Recently, we had the pleasure of attending a one-day 5-year Action Plan Workshop with Peter Kinch.
In this workshop, Peter reverse engineered the process of building a real estate portfolio. He started with the end result in mind; clarified our goals and then worked backwards in order to identify our obstacles.
For those of you who don't know Peter, he's one of the most well-known Mortgage Brokers in Canada. He is the co-author of the #1 Best-Seller, '97 Tips for Canadian Real Estate Investors' with Don R. Campbell and his latest book, 'The Canadian Real Estate Action Plan' is now available at Amazon. In 2009, Peter was recognized as the #1 volume-producing mortgage broker in Canada on the CMP Top 50 Brokers list.
As Real Estate Investors, why should we listen to him? Well consider this,
Out of all Canadian residential mortgages, only 4% are for investment properties. Out of all Canadian mortgage fraud, foreclosures/power of sales, or defaults, 70% are within this 4% of investment properties. (Now you wonder why it's much more difficult to qualify for an investment property?) Although the majority of his clients are real estate investors, Peter ฝากขายคอนโด has an impressive record of NO mortgage fraud, foreclosures, or defaults. Having a chance to meet him personally, Peter is a broker of high integrity and honesty.
According to Peter, there are two main obstacles when it comes to buying Real Estate:
Down payment Qualifying for a Mortgage
In this post, we will be discussing various sources for a down payment. How to qualify for a mortgage is discussed in Part 2.
Down payment
Generally, there are 7 sources for a down payment:
1. Liquid Assets
This is the most obvious one, includes cash, shares, bonds, mutual funds. Liquid assets are basically any assets that can be converted quickly into cash.
Remember: You have to show proof of any liquid assets, for example if you will be using cash as a down payment, you need to show your mortgage broker bank statements of 3-months showing the amount.
2. Real Estate Equity
Most of us have more equity in our homes then we realize. Using our home equity is a popular source of down payment for an investment property, although some people prefer to pay down their home mortgage. If you would like to access your home equity:
First, find out how much your home is worth. The most objective way to do this is to get an appraisal, which will cost a few hundred dollars. Your mortgage broker may recommend a local appraiser.
Second, you can access up to 80% of your home value. You can do this by either re-financing your home with a mortgage broker, or placing a secured line of credit on your home (check with your lender or mortgage broker for options).
Remember: Banks do not consider an unsecured line of credit as a source of down payment. So make sure it is secured against a property (most likely your home).
Strategic Move : Consider getting a "re-advancable mortgage" on your principle home. With this type of mortgage, as you pay down your mortgage, the line of credit on the equity automatically increases, thus having access to a tax-deductible loan.
3. Sub-Prime
This type of financing was very popular before the 2008/2009 financial crisis, and is almost non-existent now.
4. Private Money
If you would like to maximize your Loan-To-Value, but the banks turn you down, consider getting Private Money. Many individuals and private companies lend money through mortgage brokers. However, this type of loan is usually much more expensive than conventional loans, where interest rates can range between 8% and 16% depending on your situation. Also, the maximum Loan-To-Value is usually 85%. It is important to consider your exit strategy before approaching private money, as lenders would like to know how you are planning to pay them back. Do not forget that private money can come from RRSPs as well.
Also Known As: Hard Money Lender (HML)
5. Vendor Take Back
A second mortgage held by the Vendor is a popular choice (more with commercial real estate, than residential). In this scenario, the vendor lends you a second mortgage, which is secured on the title of the property. The advantage of this option is that almost everything (amount, interest rate, terms) is negotiable - depending on the vendor's situation. For example, I could not believe myself that with one deal, we were able to agree on a 6% interest rate VTB.
Remember: Your first mortgage holder (i.e. the banks) may have restrictions on second mortgages, usually up to 15% Loan-to-Value is allowed.
6. Joint Venture
If you have experience with investing in real estate, consider asking investors in your circles to partner up with you. You may be surprised to learn how many people want to invest in real estate, without the hassles of dealing with tenants and the nitty-gritty of property ownership. Especially with the stock market showing much uncertainty these days, it's a good opportunity to help those individuals secure their investments with a hard asset. This is another topic on it's own and deservingly will have its own post in the future.
Most Important: To attract good partners, you must have Confidence, Credibility and Integrity .
7. Flips
Flipping properties is a high-risk option to quickly build some capital. A typical flip involves buying a property under market value, renovating it and selling it right away at a higher price, all within one year or so. This is a widely used technique by those starting in real estate. But why do we consider it high-risk if it's so popular? Because all your profits depend on your ability to sell the property, and thus depending on something you absolutely have no control over - the market. There are of course many things you can do to protect yourself. For example, making sure that the rent you can collect covers your monthly expenses, will allow you to hold the property until the market is favourable. It also helps if you have experience in the construction industry, otherwise, once you start taking down the walls, you may have some surprises you are not ready to deal with.
Remember: Banks do not favour short-term mortgages, and thus it may be difficult or expensive to finance a flip.
Stay tuned for Part 2 - discussing how to qualify for a mortgage.
If you found this post interesting, please leave a comment below. Do you have feedback regarding Peter's book? Do you have other tips for finding the down payment?
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