An honest review of my purchasing process of an investment property (as well as my first property) as a single self-employed woman during a pandemic.
Note: I am not a financial or real-estate expert. What shared below is my personal experience, and should not be taken as advice.
In September of 2018, I had a meeting with my friend Beth who is a Real Estate Broker in Toronto, Ontario.
She had just released a new block of pre-construction units in Ottawa Ontario, which after looking at the numbers, was a great opportunity for Investment.
If you live in Canada, you know that the Toronto and Vancouver Real Estate markets are highly competitive, and realistically, the chances of me qualifying for a property in Toronto or Vancouver are low, so that’s why I had my eye on Ottawa.
Everyone’s situation is different, but for a self-employed single person with no parental assistance, partner income or family inheritance it’s difficult to purchase in these cities without a stepping stone.
But there is hope!
Yes, I could have looked at the suburbs and outskirts of Toronto, however when buying an investment property I wanted to choose a city that has a flourishing industry, and a need for rental units. It’s less common to rent in the suburbs than it is in larger cities.
Here are the considerations that I took into account when looking to invest in my first property
- Population and flourishing industries of the city (tech and population growth, mass transport)
- Potential for abandonment (will this city always be there)
- Housing supply vs demand (active rental properties and growth for rentals over time)
- Property pricing, affordability (I was looking for something in the $250K – $350K range)
- Year over year growth trends of real estate in that city
Ottawa matched just about all of this criteria, and the rate of growth YoY is currently 12% – 15% (CREA stats). I also looked at the impact of the 2008 housing crisis on Ottawa real estate, and as you can see there was not a plummet, as the price increases stayed steady.
Since I would be running my unit from a distance, the bonuses were what sealed the deal for me.
Bonuses are often offered on pre-construction units as an incentive to buy.
The bonuses included with my purchase were:
- 24 months of guaranteed rentals of that unit for $1575 per month
- 24 months of property management including support to your rental unit
- $7500 capped fees (development fees which can creep up quickly if you don’t have a seasoned agent review what’s included)
- Rental ability between occupancy and closing (be careful because some buildings don’t let you rent out your investment property out until final closing, so make sure you know when you are able to rent out)
The pre-construction unit
So now began the fun part. I got to go through the models and select the one I wanted to hold. This building sold quickly, and I did not get my first choice, but I did get my second choice.
I got a 650 square foot unit with south facing balcony on the 11th floor. I chose not to go with a parking spot, but I did get a locker in the garage for extra storage.
My total was $301,000 + HST
For all investment properties in Ontario that are not your primary residence, you must pay HST on closing, and apply for a redemption afterward which can take up to 6 months.
The initial downpayment required $5000 on agreement, $5000 at 30 days, $10,000 at 60 days and the remainder of the down payment on closing. These are fairly standard terms for a pre-construction unit.
During this initial stage of purchase, I needed to prove that I was eligible for a mortgage so I went through the pre-approval process for the mortgage which for a self-employed person is considerably more than someone who works for a company. The understanding is that employed persons have a more stable income.
This is the part that still boggles me. It’s much easier for an employed person to lose their job than it is for me to lose ALL of my clients simultaneously. Something needs to change with the outdated mortgage evaluation system.
The requirements for me as a self-employed person were as follows (and this is still pre-approval, the condo won’t be ready for another 18 months):
- 3 years of consistent income (personal tax returns)
- 3 years of consistent income (company/corporate tax returns)
- 6 months of statements (all corporate accounts and personal + savings)
- 6 months of paid client invoices
- Business registration
- Accountant and Lawyer contact info for verification of information
- Guaranteed tenancy agreement (to prove guaranteed income from property)
- 20% downpayment
Occupancy + Tenancy
For pre-construction condos, occupancy happens as soon as it’s safe and “finished enough” for you to move in. This doesn’t mean the building is finished yet so it’s not your official closing. You don’t yet own the title to the property because it first has to be complete and registered by the city to be able to grant your ownership.
Instead, you pay a monthly fee (rent) to the developer similar to what your monthly mortgage payments would be.
My occupancy was January 2019, so I was required to pay $1450 in rent to the developer, while they looked for a tenant for my unit.
My tenant moved in in May 2019, on a 1 year lease for $1575.
This was a great tenant, but needed to move so he found another tenant to take over his lease after 3 months because the ongoing construction in the building was too disruptive to him and his work… it happens, and I wasn’t too concerned. The condo was still under a lot of construction, so I understood. He found a new tenant to take over, and the transition was smooth.
Something I learned from buying a pre-construction unit was how important it is to file all of your warranty paperwork on time, and fully complete every deficiency form in detail (PDI Inspection).
On occupancy, you are asked to register all of the unit deficiencies for them to fix. There are three phases to this depending on your warranty company, so be sure to record every scratch, dent, mark, bubble and blemish. There’s a number of reports and deadlines that get sent to your warranty company to ensure that the building developers are still responsible for those fixes. Make sure you stay on track with those, and keep all of your assessment dates. The developer may try to convince you to cancel the assessments from the warranty companies with “promises” of getting the work done.
Do not cancel any assessments from the warranty company, this is the only way to keep the developer accountable.
Deficiencies are still being addressed today because everything got backed up with COVID. The building is looking great now that they are finally nearing completion on all the amenities and construction.
The Closing Nightmare
As mentioned at the beginning of this article, I purchased the unit in the fall of 2018 and like many construction projects the final closing (title transfer of ownership) kept getting delayed by municipal red tape and construction delays.
Then March 2020 hit… COVID caused a lot of lockdowns, delays, and the tightening of financial constraints on mortgages of the big banks, and the building was still not closed yet.
I received notice that final closing was going to happen in June 2020. At the beginning of May, I began to get all of my documents in order to go through the whole mortgage approval again.
See, the previous mortgage approval had absolutely no bearing on me ACTUALLY getting a mortgage because I needed to get a mortgage fully approved within 3 months of the closing date. The mortgage approval I had gotten 18 months prior was now null and void.
First I tried banks. Conventional banks generally have the strictest qualification guidelines, but I had been approved by a bank in 2018, so it was worth a shot.
I was denied by all major Canadian banks.
Next up, secondary lenders. Secondary lenders are smaller institutions that are willing to take bigger risks, but charge you a higher interest rate accordingly. So now the hunt begins for a secondary lender. To find a secondary lender, you must use a mortgage broker to shop around for you and find you a small company willing to lend to you. This means that the broker also charges a fee, so the disadvantage of a secondary lender is both a higher interest rate, and additional brokerage fees.
In May of 2020, I had found a lender and supplied all of my paperwork, had my lawyers review everything and signed the deal. Done and done right?
My closing date was June 21st, 2020 and the night of June 20th, I got a call from my mortgage broker telling me that my financing institution had pulled out.
I had no mortgage for my property that was closing the next day. The reason they gave was because I applied for the CEBA loan for small businesses. They saw this on my credit score and pulled out because they stated it was a sign of my business being unstable, despite having evidence of it doing well.
I called my lawyer in a panic and asked her what can be done.
She simply said, “you need to find a way to finance this because you’re contractually obligated to sign the ownership tomorrow. If you don’t have funding, the penalty is $3000 per day (including weekends) until you get the funding, which could take about two weeks”. I panicked even more.
As you can see by the breakdown below, finances were all accounted for and I didn’t have an extra $35,000 hanging around for ‘late fees’.
Luckily, my awesome agent came to my aid and was able to get the late fees knocked down to $200 per day. Much more manageable.
Then the next day we got to work. My broker went to more lenders, and we finally found one who came through and granted funding. However, the stipulation was that he needed an extra 5% down (so a total of 25% down). I scrambled to get another $15,000 from my company accounts and made it work.
The sale was confirmed, and the title was transferred two weeks later, at the beginning of July in the middle of a pandemic.
I also learned some valuable lessons:
- Don’t underestimate the ability of having the right team on your side (I couldn’t have done it without my Agent and Broker)
- Borrow if you need to. I was lucky to have a friend to borrow from for those last minute expenses, and promptly paid them back within a few months.
- Someone will always be willing to lend to you. Being part of this process, even if we didn’t get another secondary lender, we still had another option of going with a private lender. A private lender is a single person or small institution who will finance a mortgage at a higher interest rate than the first two options.
At the end of the day, it took it’s toll on me mentally, but I have so much more experience for the next time around.
So let’s break down the money. Here’s what I needed and when for a $301,000 investment property
- $5000 on initial signing
- $5000 after 30 days
- $10,000 after 60 days
- $41,000 Remainder of 20% on closing
- $37,000 HST on closing (you get about $24K back after the rebate)
- $15,000 Additional 5% on closing (required for my secondary lender approval)
- $2500 Legal Fees
- $10,000 Capped Fees
- $2400 Mortgage Brokerage Fees
- $6000 Rental to development company before tenancy
Total needed to complete purchase
So all in all, my final mortgage is for $225,000 + $134,000 = $369 total costs, and the same units are prices at ~ $450 on MLS so I’m still profitable, and the projections say I will be for the long term.
Get a good Agent
Get a good Lawyer
Get a good Mortgage Broker
Run your numbers ahead of time, so you’re prepared. A lot can creep up on you.
There is fine print in every real estate contract that your lawyer can help you navigate, but nothing beats the advice of a seasoned agent to close loopholes and help get you out of hot water.
Investment properties are not “easy money”. They are hard work. Physically, emotionally and financially. Investment properties are the long-game.
Financing is almost always possible, but may take a few tries so keep pushing.
A Sucker for Punishment: Purchasing my Second Property
Three weeks after the completion of my purchase in 2020, my sister came to me with the proposition to purchase a pre-construction property together.
It was an emphatic yes. The first purchase didn’t derail me from pursuing real-estate, rather the opposite. I’m so much more prepared now for what may come.
Was I crazy for purchasing a SECOND property during a pandemic? Probably. It’s scheduled to be completed in July 2021, which probably means closer to September, so let me know if you’d like to see a similar breakdown of this property purchase as well.
Investing in real estate is both easier and more difficult than what you may think. There’s a lot of misinformation out there, and I’m no expert but happy to put you in touch with those who are.