In this episode, Quentin talks with a couple who has a single-family rental that they would like to increase its cash flow, and they are also coming up with a mortgage renewal. We cove why moving to a variable rate mortgage will give them more options for further investing and what situations work best for putting properties under a corporation.
They purchased an investment property, a freehold townhouse five years ago in Alliston. They want to expand their portfolio, as they want to leave a property each for their sons, and help them in their retirement. After doing research into real estate investing, they have been excited about the possibilities that it can offer. For their next property, they are looking to buy a duplex or a triplex. They have reached out to some of Quentin’s students in the Durham Region, to join them and see and learn how the whole process works. While there Alliston property turned out great, it has a cash flow problem.
Currently, their mortgage payment is $1297 a month after property taxes, while the total mortgage amount is $227k. Their property is currently valued around $600,000. As for the current rent of the property, they are charging $1610, but if they were to re rent it, they could get over $2000. Their mortgage is coming due December. They went with a fixed rate, and they have the option to refinance early. While doing research about their next purchase, it has only led to further confusion about whether or not they should leave this property in their personal names, and then going forward, open up a new company.
Quentin suggests going through the ‘When to Use a Corporation and When Not To Use A Corporation’ course in the world to get an idea of both. Having a corporation is a good idea if they are looking to build a portfolio of three, four or more properties. The upside of having corporate is that it doesn’t appear on their personal name, but that’s only a benefit if they’re going to multiple lenders. He adds that if they’re not sure, the thing is they can always come back and do Section 85 later. He says that one of the reasons why they might want to speed up the process is that if the Liberal government gets reelected and they change capital gains tax.
Quentin suggests that for the amount of funds that they have access to with that CIVC or Scotia Bank mortgage, they should make sure that whatever they give them, they should maximize the loan that they have access to through the line of credit component to it. He adds that when they’re doing 100% financing, it’s tougher to make the numbers work but it’s good to be able to access funds because then it will allow them to invest in other projects. He suggests that never go fixed rate again.
He further says that they will never be able to catch up or take advantage of changes in interest rates, but they can always lock in. If they feel uncomfortable about anything, but lock in for a year. As an investor, access to capital is even more important because it can prevent or allow them to access more deals, and if they have a variable rate mortgage, they can always exit a variable rate mortgage by paying three months interest penalty and then access funds.
The members share their plans to sell their primary residence in the next year, so Quentin suggests going through the Getting Higher Appraisals: The Basics. He adds that a lot of people don’t understand this but as a real estate investor, that’s when you get paid on appraisals, because when you do an appraisal, you get access to funds either through a line of credit or remortgaging the property. He also recommends going through the content on Property Analyzer, as it helps learn about what to look for.
Talking about another way to get an idea about the rent is just going to Kijiji and or Facebook marketplace and look for ads in their area and see what the rents are, because that way they get a better sense of what something is renting for, or they can talk to a realtor in the area. The members share that the reason that they went directly to Scotia is they don’t have any kind of a line of credit with using the equity from the house and Alliston property, Quentin adds that they should start out right away, because it can take some time, and update them once they get it done.
Quentin adds that the mortgage brokers are really helpful in finding other types of lenders and putting it together. They can help with a plan, particularly if they’re looking to buy multiple properties. They can help plan out their next few purchases rather than usually somebody who’s at a bank will only look at their next purchase. It may not help them or position them well for those future purchases, so it’s something to keep in mind. Talking about how they can ask their tenants to vacate the property, he says that they should use the ‘Cash for Keys’ approach, where both parties sign an N11, declaring that both have agreed to end the tenancy, for a certain amount of money. They could also apply to The Landlord and Tenant Board for an above the guideline increase, if they have done a capital expense.
Talking about whether they should sell the property or not, Quentin says that the problem with single family home properties is that at a certain point, they won’t be able to leverage it enough to access any equity. If it were an apartment building, they could bring it up to the maximum loan to value, but a one-to-four-unit property is based on the rent numbers, and on comparables. Then they may have equity that they can’t access, because the rents don’t support them taking more.
He suggests going through the calculation called the Return on Equity Calculation, as it is something that he does for his portfolio. They may want to do on their property, just to see what that looks like. In conclusion, he suggests attending the Q&A calls, participate in the networking with other members, and get feedback if they have any questions, because “your journey is always easier when you take it with somebody else.”
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Action Taker's Real Estate Investing Planner, The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords, The Filling Vacancies Toolbox: A Step-By-Step Guide for Ontario Real Estate Investors and Landlords for Renting Out Residential Real Estate, and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.