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CMHC Financing vs Conventional Financing

R

Runman

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Hey all,

I have a question that maybe you experienced investors can help me with. I was wondering what would be the best route to take regarding financing. For example, Should one put down 15% and go with the 4% interest rate plus about 20000 in CMHC fees (Based on a 450,000 property) or should I put down 25% with the conventional mortgage and have the higher interest rate at 6%. I have calculated that with CMHC I would be having about 300 dollars a month extra in cashflow vs 300 less with the conventional. However, with CMHC it seems that those fees are a waste of 20000 just to get the extra 300 a month cashflow. Instead, with the conventional I could put that 20000 into my property equity with the higher downpayment. Unfortunately, this means 300 dollars more a month in financing costs.

What do you guys think about this? What is the best way to go about this?

Thanks alot


Josh
 
QUOTE (Runman @ Nov 30 2009, 02:38 PM) ...or should I put down 25% with the conventional mortgage and have the higher interest rate at 6%....

FYI you should only need 20% down to get conventional financing. It used to be 25% but the rules changed a couple of years ago on this.
 
Sorry, I guess I should have clarified. The mortgage is a commercial mortgage for a multi- family 5 units or more.

Thanks for your reply

Josh
 
The answer depends on how much you value the equity compared to cash flow. Obviously you will be required to invest more cash in the deal to gain that extra equity. Remember part of the income from the property is attributed directly to the down payment and not the property income itself.

Also keep in mind no matter how much of your own money you tie up in a property the appreciation on that property will remain the same.

I would go for the higher cash flow option investing less of my own money in the deal. That`s a win/win combination in my opinion.
 
QUOTE (Runman @ Nov 30 2009, 01:38 PM)
..



What do you guys think about this? What is the best way to go about this?



..


usually, in a flat or rising market, you make more money with less cash down and a 33% lower interest rate (6% vs. 4%).



ALWAYS ALWAYS use the cheaper money if a 5+ year hold is envisioned .. as the CMHC ticket is an insurance premium paid once, but good for 25 years (or 30 or 35 if you pay a slight premium). So you save 33% on the cost of money for 25 years .. isn't this worth a small CMHC premium upfront ?



EVERYONE in the multi-family business uses CMHC after the asset has been stabilized, us, BoardWalk, MainStreet, Northern Property REIT, CAPReit ..



Let me re-phrase: why pay a lower CAP rate than commercial if the money cost is the same ? A shopping center or an office tower has a higher CAP rate because the money is more expensive !



related post with some cash-on-cash ROI numbers showing return is below. In general, the less cash down the higher the cash-on-cash return (unless market is falling of course).





Equity Gain not the only way to make money in RE: http://myreinspace.com/public_forums1/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html
 
QUOTE (ThomasBeyer @ Dec 1 2009, 12:41 AM) EVERYONE in the multi-family business uses CMHC after the asset has been stabilized

Can you tell me what you mean by `stabilized`?

Thanks,
Steve
 
Steve - Thomas is referencing once a property has brought up closer to its highest and best use - Vacancies minimized, rents increased to market levels, and repair and aesthetic work needed to facilitate this is done - so equals higher income + less deficiencies = higher value = higher assessment to get financing based on
 
QUOTE (housingrental @ Dec 1 2009, 08:17 AM) Steve - Thomas is referencing once a property has brought up closer to its highest and best use - Vacancies minimized, rents increased to market levels, and repair and aesthetic work needed to facilitate this is done - so equals higher income + less deficiencies = higher value = higher assessment to get financing based on
indeed !

There are really only 2 reasons not to use CMHC:
a) if the property acquired needs a lot of work to raise rents, say the first 12-24 months, (with a planned re-fi at that point due to higher value)or
b) if you intend to flip it / sell it within a short time frame
 
Some really insightful suggestions here. I will use CMHC on my next purchase as it seems that CMHC is the way to go. Thanks for the words of wisdom.

Josh
 
QUOTE (Runman @ Dec 1 2009, 01:39 PM) Some really insightful suggestions here. I will use CMHC on my next purchase as it seems that CMHC is the way to go. Thanks for the words of wisdom.

Josh


You may not have a choice... many lenders are getting insured regardless of how much you put down. if you are conventional they will pay the premium yes, but your deal will still have to appease the underwriters at CMHC.
 
The only other thing I would add is that, if you own the property personally, you can expense the CMHC fees (over 5 years) when you calculate your net rental income on your taxes, this could result in a nice refund if you have employment income.
 
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