Hello Real Estate Investors in Hamilton Ontario!!
Have you ever gone through a property and said “If only the bathroom were updated and the carpet were replaced with laminate, and yada yada yada, then this property would be perfect as an investment property”
I know my investor clients have, especially the ones that are tight on cash and want to minimize their investment, afterall, we’ve all heard the term “cash is king” right?!
So what’s a Hamilton investor to do? Talk to a mortgage professional who knows how to include most of the renovations into the mortgage. Well it just so happens that this week’s guest post is by Aneta Zimnicki and she is a Mortgage Agent, long time REIN member and a veteran real estate investor. See what she has to say about the Purchase Plus Improvements program:
Purchase plus improvement (PPI) is a sophisticated investor tool not well known in the conventional mortgage channel. It is a great way to leverage money, take advantage of a lower interest loan and reserve the money you might have been using for renovations towards future down payments. PPI is also a great way to do the mortgage as a one shot deal and can save you money from fees, penalties and higher interest loans. It is an alternative to getting a shorter term mortgage (or private loan), doing the renovation, and then applying for a long-term mortgage with the new appraised value. If you think your renovation costs will be very significant and high, the latter strategy may be more useful over PPI.
PPI is not offered by all the lenders, and some that do don’t offer it on rental properties. Rules on PPI vary slightly between lenders, you must work closely with your mortgage broker to see which lender’s program best fits your goals. Typically you can get up to 10% of the purchase price in additional renovation costs. So for example a $200K purchase can get $20K in improvement loan, and your total first mortgage would be 80% of $220K, your required downpayment would be 20% of $220K.
Note that the renovations have to be true improvements. Examples of what would not be eligible would be things like asbestos removal, environmental hazards, major structural issues, things that need to be done to make property habitable <Erwin here: don’t forget mold! Don’t ask how I know ;)>; appliances don’t qualify either because they can be moved. Examples of eligible improvements would be new roof, new flooring and new windows. General maintenance and repairs are not necessarily going to be covered by PPI.
There is a little bit of work up front required for PPI however considering what you’re going to get from the lender, the hard work is worthwhile. The biggest challenge is probably getting the contractor quotes upfront during the mortgage application stage. When you purchase the property there is a financing condition. Within that timeframe you need to come up with work scope, get the quotes, choose your contractor (if comparing quotes), submit to your mortgage broker and wait for approval…all before your finance conditions expire. The lender will not look at your PPI application without the quotes, so you can’t get a head start with the lender underwriting even if you have all the other documents. <In my system, which I teach to my clients is to have one of Hamilton’s best property managers who also serve as general contractors attend the home inspection to minimize delays and provide me a quote asap for the PPI>
A sophisticated investor can prepare themselves for this by learning what renovations are typical for their target property, having a great team of contractors available on short notice, making sure contractors are able to provide quotes that reflect reasonable market prices and use clear documentation. <exactly what my PM’s do!!>
Once PPI is approved, the lender will give you a time frame to complete the renos, for example, 120 days after closing. You want to make sure that your contractor can complete the work within that time frame. Proof of completion is done a few ways, again, depends on lender. One lender, for example, has a $15K threshold, where renos under that value need only submission of receipts showing payment for the work matching the contractor quote. Larger amounts will involve an appraiser visiting the property and evaluating the completion of work scope based on the quotes submission. Other lenders need a full appraisal, and may choose between the lower value of appraised value or the PPI amount submitted at the application stage, watch out for that one…you may potentially not get the full reno cost you submitted for initially. After verification, the majority of the PPI lenders will forward the money all at once (not at stages), via instructions to your lawyer. Therefore between the mortgage closing and the time you get the funds from the lender, you will have to find a short term way to pay your contractors.
The key to a successful purchase plus improvement mortgage loan:
- Provide clear itemized contractor quote on letterhead with market value prices, and breakdown for items.
- Prior to purchase agreement signature have your contractors in line ready to visit property and provide quote during financing condition stage
- Be willing to commit to the quotes presented at the mortgage loan approval stage. If anything changes after closing (you do different renovations, renos cost different either less or more, you change contractors), this all leads to a mortgage amendment which puts you in a risk situation as now lender is re-evaluating and re-opening your file. Also if you are a repeat investor using this program you do not want to be identified with the lender as someone who continuously makes changes. The secret is the underwriters want simple, easy to understand quotes, so that if they are audited, they are able to defend their loan approval.
- Stick to the list of renovation items.
- If you have a long list of reno items where for some items you’re not really sure how much work or cost it will be, split the quote into two. Combine all the renovation that are clearly improvements and are easy to understand under one group of quotes, adding up to the 10% of purchase price and submit that to the lender. These are the items you will absolutely be doing and will be able to show receipts for. The rest of the stuff you can fund with alternate means, but at least you have more flexibility.
- Consider using a general contractor quote to combine a lot of little jobs or a property management company capable of doing the reno work that can send you one consolidated quote and invoice. <if you don’t know where to find one, sign up for my rolodex of professionals in Hamilton>
- Be honest with your mortgage broker and the lender. Avoid gray areas. Consider this program from the lenders viewpoint. They are trusting that you will increase the property value beyond what you purchased it for. They believe that you will be able to do the work, and therefore advancing money to you. Make the list an easy to understand for the underwriter use quotes and costs that are not severely under market value where there might be room for suspicion. Provide explanations to your broker for anything you think may cause questions.
- Be cognizant and prepared for some reno items possibly not being approved.
Once you become familiar with the logistics of the PPI program and are able to execute, you will feel confident to repeat this and be able to go for properties that you may have otherwise passed on before due to limited renovation funds. Using a mortgage broker familiar with this program, who has an understanding of renovations and who is an investor themselves will also be a key to your success.
Real Estate Investment Specialist
My Investment Sherpa
Mortgage Agent #M10002433
Dominion Lending Centres Brokerage #11890
I hope you Hamilton investors enjoyed that! I never new about these types of financing when I started!! If you have anymore questions about PPI please feel free to reach out to Aneta.
Hope that helps! Till next blog post – happy investing everyone!!
Erwin | MrHamilton.ca
PS: If you would an on-the-ground tour of Hamilton and select investment properties please let me know (email Maria and she’ll set it up: Maria (at) MrHamilton.ca)
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