An Investor's Guide to Financing

, A Real Estate Investor’s Guide to Financing

Is it possible to invest in real estate in today’s market even if you’re not already wealthy? When you look at how much a typical house costs in Canada, you might wonder how anyone can break into the market. The national MLS® benchmark price was $717,000 at the end of December 2022. While seasoned investors have substantial equity behind them and know how to navigate financing, it can seem out of reach for the average person. However, every successful investor was once a beginner, and almost no one had enough liquid cash to buy a property outright. Even those with substantial funds will rarely use their own money to purchase real estate. How do they do it? Let’s look at what terms you need to know as an investor and how to take the next step.

Terms Every Investor Needs to Know

Investment financing can seem complicated, but you don’t need a degree in finance or accounting to be successful. However, you should have a broad overview of how qualifying for financing works. Here are a few terms every investor needs to know.

Equity

Simply put, equity is the value of your assets minus your liabilities. For example, suppose you purchased a house for $500,000. If you pay the minimum down payment of $25,000, you will need to borrow $475,000 for the rest. Now you have debt, but you also own a valuable asset. Five years later, imagine that house jumps in value to $700,000. That means your equity has grown by $200,000, plus whatever you’ve paid off on the principal of the loan. Though it’s not quite like cash in hand, it’s almost as good. The more your equity grows, the more purchasing power you have to acquire properties.

The more houses you own, the faster your equity accumulates. For example, imagine that you had purchased two properties instead of one. If both rose by $200,000, your equity would increase to $400,000. Snowballing equity like this is how many successful investors become wealthy over the long term.

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Conventional Mortgages

A conventional mortgage is a home loan that covers a maximum of 80% of the purchase price. To qualify, you must have a minimum of 20% for your down payment. If the property is $1 million or more, you automatically need 20% upfront, regardless. These funds must come from your savings and investments, not borrowed funds, which puts conventional mortgages out of reach for many buyers. However, if you can afford the down payment, your monthly payments will be lower by paying more upfront. In addition, you may not need to add mortgage insurance.

High Ratio Mortgages

If a property costs less than $1 million, you no longer need the whole 20% when purchasing a home for your primary residence. The required down payment is now 5% of the first $500,000 and 10% on any amount between $500,000 to $999,999. However, a loan where the bank is covering more than 80% of the purchase must be covered with mortgage insurance. This extra fee will add to your monthly payment and the overall cost of the house.

If the house is an investment property you will not be living in, you cannot qualify for a high-ratio mortgage. In this case, you will still need a 20% down payment even if the price is lower than $1 million.

Private Loans

If your credit is slightly less than stellar, private loans can help you bypass the stringent requirements of traditional lenders. However, they are not subject to regulations or government oversight, and each lender can set their own rates and terms. Although it can be a way to access funds, you want to proceed with caution and read the fine print carefully. And, of course, watch out for hidden fees that drive up the cost of your investment. Private loans can come from mortgage investment corporations, syndicated mortgage providers, or individual lenders.

Seller Financing

Though financing usually comes from a bank or private loan company, there’s nothing to stop a homeowner from selling their property in exchange for regular, agreed-upon monthly payments instead of one lump sum. You may also hear seller financing referred to as “vendor take-back mortgages.” This type of financing is legal in Canada and can be a legitimate way to purchase an investment property. However, you should always be careful of fraudulent sellers and consult a lawyer to ensure everything is above board.

If in Doubt, Get Pre-Approved

Getting pre-approved is the best way to know how much financing you will qualify for before placing offers. The lender will factor in your income, debts, and perform a credit check. Once completed, you’ll have a letter certifying you qualify for financing. Taking this step does more than bring peace of mind that you will have access to funding. It allows you to remove the condition of financing from your offers, which is very attractive to sellers.

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Your Contacts for Successful Investing

Investing in real estate can be challenging, but having a team of knowledgeable professionals by your side will help you at every stage. Here is a list of experts you will want to form working relationships with:

Real estate lawyer: Every contract is legally binding, and a good real estate lawyer will review every clause and detail to ensure your interests are protected.

Mortgage broker: Why work with one lender when a licensed mortgage broker can give you access to dozens? You can shop for the best rates and terms to fund your investment with a single contact.

Real estate agent: A local agent or real estate team that works with investors will be one of your most valuable resources. They’re just a phone call away whenever you have a question or are unsure what to do next. Plus, they can introduce you to other professionals you will need to know along your journey.

Are you ready to take the next step as a real estate investor? We specialize in the entire Southern Georgian Bay area and can help you navigate the unique opportunities you’ll find in this market. Reach out today at service@KeleherCo.ca or call 705-532-9999 for more information or to get started.