Here’s a question: Is real estate investing only reserved for a small percentage of “fat cats” who were born into money or is the “average Joe” able to participate in portfolio building? Of course we know that people of many income brackets participate in real estate every day.

The question is: Can people on a limited income buy investment real estate? The answer is… yes! Now of course that answer comes with an asterisk as there are many factors which contribute to a successful purchase.

Earlier in my former life as a professional musician, I was told if I could master the art of playing jazz music, then every other kind of music would be easy to learn. This proved to be exactly true and I enjoyed a long career mastering many styles of music. By the same token, if we can understand how to acquire real estate with an extremely limited income, we can probably become very successful when we have a larger budget to work with.

Let’s put this theory to the test and see if someone on minimum wage can successfully purchase real estate. Minimum wage earners at the current Canadian average of $10.25/hour make about $21,320 annually. This can be challenging when looking to qualify for a mortgage, however it is possible… you have to pick the right property and be suitably prepared for financing.

Let’s build a few scenarios outlining what anyone, including a low income earner must undertake to be properly positioned for both mortgage qualification as well as options available to build more portfolio.

Presentation

I have seen numerous financial portfolios of real estate investors over the years through my work as a mortgage broker. One of the most common factors contributing to an investor’s inability to acquire more property comes down to lack of financial preparation and presentation for a lender.

Most investors who are successfully growing their portfolios have created (and continuously update) a detailed “financing binder.” A financing binder allows any lender a cross sectional view regarding an investor’s income, credit bureau, non- real estate investments, assets and liabilities. Also, if there are rental properties owned, a detailed outline of each property is required including:

– current property value through an appraisal;

– current tax assessed value;

– mortgage statement(s): current balance, payment, rate and maturity date;

– rental income verified by current lease agreements as well as income & expense statement

– completed maintenance statement including a repair breakdown;

– pictures of the property;

– Debt Coverage Ratio (DCR) spread sheet indicating if the properties are within most lenders’ 1.1% debt coverage ratio guidelines.

Investors who maintain an updated financing binder can be looked at as a “credible business” by most lenders and as such investors are more easily able to increase their portfolios as opposed to those who do not. So, how does this pertain to those who have one or two properties… even zero properties?

The answer is simple. In real estate, financing is everything. In today’s ever tightening lending environment, it is imperative to do everything necessary to give you an “edge” and show lenders you know what you are doing. Even if you are new to the game, you must get your financing binder in order, even if there are no properties involved… yet.

Simple Financing Binder Steps

The object here is to get your income, debts, taxes, credit and net worth statement into an orderly fashion and clean up anything directly affecting your chances of getting financed at the best rates. Anyone who wants to create and grow a portfolio of income properties must have their business together, regardless of where you are starting financially.

1. Pull your own credit. Go to Equifax.ca (score power) and Transunion.ca. These companies provide your credit score at low cost (or free) and a history outline with your creditors. Many people experience an inconstancy on their bureau which can be affecting their scores negatively. By being proactive, you can eliminate any issues which may be keeping your score lower than it needs to be. There is no negative impact on your credit score if you pull it 2 or 3 times a year (which I recommend).

2. Eliminating debt. Debt is one of the things which can hamper anyone at any financial level in adding to their portfolio. High credit card balances, leases, loans or credit lines can impede the purchasing process. If you are struggling in this area and sincerely looking to make a change in your money “habits”, perhaps talk to a credit councilor or mortgage broker to put you on a plan to eliminate or consolidate your debt. One step can be as simple as calling your credit card companies and asking for a lower rate or getting a leverage loan to maximize your RRSP contribution and using the tax refund to pay down your debt. (I’m not an accountant or financial planner, so please consult the experts in this field to help you).

3. Get your taxes current. Lenders tend to not advance mortgages to people until they know there are no taxes owing. Why? Because the “taxman” comes before everyone in the foreclosure food chain. Once your taxes are complete, you will have a Notice of Assessment (NOA). This document will show the lender your net income as well as whether you have taxes outstanding. Lenders typically require the last 2 years NOAs.

4. Get your income documents current. These documents consist of your last 3 paystubs and a Letter of Employment (if you are salaried). If you are self-employed you will need 2 years of T1 Generals (Tax returns), 2 years NOAs, and proof of being self-employed. This would consist of a copy of a Business Registration as a sole proprietor or Articles of Incorporation. If you are paid by your own numbered company and T4 yourself, you will need your latest T4s.

5. Investment statements. Current statements for any non- real estate investment such as RRSPs, TFSAs, stocks, mutual funds and the like should be part of your binder.

6. Mortgage statements. The latest statement from your lender from all the mortgages you have should include the current balance, rate, payment, tax portion (if applicable) and maturity date.

7. Property tax information. A current property tax statement as well as the latest assessment is important to have for all properties.

8. Net worth Statement. You can download a template online which you can fill in your income, including dividend/investment income, rental income (if applicable) and any other income; expenses, including all debts and who they are to. Also include assets which may include properties, vehicles, jewelry, precious metals and art (and I’m not referring to your black velvet Elvis portrait). You may also include your investments, stocks, insurance policies etc. and their current value.

Completing this task has many benefits. All successful real estate millionaires have done this step first. It is the first step toward financial freedom in real estate and it keeps track of your success through your entire real estate career.

What’s the least amount of money needed?

This depends what the purchase price is and how much you are using for down payment. Let’s look at a few examples. (These examples are to demonstrate affordability do not reflect the authors opinion on a good real estate investment purchase)

Example 1

The purchase of a 1 or 2 BR, 1 bath apartment rental condo in many centres in Canada with a population of 150,000 or less can be found at under $80,000, in some areas well under $65,000. London ON, Kitchener ON, Winnipeg MB, Red Deer AB and similar areas all fit this category. In some areas you can find trailer homes for much less.

For argument’s sake let’s agree to a $75,000 purchase price. A low income earner could feasibly be able to purchase this property, but what is the lowest income amount needed for such a purchase?

Let’s do the numbers with the following assumptions:

a) You carry no debts

b) You pay $850 in rent where you currently live

c) You have a credit score of 650 or higher

d) You have a positive net worth

e) The condo you are purchasing can be rented for $800

f) The condo needs no repairs

g) The condo fees are $200.00/month

h) The taxes are $80/month

I) The tenant pays for all utilities

j) The property is self-managed

k) You have the source for the downpayment (from savings or liquid investments)

Here are the mortgage numbers:

1. Purchase Price= $75,000

2. 20% downpayment = $15000

3. 1st mortgage amount = $60,000

4. Monthly mortgage payment (at 3.19% 5 year fixed rate )= $ 289.83 (at 25 year amortization)

Summary

To afford this property, a minimum wage income earner needs to make $21,320 annually. After expenses there is a positive cash flow of $230.17 per month. If you factor in 5% vacancy and 5% maintenance, the cash flow becomes $150.17 per month.

Example 2

The purchase of a 1 BR, 1 bath rental condo in many major centres in Canada can be found at under $150,000, in some areas well under $150,000. For argument’s sake let’s agree to a $140,000 purchase price. A low income earner could feasibly be able to purchase this property. What is the lowest income amount needed for this purchase?

Let’s do the numbers with the following assumptions:

a) You carry no debts

b) You pay $850 in rent where you currently live

c) You have a credit score of 650 or higher

d) You have a net worth of $25,000+

e) The condo you are purchasing can be rented for $1050

f) The condo needs no repairs

g) The condo fees are $225.00/month

h) The taxes are $100/month

I) The tenant pays for all utilities

j) The property is self-managed

k) You have the source for the downpayment (from savings or liquid investments)

Here are the mortgage numbers:

1. Purchase price = $140,000

2. 20% downpayment = $28,000

3. 1st mortgage amount = $112,000.

4. Monthly mortgage payment (at 3.19% 5 year fixed rate )= $ 541.01 (at 25 year amortization)

To afford this property, the investor needs $40,250 of combined family income. The investor will be making $184.00/month. If you factor in 5% vacancy and 5% maintenance, the cash flow is $79.00/month. If the minimum wage earner has a partner in a similar income bracket, they could collectively afford the condo in stellenangebote 2.

Example 3

The purchase of a triplex in Hamilton ON, a 6 plex in Saint John NB or a 4 plex in Winnipeg MN all can cost around $220,000 or less. Let’s consider a purchase price of $200,000. In order to purchase a property like this we have to consider the following:

The assumptions we are making are similar to the above example except for the following:

a) You carry no debts

b) You pay $850 in rent where you currently live

c) You have a credit score of 650 or higher

d) You have a net worth of $25,000+

e) The condo you are purchasing can be rented for $1750

f) The condo needs no repairs

g) The condo fees are $225.00/month

h) The taxes are $200/month

I) You pay $350/month for heat

j) The property is self-managed

k) You have the source for the downpayment (from savings or liquid investments)

Here are the mortgage numbers:

1. Purchase price = $200,000

2. 20% downpayment = $40,000

3. 1st mortgage amount = $160,000.

4. Monthly mortgage payment (at 3.19% 5 year fixed rate )= $ 772.88 (at 25 year amortization)

To afford this property, the investor needs $46,500 of combined family income. The investor will be making $402.12/month of positive cash flow. If you factor in 5% vacancy and 5% maintenance, the cash flow is $227.12/month.

The above examples have dealt with buy and hold properties. Similar calculations for qualifying can be done with properties to buy, fix and sell. The only challenge is the investor also needs money for renovations. This may mean the deal needs to go to a different kind of lender, perhaps that of a private entity or a corporation such as a Mortgage Investment Corporation (MIC). These particular lenders typically offer better solutions and less “stringent” lending criteria.

A challenge facing a low income earner may be saving for the downpayment. The first thing to consider is budgeting. Most people cringe when they hear the word budget. However, for many people who have successfully purchased even one investment property, budgeting has to come into play. Putting aside a regular amount each month and investing it into a fixed return vehicle offered by a Mortgage Investment Corporation (MIC) or a REIT will assist in faster capital growth.

Utilizing joint ventures can be another way to participate in real estate using little to none of your money. (Please refer to my article in Feb. 2012 CREW Magazine called “5 years to one million”)