Photo Flickr user: inacentaurdump

This dream scenario is possible because I bought the building with 100% financing three years ago.  That meant I traded a down-payment for an exorbitantly high interest rate of 7.35% with Xceed Mortgage.  This is a self-insured mortgage, meaning that CMHC didn’t provide the insurance for this high-ratio mortgage, Xceed did.  I still had to pay an insurance of sorts in the form of a ‘fee’ that roughly equaled what I would have paid CMHC.   This high ratio mortgage, on a 3 unit rental property, that was not owner-occupied would never have met

CMHC’s tight financing rules.  I was lucky to buy this when I did, because these kind of mortgages don’t exist today.

As you know, this is a great time to acquire debt.  Interest rates are as low as they’ll ever be with the Bank of Canada Prime rate at just 0.25%.  So my mortgage broker was able to secure a mortgage from Street Capital Financial that consists of:

• 90% financing based on a market value of $255,000
• 2.40% variable interest rate(Prime + 0.15%)
• 5 year term
• 35 years amortization

After I pay off my current mortgage, that leaves me with roughly $25,000 in cash and increases the profitability of the building from about $300/month to $715/month.  It’s a win-win scenario.

Now, I know many of you are probably cringing at the thought of amortizing your mortgage over 35 years.  I’m well aware of the fact that I pay down very little principal over the next 5 years.  But that’s OK with me.  Cash flow is key here and the interest on the mortgage is a tax deductible expense.  Also, I know I can expect my mortgage rate to march pretty consistently upward over the next few years as the economy improves.  This will affect my profitability, but I’m a believer in variable rate mortgages being cheaper in the long-run (more on that another time).

So, my plan is still in effect.  I want to ‘sell up’ and get into bigger buildings, but I’m going to do it a little differently.  I’ll use the money from this new mortgage to spruce up my own house a little bit, put the rest aside, then re-finance my house and pool as much cash as I can so I can go shopping for a flip.  This way I can keep my rentals, continue to grow my equity, collect some monthly passive income, and do a flip.  We’ll see how it goes…

Photo: Flickr user blhphotography

I’m going to try and stay away from my recently favourite topic about evicting a tenant.  In fact, the outcome of evicting this non paying head-ache is that I’ve just landed a new tenant who’s going to pay me on regular basis (at least hopefully).  I don’t know why I didn’t follow through with this eviction sooner, because for the first time in more than six months I don’t have to wonder if I’m going to get paid next month.

Since I knew my eviction would be in effect for November 1, I advertised the unit for rent and the first person the responded took it.  This is great, since you all know I rent in a tough neighborhood and its hard to find good tenants.  Hopefully I’m not jumping the gun on this post, since I’m set to sign the lease and collect the damage deposit tomorrow evening, but what a weight off my shoulders.

In another development I may not sell the apartment buildings after all.  One of my mortgages is coming up for renewal at the end of December and I may be able to take out enough equity to make it worth my while to

keep them.  In fact, I may be able to take out more equity than I could have made from the sale of both buildings.  When you consider that I won’t have to pay capital gains taxes on the new money, it’s pretty much a no-brainer.  Oh, and did I mention that my new mortgage will have such a low interest rate, the profitability for the building nearly doubles!

The application is with my mortgage broker now.  I’ll certainly be posting about this when I have the results.

First of all, I live in Canada so your mortgage rules are likely different if you live in the US or anywhere else.  Also, I bought my first place nearly three years ago and we all know what’s been happening with the banks lending rules – can you say belt tightening?

Anyway, back to the story.  When purchasing a home in Canada that is ‘owner occupied’, I only needed a down payment of 5% of the purchase price.  This amount varies based on the number of units in the building, the bank, whether or not this is your first home, and so on.  CMHC (who insures mortgages that are more than 75% financed) normally lays out these requirements.  You should keep in mind that your mortgage insurance premiums rise when you finance more of your purchase.  The good news is that this amount is rolled into your mortgage so you don’t have to pay for it up front.

Anyway, my down payment amounted to about $15,000.  Unfortunately I’m not a good saver so I didn’t have 15 grand kicking around my back account to make this happen. So, I cobbled together the cash with a credit line I had available.  According to most bank’s rules you’re not allowed to use credit for your down payment, so I had my Dad write me a letter stating that he gave me the money as a gift.

Great, so you’re probably wondering  what to do about this big fat credit line you know have to pay back?  Well, it is important to consider these payments when calculating your affordability of your investment.  I factored in my minimum credit line payments into my total mortgage costs.  Because I was purchasing a duplex with rental income, I deducted this amount from my new total cost.  My math told me I could afford the place, but just barely.  I couldn’t keep making these credit line payments forever.  I’d be cash starved and house poor, which in my mind is not a good investment.

I considered this when I was evaluating the feasibility of the property.  I estimated that if I put some work into the building I could increase the value of the property and re-finance the mortgage in order to pay back my credit line and free up that much needed cash flow.  So again I factored in the cost of the down payment credit line, then the cost of the renovations and my carrying costs (credit card and credit line payments), and my estimated future value of the house.  I then calculated how much I could re-finance with the bank (keep in mind it may not be as much as you originally financed when purchasing) and how much my new mortgage payment would be after I paid back my debts.

Ultimately this was how I was able to determine if the property was a good investment for me.  I put a $15,000 down payment into purchasing the property, then another $15,000 into renovations.  After about 6 months of carrying the payments on my credit line I had the house appraised and it came out to be $250,000, about $50,000 more than I paid for it.  My refinancing terms meant I could only take out a maximum of 85% of the equity With my new CMHC premiums, lawyer fees, and other costs factored in it amounted to about $30,000 – just enough to pay back my short term debt.

So I got into my first income property, a duplex, without putting any of my own money into it.  Better yet, I managed to create another $20,000 in equity for myself with the renovations and I wasn’t out a single penny!

In order to find deals like this you need to look at a lot of properties, evaluate them carefully, and ensure you can budget well.  The key is to know what you’re dealing with in terms of financing costs (interest rates, insurances, fees, and payment terms), closing fees, re-finance fees, renovation budgets, and the cash flow required to support it all.

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