In Ontario, there can be several institutional and private mortgage options to consider for financing of a rental property purchase.
There are also the more creative financing approaches that are taught in the “no money down” type real estate investing courses, but those are beyond the scope of this discussion.
Institutional mortgages for rental properties focus mostly on the property appraisal, down payment of the buyer, the presence of renters (if you have more than one rental unit, are they both occupied at the time of purchase), the credit rating of the borrower and the borrower’s personal net worth.
For a private lender, the focus is almost exclusively on the valuation of the property.
For properties in stronger markets with very good rent rolls, the loan to value you can secure may be higher.
In situations where there may need to be improvements made, a private second mortgage can also be secured for construction financing if there is enough equity remaining in the property to secure the private lender.
Private mortgages can be very useful sources of bridge financing for a rental property mortgage in the following two ways.
First, the private can act as a bridge loan to achieve a fast closing. For properties where the borrower is putting down 25% to 50%, the closing can take place in a matter of days. This allows buyers to be more aggressive on deals as they know financing will be there and close on time. Once this private mortgage bridge loan is in place, the buyer will have time to locate optimal longer term financing if its their intention to retain the property into the future.
For buyers who what to purchase and flip with or without some improvements, a private bridge loan will again allow for a quicker closing and potentially higher leverage for the short period of time the funds will be required.
A private rental property mortgage is going to be more costly than an institutional mortgage on the same property, but the speed of closing and short term interest only repayment requirements may pay for themselves in getting deals closed without putting stress on the cash flow.
If you’re actively involved in buying and selling rental properties, then I recommend that you give me a call any time you have an opportunity that is going to require rental property mortgage financing and I will quickly outline your options and work with you to get the deal closed.