Access to money has been tougher with higher interest rates, and so when this happens, Toronto real estate investors are getting more create with financing options.
One option that’s getting more talk lately is the CMHC MLI Select mortgage, which sounds pretty attractive for Toronto real estate investors that don’t have that much investment capital.
The MLI Select says that you can borrow as much at 95% of the value of the home if you invest in a multiplex with 5 or more units.
They also have lower interest rates and a longer payback period, and with new rules in Toronto where every house can be converted into a fourplex plus a backyard house, this is definitely catching the attention of many Toronto real estate investors.
The CMHC MLI Select could be a good mortgage option for some Toronto real estate investors, but is it the best fit for you? Let’s dive in!
What Is The CMHC MLI Select Mortgage?
Let me start by explaining what the CMHC MLI Select mortgage. It’s an insured mortgage for multiplexes with five or more units. They look at your affordability, energy efficiency, and accessibility.
You can get up to a 95% loan-to-value, up to 50 years to pay it off, and limited recourse with a commercial mortgage. You can earn points for each category and depending on how many points you get, that determines what type of mortgage you’d qualify for. Here are more details on the CMHC MLI Select Program.
But, and there’s always a but, let me give you the lowdown on how the MLI Select has actually been working.
MLI Select Approvals Take A While
Getting approvals for the MLI Select takes around 6 months, plus another 2 months for design/drawings. If you’re super efficient, you might be able to get the design and drawings done during the closing period but that still means you haven’t applied for MLI yet.
So as you can see, you’ll still have to get a regular residential mortgage, come up with the 20% standard downpayment that goes with the residential mortgage, and then start paying for the renovations while you’re applying for the MLI Select.
It also looks like CMHC might be tightening their rules on refinancing, and you might have to wait 24 months before you are allowed to do the refinance, which leads to the next point.
You Need A Huge Upfront Investment
It’s a huge upfront capital investment with the MLI Select, which is the opposite of what most people think. The cheapest route is to improve an existing house – not build one.
But if you’re going for a 4-unit conversion, build a backyard house, and pay for the 20% downpayment and closing costs, you’ll need close to $900,000 or more upfront in cash.
Plus, it’s not a walk in the park – it takes time and experience to get it right.
Can You Get 95% LTV?
Now, let’s dig into that 95% loan-to-value, and here’s the catch – you probably won’t hit that because of very strict rent ratio requirements. It’s tougher to explain, so let me break it down with an example.
Here’s a recent project that our client took on. They bought a house in Toronto for $1.05 million, and they are investing $150,000 in renovations to turn it into 3 units.
After renovations, current comps value it at around $1.5 million, so if they refinance that at 80%, the refinanced mortgage might be $1.2 million. So after renovations, you can pull out almost all of your initial capital and you’re hitting 100% loan to total cost (purchase price plus renovations).
Now, let’s look at an MLI Select project. We’ll need a bigger house to convert into 4 units – let’s assume we can get it for $1.2 million. Then we need to convert it into 4 units ($200,000) and build a backyard house ($400,000), so total construction costs would be around $600,000. All in, we’re looking at a total cost of $1.8 million.
The potential rents could go as high as $13.5K – actually really impressive. But, even with this, MLI caps the mortgage at $1.9 million because of very strict rent ratios. And when you crunch the numbers, that’s actually a 105% LTC.
In other words, you can borrow 5% more than the smaller project, but you need more than double the money, probably 4x the time, and you’re taking on a developer project that’s on a completely different level.
When Is The CMHC MLI Select A Good Idea?
If you ask us, the MLI Select is great if you want to scale your Toronto real estate portfolio very aggressively. Unlike residential mortgages where you’re borrowing based on your own ability, which can eventually hold you back once you get more properties and more debt, the MLI is a commercial mortgage so it doesn’t work like that.
You qualify based on how well your property cash flows – that’s it. The number of properties you already have won’t limit you from buying more investment properties. The MLI Select also offers limited recourse which means which gives you more protection than a residential mortgage if you default.
With big MLI projects, you’ll probably have better rents because you’re making more units. So you have better rents, better cash flows, and probably a bigger bump in values too. So in a way, you can say it’s better because you make more and it’s lower risk after you build it.
When Should Just Stick To A Residential Mortgage?
But if your main focus is getting the most out of your limited money and time, then a smaller project with a residential mortgage is still better in our opinion.
And because residential mortgages lend you based on market values – if we see more appreciation this year, you might even loan ratios with a residential mortgage in 2024.
Just think about it, there’s a lot going for Toronto real estate. We’re seeing the fastest changes in housing policy ever in Toronto, which is good news if you’re looking to build more units.
Add that to interest rates coming down a bit this year, this will improve affordability and give room for Toronto real estate prices to come up a bit.
Then we still have a big gap between the growing demand for homes and what’s available, and this will keep prices and rents strong.
As much as big projects sound impressive, we think the smaller ones will be the lower hanging fruit – it just has a great balance of less time, less money, less construction risk and decent returns.
The bonus is that we’re still in a buyer-friendly market, so there could be some pretty good deals around. But keep in mind – fixed rates are coming down pretty quickly, dropping over 1% in just weeks, and banks have been revising their interest rate projection down in recent weeks too, so this buyer’s market might not stick around for as long as we thought.
How We Can Help
If you’re ready to explore the best opportunities in today’s market, we’ve got your back.
We’re not your typical real estate sales brokerage. Instead, we focus on using numbers to make better real estate decisions in Toronto. That can mean looking for stronger investments with positive cash flow, thinking about risk management, and looking for ways to boost returns like value-add renovations and gentrifying areas.
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