What is the minimum down payment required to purchase a 6 unit rental property?


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LE COURRIER DE SÉRAFIN is a section that presents twice a week a user’s personal finance question, followed by an answer from Sérafin, an AI specializing in personal finance in Quebec. Everything is accompanied by a verification comment or addendum from a financial professional.

Serafin’s answers

Generally, a minimum deposit of 20% is required to purchase a rental property with six units. To potentially reduce this income to less than 20%, here are some important strategies and considerations:

1. Mortgage loan insurance: If your down payment is less than 20%, mortgage insurance may be required. This insurance protects the lender in case of default on your part. However, obtaining such insurance for a rental property with more than 4 units can be difficult, if not impossible, with mainstream insurers (such as CMHC, Genworth Canada, etc.) as they typically limit their coverage to residential properties with 1 to 4 units.

2. Private or alternative financing: private or alternative lenders may offer less stringent down payment requirements, but this can lead to higher interest rates and an increase in the overall cost of the loan.

3. Home Ownership Assistance Programs: Although primarily available for the purchase of primary residences, some specific programs may offer options to lower the down payment required to purchase rental properties.

4. Cooperation with investors: Partnering with other investors can help you spread the down payment and make the initial investment more affordable.

5. Dealing directly with the seller: Exploring creative financing options, such as seller financing, where the seller provides a loan for part of the purchase price, can also be a solution to reducing the required down payment.

It is very important to consult with a financial advisor or mortgage broker to carefully research the options available. This professional will be able to help you evaluate the implications of each strategy, such as interest rates, additional fees, and total transaction costs. This approach ensures that you make informed decisions tailored to your personal financial situation as well as the specifics of the real estate market.

Answer from André Petit, mortgage broker

In general, the down payment may vary depending on your application for a classic loan, a CMHC loan or an APH loan. With a classic loan, taking into account the income from the building and your personal income, a minimum contribution of 20% to 25% of the lower of the price or market value is required. However, if you are considering a so-called commercial financing solution, your lender will offer you financing based on the economic value of the building, in which case your down payment may vary between 25% and 50%. To potentially reduce your down payment, here are some important strategies and considerations:

1. Mortgage loan insurance: you may consider traditional CMHC funding or CMHC/APH funding. The former requires a deposit of 15% and the latter only 5%. However, the deposit will be based on market value or economic value, whichever is lower. A commercial mortgage broker can best advise you in this regard.

2. Private or alternative financing: private or alternative lenders may offer less stringent down payment requirements, but this can lead to higher interest rates and an increase in the overall cost of the loan. This could also become limiting for your future refinancing options.

3. Cooperation with investors: Partnering with other investors can help you spread the down payment and make the initial investment more affordable.

4. Direct negotiations with the seller: A solution to reducing the required down payment may be to explore creative financing options, such as seller financing, where the seller provides a loan for part of the purchase price. However, keep in mind that most traditional banks will not accept your merchant agreement.

It is very important to consult a mortgage broker and carefully research the available options. This professional will be able to help you evaluate the implications of each strategy, such as interest rates, additional fees, and total transaction costs. This approach ensures that you make informed decisions tailored to your personal financial situation as well as the specifics of the real estate market.

Have more personal finance questions? Go ask Sérafin and who knows, your questions might be published here!





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