How Financing Works for a Multi-Unit Property

I had a meeting the other day with my mortgage specialist, Joe Bondy at RBC, really to just catch up, but of course, the conversation turned to business.

Anyways, I had a couple of questions for him that I was looking for answers to, one being, Airbnb rental income.

I've never invested or done Airbnb's, but I have stayed at them, and after watching a webinar the other day about an investor whom is making 6 figures by renting out luxury rentals on Airbnb, it got me wondering how the income is classified when getting financing for a property.

Turns out, there a couple of things that occur.

One, if you want to use the rental income towards financing the property, you need to show at least 1 years worth of income from that property to the financial institution, otherwise, they won't use that when financing the property.

They also won't call it an Airbnb, but rather, they still classify it as a single family home, and since it's being used as an income property, a 2nd property, they will then use whatever the market rental rates are for the property, not the income that it will make if going to rent it out on Airbnb.

Also note I said market rental rates.

So, if your buying an income property that is already rented, and the rents at that property are below market value, the bank won't use those rents for the income, when calculating the debt to income ratio, which banks use in calculating how much they will finance. Instead, they will use the market rents, which helps.

This also got me thinking about financing in general, based on the income a property generates, and based on the amount you will be paying...

Because, banks don't always use 100% of the income a property generates, since some tenants, commercial tenants that is, are riskier then other commercial tenants.

Joe mentioned that mixed-use type properties are harder to finance, because of this, especially if the tenant is a restaurant.

For example. and this is very confusing, below is an analysis I did at one of my mixed-used properties, to see how much financing a bank would give a potential buyer, based on different scenarios.

As you can see, banks will weight the cap rate, using a higher cap rate, and I've had this done to me in the past at another mixed use property, for different commercial tenants.

(The one property I just refinanced had a body shop, and they used a 12 cap for the income from that tenant, and a 7 cap, for the income from the residential tenants).

As you can see, if a bank is only going to lend 70% of the value, and they used a weighted cap rate based on the income, which determines the value, (I go in depth about cap rates, income and property values in this blog here if you'd like to learn more),

I would need to come up with 32% of the down payment.

Joe Bondy also said they sometimes don't use any of the income when determining how much they will finance, so in the example above, for the commercial restaurant tenant, and commercial office unit at this particular property, I used only 50% of the income from those tenants, when calculating the total income that the bank would use in figuring out how the value of the property, and how much they would lend.

This is a lot to take in, and I don't expect it to make total sense, as trying to be very clear in a blog is much harder, then having a conversation.

But the main point I'm trying to get across when investing in real estate, especially income properties that are mixed-use, is know how much the bank will finance you before you make an offer.

Yes, you'll have a financing condition in place, but its better to be prepared, better to know if you will need to come up with more funds for the down payment, because the bank won't finance more then a certain amount.