Working with investor clients

CMP: How has the rental property mortgage rule changes in April affected borrowers and brokers?

 

Most lenders now only take 50 per cent of the rental income instead of 80 per cent, so often that property does not carry itself anymore. A borrower needs to show some income from a job to qualify for that rental property and will have to feed the rental property on a monthly basis even though in actuality, they might not.

 

This also means that a number of rental mortgage deals we usually sent to A lenders, we’ve had to go use B lenders because B lenders still use 80 per cent of rental income or they will take more on stated income – they are flexible.

 

Because we’ve had to take them to other lenders, the rates may be higher. So instead of somebody getting today’s five-year rate at 3.79 per cent, we have to take them to a B lender where their rates may be 4.75 per cent. It’s a double problem: The client now has to pay more money, and the percentage of rental income isn’t as good anymore.

 

 

There’s two ways to look at it because now it becomes much more difficult. You can still specialize in this niche but you’re going to have to find other strengths in the deal that you didn’t before.

 

Borrowers who go to different brokers who don’t do a lot of rental properties will get discouraged and they won’t get the help they need. But if you specialize in this tougher market, you’ll be able to tell them the challenges in the market right away. You’re not wasting a week by going to all these lenders and getting turned down. You tell them right away, “Here’s our challenge.”

 

 

As long as interest rates are low, rental properties are still a good economical equation. For the investor, they will say, “Instead of buying for $300,000, I may have to look outside the city. I may have to buy for $200,000 because then I can put 20 per cent down.”

 

You’re getting money so cheap and you’re going to own maybe fewer properties, putting bigger down payments but on the flip side, you’re going to be able to weather the storm. Lenders are saying, “We have to be less speculative, less risky. We as a lender and CMHC (Canada Mortgage and Housing Corporation) as an insurer need to be on more solid ground.” So subsequently, we’re going to help the borrowers be on more solid ground.

 

 

It’s all over the map. You have a lot of professional people who make a lot of money. They may have very secure jobs, making $150,000 a year, and don’t feel comfortable investing in the stock market but they feel comfortable in real estate.

 

Real estate does two things. One, it can build up your assets and net worth, and hopefully they appreciate. At the same time, the rents help pay down your mortgage.

 

Also, a person making a lot of money could have some possible writeoffs. Accountants will tell people if you’re making $150,000 out of a salaried job, and you just go in every day, you don’t have any writeoffs except retirement savings programs. So by putting your money into rental properties, you’re able to write off a lot of the expenses, maybe some of the repairs. Accountants can sometimes manipulate management fees, maintenance fees; do different things, and it becomes worthwhile.

 

 

It’s where you’re going to market. There’s a lot of real estate clubs and investment clubs over the years that have grown bigger. You join these clubs and network as much as you can. Then when you’re marketing on your website, you market in that vein so when people are searching for “rental property mortgages” your name comes up.

Meaghan Hutchings

 

 

The client themselves usually. On a primary residence, you get a lot more first-time homebuyers or buyers with a little less knowledge base. Usually when they are at the point of investing in rental properties, they have more experience so the clientele is more knowledgeable, which helps as long as they’ve been properly educated. But usually you can have a good conversation with them if they’re knowledgeable and know what they’re talking about.

 

 

We’ve noticed certainly in the past few months a decline in clients purchasing purely 100 per cent rental properties. Over last fall and winter, we had significantly more clients who were looking at investment properties whereas this summer, the number of clients has declined.

 

 

We certainly want to make sure if a client has more than one investment property that we have all those details upfront. We want to have the lease agreements and the mortgage statements if there are other mortgages on those properties. So we need a lot more information and documentation upfront compared to someone buying a condo to live in.

 

 

Do their homework. Know their products. Be very well educated in the topic so they can properly educate their clients. There are definitely ins and outs, and different tax benefits so the more they know, the more they can help their clients. Knowledge is power. That’s what it always comes down to.

 

 

There are certainly different advertising or direct mail pieces that a broker could use: Partnering with a Realtor who specializes in investment properties; holding a seminar on the subject that helps educate potential clients, and hopefully the people who attend those seminars become your clients.

 

Certainly look to past clients as well who’ve entered the investment market in the past. You want to make sure you’re staying in touch with them because if somebody is entering into that market, they’re looking at it long term and how it’s going to contribute to their retirement down the road. So you want to make sure you’re staying in contact with them for any future rental properties that become part of your clients’ portfolios as well.

 

 

We have a pretty good mix. A lot of our clients originally started with their primary residence, and some have now moved into the investment market. We have a mature clientele. I say around 30 per cent have investment properties.

 

 

 

If someone is considering getting into the investment market, they should talk to a broker even if they’re not actively looking right now. If it’s just a thought in the back of their minds where they’re thinking about it in the next couple of months or next few years, they should speak to a mortgage professional. They can go through the requirements, look at their finances now and develop a plan to get into that market in the future.

 

They may think they’re ready to do it in the next couple of months. When they actually look at the requirements, existing finances, what they will need to get into the market and have a bit of a safety net, they may not be as close as they think they are. Or maybe they’re closer than they think they are. But definitely, the first step is to speak to somebody and have them go through their finances ahead of time.

 

 

There’s a lot more qualification involved when you’re dealing with an investor of rental properties. We really try to focus on setting up our clients as more of a complete portfolio as opposed to looking at just that one particular property, which you would do with residential.

 

When you’re doing rental properties, the focus is usually keeping the payments really, really low, depending on what the investment goals are and keeping things liquid so if the client is looking to get rid of the property, you don’t want anything that’s closed.

 

It really depends on the investor’s goals: Are they looking to use this property as a cash flow property? Or a revenue property for equity gain?

 

 

I don’t find that the changes to the rules have made a significant impact. I find just simply the market out there is slow and people are really sitting on the fence. With the changes between the prior and current rules, they’re not that much different. The most significant change now is that investors need a 20 per cent down payment, but we didn’t do a lot of mortgages before where people had less than 20 per cent down payment.

 

People would go all the way through the process of wanting to buy a revenue property but the insurance premium on buying something with less than 20 per cent down was very, very high. So when you look at that cost versus how much money the property is going to generate you, a lot of the times people would say, “Whoa, whoa, no. I’m going to wait till I have the 20 per cent down payment,” which is really when they are more in a position to purchase a rental property. They have more equity and their payments are going to be lower. Their financial stability is usually reflected in the amount that they have as a down payment.

 

 

They first have to make the distinction that this is going to be your sole business and if so, you’re going to need some information and the experience for both the commercial side of lending as well as residential. There’s only a certain capacity of rental properties that an investor can have before you start moving it over to a commercial portfolio, which is a very different ballpark.

 

I’ll usually refer my deal off when they start to go commercial because it’s just not my area of expertise. It’s a very different lending game so you really need to expand your horizons on all types of lenders -- the way you would with any type of mortgage specialization. Know your products and know what’s available.

 

 

Sometimes it’s easier to work with people who are not as informed because it doesn’t become too complicated. You can complicate the daylights out of a deal, left, right and centre and sometimes the more information the person has, the quicker they are to formulate an idea of what they want versus what is realistically available.

 

I like working with a client who’s just starting to get into their rental properties so we can really do a more holistic approach to their portfolio. But on the other side, people who are very seasoned and experienced with having rental properties and buying them, they already know what to expect, they already know what they’re looking for so they can be quite easy to work for because they know you’re going to need a lot of documentation. They also understand it’s not necessarily about finding the best rate -- it’s about finding the best mortgage for their portfolio.

 

 

At that time in your life when you’re ready to make an investment, just as you would an RRSP, to have someone in your face, telling you, “Yes, you need to do this. You need to do this. You need to do this,” isn’t as beneficial. The clients very much know when they are ready to start looking at options and will come to you when they need to.