Mark David
Cash flow is the No. 1 priority for investors looking for that second property.
Not only are cash-flow positive homes in your portfolio an essential part of making money in property investing, it’s important to also realize that cash flow is a major factor banks consider when you’re applying for financing.
Think of your investment portfolio in terms of good and bad debt. Good debt simply refers to properties that are generating income, while bad debt refers to those that aren’t.
When applying for a mortgage, the bank will look at your income and your real estate portfolio (if you have one already) to decide how much income you’re generating overall. The more income you’re creating, the more readily the bank will lend to you. If you have properties that are negative cash flow, that’s taking money right off of your bottom line and that’ll hurt your chances for additional financing.
And while this may seem a little obvious, you must work hard to reduce all of your non-deductible/consumer debt before you get into property investing. That means paying down student loans, paying off credit cards and refraining from putting any new purchase, on payments.
The best way for you to ensure you have everything the bank is going to need and get the best possible interest rate is by working with an investment mortgage broker.
Brokers work with multiple lenders, allowing them to provide you with more than one option for a mortgage. And best of all, you don’t even have to pay them for their services because they’re paid by the banks.
But remember there’s a big difference between a mortgage for a home and an investment property. So make sure your broker has experience finding mortgages for investors.
Variable or fixed?
Generally, real estate investors should get a closed mortgage with the length of the term that fits their overall investment plan.
While many homeowners opt for a fixed-rate mortgage just for the peace of mind that their mortgage payments will stay the same for the duration of their mortgage’s term. But they do that at the cost of paying a higher rate.
Investors, on the other hand, should choose variable-rate mortgage. By doing this you’ll get a lower rate and you’ll typically have the option to lock into a fixed-rate mortgage whenever you want (make sure you have this option included in your mortgage).
But you shouldn’t necessarily lock in your mortgage because the Bank of Canada (BoC) raises its key interest rate by another 25 basis points. Instead, follow the news carefully and compare what rates the banks are offering after the BoC’s next announcement.
Fix your payments
Even though you may have a variable-rate mortgage, treat it as though the rate is fixed. For example, if you get a variable-rate mortgage at 2%, and a fixed-rate is 5%, act as though you need to pay 5% a month.
If you take the locked in mortgage, you’re immediately going to start making higher payments. But you’ll be better off if you take the variable rate and make the higher payment and all the extra money goes directly to the principal. This not only is smart budgeting, but by using this strategy, you’ll actually pay the principal down much more quickly.
This strategy also works as a buffer against future increases in the mortgage. So if the variable rate does increase slightly, you won’t have to adjust the size of your payment because you already will have been making higher payments.
Banks love this approach because your equity is increasing but your prescribed payments are a lot lower cost. So since you’re making more income every month, banks are more apt to give you even more financing.
The final plus about this strategy is that the additional payments are completely optional, unlike if you were locked into a fixed-rate mortgage.
So if one month you need to make a repair, just simply hold back the additional percentage.
The power of leverage
One of the most powerful tools you can use to maximize your returns in real estate investing is leverage. This allows you to profit from the full value of the property, while only putting a small portion of your own money into a deal. 
For instance, say you purchase a home outright for $100,000. If the home appreciates 5% in a year to $105,000, your return on investment (ROI) would be 5%.
Now say you bought that same house for $100,000, but made a down payment of only $20,000. If the home appreciates 5% in a year to $105,000, your ROI would be 25%.  
If you have tenants in the home during that year paying down the mortgage, your ROI will be even higher.
Prepared to present your plan
Once you and your investment mortgage broker have decided what mortgage is best for you and your investment plan, you should assemble everything the bank is going to need in order to approve you for a mortgage.
It’s fundamentally important that you are prepared and that you bring everything the bank is going to need to approve your request for financing. The more prepared you are, the greater chance that the bank will view you as a sophisticated investor.
Compile all of the following information listed below and organize it in a binder. This includes the following:
  1. Have a cover letter: Use this as an opportunity to assure the bank that you are providing all the information it’ll need to process your request for financing, and don’t forget to list a date you expect to hear back about your application.
  2. Proof of income: If you’re an employee of a company, you’ll need a letter from your employer confirming your position, how long you’ve worked for the company, your salary and any income you receive in addition to your salary.
  3. For further proof of income, submit one of the following:
  • Recent pay stub
  • Most recent T-4
  • Most recent T-1 General (your tax return)
  • Most recent Notice of Assessment (NOA)
  1. Have the mortgage application completed and signed: While this may seem obvious, many novices forget this step. Having the mortgage application completed shows you take property investing seriously and that you understand your banker’s time is precious. First impressions are everything.
  2. Have a personal cash-flow summary: If you already own properties the bank is going to want to know how much income you’re generating from them. So it’s best to have that information ready and accessible to speed up the approval process.
  3. Review your credit report: There is the possibility that your credit report contains inaccurate information, which could hinder your chances of getting a mortgage. For a small fee, you can look up your credit report online to ensure that everything is accurate. While you’re there don’t forget to check your credit score, as this can also greatly affect your ability to get financing.
  4. Have a statement detailing your net worth: Simply list all of your assets and liabilities in an excel spreadsheet. Also, make sure you include the money you’re using for your down payment, and if the money you’re using is a gift, indicate when you received it and that it’s completely non-repayable in the statement. Sign and date the form and you’re all done.
  5. Provide a revenue real estate statement: You need to declare the details about any properties you own. For each property list the amount of your mortgage payment, if you have any secondary financing, the amount of the property taxes and how much the condo fees are, if there are any. Also, make sure that your totals in this statement correspond to the totals you’ve listed in your net-worth statement and your cash-flow summary. Finally, list the maturity dates of your mortgages.
  6. Proof of down payment: Provide your banker with any statement that indicates that you’ll have the cash when the time comes to close. It could be a stock statement, a bank account statement or it could be a Registered Retirement Savings Plan statement. While you don’t necessarily need to use these funds at closing, you will need to ensure that the cash you do use is in a liquid form, such as in a bank account or mutual funds.
  7. Finally, and what would seem most obvious, provide information on the prospective property. This includes:
  • The address (both civic and legal)
  • A written description of the house (bedrooms, lot size, etc.)
  • Renovations within the last five years
  • Purchase price and appraisal value
  • The current and potential rent
  • Amount of money you’re looking to borrow
  • Financing subject-to-approval date
  • Closing date
  • Registration name for the property
  • Copy of the offer to purchase
  • Colour photograph of the property
  • Property analysis and due diligence
  • Copy of the current appraisal completed by an appraiser that’s acceptable to the lending institution
Remember to dress accordingly. If you don’t treat property investing like a business, the bank isn’t going to want yours.

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