Residential and Commercial

Claire Drage and Amiel Jelinek

Daniel: We're going to be talking to Claire Drage and a meal Jelinek on the commercial side, Claire Drage on the residential side, both absolute top of the line can even say that about a mortgage broker. You have a top of the line mortgage broker constantly in the top 10 or five or one or two in Canada.

We do a lot of business with them and they're absolutely amazing people actually, if this is not your first time on the REITE club, if you've been with us for a while, you've seen these people, they're all over. They're always at our events. We really like the sport.
I understand because I'm not in the business of short term or medium-term rental, but I understand there's a big difference between residential and commercial short term and medium term. You tell us about the difference’s you guys will work it together, and then we'll talk about financing for both. Take it over.

Claire: Thank you so much. It's always a pleasure and we always learn so much too. And it was quite interesting to see words from the other presenters previously under the radar and how it used to be done versus how we need to do it today. As Daniel said, I'm going to talk about residential financing and then a meal is going to cover commercials on specifically short term.

Yes, financing is doable. Yes, there is sometimes a compromise with loan-to-value rates and terms when it comes to financing. And no, you don't have to lie or defraud a lender to get financing, but it takes planning and it takes listening to what you need to hear and not what you want to hear from your mortgage professionals.

Anything different is conducting thought, which we do not want to do. Don't shoot the messengers tonight, please, as we go through your options. A short-term rental from a financing perspective is when you are renting the property. To multiple tenants, short-term in a one-year period, as opposed to having a standard lease with one tenant and you can prove it accordingly.

Proving it is the important part. Think about how many industries have experienced disruptors, such as unknown, Uber, Airbnb, Amazon, legalized weed lenders. Primarily the banks are still trying to figure out what additional risk they're prepared to take on. I think we all know banks don't move fast with changes we know, and all their risk department focuses on are the risks.

Parties, vacancy liability issues. Is it legal? Is it illegal? Will you have a CRA burden, which will trump the lender and a default scenario? Oh, I don’t know, a pandemic, your ability to successfully host. There are so many factors. Now the level of due diligence that lenders now do to ensure they have full disclosure has increased immensely over the last 10 plus years, especially after the subprime crash.

Not only do the lenders, Google the property address. They actually read the MLS listing something Milena talked about earlier. The purchase agreement and the terms and conditions they're reviewing your tax return and the rest of your portfolio. If the lender finds non-disclosure, you can be blacklisted by the lender, the default insurer and reported to one of two or both thought reporting systems one's called red X and the other one is to sit it out and they're serious systems.

Residentially, we imagine it's the same as buying a principal home or a single-family home that you're putting sort of permanent tenants in the reality is short-term rentals are viewed very differently. Residentially, what are the options and what does it look like before we ask Amiel to talk about commercials?

Under residential guidelines, we want favorable terms. We want the best loan to values. We want the best rates. We want to minimize fees, but the bottom line is a short-term rental is considered a commercial business. Technically requires commercial mortgage financing, making it very difficult, if not impossible, to get the best.

I do want to quote, best residential financing. You can of course secure alternative B lending, private lending, where the interest rates are higher and there's going to be fees involved. I think it's really important to understand short-term rentals. We use a lot of investors go, oh my God.

If I do short-term rentals, I'll make three grand a month cash flow without understanding that there is a compromise we have to make, if we want to do it properly and legally. Presumably your properties have that significant increase in cash flow. You might have to compromise by giving up some of that cash flow to support residential financing.

Now, when seeking residential financing assumptions are made by the lender that your rental is going to either continue to be tenanted based on its current use, or you can provide proof that the current use is going to change. For example, you found a property for sale. It's listed on short-term rental booking websites when it was good.

Remember the lenders will Google its current super host and it's booked for the next six months. The MLS listing indicates how fabulous it is for short-term rentals. The purchase agreement does not indicate that you're going to get vacant possession and that all current bookings are canceled.

Therefore, the lender residentially is going to assume it's going to continue to be a short-term rental, no matter what you say. You either need to ensure that your intended use, if it's just going to be a long-term rental that you have got vacant possession and all the eBay, all the short-term rental bookings have been canceled to prove to the lender.

Otherwise I was going to give another example here when you own six properties and when the lender looks at your tax returns, and six of them are short-term rentals and you're buying your seventh. The lenders are also going to make a big assumption that your seventh property is also going to be a short-term rental.

Therefore, we'll underwrite accordingly. We need to wrap up residentially. You do not want to do fraud. We don't want to miss discos. Therefore, you are looking at alternative financing, private financing or commercial. But it's doable. Amiel, do you want to touch on the commercial side? Because I think commercials are the most exciting part about financing short term rentals.

Amiel: Yeah, for sure. I'll definitely touch on that. I wanted to start off just talking about the couple of different types of commercial lending that there are out there. There's a, the first kind is where a commercial lender will look just at the property that you're buying.

Calculate their debt service ratios. They will take a sort of cursory glance at you as an individual. They want to take a look at your credit. They'll take a small look at your income and a little bit on your net worth as well. Those types of lenders. What we found is that they've basically said no to Airbnb income at this time.

They used to do Airbnb income or sorry, short-term rentals. They used to do short-term rentals, but at this time there, they're not doing it anymore. Will that come back in the future? I think that it definitely could and time will tell, they are getting scared or they got scared right at the beginning of the pandemic and they shut down.

That part of their financing is off. The second kind is what we call the small business lending and the way that they will look at it as they will look at your entire portfolio. It's not necessarily just the property that you're buying. They're also looking at other properties that you own, as well as what's your income from other sources.

Do you have a job? They will take that income into. And at the same time though, they're also going to take into account your liabilities, right? From your principal residence, as well as income and expense from any rental properties that you currently own.

And there certainly can be some strategy there too, in terms of, if you're owning property corporation incorporations, how many properties are you owning in each corporation? Okay. They may consider using some corporations and not other corporations. Something to look at anyway, these types of lenders are still doing Airbnb short term rental income.

That's how we've been able to get them financed. At this point, a lot of those are credit unions. Some of the banks, some are offering it as well. It is definitely a lender specific, right? How risk adverse are they versus, what are they. So, I wanted to touch a little bit also on what are the kinds of things that they're looking for?

Yes, they will do short term rentals. But what are they looking for? First of all, they want to have good marketable property, right? They want to have sort of the cream of the crop. They know that there's not a lot of lenders that are financing these. They want to have good properties in their portfolio.

They are definitely just like Claire said, they're going to be doing those online. And they're going to be seeing what these properties are all about. If they're looking and they see that the property has a one-star review, it's going to be tough to get that finance, this really is a business. They're looking at this as a business. Tthey want to know that business is going to continue into the future. Some of the other things are our history on income, right? With residential properties, it's easy because we have a lease agreement. We can say, yep, we're getting 2000 bucks a month and that's going to continue basically indefinitely.

With short-term rentals, it's not like that we can make estimates, but it's really tough to say, yes, this is the way that my property is going to perform. They are really looking at the history of the property. This does mean that if you're purchasing a building, purchasing a property that has not been used as short-term rental in the past, and we can't get financials from a previous owner, it could potentially be difficult to explain to them what the income is going to be moving forward. And sometimes in those situations, it could be an option to do some private financing for a short period of time, one to two years. And then we transitioned with a refinance over to the commercial where we can get better rates. Eventually it takes the money out of the building, those kinds of things.

They in terms of what else they look for. They definitely work on debt service ratio. They want to see that service, usually between 1.2, 1.4, starts if you're in that 1.2 range, then we should be able to find a lender. That'll make it work. They are looking for well managed properties.

Looking at some of those Google reviews that along with your experience, have you done this before? Or is this your first one? And they also look at or are you managing yourself or do you have a professional management company that is finding you tenants, taking care of your cleaning, your vetting, all those kinds of things that the other presenters were talking about.

They definitely look at those kinds of things. And then of course you as a board or they want to see that you're a strong borrower as well. In terms of what to expect on the commercial side of lending, in terms of loan to value we can typically be up to 75%.

We can get to 80% loan to value based on exception, however, that is all based on debt service. It's not just across the board in 75, they have to look at that service. And as long as the debt service works up to that 75, 80%, then we can get it to finance that way. In terms of amortizations, we're typically 25 years and that's typically the longest, very tough to get 30-year amortization. That's it in a nutshell.

Claire: I think one of the things that we often say is you've really got to, just because someone else said I did it this way. It doesn't mean it was the right way. And everyone's scenario is different ranging from how many properties you already have or extra security.
What are your finances like? There are so many variables and that really does involve having a calm conversation. That's very specific to your scenario.

Amiel: Yeah. And there was some talk about some accounting, right? And, what's being written off and all those kinds of things, that's definitely something to look at as well.

And to talk to your mortgage broker about, I know, this always comes up, as a self-employed individual, as well as property owners we want to write off as much as we possibly can because we don't want to pay taxes especially on the commercial side, that's really what they're looking at.
They're looking at the history. They want to see what the income expense has been. If we're adding in all these extra expenses, like while I did a rental on my home, that I'm just going to say was part of the rental property expenses. That can hurt you, a huge amount in the future, right?
Making sure that your debt service ratios are remaining, where they need to be is a huge factor in being able to grow your portfolio. Now into the future.

Daniel: Thanks guys. In other words, if I can summarize this in one. Deal with people who know what they are talking about.