Pur-Plexing

"Pur-Plexing"
by PJ Wade


When it comes to real estate, buying more may be a better long-term plan than settling for what lenders insist your current income dictates.

If your income is not high enough to finance the purchase of the single-family house you'd prefer, consider buying a revenue-generating property to boost your buying power and enhance your long-term financial prospects.
Instead of a first-time purchase that's a shoe-box-sized condominium unit, a handyman's special or something at the end of a long commute, consider a move to an apartment where you're the landlord and the real tenants pay rent that becomes your cash flow.
When the final child moves out for the final time, rather than life-by-committee in a condominium or taking on almost as much maintenance in a scaled-down bungalow, why not look into a revenue-generating property that will boost lifestyle-spending power and free up your time through an income-tax-deductible property management service? Whether you decide on a live-in asset or buy strictly for investment, the revenue generated may eventually represent or supplement pension income.
Purchase a revenue property, and rental income can cover mortgage payments, taxes and maintenance costs to increase equity or accumulated value. When the location increases in value over time, equity gets a second boost. Income-tax deductions from this rental business may reduce overall tax liability. Whether financing for the initial purchase or refinancing down the road, loan-to-value limits up to and including 95 percent of property value are possible.
From a mortgage point of view, investment revenue can dramatically increase your qualifying income and, therefore, your real estate purchasing power. Buy a two-family property or duplex, a three-family triplex or a fourplex, and you'll have one or more streams of rental income to boost your salary when it comes to qualifying for a mortgage. The percentage added to your income varies with lender policy, but it normally falls between 50 and 80 percent of rental income.
Lender calculations limit payment of principal, interest, taxes and perhaps heating to about 28 to 30 percent of your gross household income. If you already make monthly payments for a car loan or other debts, calculations will vary. The higher your income, the larger the mortgage you qualify for. Add that to the cash you have saved, borrowed from family or netted from selling another investment, and you have your total buying power.
By law, mortgages for more than 80 percent of the appraised value of a property require mortgage loan insurance (not mortgage life insurance) to reduce lender risk and, therefore, keep interest rates competitive. Lenders also have the right to include this insurance as one of the lending terms for lesser loans if the borrower appears to present greater risk. The premium on the total loan ranges up from 1.25 percent and is normally added to the mortgage, not paid out of pocket.
The federal housing agency, Canada Mortgage and Housing Corporation (CMHC), provides mortgage loan insurance through its CMHC Income Property product line for non-owner occupied 1 to 4 unit rental properties:
Purchase and refinance with loan-to-value ratios up to 95 percent for permanent residents, newcomers and self-employed borrowers
No application fee or lender appraisal required [bullet] Flexible financing options, terms and conditions
Advantages for energy-efficient properties
Available across the country with no set loan maximum
The stronger the investment potential of the property and of the borrower's financial track record, the greater the borrowing power. Higher credit scores are an important asset for borrowers. To determine your standing, access your credit scores, and credit and personal reports at no charge, before applying for financing, so errors or omissions can be corrected:
EQUIFAX
TRANSUNION
There are many factors involved, so talk to experienced mortgage brokers, real estate professionals and successful investors (like your landlord?). Ask a lot of questions about the type of income property and the locations you are considering.
You'll discover a framework of financing factors that will guide your search for the ideal property, but only when you ask for property-specific consideration will you know exactly and precisely what can and cannot be accomplished relative to a particular offer to purchase. For instance, owner-occupied properties are considered lower risk. If tenants pay heat and utilities, owner operating expenses will be lower, so a lender may allow a slightly larger mortgage.
Buying an income property is not a snap decision. Considering this alternative can add new dimension and possibilities to your real estate future. Here lies real "out of the box" thinking for those who've never thought beyond owning a house or cottage.

Source: "Pur-Plexing Yeah Buts: Need-to-Knows When Purchasing Your First Duplex, Triplex or Fourplex"

Published: August 11, 2009