finance refinancing Top refinancing tips for real estate investors Refinancing enables you to access equity in your property or switch to a better mortgage deal. Dalia Barsoum and Enza Venuto explain what you need to consider before you switch

1 march 2013 canadianrealestatemagazine.ca finance refinancing

nvestors often think of refinancing when they are looking at better deals or How it works in real life at pulling out their accumulated equity. Mortgage rates have been at a I You purchased a property in 2009 for private lender may be willing to give historical low, and from time to time we $250,000 with 20% downpayment. This you 95% of the value in the form of a see a lender launch a marketing campaign means your first mortgage at the time loan. So, let’s run the math. announcing new rate promotion for their of purchase was $200,000. Assuming This means that at a value of one-, three- and five-year fixed terms. you purchased at 30 years amortization $290,000 the private lender may be Every time this happens, we get a flow at a rate of 2.99% for five years, your willing to lend you up to $275,500, of calls from our investors who currently mortgage balance by the end of the which translates into you being able to have mortgages at higher rates, asking five years would be roughly $177,000. pull out about $98,500 in equity. whether or not it would make sense to break their mortgage and lock into these very SCENARIO 1: SCENARIO 2: attractive rates. VALUE IS UP VALUE IS DOWN Investors pull equity from their properties Now let’s assume this Now let’s assume the property for one or more reason, including using property has gone up in value at an has gone down in value. There are two equity to buy another property, paying out a inflation rate of 3% annually over scenarios here: joint-venture partner, or for a secondary loan the past five years and is now worth ➊ Value is still above the total debt. or funding a renovation. roughly $290,000, and that the sold This scenario is similar to the value comparables in the local market as going up, because you can still go to DO THE BENEFITS well as the appraisal support this a conventional or private lender for OUTWEIGH THE COSTS? value. In this case, the difference equity pull-out (depending on how between value and your mortgage It all boils down to crunching the numbers much you are looking to refinance and balance (i.e. equity) would be on your personal financial situation). and seeing if it makes sense to touch your $113,000. ➋ Value is below the total debt. current mortgage. As part of this analysis, If you were to go to a conventional If the value of your property has you need to factor in both the costs and the lender, they would be willing to give declined to really low levels where it is benefits before making a decision. you up to 80% of the value ($232,000) below what you owe on the property, in the form of a mortgage or 65% of then your only avenue for tapping into THE COSTS the value as a line of credit ($188,000). funds is to go private. In that scenario, This means that in a mortgage In most cases refinancing comes at a the lender will very likely ask for cross- situation you would be able to tap cost, including legal fees, discharge fees collateral, meaning they may be willing into about $55,000 of the equity, and associated with leaving the current lender, to give you some money but will need in a line of credit scenario you could appraisal fees, mortgage penalties (which another property as security, and they tap into only $11,000. will base how much money they give depend on the remaining term on your There are some products that allow you on the combined values of the mortgage, whether the mortgage is fixed or you to tap into the equity through a variable, and on the gap between the current combination of a mortgage and a line properties. rate on the remaining term and market of credit. If you take a private path, a rates), and the soft costs associated with the time you put in for providing support documents to the lender. can pull out. Two factors generally impact THE BENEFITS on the value of your property – one that you ✔ What your plan is for the extra money can control and the other that you have little Value determines you are receiving from the refinance control over: ✔ ➊ How much you will save over the term The condition of your property and how how much money under the new rate, compared to if you stayed many value-add improvements you have with your current lender at the current rate made since you purchased it. ✔ the lender will How the refinancing will impact on your ➋ Market forces that drive property values, cash flow and ability to obtain approvals on including: give you, and future investment purchases. Can you tap • demand and supply of real estate for your into that money through other avenues? property type and location how much you • macroeconomic forces that have an PROPERTY VALUE impact on real estate valuation can pull out Value is a primary determinant of how much • supply and demand, such as the state money the lender will give you, and will of the economy have an impact on how much money you • interest rates

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If you have equity (the difference between value and all debt owing on the property) Lenders factor due to an increase in your property value or a reduction in the debt, then your lending in your personal advisor can help you explore the best way to tap into that equity. situation, the Equity pull-out may be done by refinancing the mortgage; or in some cases by guidelines, and setting up a secured line of credit against the property without touching the first mortgage; or by what we call a “blend and extend” the property at the exercise, which is a method that allows you to tap into any equity without touching the first time of a refinance, mortgage – i.e. avoiding any penalties – and blending the rate on the new mortgage with and at the end of your existing first mortgage. Another way to pull out more equity, other the day those drive than what a conventional lender can offer, is to go private. what they can and If your property has declined in value since you purchased it, and you need to tap into cannot offer you funds, then you may want to consider private lenders as their criteria are much more lenient than those of conventional lenders. Private lenders can go up to 95% loan-to-value on a PERSONAL SITUATION If your property is located in an area refinance, compared to a conventional lenders Industry and lender guidelines are always where the local economic fundamentals who go up to 80%. shifting. Not too long ago, the banks and driving real estate values are strong, the likelihood of it maintaining or increasing in value is greater. How it works in real life Before you start applying for a refinance or equity pull-out, we recommend you get an opinion from your local realtor who Jennifer impact on amortization, because the knows the area and is well versed in the Jennifer is a real estate investor benefits still outweighed the costs. property type and its value. with a small portfolio of residential For residential properties with one to four properties. She purchased Anthony the properties when 40-year units, your realtor can share with you a list Anthony is a successful investor and amortizations were still in effect. owns 50 doors. Anthony had leveraged of comparable properties sold in the area Many of her properties had increased joint-venture funds to help expand his over the past six months. For properties that in value, and she was looking to portfolio and it was time for him to are five-plus units, your realtor can give you refinance at today’s competitive rates pay off some of his joint-venture an idea of the value based on the cap rate for in order to pull out money to buy partners. Over time, Anthony had the area and the net operating income your larger apartment buildings. become a full-time real estate investor property generates. We sat down with Jennifer and and quit his day job. His portfolio had crunched the numbers, and informed also expanded significantly. ACCESSING EQUITY: HOW ITWORKS her of the implications of refinancing Being self-employed, and with the Once you have a “feel” for what your today. The maximum amortization scale of his portfolio, we were able to property is worth, you can get in touch offered is 30 years, and some of her help Anthony refinance some of his properties had 32 years' amortization with your lending advisor to crunch some properties through a combination of left. By refinancing, Jennifer would cut private and B lenders to help pay off his numbers and help you determine how much 2 years off amortization, which on one joint-venture partners. money you can pull out and at what rates. side of the coin would translate into B lenders are more flexible than Generally, conventional lenders refinance paying her mortgage off sooner, but conventional lenders in their lending 80% of the appraised value, but other factors on the flip side it would impact on her criteria. They offer higher rates than affect what they can offer, including the cash flow. Jennifer made the informed conventional lenders but are still condition of the property, its location, and decision to move forward despite the competitive. your financial situation (income, credit, employment status).

3 march 2013 canadianrealestatemagazine.ca finance refinancing

A-schedule lenders reduced what they would income, property holdings and any other your credit report from www.equifax.ca). lend on secured lines of credit from 85% information the lender requires. • Explain what you intend to use the loan-to-value to 65% loan-to-value. ➍ Engaging a lawyer when closing the funds for. We have also seen amortization periods deal. The process may involve loan fees • Share with them any future plans for cut from 30 to 25 years for buyers putting (depending on where the deal is placed) – buying more properties. a downpayment below the 20% mark. for example, private and B lenders always • Have your lending advisor help you Similarly, client situations change charge a fee. If you are planning on with the number crunching. over time: credit may change, employment refinancing or exploring ways to pull out • Discuss the options available to you status may change from employed to equity, here are some tips that will help and have your advisor do the shopping self-employed or vice-versa, and debt levels streamline the process and get you the around for you. may also change. best deal. ➜ Lenders factor in your personal situation, Know the value: Dalia Barsoum MBA, the guidelines, and the property at the time • Get an opinion from your realtor on FICB and Enza Venuto of a refinance, and at the end of the day how much your property is worth. AMP, CMP are lending ➜ those drive what they can and cannot Know the costs: advisors with CENTUM offer you. Gather information from your lending Streetwise Mortgages #11789 • and real estate investors with provider regarding any fees associated with Step-by-step guide to refinancing over 48 years of combined breaking the mortgage, including discharge lending , financial and The steps involved in refinancing a mortgage fees and penalties. investment experience. The are similar to those for applying for a new • Call your lawyer and ask them how much team provides advisory services mortgage. They involve: they would charge for a arranging a refinance. and lending solutions tailored ➜ to Real Estate investors and ➊ The submission of a completed Give your advisor a shout: different investment strategies mortgage application. • Provide them with up-to-date (www.streetwisemortgages.com) ➋ Appraisal. information on your property holdings, ➌ Providing support documents to show income situation and credit (you can obtain

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