John and Melanie - this is the real thing!

I love sharing success stories from my clients. This story is the "real deal". Jonathan Sloot* and Melanie Grose* came in to see me about a year ago. They were living in a small house, and they needed more room. However, their current house made a perfect rental property. They came to me with the idea of keeping their current home, and buying a bigger more "family-like" house.

I was really impressed with Jonathan's and Melanie's financial discipline. They had done a really great job at keeping their amortization short on their current home and paying down on their mortgage. They had a a lot of equity tied-up in the house. I showed them how to release it through a secure-line-of-credit and that became the down payment on their new home. We also looked at the cash flow of their current home, which was to become the rental. We wanted to be sure the rents covered the expenses, plus the mortgage. 

Here's what they said about the experience,  

"We went to see Sandra because we wanted to purchase another home to live in and keep our old home as a rental property.  Although there was equity in our current home, we were unsure on how to release the equity and piece together the plan.  Sandra laid-out the strategy in a clear way that we could understand what would take place. She negotiated the mortgages for us and got us better rates than our own bank could. We basically came in and signed the initial paperwork and Sandra and her team took care of the rest"

*permission was granted by Jonathan and Melanie to share their names and story. 

Financing student rentals: lenders see them as “the plague” of properties

An area of mortgage expertise I focus on is financing and refinancing rental properties. As a rental property owner myself, most clients appreciate the first-hand knowledge on the pros and cons of owning real estate as an investment.  I have made some great decisions with real estate and also some bad ones. 

Student rentals are popular in Guelph since it’s a university town. But they’re becoming more challenging to get good mortgage financing on because of the perceived risk lenders have. As a mortgage broker, we have access to many sources of financing. I’m finding that most mortgage-lenders are not offering competitive mortgage financing on student rentals.

Here are some things that you need to be aware of when buying a student rental or refinancing it to access the equity for future investments:

• In most cases the finance company will approve the mortgage based on the borrower qualifications. Where I’ve seen problems arise is through the appraisal of the property.  Lenders are now conditioning appraisals on almost all conventional mortgage loans.  Although you may have been pre-approved or approved for the mortgage loan, the student rental property will be an issue with most traditional mortgage lenders.  If you’re buying a new student rental be sure to have the appraisal completed before the financing condition is up.  This can save you a lot of last minute problems on the closing day.

• For those mortgage lenders who will finance a student rental, you may be required to put up to 35% as a down payment versus 20% which is typical on a regular residential rental property.

• If you son or daughter will be living in the property while they are going to school, these properties are viewed differently than a student rental property purely for investment purposes. Your mortgage professional should be able to give you advise you on how to structure the mortgage loan to benefit you financially. Also seek the advice of an accountant to discuss the capital gains implications once you sell the property.

I’ve rented to students and I find most are respectful of the property and make good tenants.  As an investor, student rentals typically have good cash flow. The rent is traditionally charged per student per month and in Guelph the rent per month per student is about $500.

When you buy a student rental ensure you work with a mortgage professional that has experience financing them and can take you through the process so that you get a mortgage approval, with a competitively priced mortgage.

If you’d like to discuss your own mortgage situation, I would welcome your call or e-mail! Please contact me at: 

-          tel: 519-763-3900 ext.1001; or,

-          via e-mail at Lastovic.s@mortgagecentre.com

Buying a rental property for the wrong reasons...

One of my specialities is helping people build their their real-estate-investment portfolio. Because I'm in the business of owning and managing rental properties myself, most of my clients appreciate the fact that I have first-hand experience of what to do (and what not to do).  I've made several mistakes over the last ten years where I've lost money, but I have also had several success.  I'm proud to say that I'm finally making a decent profit.

I love Don Campbell's quote from the Real Estate Investment Network (REIN), "Real estate is not a get-rich-quick-scheme, it's a get-rich-slow-and-steady strategy". 

Here are some typical reasons people give for buying a rental property, that may be the wrong reason for purchasing (I'd love your feedback):

1. I want to supplement my income now. If you purchase a rental property and need to put a mortgage on the property to 80 per cent of it's value, you're likely not making more than $500/month on it.  I'm referring to the marketplace which I know best KW, Cambridge, Guelph, Brantford, and Niagara.

2. You want passive income. Owning a rental property is not a passive business.  There's allot of work that goes into managing a property and making money.  Depending on the property, it should take you an hour each week BUT you need to do some work each week per property.

3. You're retiring in a year. If you're retiring shortly and you're looking for something fun to do, then a rental property may be the way to go.  I've also helped retires buy properties to leave a legacy for their children.  If you have money to invest and want to make a "dividend" or supplement your monthly income, investing in a private mortgage is a good alternative.

Implications of new mortgage-lending guidelines...

With little surprise in Canada, the Minister of Finance has finally made a formal announcement that there will be significant changes to mortgage lending. The main changes are a decrease in maximum amortizations from 30 to 25 years and a maximum loan-to-value refinance amount for your primary residence to 80% of the home's value (down from 85%).

What are some of the practical implications?

1. For first-time home buyers (especially in Guelph or the surrounding area), it's difficult to find a detached, suitable home for under $260,000. The shorter amortizations will decrease a person's borrowing capacity and purchase price by approximately $40,000. The exact date of the changes is unknown yet; however, if someone has been pre-approved for a mortgage 4 months ago, be sure they call their mortgage broker and speak to them about their maximum purchase price.

2. Qualifying to purchase a rental property has tightened in the last 6 months.  We have seen most lenders go to sticker uses of how rental income is used in qualifying someone for a new mortgage loan. The shorter amortizations will also limit one's ability to purchase rental homes.  In Guelph, we've seen a surge in prices for rental properties.  The change in shorter amortizations may cool rental property prices.

3. Refinancing to only 80% of the value of your primary residence will limit one's ability to take equity out of their home to pay-off debt, or to purchase other properties.  For example if a home is worth $350,000, under the new guidelines, the individual will have access to $17,500 less equity.