What Changes to Large Portfolio Financing Means for You
2015-04-29 | 16:02:38
This is an article that I had written for REIN (Real Estate Invesment Network) on April 24.
This past Monday (April 20th), TD announced some changes to their rental policy through the broker channel. Basically,
- There is now a maximum of five rental properties per borrower including those financed by other financial institutions.
- Rental income requirements for single rental property applications including owner occupied multi-unit properties will be qualified by calculating:
- 50% of the gross rental income included in the borrower's personal gross annual income and adding 100% of the mortgage payment to the borrower's personal liabilities along with property taxes and heat costs.
Through my sources, this change is being rolled out at TD’s retail channels very shortly as well.
You might ask why should you care and does this apply to me?
These are significant changes since TD previously did not care about how many properties someone had in their entire portfolio. This was a huge advantage for investors as it allowed them to get cheap financing and to build more of a portfolio before seeking JV partners.
Before this change, most lenders were already capping the number of properties the borrower has in their portfolio. So TD is now staying on par with the other lenders. I could see where TD management is coming from in limiting their risk exposure given the state of the economy due to the lower oil prices.
TD is a favorite lender of mine to help clients build larger portfolios as well as securing financing for smaller centres (such as Northeastern BC) since most monoline lenders (eg. Home Trust) will not lend there. In the past, I had gotten financing for a full-time real estate investor who had 30 properties in his personal name. Not an easy deal since he had no other income beyond the rental income, but TD was able to approve for 75% LTV at 3%. This was a fantastic deal, but that’s not available through TD now for investors with larger portfolios. I believe TD has lost a differentiating factor from its competitors.
The second change has to do with how rental income calculations are done. This will affect individuals that are buying their first rental property. For investors with two or more rental properties there is no change; they will continue to qualify using the rental worksheet (which washes out the expenses using the rental income).
To illustrate the impact of this change, let’s consider the following example. Let’s say you would like to buy a rental property (house). You have good credit (680+), make $3,000/month, and have liabilities of $600/month (e.g. credit card, line of credit, car loans). Let’s assume that the rent will be $1,500/month and property costs (e.g. mortgage, property taxes, and heating) are $1,200/month.
Let’s also assume that TD has the best rates and terms available. Since you have good credit, TD (like most lenders) would allow the Gross Debt Service (GDS) limit to be 39% and Total Debt Service (TDS) limit to be 44%. Under TD’s new guidelines, only 50% of the rental income ($750/month) can be added to your income (e.g. from your job/work) while you have to debt service 100% of the housing costs. So your GDS would be 27% and TDS would be 48%. You would not qualify for this financing.
Previously, TD would have allowed use of their rental worksheet. In the above example, your GDS and TDS would have been within limits and you would have been approved for this financing.
In this situation, you can also look for other lenders such as Scotiabank and National Bank as options, but they currently have slightly higher rates. The deal will still work, you’ll still make money on it, and you’ll get closer to your BELIZE. That’s why I would advise you that although rate is important, getting good financing is better than no financing. In addition, National Bank could have been better choice even at higher rates because they only require 20% down payment. Through a higher mortgage loan, you can increase your ROI.
So what are your options now?
There are still lenders such as National Bank that will accommodate 16 doors; however, their rental calculation is done primarily done using add-back, which will make it harder to qualify. Although, if the rental income is reported on your tax return, it can be netted out, which reduces your debt servicing.
Beyond the 16 doors, there are options like RBC, however it will have internal limits on how much money it feels comfortable lending to you.
There are a few other options:
1) B lenders, which will have lower Loan to Value (65% LTV) and higher rates (and possible fees)
2) Commercial financing for residential properties, which will have lower LTV of 65% and higher rates (and possible fees);
3) Seek JV partners to qualifying for financing, but you will be giving up some equity
4) Move toward commercial real estate investing (e.g. multi-family), which uses the property to qualify, but the property acquisition costs will be higher.
Keep in mind policies will get tightened and relaxed over time based on lending risk. If you’re looking to build a larger portfolio, it’s important to work with different lenders and have a financing strategy to get you from where you are today to where you want to be. I would encourage that you talk with your mortgage broker/lender to understand what options are available to you.
P.S. If you want to see how I can help you grow your real estate portfolio and revenue, go here.