[CAN] Self financing for renovations, then financing after?

[kaypinkHH]

Hi all,
MrHH and I own our house (with a rental suite), and 2 other rental properties (duplexes), we are interested in buying a semi detached 3 bdrm house that needs some repairs, but was a bank foreclosure and needs some repairs. Most of the repairs are cosmetic, but a new roof and a new heating system is required (previously old oil furance, but we are going to do baseboards). Other than that, paint, fresh flooring and we are good to go. We are estimating 20-25k for renovations, and 2-3 months turn around.

Market value post renovation ~175k, we are buying it for 129k, and anticipate rent will be 1100 per month.

We are having major issues getting traditional financing from the banks. Most are declining due to the state of the house, and one declined because we have purchased too many rental properties in the past year (MMM people problem?)

We checked out a private lender, but this would add ~$5k of costs for us.

We currently have about 50k cash ready to be used for downpayment+ reno,  and we have $150 combined in our TFSAs. (And on top of that have a low interest LOC for 60k)

We are now thinking it may make sense to self finance, and then once renovations are complete and we have it rented we can go back to traditional lenders for a mortgage.

Thoughts?

[Lews Therin]

@oneyearfromnow

@Reggie

Batsignaled some people who know banks and mortgages and rental houses.

[ysette9]

I’m not a real estate person at all, but if you buy for $129k and then put more money in it and it will only rent for $1100/month, is it even a deal you want to touch? I thought the 1% rule was still a good rough rule of thumb for evaluating these sorts of things. Is it different in Canada?

[waltworks]

Sounds like an awful, awful rental to me. What are estimated PITI and your vacancy/management/ongoing maintenance/capex numbers?

-W

[Jon Bon]

Agreed, spending 50k plus on a house in such bad shape lenders don't want to touch it for a lousy 1100 a month? It sounds like an absolutely terrible deal. Surely there must be better deals out there than that.

However, ¯\_(ツ)_/¯ Canada

[oneyearfromnow]

I too am leaning towards a no on this one.....

Regardless, if you want to forage ahead....

The banks are looking for security.   Clearly, they don't think this broken down house is good security.  Their view could change once it has been renovated though.

So, you could consider a line of credit with your TFSA's or any other investments as collateral - which would mean you won't be able to withdraw those funds.  Probably not something you'd want to consider at the moment.

Or you could self fund through a Self Directed Mortgage in your RRSP (if you have sufficient funds in there to cover the purchase).   It has its issues, but with todays mortgages rates, it isn't as economically viable as it once was when rates were above the 4% rule.  I talked to Lews about this one - and Lews talked to RichMoose, who did an article about it for his blog.

Even with that, with rental properties you often have to fund a higher than expected down payment, as it isn't your primary residence.

That's my 2 cents.

[waltworks]

You might want to run your numbers (ie, actual numbers in terms of income/expenses) on your existing rentals. From your journal it sounds like that while they theoretically make $350 a month, you are not accounting for a lot of the maintenance/bad tenant/etc costs.

-W