- New or Smaller Real Estate Investors
- Mid-Sized Investors
- Experienced Real Estate Investors whose relationships with traditional banks no longer works due to the tightening of lending policy.
- New and or Experienced Investors Seeking Commercial Financing Under 2M
The Investment Property Financing Challenge
Securing financing for investment properties is more difficult than financing a home you intend to live in. There is a "risk stigma" associated with investment properties from the lender's perspective, making it increasingly challenging for many people to obtain the financing they are looking for.
All lenders are risk-averse, but some more so than others. Each lender creates internal lending policies designed to facilitate the type of business they are looking for and that steer them clear of the business they prefer not to do. The takeaway here is that some lenders do better with rental properties than others. What is deemed to be a concern for Lender A may not be for Lender B.
For self-employed individuals or those with complex financial profiles, a mortgage underwriting process can become very complicated. Without an experienced investment property specialist putting together your application and approaching the right lender, it can be challenging to get an application approved. A typical "walk into the branch process" that many rely on often becomes a frustrating experience that frequently leads nowhere.
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Why Banks Often Fall Short with Investment Properties
The reality is that most banks are not particularly interested in this type of business at this time. While investment properties come with rental income to offset expenses, lenders will always consider whether the applicant can cover the expenses independent of that income. The lender always focuses on worst-case scenarios, considering whether it is likely to be paid if, for some reason, a unit remains vacant or the tenant fails to pay their rent.
When there are multiple rental properties in the mix, the mortgage application can become even less appealing to the bank. An applicant who is relying on thousands of dollars in rental income each month to cover the expenses of multiple properties is not something that makes the bank comfortable.
A wide variance always exists between the applicant's level of comfort with a financing request and the bank's. What may seem like a good business decision for an applicant does not necessarily translate the same way at the bank.
Given that the bank doesn't want "that many" investment properties on its books
- Branch staff are typically not trained to handle investment property applications effectively, and credit policies intentionally tie their hands.
- The staff that can process these applications are few and far between and are often at full capacity, unable to take on new files.
Without getting into the weeds, both lending policy and regulatory guidelines are intentionally structured in a way that investment properties do not perform well on paper, even though they may do so in reality. This creates a buffer to protect the lender from taking on too much risk.
What this often translates to is that the more properties a real estate investor owns, the more challenging it becomes for them to fit into the bank's box.
Equally important to note is that staff motivation levels to obtain approval for this type of financing at the branch are not always high. The typical compensation model for a bank employee is designed to reward them for selling products and services that are the most profitable to their employer, which makes sense when you think about it. These typically include investments, bank accounts, and insurance.
The Best Path to Investment Property Mortgage Approval
Success starts with the right mortgage professional who understands the business, has experience, and has access to a multitude of lenders, allowing them to select the one that is best suited for the application they are working on. They are willing to invest the necessary time in collecting, reviewing, questioning, and ultimately assembling all the required information and documents so that they can be presented to the lender in accordance with their respective submission guidelines.
Always avoid rushing and jumping the gun by making offers on properties or proceeding with projects without investing the time to go through a thorough application process upfront. If you do, you may get into a position where you commit to purchase a property that either cannot be financed or the terms of financing you can get are vastly different from what you were expecting.
Regardless of what many believe, a mortgage committment letter (which always includes financing conditions) that cannot be satisfied is not worth the paper it's printed on. All committment letters include financing conditions that must be satisfied to the lender's satisfaction before the lender agrees to fund. It's therefore essential that the application process is done correctly by the person you are working with and that they have your best interests ahead of their own.
Final Thoughts
If you fall within this underserved segment of the market, then you will likely find us to be a good fit to work with.
We are motivated to work with all types of clients and loan sizes and enjoy strong relationships with prime, subprime, and private lending options. We also facilitate CMHC multi-unit residential financing.
There is never any pressure to do anything, as we are solely focused on helping you and building a relationship, as opposed to completing a transaction. Conversations with us are relaxed, friendly, and respectful. You won't be inundated with follow-ups from us if you're not ready to move forward, but we'll be here when you are.
Article from: Alan Gilman - Mortgage Broker
Phone: 613.552.1572
Email: [email protected]
DLC Neighbourhood Lending Source # 11764 Independently Owned and Operated
424 Catherine Street, Suite 1, Ottawa Ontario
