Introduction
A lot more investors are looking into big real estate projects in Toronto, specifically those with 5+ units basically because of one thing.
The strategy here is to refinance with a commercial mortgage called the CMHC MLI Select, which has better financing terms. If you take do this, then you may potentially free up more cash flow on refinancing, which can set you up to rinse and repeat more reliably.
But here’s the twist—does this actually mean a better investment? We’ve crunched the numbers, and the answer might just surprise you. Watch this video for the full breakdown!
Breaking Down the Costs
Let’s break it down with a 20% down payment scenario. Converting a single-family home into a triplex typically costs around $200K for the conversion, plus a property valued at $1M. With a 20% down payment, closing costs, and the conversion, your initial investment totals approximately $450K.
If you’re considering a fiveplex, the conversion costs spike to about $300K, paired with a larger $1.3M property price tag. This means you’ll need around $600K in capital.
Alternatively, if you opt to build, buying a lot for $1M in Toronto, demolishing the existing structure, and constructing a new fourplex with a garden suite can be a strategy. Financing the build with a 65% loan-to-cost ratio means you’ll require around $650K in capital. However, be prepared for hefty carrying costs, reaching close to $10,000 per month during the construction phase.
Time & Complexity: Key Factors In Your Investment Strategy
Converting a triplex typically wraps up in 3-6 months, making it a relatively straightforward process.
Scaling up to a five-unit conversion extends that timeline to 6-9 months, often involving navigating through multiple permits to mitigate hefty development charges. New builds can stretch over 1-2 years, especially if variances come into play, which can lead to additional delays.
So, even if two projects promise similar absolute returns, opting for the smaller project that requires less upfront capital is likely a better return on investment. When comparing projects with similar ROI, choosing the one completed faster and with fewer complications is usually the smarter move.
Evaluating Finished Project Values
Triplexes are easier to valuate because there are plenty of similar properties on the market to compare to. But with fiveplexes, it’s tougher because there aren’t as many similar ones to look at. This makes it harder to figure out their exact market worth, especially if you’re planning to sell and want to know your potential gains.
If you’re thinking about refinancing instead of selling, fiveplexes financed with commercial mortgages can be a good option because the amount you can borrow is based on the rental income they generate. This makes it predictable how much cash you can take out after the project is done and you refinance.
On the other hand, if you use residential financing, even with strong rental income, a drop in the market could lower your property’s value. This might limit how much you can borrow when refinancing, meaning more of your money stays tied up in the property.
A Deeper Look At Financing Options
For a triplex, you can typically refinance up to 80% of its value after it’s completed, with a 30-year repayment period and an interest rate around 5%.
For a five-unit property, you might qualify for a CMHC MLI Select mortgage, allowing you to refinance up to 95% of its value, with a longer 50-year repayment period and lower interest rates.
Recently, CMHC has tightened its lending rules. So, in reality, most people are getting around 85% of the property’s value for conversions, with a 40-year repayment period. For new builds, it’s usually 95% of the total construction costs with the same 40-year repayment.
So in simple terms, MLI Select mortgages for conversions might offer better returns because of the higher leverage. New builds, on the other hand, could offer similar financing terms to residential mortgages, capped at 95% of the total cost. The takeaway is that even with MLI Select financing, standard triplex conversions can still be quite attractive.
There’s definitely a benefit to going with commercial financing for the right investor. MLI Select looks at the property itself rather than just your personal income. If qualifying for a big mortgage based on your own income is tough, then going commercial will certainly help and can also help you scale more effectively too.
How We Can Help
What’s best for you could very well depend on your unique situation. If you’re trying to figure out which is the best path to take, our Toronto real estate brokerage is here to help!
Whether you’re eyeing a ready-to-go multiplex or need coaching to convert single-family homes into multiplexes, we’re here to help. Here’s what it’s like to start as a client with us:
- Initial Consultation: We’ll talk with you to understand your needs and teach you how to invest wisely in Toronto real estate.
- Market Search: We’ll search the market to find the perfect property for you.
- Renovation Support: If the property needs renovations, our trusted contractors are ready to help, and we’ll support you through the whole process.
- Leasing and Management: If you need help renting out and managing your property, our leasing and management team is here for you.
Ready to get started? Click on the link below, and let’s start working together!
What Toronto Real Estate Investment Is Right For You?
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