Real Estate Investing : Affordability Myths

I interviewed over twenty individuals and nearly all dismissed property ownership. The number one reason — they believed they could not afford it. When asked about what financing products they had considered — they disclosed that they did not know they had options.

A large part of investing is understanding how to structure your finances so that you can make the most of the capital available to you.

Below are 4 common affordability myths debunked.

#1 You must save a 20% downpayment before purchasing your first property — FALSE

Many people believe that a 20% downpayment is required to purchase a property. With rising property prices, this could easily appear to be a scary number. Luckily for you, this claim is false.

While most lenders appreciate a 20% downpayment, many will accept 5%. However, there is one catch. A down-payment less than 20% will require you to pay a premium, known as mortgage insurance.

The reason that a lender will charge a premium is because you are viewed as higher risk. You have invested less upfront, meaning you have less to lose if you cannot make payments. The lender wants to be compensated for taking a larger risk.

Canadian minimum down payment rates are as follows:

• Less than $500,000 requires 5% of purchase
• $500,000 — $999,999 requires 5% on first $500,000 and 10% on remaining portion
• Over $1 million requires 20% of purchase price.
• Anything less than 20% requires mortgage insurance

You may also be required to purchase mortgage insurance if you are self-employed or have a poor credit history, even if you have paid a 20% downpayment.

#2 You must pay principle and interest on your loan — FALSE

Until recently, this was true. However, this month Merix Financial introduced a new interest-only loan product.

The product is called “Interest-Only Flex mortgage” and is only available through mortgage brokers.

With an interest only loan, you are not required to pay the principle. This type of loan can increase your cashflow as you only pay interest.

Like everything in life, benefits come with pitfalls.

Pros: Reducing your monthly payments by paying interest-only can increase your cashflow. Money saved can be used for other investments.

Cons: Interest rates on an interest-only loan will be higher.

#3 Debt is bad — FALSE

Debt is only bad if it is not managed correctly. As long as you are closely monitoring your cashflow; the flow of money coming in and out of your pocket — debt can be considered to be healthy and good.

Often when I talk to non-investors or beginners, I can sense fear towards the idea of debt. I will tell you upfront, debt is necessary to succeed in real estate investing and the more you familiarize yourself and become more comfortable with the idea of debt and managing your cashflow, the more likely you are to succeed.

In real estate, debt is your best friend.

Similar to how we invest in the stock market, the role of money in real estate is to make more money. Therefore, the more money you can get a hold of, the more you can buy. If each property purchased produces x amount of income, each new property will contribute towards increasing your income (assuming your strategy is income producing properties).

When purchasing your next property, evaluate your strategy. Consider analyzing varying levels of down-payments to see what best suites your investment goals.

#4 Banks are the sole providers of mortgages — FALSE

Banks are not the sole providers of loans. If you are declined for a mortgage from a traditional institution, such as a bank, know that there are other options.

There exists three main types of financial institutions.

1. Banks

• Banks are the traditional and most common institutions used for borrowing. They are federally operated. When qualifying for a mortgage, banks must conduct a stress test. The stress test requires you to qualify for a loan amount based on a higher interest rate than what you’d actually be paying.

2. Credit Unions

• Credit unions are privately operated and member owned. They operate within a closed network of individuals usually organized on the basis of profession, religion, geographical community or cultural background. Often, credit unions have more flexibility and may have better rates. Credit unions are not required to use the stress test when qualifying individuals.

3. Private Lenders

• Private institutions consist of private lending companies. They are often more lenient in their qualifying process as they are not restricted by the same rules as traditional banks. A private institution may evaluate more closely your individual circumstances. For individuals who have poor credit history, private institutions may take a chance on you but require you to pay higher rates. Private institutions are not required to use the stress test when qualifying individuals.