The Financing Implications of Additional Units 

Claire Drage

Daniel: Going to see the mortgage broker. She's been doing this forever, even though she looks like she's in her mid-thirties, but anyway she's the person I know. You started the career managing over a hundred properties in Spain. And upon moving to Canada, you began growing your mortgage business and you are very successful.

Actually, you are with the Windrose Group, and I believe there's three or four others of your people here tonight and we salute them and we'll see them later in the networking phase. When folks want to maximize their footprints, what do they need to know financially? Please help us.

Claire: Definitely. You know what Brady touched on it, which was awesome, which is when you're looking at a laneway house, a coach house, a carriage house. When you go directly to the bank or even through another mortgage broker not everyone understands exactly what it is you're trying to finance, build or buy.

It's really important that if we can understand exactly what is the definition of, let's just call it a coach house for argument's sake. How is the lender going to view it? I come across this a lot where I'll speak to an underwriter at one of the major banks. And the underwriter doesn't understand their own guidelines with what we're trying to finance.

And quite often you find what happens if they don't understand it, or they can't find it in the guidelines, then they just say we can't do that if it's not attached to the main house. What I'm going to do is just touch on a few things with regards to it being a separate unit, typically situated in a backyard it's built above or in a space reserved for a detached garage that would normally go there.

And of course, entrance is typically via a laneway. I'm going to talk about a detached unit, that separate unit. If you want the value of the coach or carriage house to be considered and the rental income it generates on the appraisal report. And then let's just assume you qualify with the bank and all other areas, income, credit portfolio, et cetera.

In most cases, Linda will need to see that property meets certain guidelines and then they will use it. It must be some of this is going to sound self-explanatory. But I think the more information you have, especially if you are walking a diary with your own bank is helping them understand or the person you're speaking to what you're doing.

Typically, this secondary separate unit must be self-contained. Have a bedroom and a kitchen, a fully functional kitchen. Located above or in a space that would normally have a detached garage obviously with an entrance and minimum square footage of 350 square feet. And it cannot be the largest structure on the property.

When I say it cannot, there are some exceptions, but I think in most cases, you're going to find that the main house or the main duplex, if this is a third unit, is going to be larger. And if there's no current. It's not currently rented out. Then the appraiser will come in and do a mock event analysis.

But again, I'm walking with someone who does these a lot. You've really got to educate the appraiser on what you're looking for too. And just remind them about the requirements of the lender. As well as what you want to see in the appraisal report there is a big difference. However, between building versus buying versus refinancing.

I just wanted to spend a few minutes touching on that. If you're buying a property that already has a coach house, the questions that have already been brought up as so hugely valid, which isn't legal, does it meet zoning and bylaws? Can you obtain a clean title? Are there any outstanding work orders?

If the answer is yes to any of them, then just like I mentioned earlier, it can be included in value and it can be financed. If you want to build a laneway house or a coach house. Then you can do a construction mortgage to pay for it to be built. But I'll be honest with you. Typically, the path of least resistance is the BRRRR strategy.

Use a line of credit, private financing, a promissory note loan or cash to build, and then refinance leaving 20% equity in. Just to wrap up, I want to talk about refinancing. Let's assume you've built that second or third unit, and now you want to refinance. Typically, we find where we get unstuck is where. Let's just assume there's a large single-family home. And then there is a coach house at the back where a majority of the value is in the larger home. But the market rents or the rents on just the home alone. Especially if the bank is only going to use half of that rent to help you qualify quite often, there's so much value in those properties.

If you wanted to go to 80% of the value on a refinance, you're actually not going to have enough market rent or actual lease on it in order to cash flow, because the lender will only use half of it. We end up finding that this is where we get stuck. Some borrowers need to leave more equity. Because if they want bank financing, they want AAA rates and options.

It's just not going to cash flow because the bank will not use all of the rent for both units. Maybe you just have to get as much as you can with a nice bankable mortgage and then add an RRSP self-directed second mortgage later. And do your numbers ensure the blended rate works, but again there is a balance right now between elevated value of the entire property, which is amazing, but the rents are able to keep pace with that and create that positive cash flow.

Private financing is always an option, flexible high loan to value fast, but like everyone has said before it is more expensive. But is it that opportunity wins versus the increased cost?
It's doable. You just need to speak to someone who knows exactly what they're doing. Really both broker and bank.

Daniel: Broker and bank. That's funny because my comment was going to be, and that means don't go to your bank, go to a broker. Okay.

Claire: I'd love to say that too, it's a choice, right?
There’re amazing people at the branch level. And if you've got a good relationship and they've always looked after you, then, it's worth it. It could be worth giving it a shot. But again, I always say there's generalists and specialists. You just don't know what you get at the bank. Is it a generalist who really has no idea what this weird building is at the back in the parking lot? What does that look like? The parking lot. How do we finance that?

Daniel: That sounds a little bit more complicated than just saying I'm buying a bungalow and I would like financing for my bungalow. Thanks Claire. Thank you. Thank you. Thank you.