Investing In Real Estate – Building The Right Team #3: Mortgage Broker/Professional

As you continue your journey in real estate investing, unless you are buying a property with all cash (in that case can you lend us some ☺?), you’ll eventually need to get a mortgage. But how do you go about doing that? Today, we are going to talk about the next member in building your real estate team: the mortgage broker/professional.

Why do I need a Mortgage Broker/Professional?

The main function will be securing the mortgage for your property purchase. They will also run your credit and applications and move the mortgage along from the initial application phase to giving mortgage instructions to your lawyer for closing.

What will my Mortgage Broker/Professional Do For Me?

Aside from the actual securing of the mortgage, they will shop around to get you best rates, advise you on the best products for your needs and make you aware of any potential pitfalls of a certain type of mortgage. They basically work with you to ensure your interests are taken care of in securing the mortgage.

How Is Financing My Investment Real Estate Different From My Personal Residence?

Financing a personal residence is typically much easier than investment properties. On a personal residence the lender will look at your income and based on that decide how much you can qualify for based on certain ratios. Investment properties are different as they incorporate rental income and so weight is given to income and expenses of the property. There are also different rules ie. you can put as low as a 5% down payment on a principle residence(with mortgage insurance), with investment properties that is usually 20-25% down.

What Else Should I know And Will My Mortgage Broker Be Aware Of?

It is important that your mortgage broker/professional be aware of your goals as an investor. The planning for the future can be much different if you plan on only owning 1 or 2 properties as opposed to 10 or 20. Sometimes it is better to choose lenders with higher rates or less attractive terms, if it helps you down the road qualifying for more mortgages as your portfolio grows. They should help immensely in this regard. Therefore it is a real bonus to work with a mortgage broker/professional that has plenty of experience working with investors.

How Much Will My Mortgage Broker Cost?

Typically the mortgage broker/professional is compensated by the lender with a built in commission into the interest rate. So essentially they are working for you, at no direct cost to you as a buyer!  Check with them on this though as your situation may be unique and may require different services. Note: You will typically have to pay an appraisal fee once you have a property under contract and a mortgage commitment has been given. This will range between $200-500 for a residential property. Sometimes the lender or mortgage professional/broker will take care of this fee.

So there you have it readers. You now know about how important financing is to your real estate investment future. Choose your team member wisely and you’ll be thankful later!

Financing The Purchase - "Show Me The Money"

The due diligence is now complete and it's time to make sure your financing arrangements are in place in order to close. Even though you may have had a pre-qualifying meeting at some point along the way, you need to finalize the actual mortgage terms, rate/term/amortization, and costs which will be incurred in arranging the funds.

In considering sources for financing, one size does not fit all, and especially in commercial lending. Some of the better options might include:

• Primary Bank (established relationship and a lender who already knows you)
• Institutional Lenders (specialists in commercial mortgages)
• Mortgage Brokers (able to shop the mortgage market for you)
• Private Lenders (often in restricted situations and generally costlier)
• Seller Financing (Vendor or VTB held & either as a 1st or 2nd mortgage)
• Assuming Existing Financing (based on an approval)

Beyond the actual mortgage terms, make sure you review the costs associated with arranging it. Such costs may include - appraisal fees, application fees, brokerage fees, and associated legal expenses. All of this should be spelled out in a written "Mortgage Commitment" letter by the lender. Best to consult with your lawyer, should you have any question(s) regarding the MC prior to signing it. Any unwillingness to advance funds on the part of the lender, will affect your ability to close the transaction.

A final word on today's mortgage market (as of February 2016). It is highly competitive and with solid investment properties (ie. good cash flow, stable leases, and a solid Buyer Covenant), you should be in a position to actively shop the market. The low interest rate environmental has help expand the number of commercial lenders looking to fund real estate - meaning more sources to select from. By improving the rates/terms, loan to value amounts etc., you only enhance the property itself as an investment.

Tell us about any commercial mortgaging experiences in your market ... and as always we are just a call/click away, if you would like to investigate investment options (OPPORTUNITIES) in Windsor-Essex.

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

Positive Cash Flow = Positive Debt Coverage Ratio (DCR)

After you determine an income property yields a POSITIVE CASH FLOW, the next step is to calculate the property’s ability to service mortgage financing costs out of this cash flow.

The standard measurement within the investing world is referred to as the DEBT COVERAGE RATIO (DCR). DCR is simply comparing the property’s net operating income (NOI) to the projected mortgage financing costs – typically on both a monthly and annual basis.

Banks/Lenders typically look at DCR closely, wanting to confirm that the cash flow is sufficient to cover the related debt cost (aka monthly mortgage payment). In fact, most often they are looking to see a positive margin, which exceeds the mortgage servicing costs.

Source: Politico

Using a ‘break –even’ analogy, if the cash flow just meets the debt service costs - this would be a simple ‘break even’ outcome.

Consider the following illustration:

Property 1 
Net Operating Income - $75000
Mortgage Costs (Debt) - $50,000
DCR – 1.5

Property 2
Net Operating Income - $45,000
Mortgage Costs - $50,000
DCR - .9

*All $ amounts are annual

In the case of property 1, the cash flow exceeds the funds required to cover the mortgage requirement. In the case of property 2, a deficit is created ($5,000) which is not only an annual loss, but creates a negative return on actual cash invested.

In layman’s terms, a DCR of (1) is a ‘break-even’ - a DCR of (1.5) is ‘positive’ - a DCR of (.9) is ‘negative’. For investment purposes, this is how you should approach your analysis.

Just a final word on the bankers/lenders, you’re ability to negotiate favourable mortgage terms are clearly impacted by the property’s DCR. This gives you some insight as to how they evaluate risk in underwriting mortgages and how it ultimately impacts your proposed purchase.

How are lenders approaching DCR in your area? How does it affect rates offered and other terms proposed? 

Feel free to reach out to us, should you have interest in the Windsor-Essex market. As always, appreciate any feedback in the comments!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434