When purchasing a residential building with five or more units in Canada, there can be a lot to consider. The potential to profit on your investment will be a driving force behind most of your financial decisions, no doubt. These decisions will come to a head during the acquisition process. Everyone you hire for this deal should be ‘on their toes,’ and able to advise you on strategy from different angles of expertise.
Working with an independent mortgage broker can help you significantly reduce unnecessary costs when undertaking a project of this kind.
Firstly, they can shop the market to get you the best interest rates and terms possible on a multi-unit residential mortgage in B.C. or Western Canada. These types of financing programs fall under commercial mortgages, even when they are purchased by an individual who plans to live in one of the units.
Secondly, a mortgage broker can collaborate with your real estate agent, appraiser, accountant, lawyer and lender. On the financial side, they can walk you through the due diligence requirements that a bank will want to review. They will check to see what the chances are that your investment will appeal to a lender. Or, they can ‘crunch the numbers’ to let you know if the property is not likely to be approved for a mortgage at all.
If you are serious about purchasing a multi-unit residential building, we encourage you to get in touch with us. We have a team dedicated to Vancouver-area commercial mortgages, and beyond. Our brokerage firm is the largest of its kind in Western Canada. That means we can bulk-buy deals that other institutions won’t have access to.
You have nothing to lose, either! We work at no cost to the buyer. We’re happy to answer any questions you have, and will work hard to earn your trust in our abilities.
Contact us today!
Are you a first-time commercial mortgage borrower in Vancouver?
You may want to get acquainted with some terms that are common in the industry. They can help explain a lot of what is discussed on this page too. See our glossary page relating to rental income mortgages at the following link (opens a new tab):
How much of a down payment will I need to purchase a multi-unit residential income property in B.C.?
Generally speaking, you should expect to have at least 15% – 25% available in cash, for a down payment on a commercial mortgage.Read more
However, unlike buying a home for yourself, the down payment required to buy a residential commercial property is not so cut-and-dry. Different lenders will have different rules, and sometimes these can depend on your unique application.
Firstly, there is the consideration of insured, versus traditional financing. Depending on the strategy your mortgage broker will advise on, it may be better to opt for mortgage default insurance. This would either change your down payment amount, your monthly payments, or both.
Of course, as with purchasing any property, there will be legal fees to register the title deed and review paperwork. There may also be inspection fees.
Not only that, the mortgage down payment will not be your only up-front cost in this type of deal. Other factors you’ll need to keep in mind are:
The selling price and the appraisal value will differ
The mortgage lender will give you a mortgage based on the appraisal value. But, the seller will price the property based on potential future profit. You’ll likely pay more to the seller than what the lender will consider to be the value of the property in its current state.Read more
Let’s say the property you want to buy is being sold as a business opportunity for $5 million. This is priced based on the future profit you can make on the building, by renting out its units. Future profits factor in potential rent increases.
However, the current value of the building may come in at $4 million. This will be based on current rent values, as well as the condition of the building, its location, etc.
So, your down payment percentage for the mortgage will be calculated on $4 million, not $5 million. This means you’ll need to come up with $1 million another way, if you want to buy the building, per the seller’s offer.
Your real estate agent should work with you to sort out the details of negotiating your final price. An accountant may also come up with a business forecast for you.
Of course, information should be provided to you by the seller about the potential profit you can make on this type of building. On the business side, the wisdom needed for the transaction should be like buying any other company.
Due diligence reports will be required for the mortgage application
Before applying for a mortgage, due diligence will need to be done on the property. This includes a building condition assessment (BCA), an environmental risk assessment (ERA) as well as an appraisal and insurance quotes.Read more
Together, these services can cost a few thousand dollars, with no guarantee of outcome. If the outcome is not favourable to the lender, you may not get a mortgage for the property at all. That said, a mortgage broker can seek other avenues for a loan, such as finding a private lender, if that ends up being the case.
You may want to set up an official business for the purchase
If you decide to incorporate a business to buy the property for tax benefits, there will be costs to set up the legal entity that will own the building. A lawyer or chartered professional accountant (CPA) should be hired to do this properly, and with the structure that suits your needs.Read more
While fees for this service can differ out there, you can expect to pay around $1,000 or so to set up an incorporated business.
The upside is that your taxes may be lower this way. However, we can not speak to the benefits, nor make guarantees on this topic. We would advise you speak with an accountant or lawyer for more information.
IMPORTANT: even when you purchase a commercial property under a company, a lender will still require that all shareholders of that company be on file. This does not mean they will all be registered on the mortgage. However, they will be individually reviewed for loan eligibility (see below for more information on personal qualifications). The mortgage application will need to include personal tax information, credit checks, etc. for each shareholder in the company.
What do lenders consider when approving an MUR mortgage in B.C.?
Once you have your due diligence reports in place, there will still be more work to present to the banks. A lender will evaluate the building, and the borrower, before approving a mortgage on a multi-unit residential (MUR) building.Read more
On the building, they will assess real estate security based on:
- Due diligence reports. That is, the building condition assessment (BCA), an environmental risk assessment (ERA), and the appraisal.
- The current rental income being generated on the building. This should include the net operating income (NOI) and debt service coverage (DSC). A minimum of 1.3 DSC is required for most lenders (i.e. 30% profit after expenses).
- What type of units are in the building. In other words, are these three-bedroom units, bachelor suites, or something else? Keep in mind that plans for renting individual rooms in a unit will not be evaluated. Lenders want to know the income potential for each unit as a whole. Also, all units must be registered and legal.
- A two-year history of the building’s performance. The seller should have this in a report, and your real estate agent should advocate on your behalf to get it for you.
For the borrower (i.e. the purchaser), they will assess personal qualifying ratios such as:
- Creditworthiness and financial stability. This should include tax returns, credit scores, proof of other assets, current income streams and possibly more.
- Experience in building management. It will help your application to show you have successfully managed other buildings of this kind before. If not, you can present plans to hire a strata management company. Even if you plan to make this your new full-time job, you should have a way to demonstrate you can handle the workload and know-how of running a multi-unit rental building.
- Whether you will live in the building or not. If you can live in the building, it may help to lower your down payment minimum.
- Your net worth strength. As a general benchmark, lenders may ask that the owner’s net worth is at least 25% of the building’s appraised value. And yes – this means that you have acquired other assets of this amount. While some lenders have policies about the ratio of assets they want you to have, generally they will look at liquid assets and equity assets. Liquid assets include cash, savings, investments, mutual funds, RRSPs, etc. Equity assets include properties you own minus their mortgage balances (e.g. let’s say you own a property with a market value of $1 million, and have a $500K mortgage on it. This means you have $500K in an equity asset).
We would strongly advise that a mortgage broker prepare your application for you. They can review your paperwork, and present it in a way that can justify your eligibility for a loan.
Contact us today, and we can help you with this step, plus more:
Can I refinance a multi-unit residential property I already own?
Yes! Refinancing a multi-unit residential property can offer savvy investors a low-interest way to:Read more
- Renovate a building to yield higher rental rates, or increase its resale value.
- Add more units to the building to increase income generated from it.
- Purchase another building with a higher down payment.
- Construct a new building from scratch with a construction mortgage.
- Use cash flow for other investments that yield a higher return.
If you would like to refinance a mortgage on a multi-unit residential property in B.C. or Western Canada, we encourage you to get in touch! We have a team devoted to commercial mortgages, and exclusive deals not typically available on the open market.
You can learn more about refinancing property mortgages, here.
What are the limitations of mortgages on an MUR property?
There are many types of mortgage deals that are offered on the market. Different lenders will come with different flexibilities and limitations. So, while the rules won’t apply in all cases, generally we assume that multi-unit residential mortgages will not come with:Read more
- Portability. This means you can not move your mortgage to another property.
- Prepayment privileges. This means you won’t be able to pay down your mortgage sooner than the term length or amortization period, in order to lower interest payments.
Also, as with any mortgage, down payment amounts may affect whether or not default insurance is required. Since down payment requirements on this type of property can vary a lot, it’s best to speak with a mortgage broker to find out if insurance will apply to your case.
Get in touch at:
Contact us for help! We make multi-unit residential commercial mortgages as simple as possible
Commercial mortgages can be a lot more complex than residential mortgages. Even when you want to set up a side business with a small multiplex of 4 or 6 units, the preconditions and paperwork involved can seem daunting.
Working with a mortgage broker to handle your financing application can not only save time; it can save a lot of headache too! Our commercial mortgage team does this day-in, and day-out. They can advise on the ‘way forward’ for your case. There’s no reason to fret – just give us a shout, and we’ll make the process as simple as possible for you.
Best of all, there’s no cost to using our service! You have nothing to lose.