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Multi Unit Residential (M.U.R.)

Buying property as an investment is an opportunity to build a retirement for yourself and your family though real estate. Investment properties begin at single units (like condos or single family dwellings) all the way up to 100+ apartment buildings.

There are two categories of investment properties. Those that are considered under residential guideline (1-4 units) and those considered under commercial ones (5+). There are however exceptions for 5 or 6 unit properties that can still qualify under residential rules with certain lenders.

The main difference between the two guidelines is as follows:

Under residential guidelines, the primary factor is the borrower/buyer’s credit bureau. Then is their income followed by the property itself. The qualification is identical to buying a home except that there is an additional revenue stream from the apartments that are leased that gets added to your overall income. That being said, the qualifying ratios still have to be met. Please contact us for more information.

Unless the property you are buying is going to become owner occupied, you will need to put down 20% of the purchase price as a down payment. If your intention is to live in the property, you will need to put 5% of the purchase price as down payment for single family homes and duplexes and 10% down payment for triplexes and fourplexes. It should be noted that although some 5 & 6 unit properties can be treated as residential, the minimum down payment must be 20%.

Because personal qualifying ratios are considered under residential, there is a limit to how many properties you can own which is directly tied to the borrower’s income.

Under commercial guidelines, the criteria changes whereas the most important factor is the building itself (see MUR criteria below). Then the borrower/buyer is looked at. Ideally if the property pays for itself, there is no limit as to how many properties you can own.

WHAT’S A MULTI-UNIT RESIDENTIAL RENTAL (MUR) PROPERTY?

Definition can vary. Most lending institutions classify buildings of 7 or more residential units in this category. Some allow a small commercial component as well.

HOW DOES FINANCING DIFFER?

Lenders deal with single-family and small rental properties in their residential mortgage programs. Qualifying criteria, application process, due diligence, costs, mortgage rates and terms differ from those applicable to residential. Some of these differences are discussed in more detail below:

Qualifying criteria focuses on the ability of the real estate security to service the mortgage debt. This is known as debt service coverage (DSC).

Example: Net operating income (NOI) $100,000 / annual payment $75,000 = DSC 1.33.

Note the NOI calculation and the DSC requirement can vary from lender to lender. A minimum of 1.3 is not unusual.

Application process requires lender’s analysis of the real estate performance. Current rent roll and operating (income and expense) statement for the property, and usually 2 year’s history of operation are required. If you are purchasing (as opposed to refinancing) the property, you should be verifying these in any case for your own benefit. Financial information regarding the individual(s) or company applying for financing will also be required. And be prepared to discuss your ability to personally manage the real estate, or your plans to engage professional management services.

Due diligence, in addition to the lender’s analysis, may include third party reports such as property appraisal, environmental risk assessment (ESA) reporting, and building condition assessment (BCA). In some cases a lender also requires that a lawyer acting solely on behalf of the lender be engaged. In others, the borrower’s lawyer may be allowed to act for both parties. In most cases all third party reports and legal fees are at the expense of the borrower.

Costs, rates, and terms are obviously of concern to the applicant. Establish early in the negotiation what lender and third party fees will apply and at what stage of the process they become payable. Ask about the formula for establishing the interest rate and when it may be locked in. Terms such as portability and annual penalty-free prepayment privileges applicable to residential mortgages seldom apply to MUR mortgages. Be sure to understand the privileges your mortgage will include.

CMHC Insurance coverage makes it possible to borrow up to 85% of property value, vs maximum 75% on a conventional (uninsured) loan. Even if you borrow 75% or less, you may wish to insure the loan because this could qualify you for a lower interest rate. Insurance premiums are graduated relative to the loan to value ratio, and can be added to the mortgage amount rather than paid “up front”. Ask your lender whether it is to your advantage to insure the mortgage.

Very important – choose a lending representative that is familiar with this type of financing. A specialist in MUR financing can keep you informed through the process, and greatly simplify and expedite the approval of your application. A lending institution generalist or a residential mortgage representative works only rarely on this type of file and may not provide the expertise and quality service you need and deserve.

For more information, contact us at 514-667-5015 or investment@vantagemortgages.ca