Whether it’s to enhance the property you’re going to live in, or if you’re looking to make a profit by flipping properties in Vancouver and transforming a home and selling it, becoming a fixer-upper has many benefits.
Like any big project, it comes with some major factors that need to be taken into consideration before making any decisions. Everything from negotiating the purchase, financing, the duration of the renovation process, and how it will affect your taxes need to be properly assessed.
For any lender, lending money is about managing the risks that come with it. In simple black and white terms, as long as you stay on track with your agreed terms, conditions and make your payments on time, they won’t have to seize your property for foreclosure. Lenders aren’t fond of foreclosing on a property, as this process is both timely and costly for them.
Lenders evaluate and consider whether you are looking to renovate with the purpose of occupying or renting, or if you have the intention of making a profit by reselling it. For this reason, they can more reluctant to give mortgage in Vancouver to people who don’t have immediate plans to occupy the space.
THERE ARE SIGNIFICANT DISTINCTIONS BETWEEN RENOVATING FOR OCCUPANCY VS. FLIPPING TO SELL...
In most cases, it is more difficult to finance a fixer-upper that you hope to resell than if you plan on occupying the space yourself or renting it out without intent to sell. It’s crucial to consider this when making your plans...
RENOVATING FOR OCCUPANCY:
Obtaining financing from a residential mortgage lender is a pretty straightforward process when you are just looking to buy a property to renovate and immediately occupy or rent. There are number of ways to finance your renovation depending on the scale of the project.
If your renovation plans are on a smaller scale, you can consider a personal line of credit or home improvement loans. For bigger scale projects you may want to use your home equity line of credit, or refinance for equity take out.
RENOVATING WITH INTENT TO SELL QUICKLY:
If you’re looking to flip for profit, then lending gets a bit trickier, as do tax considerations. It’s known that residential lenders make their money based on the spread between the interest rate and their cost of funds over the term of the mortgage. We must consider that residential mortgages are meant to be for someone who is occupying a property rather than for those whose purpose for getting the mortgage is to generate more income.
With this considered, low interest rate residential mortgages are typically not available for those looking to flip properties and resell. In fact, most “A” lenders (banks, credit unions) may not even consider these applications. However, you still have the option to obtain a 6 months or 1-year mortgage from an “A” lender if your income is qualified.
SO, WHAT ARE YOUR OPTIONS?
If flipping homes is your on-going business, private lenders will surely become your best lending friends. The main things these lenders look for are quality properties and good locations; the rest they leave up to you for the most part. They are typically less complicated to work with than banks, but you will likely end up seeing extra costs such as lender fees and higher interest rates. It’s also worth mentioning that they typically require a higher down payment (a minimum of 30-35). On the bright side, they will offer you interest only loans with open terms, which means you can pay them off in portions or in the entirety as soon as you choose to.
This is a good option to consider if you’re looking to be a house-flipper, but you will also need to plan well and stay on top of renovation timelines to consistently maintain the desired margin in your project. If you feel it’s a heavy amount of work for you to do alone, finding angel investors to share the profit with is also an option… Just make sure you choose wisely.
HAVE YOU THOUGHT ABOUT THE CAPITAL GAINS AS WELL?
The Canadian Revenue Agency (CRA) is clear in determining how you will be taxed yearly. They take all things into consideration; therefore if the intention of you purchasing a property is to flip it and sell it, they will assess this as a business activity and include it in your income tax. When the time comes for you to sell for profit, they will put you in a higher tax bracket and the tax rates will be higher.
However, if your plan was to buy a home to renovate and immediately occupy or use as rental property, you should be able to get the more desirable capital gain tax treatment when the time does come for you to sell. In this case, it’s very important that you consult a professional in the field.
For many people house flipping can bring their dream home into fruition, or make them enough money to thrive further in life. Every property and project is unique, and an ideal lending solution may be available sooner than you realize.
Flipping a house could be an exciting path for you, whichever route you are hoping to take. As long as you do your research and consult your mortgage broker and review all the aspects of your qualifications and the detail of your project. As someone who has experience flipping houses, it’s a road that I can help guide you through.
Give me a call to discuss the next steps to your brighter future.