Things to know about buying multi-unit residential rentals:
- 15% Down Payment (w/CMHC)
- Valuations are calculated differently.
- Treated as a commercial mortgage.
- You're basically buying a business.
If you are looking to buy a multi-unit residential apartment building with more than 5 units...
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Apartment buildings or really any type of property that has more than 5 units is considered a commercial property. The reason for this is because you are really buying a business at this point. Multi-unit residential apartment building (and townhouse complexes) are more difficult to get and often require much more of a down payment to make the deal work.
When looking at a residential apartment building the lenders will make sure that the property can carry itself. This means that there are enough rents coming in that the property is generating about 120% of the expenses. By calculating it this way, they know that the owner won't run into trouble carrying the mortgage.
Exactly how much down is required?
This is a tough question to answer. When you get into commercial mortgages there are no set guidelines like there are in regular residential single family homes. For example, depending on how many units there are, where the property is located, what the apartment building is comprised of (1, 2 and 3 bedroom units) will all play a factor in how the bank wants to price the deal and how much they will want down.
Mortgages for residential apartment buildings are first underwritten and then the guidelines are told. There are some basic rules of thumb, but really they are so basic that they don't apply.
15% Down really means more
If you buy a multi-unit residential apartment building and decide to go through CMHC (15% down payment minimum) you will find that in most cases you will have to put down more than 15%. Once you get into apartment buildings, the way the evaluate the property is much different. The different types of appraisals are beyond the scope of this article, but suffice it to say odds are, you will have to put down more.
Let's say that you are looking for at an apartment building for $1.2M. That building generates an income which will be used to determine the price, then the expenses are calculated to figure out a net rent and then the value is determined by this amount. Whatever the lender, CMHC or the appraiser come up with is the value that needs to be used for the purpose of the mortgage.
So let's say that the purchase price is $1.2M and the valuation comes in at $1.1M. You will need to come up with 15% down of the $1.1M and then the difference to take you to $1.2M. So in this case $265,000 down instead of $165,000. So this calculation can have a big impact on how much of a down payment is required.
Best to have multiple smaller properties to start
Unless you have the resources to be able to handle the down payment, I would recommend that you stay with the smaller properties (i.e. 4-plex or 5-plex). When you have built up enough equity then you could sell and upgrade to a building or complex.
Why your next mortgage broker should be Jim Thornton
If you are looking into getting a multi-unit residental apartment building, I will help arrange your financing for you. I will have point out the pitfalls associated with different situations and will make sure that we fnd a good lender at a good rate for you. Call today toll free 1-866-257-0158.