Sub-prime Mortgages
Not many people understand sub-prime mortgages. Sub-prime mortgages are lent out when the person or the property is ‘sub-prime’. In Canada the number of sub-prime mortgages represented less than 5% of the mortgage market where as in the US sub-prime mortgages represented up to 25%. Sub-prime mortgages came about to service the individuals who had a hard time proving their income (for example the self-employed).
Ever since the sub-prime crisis virtually no lendersare active in this market. The few that remain will go up to 85% but that changes every month depending on market conditions.
- 5. Private Money
When every option is exausted to get cheaper conventional money look at private money. Private money is not for everyone. Private money is best used on a short term basis. Suppose you find an ideal property but the current owner has the rent well below market value, but you have to wait a year to increase the rent. At present the CMHC will only grant you a first mortgage for up 55% of purchase price based on the current DCR calculations. If you are very confident in the market and value of the property private money might be a great short-term solution. Financing for flips might also be a good option.
Don’t confuse private with a zero-down option. Just because the money comes from a private source and not a bank doesn’t mean that the lender doesn’t worry about risk. Some private lenders worry more about security than the banks.
- 6. Vendor take-back mortgage
In the case where the market favors the buyer vendors might be willing to do a vendor take back mortgage (VTB). VTB’s are essentially a second mortgage that is arranged by the vendor. Say for example, you wanted to buy a property but didn’t have 20% to put down you could approach the seller and ask them if they would ‘take back’ or grant you a portion of the down payment say 10%. There is currently no Canadian bank that will allow the VTB to be as high as 20%. Banks typcally only allow up to 10% of the mortgage to be VTB on rental properties.
- 7. Joint Venture partners
A joint venture partnership (JV) can be structured many ways but the most popular is when one partner does all the leg work while the other provides the cash. Both parties would be on the title and therefore responsible for the mortgage. The JV can be for whatever percentage you negotiate.
I hope you have found this information informative. Finding a good rental property includes using a good Realtor. Please contact me if you are considering buying rental property in my area!