3 Reasons why it is good to be a real estate investor in Toronto
Over the years working with real estate investors, I have come across very interesting answers when I ask "How many investment properties do you need to buy?" I have heard from 1 property to 40 properties, 1 every year for the next 5 years, don't know... Most stumble when I ask why? It starts with why. Simon Sinek explains the importance of starting with why in his TED Talk
There are many reasons for buying investment properties, here are some:
- Retirement income
- Fund children's post secondary education
- Job replacement (one spouse might be considering leaving their job)
- Supplemental income
- Family legacy
- Full time real estate investor
- Investment diversification (real estate and stock market)
Once a reason or multiple reasons are chosen, determining how much monthly income the investment properties are to generate is the next step. This goal can be achieved via different investment properties options (single family, duplex, multi-family, commercial....) and various geographic locations.
To complete "why invest in real estate" analysis, reverse Engineer the number of properties you need and have your personalized "how and where" plan developed, click here.
Referrals are still the primary method of getting introduced to a mortgage broker when buying a home or an investment property, however more and more Canadians are searching for mortgage brokers online. Borrowing hundreds of thousands of dollars is a serious undertaking and requires due diligence. Based on my years of experience here is a checklist of how to find a trustworthy mortgage broker.
Trustworthy Mortgage Broker Checklist
- Online Presence: Everyone, well pretty much everyone, has a website nowadays. However, are they active in publishing material relevant to the market? Are they experts in a niche market (real estate investment, self employed, first time home buyers, bad credit, private mortgages....) or are they the jack of all trades? Going through their website you will get a good feel if they are experts in a specific field.
- Strategy vs No Strategy: Quoting rate requires no skills, afterall most brokers and lenders have the same rates with a possible difference of up to 0.1% ($100 for every $100,000 per year). Unfortunately, obtaining a mortgage licence is easy; one course, a few hundred dollars and off you go! If a broker or agent is only quoting rates without explaining the following, run away:
- Pros and cons of each product
- How each product helps you achieve your financial goals
- Fine print terms (penalties, mortgage features)
- A plan to pro-actively manage the mortgage post funding
- Execution: A financial planner engages their clients on an ongoing basis to adjust their portfolios as economic conditions and clients' lifestyle change, why wouldn't you expect the same from your mortgage broker? Building net worth is achieved through 2 ways: 1/ increasing assets and 2/ decreasing bad debt. How will the mortgage broker track your mortgage and keep you informed? Why not have a debt manager on your team?
- Full Time vs Part Time: Since mortgage agents have a low barrier of entry, there are some out there who operate on a part time basis. There is nothing wrong with someone building their business to transition full time into the profession, but would you trust a part time lawyer, a part time doctor, a part time real estate agent or a part time contractor?
- Experience: I'm into sports, so I'll use a sports analogy: great coaches used to be players in the past. If you are looking to invest in real estate, shouldn't you engage a mortgage broker who invests in real estate, whose been through the ups and downs? If you are self employed, shouldn't you approach a full time self employed mortgage broker who personally experienced the challenges of getting mortgage financing? If you are a first time buyer, shouldn't you meet with a mortgage broker who had a terrible experience getting a mortgage for their first home?
- Job Interview: I view hiring a mortgage broker as applying for a job. You probably can recall going for a job interview, where the interviewers asked lots of questions and based on your answers (and references) got a gut feel for you. Hiring a mortgage broker is the same, use the above information to ask questions and get a good gut feel for who you should hire. You are trusting a professional with hundreds of thousands of dollars.
If you are buying your first home, an investment property or you are self employed and looking to interview a professional mortgage broker, please contact me.
There have been many changes with respect to mortgage qualifications in Canada. Above and beyond the 4 major changes announced by the Minister of Finance over 4 years, there have been changes on the backend on how lenders qualify applicants. The most recent one is mind boggling!
Investment Property Mortgage Qualification
For an applicant reporting a surplus on their T1 general (line 126), the surplus (line 126) is added to their income.
Example: Applicant's income is $100,000 and line 126 is showing $5,000, total applicant's income is $105,000. If the applicant owns other investment properties, here is the part that makes no sense: The principal portion off the annual mortgage statement is deducted from applicant's income!
Example: Applicant has paid down $10,000 of mortgage principal in the previous year, total income: $100,000 plus $5,000 less $10,000 = $95,000. This rule effectively penalizes real estate investors who build equity in their investment properties. Last time I checked statements made by Minister of Finance, Bank of Canada, Bankers..... they all advocate paying down debt and building equity now while interest rates are low (Canadians are at record high debt to income ratio).
This rule effectively encourages not paying down mortgage principal. Had the applicant paid more interest than principal in the previous year, the mortgage principal deduction would have been less and therefore their net income higher!
If you are thinking of showing a loss on line 126, it's even worse: Income less loss on line 126 less mortgage principal.
Are you confused and frustrated with all these guidelines? Rest assured this is what I do on a daily basis and I am here to help you navigate through the mortgage qualification land mines to build your real estate investment portfolio. It's all in the setup.....Happy Investing!