There are a lot of properties, especially in East Vancouver, where the home has a main floor, and 3 or 4 or MORE basement suites (or carriage house). The clients often go to their bank, and are told the lender will only use 2 suites for rental income, or won’t give them ANY credit for rental income, and they need it in order to qualify.
It is usually at this point that the clients contact me, and ask me why their bank is telling them their home is commercial property, when it is a home with 4 basement suites!?
This video blog outlines the defining characteristics of what is residential and what is commercial real estate and the various financing requirements that each has. The differences are great, the down payment requirements vastly different, and the manner the banks qualify you is in an entirely different world. Watch and I’ll explain how the banks think.
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Transcription of the Video Blog:
Hey everybody, it’s Rowan Smith from the Mortgage Centre.
I’m taking a lot of inquiries on properties that have 4, 5, or 6 suites in the home, and you know, East Vancouver has a lot of these especially in some of these larger, older, turn of the century homes that were built. The people have converted them over the years from being a kind of large mansion, to being a six or seven unit property.
I want to define what constitutes a commercial property versus what constitutes a residential property because the mortgage requirements, and the paperwork requirements, and the rate that you’ll pay, are heavily dependent on whether you are going to go residential or commercial (in terms of financing requirements).
A couple of things:
On a residential basis, if the property has more than 4 (four) units that is going to be constituted as commercial. There was one lender, Bank of Montreal, that used to do five units, but that is all gone. So if you have a property that has a main floor and four suites, that’s a commercial property so long as your are going to be using the income from that property to qualify for the mortgage.
There are some appraisers out there who are used to working with these five and six unit properties who have said that we have three units with two unauthorized suites, but that gets us into the issue of whether it is authorized or unauthorized, how much are you putting down, and all this. So, by and large, the rule of thumb is: four units in one property is residential. Anything beyond that (no matter how good the story or finances look) is commercial.
Now, if it’s zoned commercial, but people are using it residentially, it is still a commercial property and it will be judged and evaluated by lenders on that basis. Where you see this is (trying to think of areas in Vancouver): Kingsway, and these type of areas where there is a lot of low lying sprawl of commercial units in the basements (and you’ll have everything from nail salons to restaurants) with residential suites upstairs. If you are looking at one of these, they are “cash cows” and generate a lot of rental income when you have a commercial lease underneath generating the bulk of it, and a couple of residential units on top; often the owners will choose to live in those units and they sound great in principle, but because they are zoned commercial in a commercial area, they get treated commercially.
Now you say, “well what does that mean?”
First, you’re going to require a much heavier down payment:” probably 35% or more. There are some ways around this using expensive private financing , but if you are thinking of getting bank rates, that is what you’re going to be looking at. 35% down is number one.
Second, you’re going to need a commercial appraisal. They start at about $1,500 and they take a month! They don’t take three days or two days like a residential appraisal, so your subject removal period will have to be substantially longer.
Third, you are going to be looking at possibly requiring environmental studies. They (the lenders) want to look at the surrounding area and see if there is a fuelling station or a cardlock. Was there ever a drycleaner or any other chemical heavy, environmentally intensive, or environmentally dangerous business around you. Even though it’s not in your building, per se, but if it is within a very close proximity, it still impacts whether or not banks are going to want to finance it. Because, they don’t want to be on the hook, having to foreclose, when it turns out your property has massive environmental problems down the road.
- Larger Down Payment
- Environmental Studies
- More Costly, Slower Appraisals
And, the environmental study could be one, two, or three stages (or phases) depending on the type of property and they type business that is in it, or has been in it in the past.
More than four units, you are going to face commercial guidelines, probably going to pay a higher rate, and fees as well, with a much larger down payment.
Four units and less, you can get it done under a residential basis as long as it’s not zoned commercial or in a commercial area that looks like light industrial as well. So, if you are looking at buying one of these properties and you want to know if it’s even feasible, let me just take a look at it. It will take me five minutes of our time, we’ll go over the property, and determine whether or not it’s going to fit under residential or commercial guidelines, and how best to get it financed, and what you’ll need to do so.
For the Mortgage Centre, I’m Rowan Smith.