Investment Property Financing in Ontario

Understanding investment property financing 

Investment property financing can fall into several categories. It can be a rental property mortgage - a store and apartment residential commercial mixed use mortgage or straight commercial property loans.

Rental property mortgage can fall into its lending types. Depending on the lender and your application, you can get a residential rental property mortgage for up to four units. 

You'll need 20% down payment to buy and you can refinance up to 75-80% of value - but, after four units, depending on the property type and your portfolio, you fall into alternative mortgage financing or a commercial rental portfolio financing with its own lending policies and rates.

Store and apartments mixed use commercial mortgage

Investment property loans for these properties can be a challenge that requires expertise.

A mixed use commercial mortgage applies to a property with at least 50% residential component. This type of real estate no longer falls under a residential rental program. And, unless the value is closer to a million or higher, the lender pool can be a bit narrow, especially if there are issues.

Investment property loans can be complicated. There are a number of factors that fall into the decision making process when evaluating mortgage for mixed use property applications. 

Let's look at Kevin, a young family lawyer with credit in low 600's and a new law practice -- just over a year. He firmed up on the purchase of a $800,000 mixed use property without getting a firm mortgage approval first. It's a new construction mixed use residential commercial property -- office on the ground floor and a two storey, three bedroom residential unit above. One third is commercial and two thirds above is residential space.

He has a commercial lease in place for the office space and a residential rental lease for the upper levels apartment -- for total rents of $4,100 a month.

With banks boasting they bend over backwards for professionals, Kevin was not worried when he firmed up his offer, he figured that getting investment property financing with 25% down would be a breeze -- not so fast, he learned.

Kevin also owes $95,000 in student loans. He's working on filing his taxes for the first year in business and so far, can produce a draft profit and loss statement showing over $120,000 professional income.

Two weeks prior to closing, Kevin is still hunting for income property loans. He's been to his bank and was turned down for a mortgage. Going from bank to bank, from one broker to another, everyone pulling his credit lowering his credit score. This makes it even more difficult to qualify for a mortgage. His parents did not qualify as guarantors -- they co-signed student loans for him and his two sisters and now are over extended and not bankable.

Kevin was offered a private mortgage which he feels is too expensive when compared to best market rates, that he does not qualify for. But this is a good short term solution for him - in just a year, everything will be different. Private mortgage lenders are a good source for this type of property loans when everyone else says NO. Private mortgage loans are more expensive but they are a good short term help until borrower eligibility can be improved. Business borrowing costs and interest can be expensed making this financing reasonable in the long run. 

Kevin is having a problem getting investment property financing as he is new in business without a strong track record, his credit is a bit low and he is already carrying a hefty student loan debt -- financial institutions rely on the statistics that businesses can fail within the first three years. As a result, they are unwilling to take a chance unless they get strong guarantees. They maintain that without proven business income history, if one or both tenants were to vacate, there could be no one to pay the mortgage. In their mind, this borrower is simply too weak and not ready for institutional investment property loans.

Commercial property loans can be a moving target

Commercial lending can be a moving target. You have to know who’s lending, and who’s not, and what type of property at what price category.

Commercial building financing is dependent on strength of the borrower, income, the type of property, location, and industry.  Even if you fit the lender’s criteria today, there is no guarantee that they will help you because their portfolio and funding criteria are always changing.  

Several of my clients experienced this problem, even though they made all their payments on time. When their bank's portfolio and lending criteria changed, they were given 30 days to find new commercial property loans elsewhere.

Further, commercial mortgage proof of income and property value is calculated differently than other mortgages. The strength of borrower's covenant and income matters - the question to ask is who owns the property, you or a corporation. It is that owner who has to pass the lender scrutiny.

Marie Copeland, FSU, Mortgage Broker helping clients with their rental property mortgage and commercial property loans.

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Axcess Mortgage and Loans Financing Co. Ltd. | FSRA 10420

1 (905) 537-8815

Banks and AAA lenders pay us for your service. Some alternative mortgage financing and all private mortgage broker fees are payable by clients.