Updated: May 18
Enjoy this post sponsored by Streetwise Mortgages.
As mortgage brokers specializing in income property financing, we receive hundreds of questions
from investors across the country in regards to various aspects relating to financing income
In this initial series, we answer the common questions we come across:
What are the key differences between financing commercial and
multi residential properties (5 units or more); and residential properties with
1 – 4 units?
The key difference between commercial and residential financing is who qualifies for the
mortgage. If you are buying a dwelling with 1, 2, 3 or 4 units, the lenders require you to personally
qualify for the mortgage based on your income, debt load and credit.
When purchasing a dwelling that has a commercial component or is all residential with 5 units or
more, it is the property that qualifies for the mortgage based on its Net Operating Income, not
you personally, which means that you can purchase a commercial / multi residential property
even if you do not currently work or report any income at the personal level!
Having said that, there are a few caveats:
5 and 6 units multi residential fall in the “grey” zone for a few lenders, where they can be
financed under the residential guidelines offering clients better financing terms than those
offered under the commercial rules, such as 20% down, 30-year amortization option, low rates
and low cost of acquisition (i. e. no need for environmental or commercial appraisals).
Also some lenders offer the option to finance a purely residential property (1 – 4 units) under the
commercial guidelines by looking primarily at how much mortgage that property can carry based
on its Net Operating Income. This method may work better for some investors who are
buying/own legal duplex, Triplex or Four plexes and no longer qualify under the traditional
residential financing rules.
Another key difference between the residential and commercial financing are the financing terms offered and the costs associated with arranging financing.
Under the residential guidelines:
1. The minimum down payment is 20% assuming the borrower qualifies
2. The amortization can extend to 30 years
3. Institutional lenders do not charge a fee, unless the deal is financed with a “B” lender
4. Appraisal fees are low
5. No environmental assessment is needed
Under the commercial guidelines:
1. The minimum down payment is determined by how much mortgage the property qualifies for based on its Net Operating Income (NOI). For example: if the property qualifies for a 75% loan to value loan, the down payment would be 25% down. If the NOI warrants a higher mortgage amount (above the 75% mark) , the property must be financed through CMHC and the down payment can be as low as 15% of the value of the property ( as determined by CMHC)
2. On non-CMHC deals: the maximum amortization is 25 years. On CMHC deals, longer amortization options are offered such as: 30 , 35 and 40 years as long as the property’s economic life is greater than the amortization.
3. Both lenders and brokers charge a fee as a percentage of the loan amount. The fees vary from deal to deal depending on the size of the loan
4. Appraisals must be done by an AACI certified appraiser and cost at least a $1000 dollars. The larger the asset ( i. e the more units), the higher the cost
If you are really interested in building your rental property portfolio, be sure to talk to Streetwise Mortgages. Dalia Barsoum and her team can help you develop a financing roadmap and answer key questions pivotal to your growth:
1) Where will the money come from ?
2) The best way to take out equity to grow?
3) How to structure your deals to enable growth?
4) What you can expect in terms of financing for the properties you are looking to purchase and much more!
Book your complimentary planning session and consultation at the link below and get a copy of the Streetwise Best to Invest 2021 research of the top 18 investment markets across Ontario.