Buying Real Estate Investment Property
The vast majority of people looking for real estate loans, whether for their own dwelling or for investment purposes, think about private lending as a last minute source if they cannot find bank financing. However, because banks are still showing a great deal of caution with regard to lending, in the wake of the housing crisis of 2008 and 2009, and because the Canadian government has set up so many rules with regard to mortgage financing, private lenders are becoming more and more popular.
To be sure, private lenders do not offer rates that are as low as the banks, and the terms are shorter (one to two years in most cases), but for the investor, this should not represent a hurdle, as people who are looking to “flip” the property will be able to pay back the loan in a very short time — as soon as they make improvements and turn the house around for the next buyer. Investors who are looking for rental properties simply set their rent levels to pay for the cost of the added interest expense.
One of the major rule changes influencing bank financing of mortgages that affect investors has to do with the down payment requirement. For investors who do not plan to occupy one of the units at the investment property, a minimum down payment is 20 percent. Also, the CMHC (Canadian Mortgage and Housing Corporation) has also made a change to its policy for underwriting when providing mortgage insurance coverage for investors. In the past, 80 percent of the rental offset could be counted on the income side, but now that cap sits at 50 percent.
Because of these new rules, the search for private financing has become more common among real estate investors. That 20 percent down payment threshold is a major hurdle for many investors, who often fail to keep that much liquidity on hand. With private lenders, it is possible to find financing with as little as 15 percent down, and that difference opens up many more opportunities.
Another rule influencing investors has to do with income verification for self-employed persons looking for a mortgage. Borrowers that have been a part of the same business — even if they own it — for longer than three years have to supply third party validation to get approval for a loan. This also applies to people who work for companies but are paid on straight commission rather than salary. People who lack this validation generally face a minimum down payment of 10 percent on primary residence mortgages, and the qualification for investors is even more stringent.
So what is a private lender, exactly? It could be an individual, it could be a company, and it could be a mutual fund seeking to add more loans to its pool and keep on diversifying the risk for its members. Brokers such as Amansad Financial maintain relationships with these entities to connect potential borrowers and lenders. If you are looking to invest in real estate and think that bank financing may not be within reach, this is another way to get that investment property and start realizing profits.