Our realtor clients are asking us, “how do we qualify for financing in my PREC?”
Before I dive deep into this conversation, you should check out my previous article on whether you should own rental properties in a PREC.
Before you jump all in owning properties in the PREC, it is worthwhile to re-iterate what I learned from my personal experience.
Earlier this year, I tried to refinance one of my properties by my holding corporation. This corporation earned a couple thousand dollars of consulting income in the business annually.
Our application got rejected simply because we earned the extra couple thousand dollars of consulting income in the same corporation.
Earlier this month, I had a lengthy discussion with a top BMO mortgage broker and he confirmed to me that the banks are only allowed to lend to a holding corporation.
Holding corporation is a corporation that does not earn any active business income. At least that is the understanding that we got from the bank.
PREC earns active business income.
This top mortgage broker confirms that this holding company requirement is imposed by the government. I can’t confirm if it is true or not, best to speak to the bank directly. 😊
If you do decide to own the rental properties in a PREC, traditional independent mortgage brokers may or may not be able to get your financing.
There’re a few options available depending on your situation.
- Own properties in trust for the corporation via trust agreement
The downside of owning the properties in your personal name is that they can eat up your credit limit pretty easily.
If you have a goal to own large portfolio, owning properties in your personal name may limit the opportunities to buy more properties in the future.
- Work with banks that are willing to lend directly to your corporation
Almost all the banks are willing to lend directly to a corporation. Typically, you have to approach the bank directly.
Different banks might have different cash flow requirements. The bank that I am currently working with requires a cash flow coverage ratio of about 1.2. This means that the rent has to cover all the expenses including the mortgage payment by 1.2.
This bank would take into account my business income from multiple sources of businesses (in the corporation and business that we own personally) and qualify us for financing based on the cash flow of the rental properties.
By owning rental properties and qualifying for mortgages directly inside the corporation, your personal credit report might or might not be affected by these mortgages.
If it doesn’t, it will likely give you an edge in qualifying for more mortgages in the future, assuming your goal is to grow your portfolio to fund your retirement.
Documents you would need if you qualify for mortgages directly in the corporation
- Financial statements with Notice to Reader report for the last two years (it’s okay if you don’t have two years when the corporation is brand new)
- Corporation by-law, shareholder registry, director resolutions
- T2 corporation tax return with the proper rental schedule filled out showing the rental income and expenses for each property for the last two years
- Notice of Assessments issued by CRA from the last two years
- Rent roll
- Property tax bills, rental agreement
- All other documents as required by the specific bank
100% of our clients are real estate investors and/or real estate agents. We specialize helping our clients to minimize their taxes and help them build their rental portfolio so that they can achieve their goals faster. 😊
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant