Getting your Maximum Mortgage Qualification
You need to be as strategic about your mortgage as your real estate. Here’s how.
To grow your real estate portfolio, you need to be able to qualify for as much financing as possible. To get your maximum mortgage qualification, you need to work with an investor-focussed Mortgage Broker. Most people think about their real estate as a portfolio, for good reason. But they overlook the fact that they need to be thinking about their MORTGAGES as a portfolio as well. This means that you need to be AS STRATEGIC about your mortgages as your real estate. It cannot be an oversight, since one wrong move could limit your ability to get financing for future properties.
Just as a simple example, let’s say that CIBC is the easiest lender to work with. That means that I should go there first, right? WRONG. If they are a flexible lender, you want to save them for when your back is up against a wall. Conversely, let’s say that Scotia has a 4 door policy, beyond which they will not lend to you. This may mean that you want to utilize Scotia first, because you won’t be able to use them later.
This is necessarily different from how most people think about mortgages. Most people think of mortgages as a commodity – you can get it from here, or there, or anywhere. The reality is much different. Getting your first mortgage is easy, anyone can do it. Even getting a second mortgage isn’t that hard. But once you start growing your portfolio to 5, 7, or 10+ properties, you will see a different side of the mortgage industry.
This means that you actually need to think of your mortgage portfolio as a chess game. You need to be thinking 5, 7, or 10+ moves ahead. You need to have all the lenders mapped out in the order in which you wish to use them. You need a financing blueprint.
There are many clients who we’ve worked with who didn’t plan out their financing, and at best it severely hindered and slowed down their real estate investment progress, and at worst it was very VERY expensive to remediate (i.e. mortgage prepayment penalties in order to move them to a different lender, etc.)
For a more advanced example, imagine that you are employing the BRRR strategy, in which Volition is helping you find, purchase, and renovate a Single Family home in a fantastic neighbourhood into a Legal Luxury Triplex. The key component to making this work is being able to refinance at the higher ARV value in order to do an equity takeout and get most (or all) of your $500k reno money back out so that you can roll forward with another project.
The reality is, mortgage rules are a constantly moving target. Literally, lenders rules and regulations and conditions change on a weekly basis. This makes it incredibly difficult (read: impossible) for the average investor to follow and figure out how to optimize. This is where the investor-focussed mortgage broker comes in. They should be able to map out your plan for you, according to your goals.
Keep in mind: THIS is the bigger fish! This necessarily means that sometimes/often, you won’t be going after the absolute lowest mortgage interest rates! Be strategic, don’t be myopic. Think about the bigger picture. It’s more important to be able to reach your goals than to try to save a few bucks every month on a slightly lower mortgage payment.
Importance of Investor Mortgage Brokers
Investor-focussed mortgage brokers are important as well because they understand how to get financing specifically for investment properties. The problem with investment properties is that for every investment property you purchase, it makes it HARDER to get a mortgage for the next one. On top of lender policies for door limits and appetite for investment real estate (or lack thereof), the problem is 50% add-backs (and not 80% rent offset, which is more favourable for investors). In general, lenders only consider 50% of your rents, but use 100% of your expenses when calculating your GDS and TDS ratios. This means almost ANY investment property in Toronto will have a negative impact on your ratios. In order to continue buying more properties, you will need to service the remaining debt using your own personal salaries (which you will eventually run out of as well), or switch up your strategy and consider Join Ventures (using other people’s mortgage qualification), or going bigger into larger Multifamily (which utilizes commercial financing and the asset itself for qualification purposes, not you personally).
This is exactly why an investor-focussed Mortgage Broker is incredibly essential to your success. They know which lenders to approach, they know how to structure your file in a way that the underwriters will understand, and they can even (somewhat) advise on the parameters of the investment properties you will need to acquire in order to be able to continue qualifying for financing. Your Investor Realtor and your Investor Mortgage Broker will work hand in hand according to your strategy, your plan, and your goals. If they aren’t working together, there is a gaping hole in your real estate investment execution that immediately needs to be shored up. Volition is constantly working alongside our clients’ mortgage brokers, accountants, lawyers, and other advisors to ensure that we are all working off the same playbook. And oftentimes, that playbook was originally designed BY Volition’s Advisory Services, in accordance with our client’s life, financial, and real estate goals.
Investor Mortgage Brokers also know how to work with real estate held in corporations. At normal lending institutions, if you are intending to put properties into a corp, and you are working with just a regular mortgage specialist at that bank, chances are that they (and the underwriter) will not know how to deal with the corporation. They will even sometimes resort to turfing your mortgage application over to the commercial lending department. SERIOUSLY!? A commercial mortgage for a normal residential house is NOT the solution!
Advanced Investor Protip to “Improve Cashflow”
Something you may want to consider is getting a readvanceable mortgage at the time you are getting your financing. This means that you will get a HELOC alongside your mortgage, and the HELOC grows with every mortgage principal payment you make. Again, your investor mortgage broker will be able to advise, since it’s very hard to get HELOCs on investment properties, and so your best bet is to try to get them early on when your portfolio is smaller (and definitely on your primary residence as well). HELOCs can also be a way to “improve cashflow” on a property, if you consider moving funds from your HELOC back into your bank account upon every mortgage payment (equivalent to the mortgage principal paydown on each mortgage payment). You are “improving cashflow” at the expense of “mortgage principal paydown” (in reality, you are just moving money from one pocket to another pocket). If that tradeoff makes sense for you in your situation, it could be a way to improve cashflow for your investment business. In a market like Toronto, where true wealth is built on capital growth of the asset and not by the slow process of paying off the mortgage, this could make sense.
Another way to do this is to get the full 80% LTV as a 65% HELOC segment and 15% mortgage segment (NOTE: HELOCs are not allowed to be more than 65% LTV). This means that you won’t be paying off any principal when making HELOC interest payments, and only a small principal payment when making your mortgage payment. This can drastically improve cashflow as well, in a similar fashion to the previous example… the mechanics are just slightly different. Qualification for a large HELOC can be much tougher than a mortgage, though, so this might not be for everyone.
And as you start progressing into more complicated and complex projects, there is a whole other world of financing: B-lenders, Purchase Plus Improvements, construction financing, private lending, RRSP 2nd mortgage lending. Some of these will be thru your mortgage broker, but you will only learn about some of this from advancing your knowledge of Investment Real Estate and being part of real estate investment communities, like our Real Estate Investor Meetup (which is the largest in Toronto). In fact, November 2021’s meetup is about RRSP 2nd Mortgage Lending!
Volition is strategic partners with the top investor-focussed mortgage brokers in the country. As a result, our clients have the best chance to qualify for as much financing as possible. Reach out if you are interested in being a Volition client, and we can refer you to our top mortgage brokers partners.