What is the minimum down payment required to acquire a 6-unit rental property?

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LE COURRIER DE SÉRAFIN is a section that presents twice a week a user’s personal finance question, followed by the answer from Sérafin, an artificial intelligence specializing in Quebec personal finances. Everything is accompanied by a validation comment or a supplement by a financial professional.

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Sérafin’s answers

In general, a minimum deposit of 20% is required for the purchase of a six-unit rental property. To potentially reduce this intake to less than 20%, here are several important strategies and considerations:

1. Mortgage loan insurance: If your down payment is less than 20%, purchasing mortgage loan insurance may be mandatory. This insurance protects the lender in the event of default on your part. However, obtaining such insurance for a rental property with more than 4 units can be difficult, if not impossible, with the usual insurers (such as CMHC, Genworth Canada, etc.), because the latter generally limit their insurance to residential properties with 1 to 4 units.

2. Private or alternative financing: Private or alternative lenders may offer less strict down payment requirements, but this may result in higher interest rates and increase the total cost of the loan.

3. Homeownership Assistance Programs: Although primarily available for the purchase of primary residences, some specific programs may offer options to reduce the down payment required for the purchase of rental properties.

4. Collaboration with investors: Partnering with other investors can help you split the down payment and make the initial investment more affordable.

5. Direct negotiation with seller: exploring creative financing options, such as seller financing, where the seller grants a loan for part of the purchase price, can also be a solution to reduce the necessary down payment.

It is crucial to consult a financial advisor or mortgage broker to carefully review the options available. This professional will be able to help you evaluate the implications of each strategy, such as interest rates, additional fees, and the total cost of the transaction. This approach ensures that you make an informed decision adapted to your personal financial situation as well as the specificities of the real estate market.

Response from André Petit, mortgage broker

In general, the down payment may vary depending on your request for a conventional loan, a CMHC loan or an APH loan. In a conventional loan, taking into account the income from the building and your personal income, a minimum contribution of 20% to 25% of the lesser of the price or market value is required. However, if you are considering a so-called commercial financing solution, your lender will offer you financing based on the economic value of the building in which case your down payment could vary between 25% and 50%. To potentially reduce your down payment, here are several important strategies and considerations:

1. Mortgage loan insurance: you might consider traditional CMHC financing or CMHC/APH financing. The first requires a down payment of 15% and the second as little as 5%. However, the down payment will be based on the lesser of market value or economic value. A commercial mortgage broker will be the best person to guide you in this context.

2. Private or alternative financing: Private or alternative lenders may offer less strict down payment requirements, but this may result in higher interest rates and increase the total cost of the loan. This could also become limiting for your future refinancing options.

3. Collaboration with investors: Partnering with other investors can help you split the down payment and make the initial investment more affordable.

4. Direct negotiation with the seller: exploring creative financing options, such as seller financing, where the seller grants a loan for part of the purchase price, can also be a solution to reduce the necessary down payment. Be advised, however, that most traditional banks will not accept your agreement with the seller.

It is crucial to consult a mortgage broker to carefully review the options available. This professional will be able to help you evaluate the implications of each strategy, such as interest rates, additional fees, and the total cost of the transaction. This approach ensures that you make an informed decision adapted to your personal financial situation as well as the specificities of the real estate market.

Do you have other personal finance questions? Go ask Sérafin and, who knows, your questions might be published here!

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