How to Buy 15 Investment Properties with Minimal Income

Of course I exaggerate with the title of this article, but the principle behind it is actually true. Allow me to explain why.

When you apply for a mortgage on an investment property, major banks usually qualify you in the following way: they combine your personal gross income with 50% of rental  income from the investment property, and use this combined income to figure out whether you satisfy the allowed ratios. Not the best deal, trust me. And especially not so when 100% of all your liabilities are included in the  calculation (mortgage payments, property taxes, heating costs, half of the condo fees - both from your principal and rental property), while only 50% of the rental income is used.

So, even if you purchase a property whose income can pretty much cover its own expenses, if the combined income does not satisfy the formula, you could be out of luck. Imagine now that you already have one investment property and are looking for a second or third one... It gets harder with every additional property.

Things get much better when you decide to purchase your third, fourth, 15th property, and so on. I know, I know - we all may be some years away from that, but once you read the rest of this article, you will see how this makes sense.

CIBC Firstline Mortgages has a program that is called "Investment Properties Portfolio". Here is how it works.

If you already own two investment properties and are looking to purchase a third one (or own one and looking to purchase second and third at the same time), your personal income only needs to be high enough to carry expenses related to your principal residence, and your personal debt (such as credit cards, loans, etc). The investment properties that you own become part of a portfolio, which is subject to certain rules of its own, irrelevant of your personal income.

The bottom line is for this portfolio to maintain a Debt Coverage Ratio (DCR) of 1.1. In other words, the rental income of all properties inside of a portfolio has to be 10% higher than all expenses against those properties. Let`s take one property as an example. If your rental income is $1,100, your mortgage payment is $650, your condo fee is $200 and your property taxes are $150  - you have a DCR of 1.1 (since rental income of $1,100 is 10% higher than $1,000 of expenses).

The formula used to calculate the DCR is a bit more detailed, since it takes some other factors into consideration, but it does not significantly stray from the concept Iíve just presented. 

In addition, the applicants need to satisfy a few other conditions. Some of these include minimum net worth in tangible assets, liquid assets needed to  cover 12 monthly mortgage payments and down payment which comes from own sources. And of course, for a portfolio to be called portfolio, it needs to have at least three properties.

What it comes down to is this. When you find a property (and it is your third), the property taxes and condo fees will already be set, so you won`t be able to influence that part of the formula. On another hand, you will have a rough idea of how much rent you can get against the property. What remains for you to figure out is how much down payment you need to come up with so that you have a mortgage payment low enough to satisfy the DCR of 1.1.

And from then on, as long as you maintain that ratio, the sky is the limit. 

Even Donald Trump would be proud :)



### Posted on: February 15, 2011 by Tino Brelak.


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