# Buying a second investment property...



## gerogesin (Jan 3, 2014)

I am writing to see if it is possible to use equity on my first rental property combined with my current savings in order to be used as a downpayment on a second rental property. The home is likely valued at 300k with 200k mortgage remaining. I'd like to buy a second rental at 300k but require 20% (60k) downpayment. 

I could access the equity from my own home but I no longer have a mortgage. Would I just get a loan from the bank using my 

My question is:
1. Is accessing this heloc possible?
2. Is the heloc interest payment tax deductable?
3. Would the lender allow this source of downpayment even if my debt service ratio is low and credit is good?


----------



## rikk (May 28, 2012)

gerogesin said:


> ... I could access the equity from my own home but I no longer have a mortgage ...


Just saying, you can take out a mortgage on your "own home" ... I did that to partially finance a new build.


----------



## Just a Guy (Mar 27, 2012)

You can refinance your rental in most cases to get the equity required.

The interest on the loan, not the entire payment, would be tax deductible.

The bank doesn't really care where the money is coming from, but may push for a HELOC on your primary residence.

My advice would be to refinance first, then go shopping once you have the money, that way you can ensure you get the loan on the correct property without the bank having the power...but in reality, it makes no difference which property actually owes the money, you are responsible for the same amount, so it's purely psychological. 

Now that we've assured you you can get the money, I'd like to know what you'd plan to buy for $300k as I have a feeling it's not going to be a good, cash flowing investment...if it's a single door, I'd try and talk you out of that part of this idea...


----------



## gerogesin (Jan 3, 2014)

Just a Guy said:


> You can refinance your rental in most cases to get the equity required.
> 
> The interest on the loan, not the entire payment, would be tax deductible.
> 
> ...


Considering I don't have a mortgage on my primary residence, would the bank\lender give me a loan while putting a lien on my house (as collateral) and calling it a heloc? I would rather not have to registered my current rental as a collateral as it would cost me more money to switch lenders after my term. 

I am looking at a home that is for sale @ 315k and has two dwellings (basement apt). I figured I could possibly rent the upper unit for 1500 and lower unit for 800. I need to inquire to see whether there are two separate hydro meter. 

How do I file my taxes on the interest I've paid on the HELOC? It would likely be in the neighborhood of 40-50k in size.


----------



## Just a Guy (Mar 27, 2012)

It would probably be much simpler to get a HELOC on your primary residence. I'd get it to be fairly large as you don't need to use the whole thing if it's a HELOC, but increasing it later is a pain.

Also, see if you can lock in portions of the heloc like a mortgage with principle pay down included...TD has this, and it's very nice for rentals and bookkeeping. 

I'm not really an expert on taxes, I hire an accountant which is also a tax deduction, but I recall that there is a section on secondary income where you report the rent and expenses associated with the property.

The rules change as to what can be considered an expense after you own a number of properties (three as I recall, but I don't know if that's three doors, where a duplex counts as two, or three properties). 

You need to make sure that the second suite is "legal" and permitted...illegal suites, while being fine for years, can come back to haunt you if you have the wrong tenant/neighbour who reports it.


----------



## gt_23 (Jan 18, 2014)

gerogesin said:


> Considering I don't have a mortgage on my primary residence, would the bank\lender give me a loan while putting a lien on my house (as collateral) and calling it a heloc? I would rather not have to registered my current rental as a collateral as it would cost me more money to switch lenders after my term.
> 
> I am looking at a home that is for sale @ 315k and has two dwellings (basement apt). I figured I could possibly rent the upper unit for 1500 and lower unit for 800. I need to inquire to see whether there are two separate hydro meter.
> 
> How do I file my taxes on the interest I've paid on the HELOC? It would likely be in the neighborhood of 40-50k in size.


Get a HELOC on your primary residence for as much as you want. The rate will likely be P+50. I'm not sure why you would do a HELOC on the 1st rental, as you only have $40k max.

For taxes, you have to fill out a P/L statement for each rental property called T776. Add the interest from the HELOC to the interest on the 2nd rental property mortgage and claim this total on the interest expense line for that property. Very simple.

Also, what city are you in?


----------



## Mortgage u/w (Feb 6, 2014)

gerogesin said:


> Considering I don't have a mortgage on my primary residence, would the bank\lender give me a loan while putting a lien on my house (as collateral) and calling it a heloc? I would rather not have to registered my current rental as a collateral as it would cost me more money to switch lenders after my term.
> QUOTE]
> 
> Qualifying for a mortgage (or HELOC) on a primary residence vs a rental is different. However, in your situation, you do not have the required equity in your first rental so no choice to get it from you main residence. If you're intention is to fully mortgage your main residence (80% of the value is the max) and you would be able to pay off your new purchase, that could be a good possibility - since you will only have 2 mortgages to manage vs 3.


----------



## gerogesin (Jan 3, 2014)

Thanks for all the response. 

I will give my bank a call regarding getting a HELOC on my primary residence so that I can fund a downpayment on another rental property. I currently have a bit of money saved and will use that in combination with the HELOC to fund a downpayment and closing cost on my second rental and possibly third rental. 

In the end, I will have:
-Mortage #1 for first rental (currently have)
-HELOC from Primary residence (which the interest is tax deductible)
-Mortgage #2 for second rental
-Mortgage #3 for third rental

The fundamentals of course will be to ensure all the future properties cash flow and tenants are screened well. 
I assume that the HELOC from my primary will have to have a strict paper trail in case of CRA audits. 

I am located in Ottawa which allows for basement apts. I will look further into the legalities of basement apts in my area.


----------



## Just a Guy (Mar 27, 2012)

A better way to do it, if you have the credit, is to buy the 2nd place outright using the heloc on your house. Then apply for a mortgage on the rental. This is especially good if you can add value to the place and get it appraised higher than your purchase price.

When you get the mortgage, you pay down your heloc. Rinse and repeat.


----------



## Jagt Mirage (Sep 29, 2014)

gerogesin said:


> I am writing to see if it is possible to use equity on my first rental property combined with my current savings in order to be used as a downpayment on a second rental property. The home is likely valued at 300k with 200k mortgage remaining. I'd like to buy a second rental at 300k but require 20% (60k) downpayment.
> 
> I could access the equity from my own home but I no longer have a mortgage. Would I just get a loan from the bank using my
> 
> ...


Most banks refinance up to 80% of the value of the house, so for your 300K house you can refinance to 240 which'll give you 40K equity towards the second rental. I'm not a big fan of HELOC as the interest rate is higher. I would refinance the first house as you say, for 240. If you can scrape together 20 to make the 60K 20% down that would be ideal (don't want to pay CMHC insurance). If you're short, I'd take out a small mortgage on your primary residence to fill the gap up to 60.


----------



## GregoryWong (Aug 11, 2011)

Just a Guy said:


> A better way to do it, if you have the credit, is to buy the 2nd place outright using the heloc on your house. Then apply for a mortgage on the rental. This is especially good if you can add value to the place and get it appraised higher than your purchase price.
> 
> When you get the mortgage, you pay down your heloc. Rinse and repeat.



Just a Guy, are you able to explain this scenario a little more? This is very interesting to me. I understand the part about buying the 2nd place outright with the heloc, but you lost me about applying the mortgage to the rental. Is the mortgage on the 2nd rental, or 3rd rental?


----------



## carverman (Nov 8, 2010)

gerogesin said:


> T
> 
> I am located in Ottawa which allows for basement apts. I will look further into the legalities of basement apts in my area.


New rules and regulations are now in place for basement apartments in OTTAWA.

In the past there has been some deaths due to fire traps, and illegal apartments. 
http://www.ottawafireretrofit.com/rules.htm


----------



## Just a Guy (Mar 27, 2012)

GregoryWong said:


> Just a Guy, are you able to explain this scenario a little more? This is very interesting to me. I understand the part about buying the 2nd place outright with the heloc, but you lost me about applying the mortgage to the rental. Is the mortgage on the 2nd rental, or 3rd rental?


Okay, you currently have a rental (with mortgage) and a house (no mortgage). Let's ignore the first rental and mortgage as it has no bearing. So you just have a clear title house.

You apply for a heloc on your house and get 80% financing (let's say, for arguements and simple math, your house is worth $500k, so you get a heloc for $400k). You can now go out and make an offer on a rental property and have a lot more freedom than the average joe. You can make an unconditional offer for example, since you don't need to worry about financing, sometimes this gets you a better price.

So, let's say you find a place and get it for $300k (a little high in my opinion, but better than most of the ones people propose here), so you pay for it on the heloc. Now, you go in, do some renovations, paint, spruce the place up and find renters that pay you close to $3k/month (that would be my target rent for a 300k place). It's taken you a month, now you approach the bank for a mortgage on the clear title rental.

Because the property is clear title, they send out an appraiser to look at the place and compare it to market. The purchase price, technically, doesn't play a large role in what the bank will appraise it at. If you were to buy a place and apply for a mortgage, the purchase price basically determines the mortgage value, if you buy on a heloc, and it's clear title, the bank doesn't use the purchase price anymore, even if you apply the next day...though it may be a comparable. It's a little loophole that works very nicely if you buy a foreclosure which usually sells below market value.

So, hopefully your renovations (and your cash discount on purchase) improve the value of the property, and the place appraises at $375k so the bank offers you a 300k mortgage on the property (80% LTV). You get the mortgage, pay down your LOC and you've got a property 100% financed (minus the legal and Reno fees) and your line of credit if free to buy another property.

Now, I realize that this scenario is unlikely at the 300k level, but this is basically what I do. Of course I look for places under 100k/door which usually means foreclosures where there is a good chance of raising the value and getting full financing including renos and fees...still, even if you only get 80% of your purchase price, you pay down your heloc, loc in the remaining portion at mortgage rates and you still have nearly 350k to buy another one...plus, each month, a little more of the heloc becomes available from the principle pay down.

The banks send you off a yearly statement for the heloc locked in portion, so keeping all the accounting straight is simple.


----------



## GregoryWong (Aug 11, 2011)

That is great info, much appreciated for taking the time to explain that!!

Have you ever had the banks come back to you and say your debt servicing ratio is way off and we're not going to give a mortgage on a place? Or have you always had enough equity or cash flow to cover?


----------



## gt_23 (Jan 18, 2014)

Just a Guy said:


> Okay, you currently have a rental (with mortgage) and a house (no mortgage). Let's ignore the first rental and mortgage as it has no bearing. So you just have a clear title house.
> 
> You apply for a heloc on your house and get 80% financing (let's say, for arguements and simple math, your house is worth $500k, so you get a heloc for $400k). You can now go out and make an offer on a rental property and have a lot more freedom than the average joe. You can make an unconditional offer for example, since you don't need to worry about financing, sometimes this gets you a better price.
> 
> ...


Is there a waiting period between when you buy the house for cash and when the bank will give you a new 1st mortgage to get your cash back out?


----------



## Just a Guy (Mar 27, 2012)

GregoryWong said:


> That is great info, much appreciated for taking the time to explain that!!
> 
> Have you ever had the banks come back to you and say your debt servicing ratio is way off and we're not going to give a mortgage on a place? Or have you always had enough equity or cash flow to cover?


Nearly every single time I ask...banks like to say no. I don't take it personally, and just ask them again. The credit department always seems to reject, then I work with the bank and they eventually say yes. The properties are only 80% LTV, and make great cash flow, so they eventually give in.

Gt_23,

Technically no, but some appraisers will use the sold price if it's close to the purchase date. I've had appraisers who've done both (look at the market price or look agh the sold price). It all depends on luck. One of the places I bought last year for 73k was appraised very close to that even though the city assessment was 200k and it generated a rental income of $1600. At the same time, I had another property appraise at double the purchase price, so it all evened out for me.


----------



## getliquid (Mar 2, 2014)

Just a Guy said:


> So, let's say you find a place and get it for $300k (a little high in my opinion, but better than most of the ones people propose here), so you pay for it on the heloc. Now, you go in, do some renovations, paint, spruce the place up and find renters that pay you close to $3k/month (that would be my target rent for a 300k place). It's taken you a month, now you approach the bank for a mortgage on the clear title rental.
> 
> .


Most of the Ottawa rentals I have seen is more like $300K for $1500/month in rent, seems to be a lot of similar ads on kijiji.... where do you find 100K/door? If you find deals like this constantly I would be your JV partner for sure!

I'm looking to get a rental or two in Ottawa, do you recommend new builds or existing 10 yr old houses in better neighbourhoods? or condos? Do you recommend the local investors that look for silent JV partners?

I'm not the type to repair-->flip, more for the long term hold type.

thanks!


----------



## Just a Guy (Mar 27, 2012)

I've outlined how I find places in other threads...you probably won't find a new build for that price unless the whole project failed. I also know that there aren't a lot of places under 100k and they don't last long if they are available...most of mine I've offered and closed in under a week of the listing first appearing. I'm averaging 75k/door and rent just over 1050/door rent for the 6 I picked up last year (non in Ottawa sorry to say). All 100% financed after renos...so I don't really need a JV. 

Personally, I've been looking for apartment blocks, but they are all priced over 100k/door so I keep picking up individual units for less...

I'm not a flipper either, I play monopoly with real buildings.


----------



## Mortgage u/w (Feb 6, 2014)

gt_23 said:


> Is there a waiting period between when you buy the house for cash and when the bank will give you a new 1st mortgage to get your cash back out?


Just a little detail I would like to add to your strategy of refinancing on clear title because the strategy may not always work. The banks have a maximum equity take-out when refinancing on clear titles which is $200k. Anything above that can be done on exception but I can tell you that it will be refused more often than not. Reason is exactly for eliminating the 'strategy' you outlined. Banks will not take on the risk of maximizing their exposure on all your rentals. 
To answer your question GT, there is no time frame, however common sense is applied. If you apply the next day, it is 99% sure the value used will be your purchase price. If its a while later and you can demonstrate the value is higher, then an appraisal will be ordered to determine the new value......but again, the max equity take out is limited to $200k.


----------



## gerogesin (Jan 3, 2014)

I did not know it was possible for a bank to give you a mortgage on a property (second rental) that is paid off in full (using your HELOC on primary home). I was always under the impression that they will only offer a HELOC on properties.

Just a Guy>> That is a clever strategy. From your experience, do the lenders consider your rental income as part of your gross income in order to calculate your TDS and/or GDS? I've heard they only take 1/2 of the rental income as they do this to account for vacancies, maintenance, etc. 

Getliquid>> You will not find a rental that will cashflow as well as any properties that justaguy mentioned here in Ottawa. You would have to consider searching out of town perhaps carleton place, perth, limoges, etc. The other alternative is to try and find a double-dwelling home or find a place with the potential to be a double-dwelling home. The down side is that you have to landlord more tenants.


----------



## Just a Guy (Mar 27, 2012)

You can get a mortgage on any property...you can also remortgage an existing property for more if the value goes up, or you've paid it down. Helocs are actually harder to get on a rental property, the banks prefer a mortgage.

Different lenders have different formulas to calculate income...one of the ways we get around the initial rejection I'd by changing the calculation on rent before submission...but they never give you full credit for all the rent.

As for finding properties, you'd be surprised where they show up. I've had PMs with people from all over that found properties once they started looking...but they are rare in this market.

There are actually tax benefits to owning several doors...I think the minimum is three rentals, plus you also get the benefits of multiple streams of income.

You should check out www.easysafemoney.com. His book was a good beginners book, and his site has a lot of articles...though he seems to have stopped writing lately...

Mortgage u/w, as I never come close to that limit with my purchases, I'll bow to your expertise here...but if it's a duplex, would they consider upping the limit to 400k since there are two doors? That arguements may be a way to get the exception if it wasn't automatic.


----------



## Mortgage u/w (Feb 6, 2014)

Just a Guy said:


> Mortgage u/w, as I never come close to that limit with my purchases, I'll bow to your expertise here...but if it's a duplex, would they consider upping the limit to 400k since there are two doors? That arguements may be a way to get the exception if it wasn't automatic.


No...regardless the property type, $200k would still apply. Where I would do an exception is if you require say $250k on a clear title rental in order to discharge a $250k mortgage on primary residence. I know you have a good net worth and by discharging the primary mortgage, I know your intention is not to re-borrow. 

Gerogesin, rental properties are unsually qualified with 50% rental income added to your personal gross income. When there are multiple properties involved, there is a separate rental worksheet that is done in order to determine the profitability. Any losses/gains are added/deducted to your income.


----------

