Real Estate Talk:
Income property / 6
A look at promise to purchase conditions: Financing
By Joseph Marovitch
Last week we discussed the four conditions that must be in the promise to purchase for an income property, to protect the buyer, and we focused on the 3rd condition, the “Examination of Leases and Expenses”. Today we are going to discuss the 4th condition, “Financing”.
Four conditions that allow the buyer to verify the information:
1. First visit
3. Review of expenses, leases and any other financial documentation
It is possible to purchase an income property in cash however few investors use their own money to finance an income property. Money should work for you and not the other way around.
… as time goes by and the property increases in value, the owners can borrow against the property to buy a second and then a third income property to increase their portfolio.
Money can be borrowed from your financial institution and used to purchase the income property. With a cap rate that allows for a profit after expenses, and after a period, the mortgage will reduce as the property pays for itself. As well, as time goes by and the property increases in value, the owners can borrow against the property to buy a second and then a third income property to increase their portfolio.
Acquiring a mortgage to finance an income property takes time and an investment. Unlike a mortgage for an individual residence, an income property requires 15% to 30% down and can take up to 40 days or more to obtain from the bank. The bank will evaluate the property and determine the value based on a calculation by the CMHC (Canadian Mortgage and Housing corporation). The CMHC is the government institution that insures all bank mortgage loans. There are many rules in place the CMHC has to determine the value of the property and how much the buyer is required to put down. One of the factors include whether the buyer intends to live in the income property. If the buyer does not intend to live in one of the units, the buyer is then required to put down a minimum of 20% of the purchase price.
In setting the condition for financing, the offer must contain the following:
• The amount the buyer intends to borrow
• The maximum interest rate the buyer is prepared to accept
• The amount of years the mortgage shall be amortized over
• How many days the buyer requires to attain the mortgage
Should the buyer’s financial institution approve a loan with the amount the buyer wants to borrow, at the interest rate or lower that the buyer requested, amortized over the period requested, and within the time period stated to attain the loan, then the condition is satisfied, and the property is purchased.
‘Unlike a mortgage for an individual residence, an income property requires 15% to 30% down and can take up to 40 days or more to obtain from the bank.’
Should the buyer’s financial institution not approve the loan, or provide an interest rate that is higher than the buyer requested, or amortize the loan over a shorter period then requested, or not provide the loan within the time period required, the buyer can cancel the offer in writing.
There are many other options possible other then cancelling the offer if the buyer is motivated. The buyer can accept the terms of the bank. If the loan is not approved, then the buyer may have to go to a private lender.
Next week’s topic: Income Property – Landlord’s Obligations
Should you have questions or require further details, please feel free to contact me.
Have a great week.
State of the market
The condo market has been on the rise as more and more buyers consider condos a more viable financial investment, as housing prices rise due to lack of inventory. However, you may have heard that the President of the USA has decided to place large tariffs on Canadian steel since we are a security threat to the US. Oh yes, he also wants to back out of NAFTA.
These factors can affect the real estate market, especially the tariffs. Placing higher taxes on Canadian steel means the price of steel will significantly rise. In turn, the higher costs will be reflected in the price of new construction condos and houses, as well as renovations to existing property. In this on-going drama, we will have to wait and see what comes of the negotiations. I will not say more until the art of the deal plays out.
Read also: Real Estate Talk: Income Property / 5
Joseph Marovitch has worked in the service industry for over 30 years. His first career was working with families from Westmount and surrounding areas, hosting children between the ages of 6 to 16 as the owner and director of Camp Maromac, a sports and arts sleep away summer camp established in 1968. Using the same strengths caring for the families, such as reliability, integrity, honesty and a deep sense of protecting the interests of those he is responsible to, Joseph applies this to his present real estate broker career. Should you have questions please feel free to contact Joseph Marovitch at 514 825-8771, or firstname.lastname@example.org