Steve Ennis on CMHC insured multi-family residential financing

Adrian:

I'm joined today by Steve Ennis, who is with CMLS Financial, a Canadian lender that services both the residential and commercial mortgage lending space. Today we're going to be talking about CMHC-insured, multifamily residential financing. Steve, welcome to the show.

Steve:

Really happy to be here. Thanks for the invite, Adrian.

Adrian:

Just so that people get an idea of who you are and who you're with, could you tell us a little bit about yourself and CMLS?

Steve:

Yeah, for sure. Well, I've been in lending for about 15 years now, probably about 70% of that strictly on the commercial side. I was with Bank of Montreal as a commercial account manager for five years before joining the BDC on the Island for another five. And then after that I tried the brokerage route, and I did independent mortgage brokering for five years before joining CMLS about a year ago.

Adrian:

What is your role at CMLS?

Steve:

I am on the Strategic Lending Group, it's called. We do all the insured multifamily in Canada, and I'm strictly broker-driven. We've had a commercial presence in the marketplace for quite a while, and those guys deal mainly with borrowers, but we're the first commercial multifamily directed strictly at mortgage brokers.

Adrian:

What are the primary differences between a standard residential mortgage, which can go up to four units, versus multifamily residential, which is more than four units?

Steve:

Probably the biggest difference is we're more concerned with the assets. If you're going to look at four or below, the first thing a business development manager is going to look at is where the buyer's income is coming from. Do they have a job? Do they own a business? That's what they're looking for. With us, it's very different. We're looking at the assets. If it's an apartment building, I'm asking for the rent roll and the operating statements to assess the cashflow from that building.

Steve:

There's a lot of little differences, but that's probably the biggest one. So, when mortgage brokers are calling me about GDS/TDS ratios, I kind of throw that playbook out the window and start from scratch, and we're all about debt service coverage ratio. So, it's a little bit of a different lens for traditional mortgage brokers.

Adrian:

Now, why would someone use a mortgage broker along with CMLS versus going to their own bank or a credit union?

Steve:

Probably the biggest one is a lot of those lenders, for some reason ... I'm not actually sure why they don't. But a lot of those lenders, even though they will finance multifamily, they won't do it with CMHC insurance. So when do you take away that insurance piece, it becomes more of a traditional commercial deal where you're looking at loan devalues, say 65%, 75% range, 20 year amortization, maybe 4% to 5% interest rate, because it's more of a commercial deal.

Steve:

But with us, with that CMHC-insured piece, we're stretching amortizations up to 40 years. Our rates plummet now. We're in the low 2% right now for a five-year, and we can get the leverage even higher, up to 85%. So, that's the biggest thing. For some reason, the lenders on the street, they don't have an interest in the CMHC insurance with these apartment buildings.

Adrian:

From a high-level perspective, what are the expected CMHC fees if someone is to use the CMHC program for insured multifamily residential financing?

Steve:

For the fees for CMHC, they charge $150 per door. We prepare the CMHC submission. We'll do the underwriting for it, submit it. Once they receive it, they'll reach out to the borrower and ask for that fee. So a 10 unit apartment building, it's $1,500. And then they have their premium, which is amortized. It works out to anywhere from $20 to couple hundred dollars, depending on the size of the mortgage per month. That caps out at about 5%. So if they go max loan-to-value, max amortization would be about 5.25%. But it is a sliding scale, so it can go as low as about 1.25% for the premium.

Adrian:

And you can do loan-to-value up to 85% depending on the deal?

Steve:

Yeah, exactly. Like I said, the first conversations I have with my mortgage brokers are, "What's the rent roll and what are the expenses?" If the landlord has been pretty good and he's been keeping his rents up to market, then yeah, I can go max loan-to-value, max amortization. In a place like Winnipeg, I've got to say, I'd love to do more deals in that place because the dollar goes so much further in Winnipeg. I can get 85% in Winnipeg no problem, whereas in some markets like Vancouver, the relationship between income, rents, and property values are stretched so much. Whereas 85% is easy to Winnipeg, Vancouver you're looking maybe 65%, 70%.

Adrian:

What sort of a borrower covenants are we looking for as a baseline?

Steve:

CMHC does have a minimum. They want to see 25% of the loan amount. They want to see that in the terms of net worth. So if we're doing a million-dollar deal, the borrower individually has to have $250,000 net worth.

Adrian:

And that can include equity in real estate?

Steve:

Yeah. Equity in real estate. RSPs are fine, savings accounts are fine. I've spent time on the phone with CMHC cobbling together to get to that mark, and they're a Federal Crown Corporation. Their mandate is to help Canadians. So they're really, really good to work with.

Adrian:

Would retained earnings in a professional corporation such as a medical corp or a dental corp be acceptable to CMHC for assessing overall net worth?

Steve:

Yeah, I've done deals like that before. I did a deal recently, it was a holding company, and then corporate guarantors. So we submitted it looking for just a corporate guarantee. They said, "Okay, well, these holding companies have enough assets in them that they're strong enough that we don't even need personal guarantees." It is possible, but it's really what CMHC approves at the end of the day.

Adrian:

A lot of my clients may have one rental property or a couple of duplexes, perhaps triplex or fourplex, and one of the biggest challenges or perhaps desires and plans is to evolve into true multifamily residential. What recommendations would you have for a qualified rental property owner that does want to evolve their portfolio from those types into a true multifamily residential using the CMHC insurer program?

Steve:

That's a very good question. A few little pieces of advice. CMHC on the multifamily side, their underwriting takes a little bit longer. So the first thing I'd say is to be patient. Single family insured, your turnaround time is maybe, worst case scenario, 24 hours. With CMHC multifamily, you're close to eight weeks to get that certificate of insurance. So, be patient is number one.

Steve:

Number two, the fees are not crazy, but be prepared to pay a little bit more than you would for something that falls under the single family bracket. For example, we're going to need to stay an appraisal. A single family appraisal, you're maybe $350. Whereas a multifamily, honestly you're probably about $2,000 for a proper commercial appraisal on that. And then, like I said, with CMHC you have a $150-a-door fee. So, the few more fees. I'd say worst case scenario, a separate piece of advice, if you're nervous at all, if you're used to duplex, triplexes, and that 20-unit apartment building, 10-unit apartment building makes you a little bit nervous, just get a property management company.

Adrian:

Yeah. No, I echo that, and it's going to cost you 5%, or it may be even 4% of collected rents, and now you've got someone taking care of those concern challenges for you.

Steve:

Yeah. Because we've done deals where I've had some borrowers in BC and they want to buy in Winnipeg just because they can get to that 85% loan-to-value mark. The obvious concern is it's hard to fly back and forth whenever there's an issue, whenever something needs to be addressed. So we just say, "We'll make it a condition, get a property management company. At the end of the day we're really doing you a favor," and usually borrowers are like, "Yeah, that's a great idea."

Steve:

So, keep that in mind. And then, last piece of advice, just go for it. I had one little thing I wanted to say. I was in the Western Canada Apartment Investment Conference this week. It was a virtual one, obviously. One of the heavy hitters on the realtor side was saying, "One of the biggest entrants into this market this year is first-time buyers."

Adrian:

Why is that?

Steve:

I think it's because they're kind of hitting a roadblock, a lot of these guys, with their portfolios. They've done a fantastic job building up property after property, and they hit eight to 10, and now lenders, they have maximum number of door policies. So, they get stuck. They're comfortable with real estate, they've got nine properties, and now none of the lenders will allow it because they have that maximum door. So they're taking that jump into that space. Also, there is almost no competition from foreign buyers in this space because of the foreign buyer tax.

Adrian:

Yeah. I echo that. As far as duplex, triplex, and fourplex lenders, some of them cap out at five properties, others at 10. The beauty of the product that we're talking about is they don't necessarily need to divest of their current portfolio, because you will allow the equity position in those properties to add to the net worth for the borrower covenants. So, that's an amazing opportunity for someone to take their real estate investments to the next level.

Steve:

Yeah, you just nailed it with the covenant. They easily qualify with CMHC's minimum net worth requirement, and our credit group loves it because it shows that they've got experience with renters. So, those are fantastic. I tell everybody who will listen, I say, "If you've got those borrowers that feel stuck at eight properties, if they're nervous, try a fiveplex. If they're a little more aggressive, try a 10 or larger." Because it's such an easy deal for me, those guys.

Adrian:

Now, one of the biggest challenges obviously is finding assets to buy. Do you have any tips from seeing deals of how we may be able to go and find the right properties to do these type of deals?

Steve:

I'm saying bedroom communities are fantastic. Inside the core, it's kind of tricky. Every market is like that. Downtown Vancouver is tough, Downtown Toronto, Edmonton, Calgary. Downtown, it's tough to find. But if you kind of get just outside the core where people are living and commuting, those are great markets. The prices are a little bit more reasonable. The values are still strong. There seems to be a little bit more available.

Steve:

I was talking to my Toronto guys last week, and the ones they do in the Toronto core, Downtown Toronto, almost none. It's all kind of out in the bedroom communities. Mississauga, Windsor, Hamilton. So I'd say look a little bit further.

Adrian:

Do we have a minimum population count for that bedroom community?

Steve:

Yeah. I'd say it's tougher ... I'd say below 30,000 is kind of tricky, but bedroom communities are usually okay in it. It's the remoteness that's the challenge. If they're small, like below 30,000 and nowhere near a major center, then it's kind of tricky for our investors.

Adrian:

But of course here in Winnipeg, we've got a handful of bedroom communities or towns that are a 20-minute drive. So those are worth taking a look at?

Steve:

I love to see those. I love to see those deals.

Adrian:

You spoke to your love for Winnipeg real estate a little bit before, but can we dig deeper into that a little bit? Why do you love Winnipeg real estate?

Steve:

I think it's because I'm in Vancouver, and the prices here are just so far out of whack. Your dollar goes so much farther and Winnipeg. Like I said, 85% is easy. I can advertise 85% in Winnipeg and hit it no problem. I advertise it in other parts of the country, and you get the numbers and it's like, "Sorry, it caps out at 70% sometimes." That's not quite as attractive because you've got to have more down payment. But no, it's a good size market, Winnipeg. Like what, do you have over a million people there?

Adrian:

Yeah. When you encompass the surrounding area. Now, we are a little bit of I think a loyal bank and credit union town. I guess just in closing, what makes CMLS a competitive lender in the multifamily residential space? Why should someone consider CMLS as an option?

Steve:

Because the savings are just ridiculous, especially when you look at it over the life of the loan. When you look at that much lower rate you get, especially with the premium, you're getting that at every single renewal. You might get sticker shock from the premium you face upfront, but the savings make up for it easily in that first five years, and for the life of that loan, you're getting those insured rates offered to every year.

Adrian:

And that premium is fully tax deductible, so you just have less exposure on your passive income.

Steve:

Exactly.

Adrian:

Yeah. Steve, it's been a pleasure to have you on the call today. If someone wanted to reach you directly, how would they reach you?

Steve:

Several places. Easiest is email. Steve.Ennis@CMLS.ca, or my LinkedIn account or my Facebook. Or my number directly, (604) 787-4885. I'm easy to find.

Adrian:

And of course, if you are here in Manitoba, I have a direct connection to Steve. So, I'm more than happy to assist with your multifamily residential financing needs, using CMLS and the CMHC-insured program as what sounds like an excellent option for your borrowing needs. Thanks, Steve.

Steve:

I can't wait until this COVID nonsense is over and I can finally do a visit to Winnipeg. I can't wait.

Adrian:

Well, we do have some of the best food, and in my opinion, some of the best beer around.

Steve:

Oh, I can't wait.

Adrian:

Okay. Have a good one. Thanks, Steve.

Steve:

Thanks so much, Adrian.