# Financing 1st RENTAL PROPERTY and onwards - STRATEGIES?



## newbie123 (Jun 19, 2014)

Hi all,

About myself:
-own home worth ~$1.5 million free and clear
-interested in buying 5-10 rental homes in the next 10 years
-already have 20% down payment (DP) cash ready for purchase of 1st rental property
-each rental property will have renos/repairs done to increase value
-ideally would not want to keep on using cash for financing subsequent rental properties

Best financing strategy from here?
-get a traditional mortgage for rental property? (not a fan of this one)
-mortgage against my home? (is this called a home equity loan?)
-at what point during this whole process would it be a good idea to use: i) HELOC, ii) cash-out refinance?

Any advice would be greatly appreciated!


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## Just a Guy (Mar 27, 2012)

I’d first find a good realtor who can actually help you find a good cash flowing rental. These are very rare, as they want you to spend a lot of money as they are paid on commissions. 

Next, I’d buy the property on your heloc, do the renovations, and then seek a conventional mortgage at 80% LTV. If you did your homework and Renos properly, you should be able to get all your cash back out at 80%. This is basically what I’ve been doing for years. 

You should check out the book on easysafemoney.com as it basically outlines this strategy.


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## newbie123 (Jun 19, 2014)

Thanks Just a Guy, that site is currently not working .

Would it look something like this?
Example:
-purchase 1st rental $450,000 using HELOC for the $90,000 DP
-complete renos for say $50,000
-get conv. mortgage secured against my home for $360,000 ($450,000 x 0.8) PLUS $40,000 ($50,000 x 0.8)(the purchase plus improvement mortgage)
-rinse and repeat for 2nd rental?


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## nobleea (Oct 11, 2013)

JAG is going to tell you that it'd be pretty much impossible to make money renting out a 450K property. Unless rents are on the order of 4-5K/mo.

Try shopping around for things in the 60-140K range.

Your steps are incorrect. You use a HELOC on your home to purchase the entire property, cash.
Then do your renos, also with cash.
Then get a mortgage on the rental.
Repay your HELOC with the mortgage proceeds.


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## Just a Guy (Mar 27, 2012)

Nobleea is quite right, it would be really hard to find a cash flowing $450k property without fudging the numbers. 

The book can be found here...

http://www.blurb.ca/b/994817-the-simple-solution-to-canadian-real-estate-investi

I think it's also on smash words and iBooks. 

The site had quite a bit of good information on it, hopefully it won't be down long.


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## newbie123 (Jun 19, 2014)

Thanks Noblee and JAG for sharing this strategy! Just wondering, is there an advantage to this strategy vs say just paying the 20% DP with HELOC, then getting a conventional mortgage @80% LTV post-reno?


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## Just a Guy (Mar 27, 2012)

If you seek financing right off of a purchase, the banks generally appraise the property within a few thousand dollars of the purchase price (they just look at other properties to ensure it's in the ballpark). If, however, you seek financing on a "clear title" property, the appraiser has to look at comparable properties. So, if you purchase a property below market value, You won't benefit from it.

Next, if you renovate afterwards, you'd have to break your mortgage and requalify if you want to take out the equity you created through the renovations.


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## sags (May 15, 2010)

A cheap unit can be upgraded, but how do you upgrade a rundown building and crappy neighborhood, which are significant factors in real estate prices and rents ?


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## newbie123 (Jun 19, 2014)

Ahh, I see. Regarding the second point, I just thought the "purchase plus improvements mortgage" would help with not having to break the mortgage and requalify post-renos. Say renos are $40,000, the lender returns that money after renos are complete, no refinancing required.


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

Your purchase + renos mortgage is doable, however, you won't be able to pull out any further equity later on since your reno value was already factored in. You need to be ok with that. That also means that it could be a while before you are able to pull out enough equity to get your DP back for the next purchase. If you pay the rental and renos cash (off your exisiting home HELOC), there is a better chance that the value increases significant enough to get all your money back to move on.

Of course, your plan on paper is usually better than real life so you need to pick out the right property that requires the right renos to provide max value.


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## nobleea (Oct 11, 2013)

Unless you're looking at a 4 or 6-plex, 40K in renos is way too much. To get a single unit cleaned up and ready to rent should be 5-10K at most. Granite countertops and SS appliances might only get you $60/mo extra in rent, if that. It doesn't pay off.


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## Just a Guy (Mar 27, 2012)

Yeah, you have to learn the difference between rental quality renovations and selling quality renovations. I can usually renovate an entire place for 5k in materials, and most places don't need a full renovation. There's no point in putting in granite countertops and such, since tenants have a tendency to not take the best care of your place.


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## AltaRed (Jun 8, 2009)

My key take on this is to avoid single detached homes. They are maintenance pits. I see things like triplexes, 4 plexes, and 6 plexes as potentially cash flow positive. The key is to buy 'doors' not properties.


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## Mukhang pera (Feb 26, 2016)

AltaRed said:


> My key take on this is to avoid single detached homes. They are maintenance pits. I see things like triplexes, 4 plexes, and 6 plexes as potentially cash flow positive. The key is to buy 'doors' not properties.


If memory serves, the grand master himself, JAG, owns a few single detached homes. Perhaps I misremember. As for triplexes, the OP should be aware that some here see them as not worth the powder to blow them to Hell. See, for eg.:



Rusty O'Toole said:


> In this day of low interest rates the old rules don't hold as much water as they used to. But yes, that is a ridiculous price and the chance of making any money off the rent is nil. Either the buyer is depending on the 'greater fool' theory of selling for an even more ridiculous price in a few years, or doesn't understand the concept of investment returns. In duplexes and triplexes this is not unusual. They usually sell to amateur investors who don't know how to figure their returns or don't care. They see themselves living in one unit and getting cheap rent by using the rent from the other units to pay the mortgage.





andrewf said:


> As an investor, I would be looking for at least 7%. High quality assets trade at cap rates of 6%. Triplexes are not high quality assets, so should be trading at a discount.


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## AltaRed (Jun 8, 2009)

I look at it from a maintenance and upkeep perspective. Keeping up with all that wold be a huge headache. Repairing things inside is enough work for a landlord..


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## newbie123 (Jun 19, 2014)

Thanks for your input Mortgage u/w! I'm definitely going to discuss this strategy with my mortgage broker.


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## Just a Guy (Mar 27, 2012)

The type of property doesn’t really matter. What matters is condition, location and price per door (not to mention the rent it can generate).


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