'Real estate investing is about people first.
Money follows if you treat people right. '- Dalia
Hello FNM community,
I had the pleasure of interviewing Dalia Barsoum, Canada's top real estate financing expert, an accomplished speaker, best selling author and real estate mogul. She is also a regular contributor to Canadian Real Estate Wealth Magazine, a business owner and sought after speaker. In 2014, she won 'Mortgage Broker of the Year Award' by the Canadian Real Estate Wealth Magazine.
For those of you who are wondering how financing works in the real estate world, I will say this after having read her book: “Canadian Real Estate Investor Financing: 7 Secrets to Getting All the Money You Want”…it has everything to do with planning the right way with the right financing expert.
I have known Dalia for years. I still remember the day I called her - I was blown away by how genuine, approachable, knowledgeable and helpful she was. I wished I had spoken to her sooner before purchasing real estate investment properties. That day forward, she helped me devise a long term financing plan and I finally felt confident in growing my real estate portfolio.
In this extremely valuable interview, you will learn:
- Why developing a financing plan is a crucial component for building an investment portfolio.
- Top financing tips for real estate investors.
- What do lenders look for?
- The financing wall explained simply and how to get around it.
- The lifeline to real estate investments – readvanceable mortgages.
- Creative financing strategies.
- Common financing pitfalls.
Over to Dalia Barsoum – Financing Expert for Real Estate Investments:
1) Everyone likes to hear why others choose to invest in real estate. Why real estate for you and how did you get started in real estate investing?
I started investing in 2008. At the time, I was still working in wealth management at one of the banks and it was also around the time when the stock market took a dive. My husband and I saw a significant portion of our mutual funds and stock based portfolio decline.
That was a wake up call.
The dive in the value of our stock portfolio gave us the push to take control and invest in an asset like real estate where we have control of our destiny.
My first properties were starter homes – in family oriented neighborhoods, close to transportation , schools , shopping and nature
2) There are lots of real estate investment strategies out there, what real estate strategies do you use and do you mine sharing your goals for each of those strategies?
My primary strategy: Buy and Hold Real Estate
Goal: Build long term wealth
I buy where the real estate value drivers are strong and where rental demands are also strong. My strategy -and still is – to buy properties that have a good chance of picking up value in the long run due to a) the property, b) neighbourhood, c) city appeal and d) where they will carry themselves with a small cash flow for the holding period.
Patience is virtue – I’m letting time work for me – building wealth through mortgage pay downs and slowly increasing cash flow.
Secondary Strategy: I also use 2 secondary strategies as “accelerators” to my primary strategy.
Goal – Immediate cash flow and to grow the capital – all backed by good real estate.
The first one is buying run down properties (with multiple sub-units) in top locations in the GTA , renovating them over 3-4 months; increasing the value and refinancing to pull out most of the initially invested capital. I then rent them at a much higher Rent “due to the enhanced condition ”
The goal is to force value into the property and provide funding for the next project and hold onto a property in a location that will likely continue to appreciate while cash flowing nicely in the short term.
The second one is private lending – becoming the bank.
This is lending funds in private second mortgages on a short-term basis for certain properties across Ontario.
3) Have you ever faced some scary situations as a landlord? Could you share that story with us and how you overcame it?
I had a tenant whose wife left him unexpectedly.
He went into severe depression and called me that morning crying.
He could no longer afford the rent. Had no family to go to and was so depressed that he was thinking of killing himself.
I have always maintained an excellent relationship with our tenants and worked with them whenever things got tough.
To resolve the situation, I ensured that the tenant connected with a medical professional in regards to his depression.
I called him on a daily basis to check on him and to give him the opportunity to speak with someone as he had no family. I also visited from time to time and brought him lunch or dinner.
We changed his payment plan to make it more affordable.
It took 2 months before the tenant was able to relocate and also get back to a better state of mind.
While I have had some delays in receiving rent from this tenant due to his personal situation, at the end of the two months, he left the property in a great shape and paid off any remaining outstanding amounts.
This tenant could have left the property in a bad shape and could have defaulted on his rent but he didn’t. He appreciated our support during the tough times and worked really hard to leave us in a good shape.
4) When I first started investing in real estate, I dreaded the financing process, it was so complicated to understand and that process was nerve-wrecking. You’ve worked with hundreds and hundreds of real estate investors, what are your top tips for financing a rental property to help make this process easier for new real estate investors?
Here are my top tips:
a) Plan financing
Don’t wait until you have a property to discuss financing with your mortgage broker or lender – it is too late! Have a detailed discussion about your plans and provide all necessary documents for your lending adviser to review before you go shopping for your next property.
Planning will help you understand the following:
- What you can and can’t do given your income, credit, strategy and resources;
- What rates, terms and down payment requirements you can expect not just on your next deal but in the near future;
- How will you structure the deal; and
- Potential risks associated with financing and your back up plan.
Planning financing the right away => get more approvals for your deals + more favorable terms
Many investors go about financing the wrong way. They wait until they have a deal. Scramble through the process and only to learn during the process that the rates and terms they are getting are not what they hoped for or even worse: their deal gets declined.
b) Work with a mortgage broker that is experienced in portfolio financing
At the risk of sounding biased or self-serving: working with a mortgage broker who is experienced in portfolio financing is an absolute must in my opinion, if you want to grow your real estate investments. Talking to your preferred lender or transactional mortgage broker may get you an approval in the short term. However, it does not necessarily mean that you have structured financing right for the long term.
Think 3 steps ahead when you finance the deal at hand to keep your options opened for future growth.
c) Keep your credit in shape
Paying your credit cards on time, avoiding high utilization of credit card balances will always serve you well when you seek a mortgage. It is not the only factor when it comes to mortgage approvals on rental properties. But it will definitely get you better rates and terms compared to someone who has bruised credit.
5) At one point in time, every real estate investor will hit a financing wall. For some people, that is four and others are ten?? What’s the common range? And how does it get calculated in simple terms?
This is relative, not absolute.
Let me explain .. Firstly: the wall applies to residential properties (1-4 units ) not commercial (5plus, mixed use or commercial). We categorize lenders in different tiers when it comes to income properties
a) Tier 1: lenders who offer great rates, terms and mortgage products on rental properties
- Down payment is 20 down, amortization is 30 years and rates are the lowest. No lender fees
- Those have a cap of 5 properties max
- They would not touch your deal be it a refinance or purchase if you own 5 properties (including your home). Regardless of whether or not they or another lender holds the mortgage
b) Tier 2: lenders who offer great rates and terms on rentals but may require 25% down, may shorten amortization to 25 years or charge an insurance premium
- May offer 35 year amortization
- Have a cap of 4 properties max
c) Tier 3: Lenders offer great rates, terms and mortgage products on rental properties
- Down payment is 20%
- Amortization is 30 years
- And rates are still competitive and low
- No lender fees
- A cap of 16 doors
- A duplex would be considered 2 doors
- Their qualification requirements are harder then tier 1 lenders
d) Tier 4: Same as tier 1 and 2 in regards to rates and terms on rentals
- Down Payment is 20% down
- Amortization is 30 years
- No lender fees
- They have no black or white limit on the number of rentals you can hold but will put the breaks on your portfolio growth when it’s time to limit their exposure and manage their risk
- typically require significant liquid assets to keep your portfolio going to manage risks
e) Tier 5: Lenders offer more expensive rates and terms
- Down payment is 25%
- Amortization is 30 years
- Lender fees can go up to 1% of the loan amount
- Each of those lenders can typically finance up to 2 million dollars in mortgages per client.
Depending on your credit, how you derive your income, your portfolio debt coverage ratio and how you hold properties (personal vs corporation), down payment structure.
Your deal would fall under one of the tiers above. Which implies that every ones wall is different.
Though proper planning, the objective is to get your deals done with the group of lenders that offer the most competitive financing. Having said that, there will come a point in your portfolio, where the only type of financing that is possible would be with tier 5 lenders.
6) What is your top creative financing strategy used by veteran real estate investors (who often have their own companies) and what are the pros/cons?
Other people money – Be it joint ventures or RRSP second mortgages.
Pros: The beauty of this strategy is having access to funds to keep your portfolio going
Cons: The down side is that working with OPM is like a marriage. Some investors jump at joint ventures without understanding the exit strategy, getting independent legal advice and putting the right contracts in place. That is typically when things go wrong.
7) Personally I like having secured lines of credits as a life-line (equivalent to cash) for each of my properties to pay for expensive repairs (as just in case). Is this is a good idea? What advice can you give about readvanceable mortgages (or smith maneuver) and secured loans? (Does it hurt their debt ratio?)
An advancable mortgage is a product I highly recommend for investors. It is basically a mortgage that comes with a secured line of credit attached. As you pay down the principal on the mortgage, you get access to the funds on the secured line of credit.
Over the long run, this gives you access to equity to invest or renovate or for emergencies without having to qualify for it. Having a secured line of credit or an advanceable mortgage does not hurt you as an investor, except for a very small group of lenders that will factor full utilization of the secured line during an application, regardless of whether or not you use the line of credit.
8) What are some common pitfalls real estate investors face (other than above) and what is your advice for preventing them?
- Taking a transactional approach to financing versus a strategic approach. This is how investors hit the wall
- Jumping into joint ventures without understanding the best way to structure financing when a group is working together. That is typically how JV deals get quite complicated when it comes to financing.
- Chasing rates without understanding if they would qualify for that rate and how the lender will look at their situation. While shopping the rates, they hurt their credit and waste their time.
While rates are very important – planning helps investors understand the types of lenders they qualify for and then we can negotiate down rates.
Dalia is the author of Canada’s Best Selling Real Estate Financing Book: Canadian Real Estate Investor Financing: 7 Secrets to Getting All the Money You Want.
With her business partner Ms. Enza Venuto, Dalia operates, a successful award-winning Canada-wide lending practice (CENTUM Streetwise Mortgages: www.streetwisemortgages.com ) focused on traditional , creative and private financing options for Real Estate investors investing in Canada and the U.S. The team funded over $1.7 Billion on mortgages since inception of the brokerage and is ranked among the Top 75 Brokers across Canada by the Canadian Mortgage Professionals Magazine.
Dalia has helped many Real Estate investors kick start their investment plans and reach their investment goals and has implemented many of the financing strategies she teaches through her personal real estate portfolio holdings.
Do you have any financing questions? Share your comments below. If you found this interview extremely helpful, like I did, please share it with your friends and family. Also, let me know how I can best support you in your journey through direct emails here. I’m here to empower, guide and encourage you to reach your financial nirvana.