# Investment property mortgage question



## RCB (Jan 11, 2014)

Background: I have two mortgages with my bank, personal home and a house I rent to students. I also rent out my father's home to students. My father has been in a nursing home for a few years. We spent a fair amount to bring his house to fire code for it's use, and upgraded much of it. My plan was to assume the mortgage before it is due for renewal later this year, and then switch the mortgage to my bank for the renewal date. It is only 4 1/4 years into the mortgage. I pay all expenses...mortgage, property taxes, commercial insurance, etc., nothing comes from my father.

I spoke to my bank, and was told because I rent with a lease to each tenant (technically a rooming house, therefore the higher fire code standard), and there are 6 bedrooms, it's considered a 6 unit building, not a house, and I can't get a mortgage there. This is unfortunate because it not only brings in a much higher rent, but also allows for much more control of the house, keeping it in better shape (I pay for a weekly housekeeper, pay one tenant to supervise, etc.). The only alterations were exit signs, painted metal fireskins and self-closing hinges for the bedroom doors, utility room fire door and sprinkler system, replaced some paneling and accoustic ceiling with drywall, and fire extinguishers. It is still a house, no renovations to the normal layout, a nice family home in a family neighbourhood.

My father is not well, and now has dementia, so a sibling and I have Power of Attorney, and have taken care of his finances for several years. One of us has been renting out his house for most of the time he has owned it, due to sudden hospitalization.

Mortgage advice? We are trying to avoid a large cash outlay (20%), and while it needs to be appraised to move it to my bank, we think the market value has increased by enough that the 20% equity is there.


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## Just a Guy (Mar 27, 2012)

Okay, this situation is a little more complicated than you think...

First off, understand that, even though you're the one doing everything, in the eyes of the world and legally, it's been your father.

Second, if you transfer it to your name, you will trigger a capital gain from the date he moved out to the nursing home until the day you sell as it was no longer his primary residence. 

Third, in Canada, you basically can no longer assume a mortgage...you need to qualify for it as if you were buying it...and qualifying for a rental is much harder today than it was a few years back.

It's true some banks won't touch rooming houses, that's just policy.

If the current bank will renew the mortgage, that may be your best option, however it will still be in your dad's name...if he dies, you'll be stuck in the same situation of having to qualify to assume the mortgage, so you'd only postpone the problem a little while at best...

Best advice, talk to the current bank and see if you can qualify to take over the property as it stands. If they don't, talk to your bank, and a mortgage broker...expect to hear a no. Don't give up though, as to speak to someone higher up in the bank.

Getting money right now is tough, but not impossible...if you get an offer, you may jump on it because there probably won't be multiple in this environment...


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## RCB (Jan 11, 2014)

Thanks, Just a Guy.

Yes, I'm aware all eyes see these transactions as my father's. I even had to get the commercial insurance in his name.

I've been aware that to assume the mortgage, we must qualify. As this would be a second rental mortgage (our first qualified on my husband's income), my understanding was that we would have to qualify using the rental income (at 50-80%). That's covered, however it's covered because of numerous leases. Would we not run into the same problem (considered multi-unit) qualifying where the mortgage is currently held?

Would my father pay capital gains if he's already paid income tax on all of our payments to him (mortgage, property tax)? There would be no payment to him, just losing the mortgage obligation with our assuming the mortgage, per the decision of my sibling and myself. He has more money than he could ever use, and what would normally be a top-up payment when assuming the mortgage would only end up with myself and my sibling eventually. I would be paying my sibling on the side for improvements he made, when he used the house, and intended to assume the mortgage.

Should I also see the mortgage broker that handled the original deal?


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## Just a Guy (Mar 27, 2012)

The bank that currently has the mortgage would most likely offer to renew to your father without doing any calculations whatsoever or caring that it's a rental...renewals aren't the same as new mortgages.

Of course, don't confuse qualifying with assuming...qualifying now means applying as if you are a new customer, they will usually look at it as if it's a new purchase and where the income is coming from, etc. The history of the place will play next to no role in their decision.

Capital gains are triggered if the value of the property has increased between the time he moved out and the time the place changes title (nothing to do with income tax, it's the gain in the property value). You may be able to claim the conversion costs and other things to negate any gains, talk to an accountant, but don't assume there are none. The paper trail and losses are important to cover your butt, it's not hard to negate the profits in real estate, but if you don't do it properly, they can fry you. Spend the money on the accountant, it's a deduction anyway. 

If it were me, I'd approach the current bank first about the mortgage. I'd also approach my bank at the same time. See if either will do the mortgage. They may give you a no right away, but don't give up, ask if there is something they could do...even if they say they don't do rooming houses, that's technically not true...

Assuming they come back with a no at first, then I'd talk to a broker (can't recommend the one you had as I don't know it). Expect it to be difficult...lending is tight. 

I had to threaten my bank with moving my accounts before they somehow found a way to do a deal...then they qualified me for double the amount I needed, but said no more after I only used half. I pointed out that I'd qualified for double what I used, they admitted that I could use the extra on a different property...which brought in more income, which upped what I qualified for, which allowed me to buy more...it's all a game, not fun to play, but no doesn't mean no. I added 4 doors last year after the first no.


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## RCB (Jan 11, 2014)

Thanks!


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## Westerly (Dec 26, 2010)

Just to add, there is a 4 year principle residence election that can be filed with CRA after a person moves out. I believe it's filed annually. It can be "filed late" after the fact with a penalty, could be worth it depending on the gain. Also, just because title transfers doesn't automatically mean a sale to CRA. They look at beneficial ownership. Further, not sure where you are but some provinces will not allow a title transfer to POAs.


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## RCB (Jan 11, 2014)

Thanks for that. We use the same accountant, doing our taxes at the same time, so I'm sure the accountant can address this. As for POA, we're in Ontario.


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## marina628 (Dec 14, 2010)

I would be careful giving too much details to the bank who is presently holding the mortgage as they may give you same issues as your bank.I know TD has a 4 tenant limit on rentals or at least they did in 2008/2009.


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## Synmag (Apr 16, 2011)

I agree with what's been suggested so far I'm just unclear what the 20% cash outlay is you mentioned in your first post. Is it about a $100,000 down payment if you can qualify for a mortgage or is it your Dad's tax bracket on the capital gains, which I estimate around $10,000 based on information you provided, he would have to pay if he were to pass away? 

Do you have sufficient equity in your two properties to leverage for the down payment in order to qualify for the mortgage? As Just A Guy said don't be afraid to twist your bank's arm to get what you want. If by chance your mortgages are up for renewal soon, you can threaten to leave with all your business. This is especially effective if you have RRSPs with them or other investments. Even if they say no, call their bluff and initiate a transfer and whatch them change their mind. I have been successful in extracting good rates and eliminating fees with my bank but it took me moving one mortgage to a different bank before they cooperated. Once they got the transfer paper they called me that they could give me the "best" rate. I told them they were dealing in bad faith and missed their chance. Next time I moved they took me seriously and gave me the rate I wanted and eliminated assessment fees that they initially said they would definitely will not pay. They even renewed my variable rate mortgage at my previous rate automatically. Play the two banks against each other and tell them you will move to the other if they don't help you. Don't be afraid to get aggressive and demand things. 

Failing that you have the option to go to the secondary mortgage market. You may have to pay a bit higher rate but you should be able to secure a mortgage. At a real estate investment seminal I was told that every one can get a mortgage it just may cost more if you are deemed a higher risk. I know a broker I can recommend if you like who arranges private mortgages. My sister bought an investment property and she lost her job before closing. This broker told her not to worry she can get a mortgage for her. Since you have tenants in place with leases and if you are cash flow positive you should have no problems getting a mortgage. 

Have you considered keeping things as they are until your Dad passes away? It may be more advantageous to pay capital gains in his hands as he would probably be in a lower tax bracket. You would have to weigh the pros and cons and explore the estate side of things. You said he has more money than he will need, perhaps the mortgage can be paid off from the estate when the time comes. 

Another strategy to explore would be if your mother is alive and insurable (or a spouse's parent if you have one), to look at life insurance as a tool to perhaps cover taxes and other expenses.

Good luck...


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

The biggest problem is you converted the property into a rooming house and no lender (surely no insurer) would finance that under residential loan policy. You will need to see a commercial lender. As long as the profit to debt ratio is above 1.10 to 1.20, you should get the financing no problem.

The only way you can get a residential loan is by staying conventional with the current bank and ensuring there is lots of equity available. Although 20% is min, banks are much more flexible if the equity is higher...especially if your an existing customer with solid assets.


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## OurBigFatWallet (Jan 20, 2014)

Since the place is technically a house I assume it's zoned R1 (single residential). Could you not argue your case to the bank that it is technically a residential house, not a commercial property? Or is the tenant policy in their lending fine print?


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

OurBigFatWallet said:


> Since the place is technically a house I assume it's zoned R1 (single residential). Could you not argue your case to the bank that it is technically a residential house, not a commercial property? Or is the tenant policy in their lending fine print?


There is no arguing policy or risk. Technically it IS "residential" however this type of home does not fall under residential lending guidelines...which is why banks will refer to commercial lending guidelines in these circumstances. Only way to get a residential loan is on exceptional basis by a specific branch who knows their customer and is willing to take on the risk. Usually, they will not finance more than 65% of the home's value - some more, some less.....basically, you'll need lots of equity available otherwise you're out of luck.


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## RCB (Jan 11, 2014)

Here to update.

Due to summer turnover in student tenants, we did not have leases in place to approach my father's lender to assume the mortgage. We opted to purchase the house, using our own bank as the lender.

As our branch and loan officer are very familiar with us, we had absolutely zero problem obtaining a residential home mortgage for 80% of the appraised value, with the 20% equity "gifted from family". This will payout my father's mortgage, cover his legal fees, and re-pay my sibling for his renovations.

We were fortunate to qualify based on my husband's income, and about 30% of the rental income of the other rental property. The rental income of this (great cashflow) house we purchased was not used at all.

Upwards and onwards.

Thanks for the input.


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## Jagt Mirage (Sep 29, 2014)

Mortgage u/w said:


> Usually, they will not finance more than 65% of the home's value - some more, some less.....basically, you'll need lots of equity available otherwise you're out of luck.


Really? That's a bummer. My mortgage is coming up for renewal in 8 months and I was planning to refinance my investment home to 80%, which'll let me pay off the mortgage on my principle. If it's only 65% then that puts a damper on my plans.


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

Jagt Mirage said:


> Really? That's a bummer. My mortgage is coming up for renewal in 8 months and I was planning to refinance my investment home to 80%, which'll let me pay off the mortgage on my principle. If it's only 65% then that puts a damper on my plans.


Don't confuse commercial vs residential. What type of property do you have? If its a mulit-unit, up to 4 units and strictly residential use, then you will have no problem refinancing at 80%. If its anything other than that, then it will be a case by case scenario.


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## Jagt Mirage (Sep 29, 2014)

Mortgage u/w said:


> Don't confuse commercial vs residential. What type of property do you have? If its a mulit-unit, up to 4 units and strictly residential use, then you will have no problem refinancing at 80%. If its anything other than that, then it will be a case by case scenario.


oh whew. It's a residential property which I converted into a triplex.


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