3 Ways to Finance Your Toronto Rental Property Renovation

3 Ways to Finance Your Toronto Rental Property Renovation


Buyers are back, listings are still low, and so the real estate competition in Toronto is definitely back. But this time around, the market is more uneven, with a bigger demand pickup for end-user-type homes and generally homes that are all ready to go.

So the best “deals” are homes that need work, and the reason is simple. Most end users can’t take on renovations even if they want to because it could be tough to figure out living arrangements during renovations. And for those who could figure this out, they might still not want to do it or might not have the money for it. 

If we can solve the money part, this could open up more opportunities for you as an investor, which brings us to a frequently asked question about financing for renovations. 

In this video, let’s talk about how we typically like to do it and then also introduce a special mortgage program from one of the big banks that not many investors know about, which could also help with this question.

Why Investors Choose Turnkey Properties

There are a couple of financial reasons why investors choose turnkey homes to invest in. 

The first one is that it could be easier to qualify. When you buy an existing home that’s not in very good condition, the banks market rents to add to your income to qualify you, and it could be as low as $3,500 on a run-down Toronto starter home. 

But if you buy a similar home in better condition, market rents might go up to $5,000, and that will be added to your qualifying income. So, there’s actually a lot of potential to qualify for a lot more if income qualifications are a concern.

The second part is that the amount of capital you need for a house that needs renovations is actually higher a lot of times because you can only get a mortgage on the current value of the home, which is basically the purchase price when you first buy it. And if you can’t figure out how to get money for renovations, that’s just out of the question as well.

How Investors Finance Renovations

Here’s how investors do it: When you’re just starting out, realistically, it would have to come out as cash, so saving up is key. But as you start to grow your real estate portfolio, coming up with the money does get easier, and you also open up more options. 

Some investors would refinance another investment property (if there’s extra equity there) to pull cash out for the renovations. Typically, this offers the best rates, but you’d have to be committed to the bigger mortgage for a fixed term.

Another common way to do it is to get a HELOC (home equity line of credit) on your current home if there’s room there. HELOC rates are higher, but payments aren’t too far off from regular mortgages because you don’t have to pay any principal back with each payment. It’s also more flexible; when you’re not using it, you can pay it back at any time. 

So what happens is that this can be pretty useful for renovations. Then, once you bring up the value of your newly renovated investment, you can refinance it to pull out more cash, pay off your HELOC, and then lock in a bigger mortgage for the subject investment.

Now here’s where a concern might be: Refinancing to pay off the HELOC works well when market prices are stable or trending up. But it’s true that there’s a bigger risk in today’s more volatile market. If market prices drop, the market value post-renovations might end up coming in lower than you expected. And that could mean not being able to refinance and not being able to pay off your HELOC.

Special Purchase Plus Renovations Mortgage

Honestly, that’s a very valid concern, which is why we wanted to share an A lender mortgage program that ends up eliminating this short-term market volatility risk if this is something you’re concerned about. 

In a nutshell, this program guarantees your refinanced amount right at the time of purchase. Another way to look at it is that you’re getting qualified for your purchase amount and the refinanced amount post-renovations all in one shot.

What happens is that when you buy a property that needs work, you’ll also need to send the bank a contractor quote for what you plan on doing, and the appraiser will take a look at everything before you buy. This is not a construction loan with higher rates and more milestones. 

With this program, you’re getting the best rates, just like with a normal mortgage. Once the appraiser looks at everything, they will give the bank a value as-is and a value as-completed, and the refinance amount would be the lesser of the value as-completed or your purchase plus renovation cost.

Then you’ll get two separate fundings. The first funding will be just for the purchase, so you’ll still need to use cash or a HELOC to pay for the renovations. After renovations, they’ll inspect to make sure everything is done, and once it’s okay, you’ll get the rest of your funding.

Other Considerations

From a risk standpoint, this is great if you’re looking to get rid of the short-term refinancing risk, but there are also a few things to keep in mind here. 

Because you’ll need to get contractor quotes before they approve this program, you’ll want to have your contractor contacts lined up and ready to give you a quote on demand. 

You also have to know that if this is the only option you’re considering, then you would have to go into the purchase with a mortgage condition, and this could affect your competitive edge if there are other buyers who have better offers.

The other thing to keep in mind here is that the maximum value the bank would approve you for is the purchase plus renovations amount. So if the market ends up heating up a lot more, then you’d still have to do another refi to top up that amount. 

And then there’s the fact that you have to do what you said you’d do. If your final improvements don’t match your initial scope of work, then you might actually end up needing to pay for the cost difference.

All in all, we think this is a great program, and it could also help those who might need a bit of an extra hand with income qualifications. I mentioned earlier that banks usually use existing market rents to qualify you. But in this case, future rents are used, so you could possibly end up buying something that you might not have been able to with just a normal mortgage.

How We Can Help

Hopefully this was helpful for you, and if you want to learn more about this program, just reach out to us. We’re also around to help you learn more about these types of investment opportunities and give advice as to how to best structure your finances, so just contact us to book a time to chat privately!

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