Mortgage Advice for Short Term Home

[Van G]

We're looking to purchase our first home and would like some suggestions on how to approach financing. We will be keeping this property for a maximum of 2 years, but more than likely 6 - 12 months.

Our long term plan (10 yr) is to complete 5 - 8 flips if the market conditions support it and build equity and eventually tax free gains.

We'll be putting down 5%.

How should I approach this? Take a mortgage for the project term, or take a mortgage for the long term.

In a brief conversation with our TD Broker who finances our commercial builds she thought doing a 1 yr open at 4.25% (variable) and convert it when the time is right (mid 09).

Thoughts?

[Germack]

Thoughts?

Do you have any prior experience with real estate investing?

Your plan sounds like a quick way to bankruptcy!

[pdurple]

We're looking to purchase our first home and would like some suggestions on how to approach financing. We will be keeping this property for a maximum of 2 years, but more than likely 6 - 12 months.

Our long term plan (10 yr) is to complete 5 - 8 flips if the market conditions support it and build equity and eventually tax free gains.

We'll be putting down 5%.

How should I approach this? Take a mortgage for the project term, or take a mortgage for the long term.

In a brief conversation with our TD Broker who finances our commercial builds she thought doing a 1 yr open at 4.25% (variable) and convert it when the time is right (mid 09).

Thoughts?

For one thing, you will be throwing money out the window by only putting 5% down. You will be required to pay for default insurance when you put down less than 20%. It will cost you thousands.

You will definitely want an open mortgage product.

[dutchca]

You are asking mortgage advice on a public forum - shouldn't you know about this before trying to flip houses?

Do you even know what CMHC insurance is?

Your question frightens me.

Look for something open - and put enough down to avoid CMHC insurance. Believe it or not - the lower the rate - the better :lol: . You would be best to find a mortgage with little or no prepayment penalties - in lieu of an open mortgage.

When you sell, don't use an agent - 5% off the top.

Good luck with it.....

[Van G]

I was hoping for a little more detail!

I do indeed know what CMHC is, and in my case, I'm better taking that hit and keep my money working for me in my business and investments. The old saying 'it takes money to make money' fits here.

With regards to not using an Agent, I disagree but that's not part of this conversation.

Anyway, I hope I can get some advice on products or approaches that I may not know of. This is why I posted.

TIA

[pitz]

We're looking to purchase our first home and would like some suggestions on how to approach financing. We will be keeping this property for a maximum of 2 years, but more than likely 6 - 12 months.


Well basically a short-term open floating rate mortgage is about all you could really look at. Fixed rates will cost you quite a bit in prepayment penalties, although you could port the loan to another house if you meet the lenders' criteria.


Our long term plan (10 yr) is to complete 5 - 8 flips if the market conditions support it and build equity and eventually tax free gains.


...and just what value do you intend to add to the properties? Basically, house prices, in the long term, do not go up, they remain flat, or even decline slightly in real terms.

If you're adding some value, then sure, you might have a go at it.. But basically, if you're into flipping things, you're much better off, historically speaking, flipping bonds, than flipping actual houses. Flipping, in essence, only is profitable in 2 ways:

1) Speculating on changing interest rates and changes to the underlying discount rate of the imputed cash flows of a property;

2) Doing something to the underlying property, or the management thereof, that causes the underlying cash flows to change.

Any gains as described in 1) are not sustainable in the long run; markets go through cycles of expanding P/E multiples and contracting P/E multiples. No matter what you do, you cannot repeal the business cycle, or the capital asset pricing model for that matter.



We'll be putting down 5%.


That's not enough. Good luck getting any financing, especially with your intentions, at reasonable rates.


How should I approach this? Take a mortgage for the project term, or take a mortgage for the long term.


Come up with a solid business plan, and present it to your banker. Don't delude yourself into thinking that you're gonna be playing the RE lottery, and don't use unrealistic numbers. The average house in Canada has a negative long-term real rate of return.


In a brief conversation with our TD Broker who finances our commercial builds she thought doing a 1 yr open at 4.25% (variable) and convert it when the time is right (mid 09).


I'd be shocked if TD had any willingness to finance something like this, unless they could dump the risk onto CMHC or some other sucker.

[AllWheelDrift]

Variable open is probably your best bet. You should be able to do Prime - .75% (aka 4.0%) so you need to get your TD broker to work harder for you. Might as well get it for a 5 year term because since it's open you can pay it off without penalty any time before that anyhow.

Good luck with your strategy and keep your fingers crossed because to overcome the costs of CMHC insurance and realtor fees you're going to need prices to rise substantially in a market that looks like it may be cooling.

[Van G]

I agree with RE being a flat to negative investment, but for our purpose we use a 0 growth rate but our value and ultimately profit (equity increase) is created by the renovations we do to the property.

Market is cooling but we're focused on very specific neighbourhoods where they continue to see a high demand. Good properties, marketed properly (that's where a good Agent comes in) still have multiple offers.

We're both in the construction business and have access to trades for those that we can't do ourselves and good pricing on materials (look who I'm talking to about good pricing :)

TD Broker laid out the plan you made reference to - porting the mortgage to the next property. 5% down isn't an issue. We'll have to discuss the Term. CMHC on the first property is 13K, but I consider that the cost of doing business, and not that much over the course of 10 yrs.

In addition to advice on how to structure financing, could I throw how should I shop the deal once I know what I want?

[pitz]

I agree with RE being a flat to negative investment, but for our purpose we use a 0 growth rate but our value and ultimately profit (equity increase) is created by the renovations we do to the property.
We're both in the construction business and have access to trades for those that we can't do ourselves and good pricing on materials (look who I'm talking to about good pricing :)


Well, my advice then would be to buy a house, buy something that you can afford, based on sound investment criteria. If you can fix it up and sell it for a profit (after expenses) and buy something similar -- great. If not, then at least you have a place to live and you'll be building up equity by making your mortgage payments, minus whatever depreciation exists in the market generally.

The days, however, of buying a $300k house, putting in $50k worth of paint and kitchen remodelling, and selling for $450-$500k are, IMHO, over though. If you get $350k out of the deal and monetize your labour in a tax-free way, then I think you'd be doing well. Of course, you have all the selling expenses ontop of that.