March 2012 Phew! The recent 2012 Canada budget annoucement did not include any changes to mortgage rules. There was speculation that they might be talk of lowering the amortization from 30 to 25 year or increasing the minimum downpayment requirements up from 5% (for owner-occupied property, rental property minimum remains at 20%).

Over the last 4 years, there have been a number changes to mortgage rules, it seems the government feels that is enough changes for now. Interestingly, Jim Flaherty, the Minister of Finance was recently quoted saying:

“I find it a bit off that some of the bank executives are taking the position that the Minister of Finance or the government somehow should tell them how to run their business,” ……”They must forget that they are actually the ones who issue the mortgages,”……. “It’s their market. It’s not my market. They decide what they want to charge in interest rates. They’re the ones who make the profits out of this business, so I do find it a bit much when some of the bank executives turn to the government, the Minister of Finance and say, ‘”You ought to change the rules and make it tighter.”’

No one is stopping lenders from making their own policies, beyond what is stipulated by the government. If lenders feel things are too risky, they can make their policies stricter, you don’t necessarily need government intervention for that. The mortgage market is filled with many lenders, some have more flexible policies than others, it comes down to a business decision on each company’s part. Certainly, if the retail banks decide to make their policies stricter, in lieu of not receiving any new mortgage rules from the government, you will most likely see another mortgage lender market emerging that can accommodate for the consumers that can’t fit their model. Competition is good, this could be good for consumers.

You can check out the highlights of the 2012 budget here:

http://www.canada.com/business/Budget+Highlights+2012+federal+budget/6380795/story.html

Savvy real estate investors run their real estate investing like a real business, not just like a hobby. You can’t have the attitude of skimping out on advice and professional services. In addition to having the right mortgage broker on your team that can help you navigate through mortgage planning and the ongoing changes in mortgage rules and policies, you will need to align yourself with the right lawyers and accountants. Submitting your tax returns with intentional errors or full of ‘gray areas’ is business suicide. You do not want to set yourself up for an audit (which my accountant says, ‘not if, but when’), and put your joint venture business partners in jeopardy (auditor may sniff out a new path to follow).

Unfortunately, in the world of tax auditing, you are considered guilty until proven innocent, pretty harsh if you can’t produce the right documents. Think about trying to fish for documents or remember some expense that happene d years ago. Not worth the time, best you spent that time focussing on productive things. Keeping good records for tax purposes has multiple benefits. From a mortgage perspective, it will make the mortgage approval process so much easier and faster, plus you will get instant credibility with your mortgage broker and the lenders’ underwriting departments. It is always a pleasure working with clients that have documents at the touch of a button. Having your financial documents in order will help you understand the health of your business (Are you making money or not? What holes leaking money do you need to plug?) and mostly importantly, avoid the unpleasant tax audit panic and scramble.

Here is a recent article I came across ‘Where Revenue Canada Finds Unreported Income’, much of the points made in this article affect real estate investors, take note.

http://www.capitalmagazine.ca/tax/where-revenue-canada-finds-unreported-income-9378

A summary of the points from the article:

• Repairs or renovations. Don’t claim capital improvements as repairs . Canada Revenue Agency (CRA) scrutinizes businesses that buy, renovate, and sell buildings because unreported cash income can be used to pay contractors under the table.
• Net-worth audit. CRA looks to see if your lifestyle is roughly equivalent to your income and net worth.
  Inferred revenues. With cash-intensive businesses, CRA double-checks reported company revenues by indirect means, such as extrapolating.
• Personal use of company vehicles. Document in a log and only claim expenses for the business portion.
• Meals, entertainment, travel. Make sure you can explain how all such expenses relate to the business.
• Ineligible business expenses. For example, golfing does not qualify.
• Loans from the corporate account. CRA looking for evidence of timely repayment.
• Credit cards. For business expenses, CRA doesn’t regard a credit card statement as sufficient record-keeping.

Check it out! I made into today’s article in Money Sense ‘How to Buy Income Property’. It discusses how and why I got into real estate and I provide some advice on real estate investing. This was a great opportunity, I am very happy to share my knowledge and help people on a large scale like this. Enjoy and feel free to share!

http://www.moneysense.ca/2012/03/15/how-to-buy-an-income-property/

Many buyers are frustrated with the home prices in the major urban areas in Canada and may feel that they are constantly chasing the market. The moment a first time home buyer has enough savings for a down payment that would give them an affordable monthly mortgage payment, the home prices have moved up and more down payment is now required for that affordable monthly payment.

It is important to not forget that Canadian first time home buyers are eligible for the Home Buyers’ Plan (HBP).

HBP allows you to withdraw up to $25,000 from your registered retirement savings plan (RRSPs) to buy or build a home that you will occupy. For a couple, that is potentially up to $50,000 towards the down payment. With the instability of the financial markets, investing your RRSPs into your home rather than volatile funds can be a good use of your hard earned savings. Also, contributing into RRSPs yields you a tax rebate. So, you may choose to invest into your RRSPs and then use those funds for your down payment via HBP, plus get a tax rebate. Note that the RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year. Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. Even if one of the home buyers has already been a homeowner before, the other spouse or common-law partner may still be considered a first time homebuyer.

With the HBP, you either use it or lose it, as you are usually considered a first time home buyer only once. When you move up the property ladder and sell your first home, the equity, which would include the funds from HBP, can be transferred over to your new home, so your investment lives on. Also, important note to real estate investors, using the HBP on your own primary residence will allow you to keep more of your savings and use towards downpayment for investment property. HBP is not allowed on investment property.

Information on the Home Buyers’ Plan can be found on the Canada Revenue Agency site:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

Many people wonder what factors contribute to the credit score. The score is the result of a complex formula that follows these general guidelines:

35% Payment History
30% Outstanding Balance
15% Credit History
10% Types of Credit
10% Inquiries

Some tips:
Spread credit card balances over multiple cards to stay below 50% of limit. When you are close to limit, it is interpreted as ‘maxing out’.

Total Debt Service Ratio for mortgage qualification calculations uses actual balance on credit cards, not the allowable limits.

Limit the number for credit inquiries per year. When you apply for a credit card (including those store credit cards!), loans, lines of credit, a credit check is done, you may not even know it. More inquiries are interpreted as you shopping around for loans and getting declined.

If you have good credit and accidentally forget payment once, it is not the end of the world, there is a time cushion before it gets reported, but you can’t make a habit of it. Missed payments are a big part of the score. Pay at least the minimum amount.

If you are repairing your credit after bankruptcy or consumer proposal, there is no room for mistakes, pay on time.

Pay credit cards weekly rather than monthly to increase score.

It is recommended that you review your own credit report for mistakes and errors. The credit bureau gives you an opportunity to correct these errors. You can get your report instantly online (about $25) or you can mail in a request for free report. Checking your own credit does not impact your score. There are two bureaus in Canada, Equifax is the most widely used.

http://www.consumer.equifax.ca/home/en_ca
http://www.transunion.ca/

It took me some time to come around and accept that mortgages can be good debt, if the property is well chosen and the mortgage is properly planned. It is the key to accelerating your wealth growth. Your initial challenge is getting over your fear of debt, and wiping away the generalities you have learned about debt from your parents, newspaper headlines and society. In this way you empower yourself and open yourself to learning how mortgages can help you grow your wealth.

When you buy stocks, as a regular small-time stock investor, you rarely get significant leverage of your money. Most likely, 100% of the money you put in is used to purchase the stock. If you are lucky, you may be able to qualify for a margin account of 50% or 2 to 1. The reason for this discriminating leverage is that lenders consider stocks risky and not a reliable asset. At zero leverage, for example, if you have $50K to invest, you control $50K worth of asset.

Lenders view real estate as a much less risky venture. That is why they are willing to lend at a much higher leverage than for stocks. They view real estate as a real tangible asset, and great security as collateral for loan (real estate can’t physically disappear, stock certificates can go to zero on the other hand). Typically for a rental property, lenders are willing to loan 80% of the value of the property, allowing you a down payment of 20% and allowing you to purchase property priced 5 times your down payment. At 80% loan to value, if you have $50K to invest, you control $250K worth of asset. Essentially, any increase in real estate asset value yields you 5 times more than in a zero leverage stock investment scenario. (Works the other way too, 5 times depreciation, but that is why you focus on well selected real estate that has positive cashflow, to mitigate this risk).

Having learned this concept, I realized that it would take me 5 times longer to make money via stocks or other safer investments, like saving accounts, mutual funds or GICs, than if I decided to invest it in real estate. I realized that I could get to my wealth goal 5 times faster if I simply got over my generalized fear of leverage and started to educate myself on how it can help me.

Getting over this fear for some can be difficult, especially when the people that are close to you do not embrace this concept with you. I was raised thinking debt is bad (yes, absolutely, don’t get me wrong, that is healthy to think that, you can’t spend yourself into oblivion but you do need to do something productive with your savings…..) Getting one mortgage, let alone multiple mortgages for investment property was not in the vocabulary of how I was raised. Yet, I did overcome my fear, and that was the beginning of my journey to a brighter financial future. At this point, I was yet not a mortgage broker (more on how I came to this profession later), I was working as an engineer in the automotive manufacturing industry.

I studied mortgages and how I could maximize my existing savings and equity into multiple investment property purchases. I figured what better way to attract future joint venture money partners, then to use my own money first and learn from my own investment properties? I learned that there were more options for mortgage products on your primary residence than rental properties. So, I focussed first on getting my primary residence mortgage structured properly. This was fundamental in the subsequent success of growing my rental property portfolio.

I realized at this point, my existing condo residence (my only property at the time) was what real estate veterans call a ‘dog property’, sucks money and does not appreciate. The condo fees were too high, the appreciation was not as much as I expected and if my husband and I moved out and rented it, it would not cashflow. Also, I had some equity in the property that was sitting there doing nothing. So we decided to sell it and buy a freehold property in Toronto, in an area that was poised for gentrification. The priority was getting that primary residence purchase done first, we felt it was safest to qualify for the home mortgage first before building a portfolio with other mortgages.

We ended up looking for the next 8 months in the competitive Toronto market (my awesome husband trusted me and gave me the reins to all this real estate investing stuff while he focussed on his IT business). This was truly a test for our emotions. We were looking for a modest house with a basement apartment, renovated property or not, in neighbourhoods that still had some transitioning to go. Seems like everyone was looking for the same thing as well. I remember the first property we put bid on, 11 offers and it went $110K over asking price. And this place needed a lot of upgrading! What a blow to us. Subsequently, our scope widened to other neighbourhoods, and we kept trying for 8 months. 11 times we put in offers and we finally got a great property under contract with a financing and home inspection condition. Because I knew about the ‘purchase plus improvement’ mortgage product, I did not get scared by the work that property needed, I believe that could have been a competitive edge I had over the other buyers. I put together a contractor quote for the work required, focussed on easy to understand and big ticket improvements, and submitted for mortgage approval. We took advantage of low down payment for owner-occupied residence and an extended amortization to make our monthly payments manageable. We also chose to rent out our basement to help with the mortgage payment. Doing this made part of our mortgage interest tax deductible and also keeps me sharp with my property management skills (I outsource property management for all my other properties).

Because of the low downpayment and adding the renovation costs to the mortgage via purchase plus improvement, I was able to have money for downpayments on investment property, which I subsequently began purchasing (after careful studying and due diligence). I chose to specialize in the Alberta market due to its economic fundamentals. I took advantage of mortgage strategies such as extended amortization and RRSP 2nd mortgages to make my money work harder.

So, in a nut shell, From one dog of a property, selling it and proper mortgage planning, I was able to stretch my money over 4 properties comprising of a total of 7 doors (single family homes and duplexes) with my own money. Instead of my money controlling assets at a 1 to 1 ratio, I was now in control of over $1.2M worth of cashflowing assets (today I have more property, I now work with joint venture money partners). Even 1% increase in appreciation is $12K, not bad! Then you add mortgage paydown and rental cashflow after expenses, amazing! It’s almost crazy to think even after paying the interest on a large sum of borrowed money, you can still make significant money! I was completely in love with the power of leverage and the power of a well-chosen mortgage combined with well-chosen real estate. I couldn’t stop telling people this has to part of their wealth growth strategy! I began telling co-workers, friends and family how mortgages can help you get wealthy. Then I knew, that I had to leave my engineering job and become a mortgage agent :o) The timing was right, by this time my own money was exhausted for downpayments and I knew I would not be applying for any mortgages in the near future that needed a reliable salaried job income to qualify.

So this is sort of full circle for me. I now help many new investors get started on the same journey as me. I see my story in them and I am enthousiastic about passing on my knowledge and helping investors with mortgage planning. I want to inspire people to take control of their financial destiny, so that they have a brighter future. I believe real estate and mortgages are a stepping stone to that future.

Thank you for reading my story and enjoy the rest of the blog posts.

So you may be wondering, why the name ‘My Mortgage Sherpa”?

The Sherpa are an ethnic group from the most mountainous region of Nepal, high in the Himalayas. They are highly regarded as elite mountaineers and experts in their local terrain. Sherpas were of immeasurable value to early explorers of the Himalayan region, serving as guides and porters at the extreme altitudes of the peaks and passes in the region. Today, the term is used casually to refer to almost any guide or porter hired for mountaineering expeditions in the Himalayas. (source: Wikipedia)

The term Sherpa is also used to refer to local people, who are employed as guides for mountaineering expeditions in the Himalayas, particularly Mt. Everest.

I am your Mortgage Sherpa, your Sherpa in your journey towards financial success. Real estate has been the investment vehicle for much of the wealthy and is key to financial success. Attaining a mortgage that will optimize your financial and real estate goals is critical, and requires expertise and knowledge. A number of years ago, I was a newbie real estate investor myself, I have done this journey already and discovered the power of a well-chosen mortgage strategy. I am an expert in investment property mortgages and real estate investing, and I will navigate and help you reach the summit of your financial success. I am part of your team and in your toolbox, you can leverage my expertise and time, with that you will be able to accelerate your real estate investment dreams (imagine climbing Mt Everest without a guide!).

Congratulations on taking control of your financial destiny! Real estate investing is a wealth multiplier! The sooner you start, the better.

And to those who asked, no, I haven’t climbed mountains recreationally……yet :o)

Okay, it is time for me to stop keeping things to myself. In this blog I will share information and insights about mortgages, real estate investing and real estate investment mortgages.

Mortgages for real estate investment property is a very TINY sliver of the mortgage lending market. Add to that several existing rental properties in your portfolio, and this is even a smaller minority. You may have already found through talking to regular lending channels that there is a lack of understanding in investment property mortgages and your investment goals. The core these regular lending channels is not your type of business, they are focussed on serving the average mortgage customer. Well, I am here to fill this void, educate you and help you on your journey to financial success. As you will gather from my posts, proper mortgage planning is critical to your financial and real estate investment success.

A number of years ago I started investing in real estate and have had an incredible journey. I discovered how amazing mortgages are and how they can accelerate your wealth growth. I will cheerfully share my insights with you. Cheers for now!