For Self-Employed Real Estate Investors

Don't Quit your Day Job Yet!



Canadian Real Estate Wealth contributor, Peter Kinch explains the ways brokers can ensure their BFS investor clients can still get the financing they need

As a self-employed real estate investor like myself, the Canadian mortgage lending environment will be more challenging in 2012 than it has been in past years, but sophisticated investors will learn that this can create opportunities for those who understand the rules and learn to work within them. While others continue to complain that things aren’t the way they ‘used to be’, savvy investors will be prepared to do a little more paperwork to get approvals. The key is to understand the position that the lender is in.

Given the global and political environment, lenders are not going to be open to clients who want to take shortcuts and provide the bare minimum when it comes to documentation. Statistically, self-employed real estate investors have been amongst the highest percentage of borrowers who default for Canadian banks over the past four years. So it should come as no surprise that lenders are going to scrutinize those files more than others. At the end of the day, banks want to mitigate their risk – real or perceived. Your job is to make sure your clients provide them with enough information that they can feel confident with the file and do not see them as a risk.

Prepare for more paperwork

The first thing a self-employed real estate investor will realize is that banks do not applaud you for having a ‘creative accountant’ who helped you to minimize your taxes by reducing your ‘verifiable income’ down to nothing. Congratulations, you now don’t have to pay taxes – but don’t turn around and expect to qualify for a mortgage. From a bank’s perspective there is a huge difference between a borrower buying a principal residence and a rental property. Again, the statistics bear the real truth. Statistically speaking, Canadian homeowners have less than a one per cent default rate on their mortgages – when it is owner-occupied. Conversely, the largest amount of fraud and default that lenders experience is with those mortgages that are arranged for investment purposes. As such, there are two sets of rules for mortgage borrowers – one for homeowners and one for investors.

Nowhere is this more evident than with the self-employed individual. Many banks are still willing to accept the fact that self-employed borrowers have a tendency to write-off as much as possible and therefore have a correlating low verifiable income. If it is for the purchase of an owner-occupied home, they will grant them a degree of flexibility and even allow a high-ratio mortgage at fully discounted rates based on ‘stated-income’ (if deemed to be reasonable).

However, if that same borrower were to go to the same bank to ask for a mortgage for a rental property purchase, the rules would be completely different. The mortgage for the rental property would now have to be ‘fully-income qualified.’ This poses a problem for the majority of self-employed borrowers – especially if you’ve only recently become self-employed. The majority of lenders define ‘verifiable’ income as a two-year average of line 150 on your tax return. Line 150 is the amount of ‘taxable’ income that is ‘net’ after all expenses. They will also ask for copies of your T1 General to determine the source of the income. For example, a lender will want to make sure that the income as stated on line 150 is derived from business income and not capital gains.

Selling real estate or cashing in RRSPs is not a sustainable source of income and will not be allowed. The lender will also ask to see the company financials to determine the revenue trend. Some owners pay themselves a healthy salary but do so at the expense of the bottom line. Banks will want to see that the company financials are strong and can sustain the income it is paying to the owner. Long gone are the days where you can simply give a lender a Notice of Assessment or a job letter that you’ve written yourself and tell them that should be sufficient. In today’s market that simply won’t do.
Subprime options

For investors who still hope to buy real estate but are finding it challenging to qualify for conventional mortgages, there are still a few unconventional options in today’s market. Home Trust, Equitable Trust, and Optimum Trust amongst others still offer ‘stated-income’ mortgages for self-employed borrowers who can show ‘reasonability’ of income. The maximum loan amount will only be 75 per cent. The interest rate will be about one to two per cent higher than fully discounted rates and there will be a 1 per cent lender’s fee. The cost is obviously higher, but still a cheaper alternative to having to bring in a joint-venture partner and give away 50 per cent of the deal just so they can help you qualify. In the end, you simply have to balance the cost versus the benefits.

Going commercial

If you are a self-employed real estate investor and you’re still concerned about how to qualify for mortgages in the current market environment, there is some good news. Everything mentioned in this article pertains to ‘residential mortgages.’ The easiest way to circumvent the strict rules surrounding the residential mortgage market is to simply shift your focus to multi-family purchases. If you buy a property with six units or more, you move into the ‘Commercial Sandbox’ and commercial mortgage rules are completely different than residential.

Among other things, in the commercial sandbox, the focus shifts from you, the borrower, and your verifiable income to the building and the amount of cash flow therein. Commercial financing has other issues and it is certainly not for everyone, but for the self-employed investor who is being inundated with negative headlines in today’s marketplace – this just may be the answer you were looking for. But until you decide which direction you’re going to go – don’t quit your day job (just yet).

 YES to Alternative way of Investment

As real estate investor myself, I haven't stop investing and I decided to diversified my porfolio and added stocks and options this year.  For anyone who is first time like me, I suggest you read  books and attend some informationseminars.  Distat and Academy of Learning are giving free sessions in Vancouver.   My only way of direction is to succeed in this new investment, so I spent a lot of time reading and have structures and trend tools already set. 

Another investment is REIT and income.  LEGUE is offering good ROI and you can start from  $ 1,000 .  If  you order their free BLUE BOOK, it will give you more idea of what i'm talking about.  I met in person the Board of Directors during the Legue Summit Event and they have visions.  

It's mostly patriachal in the investment world although women like me are forwarding and aplying the gift of strength and skills to invest.  I met a lot of real estate women investors nowadays and some are my clients and friends and I have to say that i'm proud of them!    

Grace Brrewster
www.778homes.com

Congratulations to my Buyer for finally moving to her new townhouse in New Westminster.

Built in 2012, BrickStone Walks is a Heritage inspired New West homes with stainless steel appliances, quartz countertops and brick exteriors.  A great range of both 1 and 2 level homes owers are now moving to their townhomes.  With a central location within the heart of the New Westminster, steps from skytrains, grocery, restaurants, shopping and coffee shops. The actual site location is at 828 Royal Avenue New West . All homes have in suite laundry closets and spacious closets in the master bedrooms and second bedrooms as per floorplan. In addition, all of the BrickStone Walk New Westminster townhouses have ample outdoor living areas that are ideal new owners looking to entertain or enjoy the outdoors. The BrickStone Walk Townhome.

                                                   

Foreclosure

A Foreclosure success deal for my Buyer!!!

After doing all the due diligence on a foreclosure property that my buyer had an eye for, the court dated on March 30, 2012 came so fast. My buyer and I attended the Foreclosure decision of the Supreme Court in New Westminster. Ten minutes before the hearing, the heart pumping blood of excitement was mixed with nervousness and doubt. No one could tell if we were going home with a subject removal from the Court or we would start all over again on house hunting. The Judge asked one more time if there was another offer coming and fortunately it was just our offer and to make the story short....we went home with a subject removal!

My buyer was very happy and is looking forward to complete the deal soon. She knows that the property is a good buy after giving her a market analysis of the area. There's no perfect house and she is aware about it. Foreclosure is As Is Where Is and she will be spending money to make the house meet her cosmetic standard and some upgrading. She knows that she is lucky to have a home sweet home with her husband and kids! Congratulations!!!

If you are interested to purchase a foreclosure, please contact me and I would be happy to provide my expertise and free service.

Best Regards,

Grace Brewster

778-837-3617

gracebrewster@telus.net

To request for foreclosure listings in your area please go to :

http://gracebrewster.sitebuilder.point2.com/

BIDDING WARS

I have been in so many bidding wars and there's no room for negotiation if the faucet is leaking or the water tank is old. It is As Is Where Is and you pay more. The one who wins the bidding war is an offer without subjects to financing or inspection (this is my experience from the last 3 months). Even if there are subjects, the seller won't fix anything from the inspection result 'coz there's a back-up offer. The same in foreclosure--your offer might get accepted, but at the court date, there might be more offers coming and more than the asking price.

Don't blame anybody when you get the house from bidding war and you have major expenses to occur when you move in. We are here to protect you! If you know the house is not worth it , move to the next one. The psychology of emotion sometimes can disturb your judgement.

Bidding war is not for everyone! Seek advice! REALTORS® who have been in this situation have team of experts bank/appraiser/inspector/structural engineer, lawyer to help you prepare for bidding war.

Thank you Barb Olsen Bell for all the Clauses and helping us to become an expert on the Contract of Purchase & Sale. Helping you is what we do!!! :)

Subdivision

As a small investor myself and working with other investors, owning or investing in real estate can come in many ways. Subdivision is one of the interesting topics I want to talk about. I haven't done this, but I would love to try to subdivided a land if I buy an acreage in the very future. Developers would either buy already a subdivided land from land developers or they do it by them selves. Land development may take time because of application on re zoning. Having the experienced to work with developers, reading so many development books and selling pre sales--once you have the permit ready and depending where you are, a building may take 18 months or more to built while a detached house is only 6 months.

For example, East Vancouver single RS1 is about 30X100 lot size. What if you have an old house and you have a double lot of 60X100. You know your house has no more value, but the land is double and you can subdivided it and sell the two lots. This is one good way to invest in real estate.

For further information about subdivision. Please click the link.

http://www.th.gov.bc.ca/DA/subdivision_handout.pdf

Thank you for reading!

Must see!!! Old Vancouver--always a Beautiful City

Please click the picture to see the youtube video. Enjoy viewing :)

OPEN HOUSE January 14, 2012 from 1-3

14 BEGBIE NEW WESTMINSTER


Beautiful large 1 bdrm ( 741 sq. ft plus huge balcony) with fabulous unobstructive water view and city view. Upgraded engineered wood flooring. Modern stainless steel appliances, granite countertops, insuite laundry & insuite storage. Enjoy the modern living at Inter Urban and steps away to Skytrain & shopping. No HST. 1 dog or cat allowed. Open House Jan. 14 & 15. Sat/Sun 1-3.