Well, I am back from my 2-hour course on “How to Purchase Rental Properties.” Would I recommend the course? That is a tough call. Let me tell you how it went and I’ll let you decide. The cost for taking the course was $22.47

There was basically 4 presenters: 1 financial planner, 1 mortgage broker, 2 real estate agents. Each one was responsible for a section of the course.

Part 1: Financial Planner’s Presentation

Section 1. Reserve fund

In this section, the financial planner explained the importance of having a reserve fund and how we should have our money in 3 compartments.

Compartment 1 is a small emergency fund. Should be held in a high interest savings account or money market fund. She recommended a minimum of $1,000 be kept in this account.

Compartment 2 is for medium term expenses needed in 6-10 month time frame. This compartment should contain 3 months worth of rent. She recommended mutual funds (medium risk).

Compartment 3 is for long term expenses needed in 1-5 year time frame. Once again, she recommended mutual funds (higher risk).

Obviously, the idea of a reserve fund is a great idea. Compartment 1 is for quick emergencies such as plumbing repairs, etc… Compartment 2 is more targetted for times when you have a vacancy and you would use this money to make up for the missing rental income. I would argue for both of these compartments, the money should be in high interest savings account.

For me, compartment 1 and compartment 3 are made up from your maintenance and repair budget. Normally, a value such as 5% of gross rental income should be allotted for maintenance and repairs. This money should be placed in a reserve fund for when repairs and maintenace are needed.

Compartment 2 would come from your vacancy rate. If there is a 2% vacancy rate in your area, you should allot for 4% of gross rental income to compartment 2.

Section 2. Mortgage life insurance

The financial planner suggested that instead of taking out life insurance with your mortgage, you should get a term life insurance for the duration of your mortgage. This seems like a no brainer.

With mortgage life insurance, you are insured for the amount of your mortgage. If something happens 10 years down the road, the plan will only pay out whatever is left on the mortgage and the only beneficiary is the bank. With a term life insurance plan, you would be covered for the whole amount of the mortgage no matter when it is needed and you can designate your beneficiary.

One key point was that, if you become sick, and you default on your mortgage payment, you are also defaulting on your mortgage life insurance payment as well (since you pay the life insurance premium at the same time as your mortgage payment). If something happens to you, the bank could claim that you have no insurance since you weren’t paying your monthly premiums. This was a good point. When you are sick (and possibly dying), I am sure the last thing on your mind is a mortgage payment.

3. Taxes, Taxes and more taxes

The financial planner basically explained the different treatment of interest income (and how you can write off your interest expenses) and capital gains tax. Very basic stuff.

Part 2: Mortgage Broker’s Presentation

4. Property Classifications

The mortgage specialist explained how lender’s view different properties. Of course, it is dependent on the lenders themselves, but as a rule of thumb:

Residential property would be a property with 1-4 units. Other lenders will consider a property with 1-6 units as residential. Anything over 6 units is considered commercial property. Commercial properties carry higher interest rates than residential properties.
I have been exploring options where I would own my income producing property within a corporation. I asked her about financing a purchase thru a corporation. She said that first of all, I would have to personally guarantee the loan. Secondly, I would pay a higher interest rate (possibly 2% higher). This definitely puts a kink in my plans to own the property inside a corporation. So much for limited liability! I still plan to explore this option in the future.

5. CMHC Guidelines and alternatives

Continuing with her presentation, she went over various scenarios such as how different downpayments would either trigger CMHC loan guarantees and/or higher interest rates. Scenarios such as owner occupied 4 unit buildings versus non-owner occupied 4 unit buildings.

She also discussed rental offset. Rental offset is when a lender takes a percentage of the rental income (say 50-75%) and adds it to your employment income before calculating your debt service ratio.

6. Downpayment, Income and Credit

In this section, she discussed coming up with downpayments. Two most common methods: from savings and from taking equity out of your principal residence. Nothing too exciting in this section. You can take a maximum of 75% out of the equity of your home before having to go to CMHC for loan approval.
All in all, this was definitely the best part of the entire course. I would definitely look at using a mortgage broker in the future. She works at Invis . I figure that this part alone was worth the money I paid for the course.

Part 3: Real Estate Agents’ Presentation

7. Why Use a Real Estate Agent?

In their humble opinion, the reason for using a real estate agent is because they know everything about real estate.

8. Market Stats

They provided a bunch of charts taken from City of Ottawa, Conference Board of Canada and Statistics Canada websites showing information such as employment growth in the area, vacancy rates in major cities in Canada, average rents in different parts of Ottawa for a two bedroom apartment and immigration into Ontario. Of course, they showed how we are not in a housing bubble - we are exactly where we should be.

9. Buyer Agents

They discussed how real estate agents can act either as buyer agents, seller agents or dual (both buy and sell). In my point of view, it is in the agent’s best interest for a buyer to pay as much as possible since their commission is a percentage of the sale price. So there seems to be a conflict of interest in the buyer agent and dual agent scenarios.

10. Is it Legal?

Real estate agents will do the legwork to ensure that the property you are purchasing is legal (not illegal units in the basement, retro certificate in place).

This whole section was a bunch of fluff. The charts were nice. I am going to have to see if I can find them on the web myself. Other than that, it was more of a sales pitch to use them for your real estate needs.

My thoughts:

So that was the whole course. I was disappointed because I was hoping we were going to do some number crunching: calculating cap rates, calculating cashflows, determining what a property is worth, etc…

Was it worth the 2 hours of my time and $23? I think so. The mortgage broker was interesting and provided a bit of insight into the borrowing process.