Government money for real estate investors. Do you qualify for government grants or loans?

Like so many of you , I receive my share of unsolicited emails, especially anything related to real estate. One email I received was offering information on how to get government money for your business.

So this email got me thinking about what is available for real estate owners. I have come across some programs in my every day dealings.

If government money is available, whether it be a grant , forgivable loans, etc.,  you can search the internet or visit the local city hall. If you don’t want to spend some time searching , then these companies that sell you the information might be worth contacting. In my own opinion, why pay for information that is free to get on your own.

Here are some incentives I know about, and where to access the information.

On the Federal level Canada Mortgage and Housing Corporation, (CMHC) offers the following incentives for property owners;

• Rental Residential Rehabilitation Assistance Program — Rental RRAP offers financial assistance to pay for mandatory repairs to self contained units that are occupied by low-income tenants.

• Residential Rehabilitation Assistance Program (RRAP) — Secondary/Garden Suite This program offers financial assistance for the creation of a Secondary or Garden Suite for a low-income senior or adult with a disability

• Residential Rehabilitation Assistance Program (RRAP) — Conversion – This program provides financial assistance to convert non-residential properties into affordable, self contained rental housing units or bed-units.

• Residential Rehabilitation Assistance Program (RRAP) — Rooming House -This program offers financial assistance to pay for mandatory repairs to rooming houses occupied by low-income tenants.

• Shelter Enhancement Program (SEP) – This program offers financial assistance in the repair, rehabilitation and improvement of existing shelters, and to assist in the acquisition or construction of new shelters and second-stage housing for victims of family violence.

To get further details for each of the above programs , you can visit the CMHC website, click here.

On a municipal level find out if your property is located within a BIA (Business Improvement Area ) of the city. A BIA is an association of commercial property owners and tenants within a specified district who join together with official approval of the City aimed at stimulating business.

I know of BIA’s offering Grants to be used for improvements to the façade of the building and could include things such as making the entrances wheelchair accessible.

Other incentives available could include things such as vacant property tax rebates, brownfields remediation, development charge exemptions, heritage properties restoration grants, and others. Every municipal area is different and offer incentives based on their community needs.

To search for incentives in your area , just type in the search engine the city of your property and “financial incentives”, this should get you to the webpage where all their incentives are listed.

I know that real estate investors are always looking to improve their properties with the least amount of capital required.

By knowing about incentives and programs being offered by government agencies, you might look at your next potential investment with a new perspective.

Comments or questions are always welcomed.

How net income determines how much you can borrow.

During my last blog , I spoke about the importance of calculating the net income of an investment property. This post will talk about how the calculation of that net income will greatly affect the amount of mortgage money a bank will advance.

When we view income producing real estate the lender is looking at the borrower’s covenant, but more importantly they are looking at the building as its own business entity.

So they will review the income and expenses provided by the borrower or their agent, and look to see if the numbers are realistic or need adjusting. Usually the areas of most concern are the actual income collected, repairs and maintenance expense and property management.

Here is an example of what a lender will receive from a borrower applying for a mortgage.

Total Rents:	$200,000.00
Expenses:
Property Taxes	$20000.00
Insurance	$5000.00
Utilities	$15000.00
Rental Items	$2000.00
Repairs and Maintenance	$1000.00
Management	$4000.00
Total Expenses:	$47,000.00
Net Income:	$153,000,00

Now the lender will take the numbers provided and will adjust them based on their lending guidelines: The numbers provided below are for demonstration purposes only, and do not reflect any particular lender.

Potential Rental Income:	$200,000.00
Less:  Vacancy      5%          & Bad Debts: 2%	$10,000.00 $  4,000.00
Gross Operating Income:	$186,000.00
Expenses:
Realty Taxes	$20,000.00
Property Insurance	$5,000.00
Utilities	$15,000.00
Rental Items:	$2,000.00
Repairs and Maintenance	$5,580.00
Management 5%	$  9,300.00
Total Expenses:	$56,880.00
Net Income:	$143,120.00

We can see a difference of $9,880.00 net income from what the borrower submitted to what the lender is going to use in their mortgage calculations.

One further step the lender will input into the numbers is what they call a “coverage allowance” , which is a safety net number for the lender. Usually the higher the allowance will mean the project is perceived to be a higher risk, or the lender is more conservative.

Lets assume the coverage allowance is 15%, (with some lender it will be higher),  this amount will be deducted from the lenders net income and arrive at a new net income to base their mortgage amount.

Here is the amount of mortgage you will receive.

Net Income:	$143,120.00
Coverage Allowance 15%	($21,468.00)
Net Income for financing:	$121,652.00
Monthly Income to Cover Debt:	$10,137.66
Assume Interest Rate;	6%
Mortgage Payment Factor (20Year Amort.)	7.13
Mortgage Amount	$1,421,832.00

How does what the lender will advance in mortgage money compare to the purchase price of the property?

If we look at the original net income of $153,000 and a cap. rate of 7.5% , then the purchase price would be $2,040,000.00. If we take the net income provided by the lender then the purchase price with the same cap. rate of 7.5% would be $1,622,027.00.

After determining the amount of mortgage they will advance, the lender will now look at their loan to value lending guidelines and the appraised value of the property to see if they are in line.

If the appraisal value came in at $1,900,000 and the loan to value ratio  is a maximum of 65% then they would advance the amount of $1,235,000, which would be a decrease of $186,832.

I have demonstrated the basics of how a commercial mortgage is usually calculated, but also keep in mind that each property, lender and investor are unique.

Your comments and questions are always welcomed.

How do you calculate your net income, and the negative impact of getting it wrong?

As an investor one of your most important calculations will be the net income of the property. The calculation of net income in real estate is different than calculating net income of a business. Items like interest charges, depreciation, income taxes are not used in calculating net income for real estate.

We define net income from real estate as all income generated by the property and deducting operating expenses. The importance of calculating the net income properly is that there is a correlation between the value of the property and the net income.  When valuating the property the net income along with the capitalization rate are used to arrive at value. Here is an example of arriving at a market value of a real estate property:

Net Income: $100,000.00 Capitalization Rate: 7%  Value = $ 1, 428,571.00

In the above example the value is calculated by dividing the net income by the capitalization rate. Now, what if the net income was incorrect and was actually $95,000.00, what does that do to the value?

Net Income: $95,000.00 Capitalization Rate: 7% Value = $1, 357, 142.00

A difference of $5,000.00 in net income results in a decrease in value of $71,429.00.

Now that you have an idea how net income can affect your value, lets look at some problem areas when viewing the income and expense statements provided by property owners.

The one problem we see is that there is no uniformity in how the numbers are presented. From my own experience, I find that more often than not I have to view the numbers and then reconstruct the statement to reflect the true picture of the performance of the property.

Here is a list of some items to consider:

1. Is the stated income up to date;
2. Is the vacancy rate realistic for the area;
3. Are the property taxes for the current year;
4. Are all rental items included, such as laundry equipment, hot water tanks, pest control, etc.
5. Is there an expense for repairs and maintenance;
6. Is there a budget for management fees, and is it realistic;
7. Will you get the same insurance premiums,or ;
8. Marketing and advertising to attract tenants;

The other consideration that every real estate investor must keep in mind is the ability to finance the property, and how much mortgage the bank will advance. See, no matter what numbers we show the bank, you can bet they will adjust figures to meet their guidelines.

If you would like to receive an income and expense spreadsheet, that I utilize on a daily basis, then send me an Email Spreadsheet, and I gladly forward you a copy at no charge.

On my next post, I will discuss capitalization rates and how net income will influence how  mortgage financing is calculated.

Power of Sale properties. Are they really a good deal?

From talking to potential investors, every now and then I get asked the question “ Are power of sale properties a good investment”?

When I hear this question I always think that by asking they believe this type of property is better than buying a property not under power of sale. Just because someone is unfortunate enough to be in a financial bind, it doesn’t mean you will get a steal of a deal, it just doesn’t work that way.

The reason “Power of Sale” was introduced is that the procedure involved to foreclose was very expensive, time consuming and relied upon a number of requirements. A foreclosure is a remedial court court action taken by the mortgagee to cause forfeiture of the equity of redemption of the mortgage, and also subsequent encumbrances equity of redemption.

The key here is “equity of redemption” which means the right of a borrower to redeem their property by paying off the outstanding mortgage debt and all associated costs in full and bringing the mortgage into good standing.

In a foreclosure the mortgagee sues for payment, possession and foreclosure of the mortgagor’s equity of redemption.  There are various steps that must be followed, but if successful the final result is that the mortgagee gets full control of the property known as a Final Order of Foreclosure (FOF).

Under a power of sale, the mortgagee will try and remedy a default by the mortgagor, by a power contained in the mortgage document or the Mortgages Act.  The power of sale is the fairest and most inexpensive method to deal with, as it allows for the mortgagee to retrieve only what is owed to them , and nothing more.

Now the reason why you will not get a better deal by purchasing a power of sale property is that there is an obligation on the part of the mortgagee to obtain the best possible price, which is protecting any equity the owner may have in the property. 

Please note that the procedures discussed in this article are just an overview, and that the procedures of real estate Foreclosures and Power of Sales are complex areas of law. I strongly recommend seeking legal advice from a solicitor specializing in this type of real estate law. 

New lending rules and how they could impact the current real estate market.

The new lending rules for government insured mortgages come into effect today, March 18th, 2011.

All federally regulated lenders are required by law to obtain mortgage insurance on loans to homebuyers that have a down payment of less than 20% of the purchase price.

This loan is called a high ratio or high loan to value, in which the Buyer pays premiums on the insurance, and which the lender is protected in the event of default on the mortgage. The Canada Mortgage and Housing Corporation (CMHC) is the crown corporation and is backed by the federal government.

The changes in its rules are as follows;

• reduce the amortization period from 35 years down to 30 years for loan to value ratios that are in excess of 80%
• lower the maximum amount that a property owner can refinanced their properties from 90% down to 85%
• withdraw government insurance backing on lines of credit secured by homeowners, such home equity line of credit  or HELOCs for short.

These changes only apply to applicants that don’t have the resources to put down 20% or more and thereby making lending to them a higher risk. The changes will reduce the buying power because at a 35 year amortization your monthly payments are reduced thereby qualifying for a larger mortgage.

Lets look at an example:

Purchase Price $500,000 5% Down payment $25,000.00*4% Interest Rate

Amortization at 35 Years	Amortization at 30 Years
$2,103.18	$2,267.72
$475,000	$440,378.00
Principal Reduction:	-$34,622

For some one who applies for the above mortgage the new rules today mean that the bank will qualify them for a mortgage of $440,378 vs. the $475,000 they would have been approved for before the new rules.

The second rule change has been implemented to reduce the amount of debt a property owner will carry , as it will reduce the amount of equity you will be able to pull out of the property.

For investors who are thinking of refinancing and pulling out equity to increase their portfolio, the amount you have to purchase more property has just been reduced.

The third change takes into effect on April 18th, and involves the banks not being able to insure non amortized home equity lines of credit, thereby increasing their risk, and again making it more difficult for a property owner to utilize their home equity.

The question is will these government changes slowdown the real estate market. Given that the margin of change is not that significant, I think it will eliminate or greatly reduce the riskiest buyers.

My question has always been why did they increase the amortization periods in the first place, given the fact that the market was healthy and not in need of any incentives to get more buyers.

Along with the debt levels among consumers soaring,  qualifying for a mortgage has become tougher and that will also cause a slowdown in the real estate market for 2011 anyway,

Mr. Flaherty acknowledged that:

“We expect some moderation in the market. We’re taking these steps in any event now because of our concern about higher interest rates down the road.”

Your comment and questions are always welcomed.  

Why are you investing in real estate?

I can’t remember the number of times I have asked this question”Why are you thinking of investing in real estate”?.

Everywhere we look today we are inundated with real estate, from real estate shows on channels like HGTV, or reports on the nightly news talking about market conditions, everyone is talking real estate.  As a real estate broker , this is good for business as our product is constantly being promoted to the public.

What this also does is bring out a lot of potential first time investors, and the reason why I always ask the question.  Yes real estate is a good investment, and yes you should know all the positives of becoming an investor.

Here is my list of reasons why you should invest in real estate: 

1. Cash flow from rental income
2. Power of Leverage
3. Appreciation
4. Equity Build Up
5. Opportunity to create additional value
6. Increase your net worth 

Cash flow from income

Given the current historically low interest rates we have seen over the past 50 years , makes it possible to generate a positive cash flow after deducting your operating expenses and financing costs. Unlike other investments such as stocks paying dividends, which is more susceptible to the economy, if you experience a downturn in the market, you are still getting your same rental income.

Power of Leverage

Real estate allows its investors to control a large asset with only a small initial capital investment. Let’s assume a property value of $500,000 with an initial down payment of 15%. Now if the value of the property increases you are getting the increase in the asset value not the initial down payment.  If we assume a 5% increase year over year then, your value will go to $525,000 increasing by $25,000 which represents a 33% increase on your initial investment. That’s the power of leverage. 

Appreciation

Historically real estate values do climb upward, and provide increased wealth and net worth. When we talk historical values, we should also look at the area and location of the property.

Equity Build Up

This is like having a savings account , in that every month you make a mortgage payment a part of that payment reduces your principal balance, and thereby increasing your equity position.

Opportunity to Increase Value

Good investors are always looking at maximizing their properties and generate more income or upgrade the property to attract higher rents. Unlike other investments this is unique to real estate.

Increase Your Net Worth

By holding real estate investments long term you gain by increasing cash flows, increasing equity,and increasing appreciation.

As always your comments or questions are welcomed.

Investing in a commercial condominium. How much square footage are you buying?

I have been marketing a couple commercial condominium units recently and the subject of the actual square footage of the unit came into question. An agent had a potential Buyer and was asked to go into a unit with a measuring tape to calculate the size of the unit. 

When they finished measuring, I received a phone call from their agent stating that “the square footage you indicated on the listing is a lot more than the square footage we measured”.

They had assumed I made mistake, and wanted to know how I arrived at my figures. This scenario happens quite often because investors or business owners of this type of property don’t take into consideration common areas, which are shared by all unit holders.

If the square footage is not properly explained, and the investor or business owner don’t have a space planner or architect outline the property before purchasing they could wind up with a property that doesn’t meet their needs.

Let me give you an example of how the commercial leasing market works, and how it relates to this situation when it comes to square footage. When you lease  commercial office space, you will see terms such as "’rentable square feet'’ and “usable square feet”.

There are different standards when measuring floor space with the oldest known measurement standard being from BOMA , which stands for Building Owners and Managers Association. This is an international standard for the measurement of office, industrial, retail or commercial space.

They define '”usable square feet'” as  the square footage that the Tenant has exclusive use and includes all closets, storage facilities, restrooms, etc. This area is not used to calculate the square footage charge because now you need to add the common area which becomes the '”rentable square feet”

The definition of '”rentable square feet” measurement is combining the usable square footage with a portion of the common area. which includes items such as main lobby area, janitor closets, public washrooms ,common hallways, garbage rooms, mechanical rooms,elevator shafts, etc., and is calculated as a pro rata share.

The common area square footage can add anywhere from 10-25% to the total square footage. This added square footage for common area is called a “core factor”

If you want to know the core factor of the unit ask the Seller for a Survey of the unit, or hire an Ontario Land Surveyor to certify the area you are purchasing.

Your questions or comments are always welcome.

Are you a real estate investor or real estate speculator?

I was recently asked a question from a fellow agent regarding real estate appreciation. The question asked by her client was “what percentage increase could an investor expect if they bought pre construction and sold before completion”? This got me thinking if the real estate investor was more a speculator than an investor.

The definition of a speculator as defined by Merriam-Webster is an “activity in which someone buys and sells things (such as stocks or pieces of property) in the hope of making a large profit but with the risk of a large loss”.

Success in real estate is usually long term investment, and as such an investor should look at any project with the intention of holding long term. If your thinking to get in and out quickly then I would say you are a real estate speculator.

Since no one can predict to 100% accuracy what will happen in the future, real estate like any other investment still carries a risk, which is often forgotten during rising markets.

If your planning to do this type of investing business, then be aware of the fine print on the agreement you sign with the developer.First of all many developers wont allow you to assign the Agreement of Sale until after you close on the deal. If you are able to negotiate an assignment clause in your agreement, you are still liable to close on the deal in the event the assignee cannot or will not follow through.

Also, make sure you know the Buyer (assignee) has the money and financial capability to close on the transaction.

If your agreement does not have an assignment clause should you walk away from the property? That’s where really knowing your market and understanding the numbers will be of great help to make an informed decision.

If you don’t have an assignment clause and decide its still a good deal because  “I will be able to sell after closing"’and still make a profit, then keep in mind you still need to arrange financing, find a lawyer, and pay all closing fees including land transfer tax. 

Always make sure that you are prepared to go all the way to closing the deal, in the event your plans don’t work out, i.e.. finding a new qualified buyer, decreased market value etc..

By planning for long term ownership you are still in a great position to cash in short term. with less risk of losing money, and you also might make more money. Think about it this way, if you know you can close and keep the property without any problems, that gives you more confidence while you are trying to sell, and that could result in a higher price negotiated, as opposed to having to sell and taking the first reasonable offer.

Should the property value increase  then you decide if its time to sell, if property value has decrease then you don’t need to sell because the property is sustainable. That’s having control over your real estate portfolio. You don’t need to rely on the market to keep increasing (for that period of time before you need to close). for you to make a profit.

Some investors I know are always thinking about increasing their portfolios and would look at the possibility of cashing in on equity and purchasing another property. 

As I mention in past posts, you really have to know the numbers of your market, as this is the best way to plan your real estate investments.

Yes I will admit that real estate speculation could and has made many investors money. However, don’t avoid the basics and you should still be ahead.

Housing starts increased in February. What region showed the most significant gain.

The latest numbers released by CMHC showed an increase in housing starts. In February there where 181,900 units , which was up from 170,600 units in January 2011.

The overall housing starts moved higher because of increases reported in Ontario and the Prairies, according to Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. The report all stated that the “bulk of this increase” was from multi family starts in Saskatchewan and Toronto.

When looking at region to region the February seasonally adjusted annual rate of urban start numbers where shown as follows:

Atlantic Canada – fell by 24.7%

Quebec – fell by 7.1%

B.C. – fell by 5.9%

Ontario – increased 29.3%

Prairies – increased by 26.1%

Some felt the uncertainty with the HST which came into effect July 2010 , contributed to the drop.

The given the amount of condo projects you see around the city of Toronto, is no real surprise that it showed the highest increase across the country.

If you want to see full report:  http://www.cmhc-schl.gc.ca/en/corp/nero/nere/2011/2011-03-08-0815.cfm

Does a decline in building permits mean a decline in the real estate market?

A recent study released by Stats Canada indicated that the value of building starts dropped from December to January

The report stated that “Municipalities issued building permits worth $5.4 billion in January. Analysts had forecasted a rise of 0.7% rise, however the actual drop was 5.1%.

The reason for the decline was lower construction intentions for the residential sector in Ontario, and the non-residential sector in Alberta and British Columbia.

The drop in value of building permits was felt across the country with 6 provinces showing drops.

Do these statistics indicate that we are in a market that will slowdown, or decline? Since the numbers reflect a short period (one month), its difficult to extrapolate any type of trend. However, some economists think that this could be the start of a gradual slowdown in the housing market. I don’t agree as I think its still too early to predict where the market could be going for 2011. 

The point of my post is that short term indicators, statistics don’t normally indicate where the market is heading, and should be looked at on a longer term basis.

Where do you think the real estate market is heading?