CMHC Changes & Financing For $2M–$10M Projects

[00:00:00] Welcome to the Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:12] Another wonderful episode of the Canadian Real Estate Investor Podcast on deck here. Today, it's not just Nick and I, we have Josh from Build Capital. We get a lot of requests. We talked a lot in the past about MLI Select, CMHC Financing.

[00:00:29] We get a lot of requests to have experts on who are doing those types of deals. So, Josh is one of those experts and he shared a lot of insight with us. Hey, Nick?

[00:00:39] He certainly is an expert, Dan, and he certainly did share a lot of great information with us.

[00:00:47] You know, Dan, the crazy thing about CMHC and you'll all hear this as we get into the episode, and for anyone that tries to follow along with CMHC, it's crazy.

[00:00:57] It is such a moving target, specifically when it comes to some of the financial instruments, specifically when it comes to some of the emerging market sectors like the four units, the three plus ones, the five plus ones, the missing middle style construction and financing.

[00:01:15] And they play an integral role in that whole process. So, it's absolutely necessary to have guys like Josh or us and by extension Josh in your back pocket, in your Rolodex and on your team that can help you analyze these deals.

[00:01:33] So, Dan, what are some of the things that we spoke about with Josh? I mean, one of my favorite things was when he brought up how kind of pre-con deals were the hottest thing.

[00:01:43] And now they're kind of being replaced with MLI deals. I love that comparison. That's kind of the new sexy thing.

[00:01:49] Well, it is fascinating, right? And I thought, you know, part of it's a good thing, I think. Like, we, you know, pre-construction investors are like, that's basically excess capital that's above and beyond the amount of demand in the housing market.

[00:02:05] That, or sorry, it's excess demand and that capital like can go and flow into pre-construction and actually create housing, right?

[00:02:11] So, that's what it was doing through the pre-construction format before. Now, all of a sudden, that capital has discovered the MLI Select and they've made it a pre-con thing, right?

[00:02:21] So, you're getting a lot of Ontario investors doing a lot of these CMHC finance deals in Alberta for the most part. That seems to be the play.

[00:02:28] I think that, and Josh really, you know, explained it pretty well. He said, you know, this is high leverage. Like, this isn't, it's probably comparable risk profile to a pre-construction investment, right?

[00:02:40] And so, I think that we had a really good discussion about it. He obviously really, really knows his stuff well on this stuff. We're always excited to have him on the show.

[00:02:47] And I guess just as a bit of a plug for the stuff that we do with Josh, he hosts our meetup in Hamilton. So, if you're an investor in the Hamilton market, get out there and have a discussion with him.

[00:02:57] And he's also one of our experts in the realist.ca community. So, he does a regular call on CMHC MLI Select financing.

[00:03:06] And so, if you're interested in learning about that a little bit more in a group coaching setting, we do have a group coaching option available now.

[00:03:13] We kind of tapped out how much we're able to do on an individual basis. So, if you're interested in a group coaching, it's a little bit less, I'd say, involved than the one-on-ones.

[00:03:22] But for people who don't want to go and spend all that money on a one-on-one program are looking for more of a group coaching setting, some accountability, some ability to ask questions and learn things in a little bit more granular and learn from the successes and failures of others.

[00:03:35] Give us a shout. We're wanting to bring on a test cohort for that program in the new year.

[00:03:41] And me, you, and I guess Josh will be a part of that as well.

[00:03:45] Yeah, well, look, I mean, you and I and Josh are already a part of a lot of investors' journeys and lives.

[00:03:51] Dan, you and I, I guess, helping everyone in there.

[00:03:54] But Josh specifically, I think he's working with at least six or seven of our active students across the country looking at some of these style of projects.

[00:04:05] So, it's really exciting to see.

[00:04:06] And, you know, we also talk about, you know, as I said, CMHC is such a moving target.

[00:04:10] So, Josh goes over every single CMHC update and change that has happened in the last few weeks all the way to a few months ago.

[00:04:18] And he really articulates well, Dan, how these changes impact both investors and small cap developers.

[00:04:25] He talks about the challenges and opportunities that arise from these changes.

[00:04:30] And, of course, the importance of working with a team.

[00:04:32] And then, even more importantly, who needs to be on that team if you want to get involved in this style of real estate investing.

[00:04:41] So, I had a great conversation with him, as I always do with Josh.

[00:04:44] Wealth of knowledge.

[00:04:45] So, on that note, let's dive into the episode.

[00:04:48] Yeah, let's get to it.

[00:04:49] Yeah, guys, really appreciate you having us on or having myself on.

[00:04:52] You know, it's kind of, you know, a surreal experience.

[00:04:55] My business partner and I, we started in the real estate industry by creating content and helping, you know, real estate investors and developers kind of navigate the debt markets.

[00:05:05] And to watch you guys grow this into what it has, honestly, it's amazing to see.

[00:05:11] And it's a pleasure to have the opportunity to be on here and talk to you guys.

[00:05:15] You know, a little bit about myself, my business partner and what we do.

[00:05:18] So, we help developers and investors essentially in the missing middle.

[00:05:23] You know, there's a massive gap in the market and Canadian market where essentially under $10 million, the big banks don't have an appetite to help at an institutional level, midsize investors and developers.

[00:05:36] So, what we do is we try to provide that level of expertise and planning to midsize investors and developers across the country.

[00:05:43] So, BUILD Financial stands for Buildings, Land and Development.

[00:05:46] And we're experts in helping these people or people across the country, you know, plan and develop and build.

[00:05:55] So, you know, it's been quite a journey so far.

[00:05:58] And the outpouring outreach in the country is immense.

[00:06:02] You know, we firmly believe that the next wave of investment from retail investors is going to be exactly what we're talking about today.

[00:06:11] You know, the increased densification about the 4 plus 1s, you know, finding ways to create infill development, purchasing pre-existing stock.

[00:06:19] You know, it's a major part of the market that a lot of people don't talk about.

[00:06:22] But I think this is how Canada is going to build and fix the issues that we fundamentally have.

[00:06:28] Yeah. Yeah, I completely agree.

[00:06:30] And I think that's why the work that you're doing and the space, the niche that you've chosen to really own is so important, right?

[00:06:40] And, you know, Josh, anytime I'm speaking on your behalf to a client that I'm going to introduce you to, you know, I always say he's the 2 to 10 million guy, right?

[00:06:49] And, you know, for a lot of people in, you know, I'm going to throw myself in the mix here as well because I'm a mortgage broker and we do different things.

[00:06:55] But we work on a lot of stuff together, you know, a lot of people in our discipline really want to go after the, you know, we're all want to be, you know, the Moby Dick whale hunter type of guys, right?

[00:07:06] It's a lot cooler to talk about, hey, I just did a 50 or $100 million project.

[00:07:10] But we all know that those are not only harder to win and harder to finance, but, you know, it's hard to compete with legacy relationships with the banks, et cetera, et cetera.

[00:07:19] And at the same time, it's just as much work to do a $10 million project as it really is almost to do a $100 million project.

[00:07:26] So when you talk about the missing middle and we just did an episode on that, it's not just the missing middle when it comes to actual housing stock, it's missing middle financing.

[00:07:36] And I think you being on the forefront of providing, you know, new financial instruments and really kind of sinking your teeth into this side of the business, I think is not only very much needed, but very smart of you.

[00:07:52] So, you know, on that note, maybe speak a little bit to kind of who falls into that $2 to $10 million.

[00:07:58] What kind of projects would we be talking about?

[00:08:01] Sure.

[00:08:02] I mean, you'd be surprised, you know, I mean, most major markets outside of the GTA are about $200,000 to $180,000 a unit.

[00:08:10] So if you're looking at a pre-existing building, you're talking about a 40 unit, up to 40 units, which is basically all major pre-existing multifamily that was built in the 60s or 70s.

[00:08:23] So give or take a few larger buildings, but the majority of the stock right now that is being sold on market falls within that category.

[00:08:32] And unless you're a REIT or unless you have significant experience in finding ways to be able to get through acquiring these buildings and then stabilizing them and using different financial instruments to get there, you know, the opportunity to be able to do it is very small.

[00:08:48] So when you're looking at projects under that $10 million space, it's a significant amount of the development that's happening right now.

[00:08:55] Anything above $10 million, you have 45, 50 unit buildings.

[00:09:00] It's more like an institutional play where, as you said, the amount of people and financing that is available to you at that point is everybody wants to do that.

[00:09:10] You know, all the big banks want to do that.

[00:09:11] You also need to become a certain type of board to push past that $10 million space.

[00:09:19] Like you can't fake, you know, building a $10 million project or you can't stretch to get that $10 million.

[00:09:27] Whereas like if you're looking at a $2 million development, you can either bring a partner on or you can use experience from somebody.

[00:09:33] So we're kind of like the glue, which you're putting people who have different experience and net worth and capital together to do these midsize projects.

[00:09:43] Because what we're seeing is the average retail investors purchased a duplex.

[00:09:49] They purchased 10 of them.

[00:09:51] But realistically, your income is no longer ever going to service the debt that needs to be taken on to be able to purchase these residential real estate buildings anymore.

[00:10:00] So, you know, we're finding that there's a glass ceiling right now for retail investors.

[00:10:05] And that middle space is where we're seeing a lot of people pool resources to build and develop.

[00:10:12] Yeah.

[00:10:12] So fake it till you make it doesn't cut it anymore, right?

[00:10:17] It's not what we're finding.

[00:10:18] You just need to be a more sophisticated investor.

[00:10:22] You know, you need to understand the actual debt instruments and the products that are out there.

[00:10:27] You need to be able to understand different types of capital.

[00:10:30] So if you're using private capital, bridge capital, insured capital, you know, it's not just a one and done.

[00:10:36] Go to the bank and the bank's going to be able to help me out.

[00:10:39] You know, when I was a kid, my parents or my grandparents used to say, you know, the rich get richer.

[00:10:43] And it didn't really hit me that, you know, one day the ability to be able to purchase real estate was actually not going to be around anymore.

[00:10:51] But you're fundamentally seeing it right now.

[00:10:53] You're watching how difficult it is to purchase residential real estate.

[00:10:56] I think it's a fleeting moment where we're going to look back on this and this is going to be, you know, this cycle is really going to be where that affordability is no longer there anymore.

[00:11:07] Yeah.

[00:11:09] It's interesting when I like, you know, you have this huge cohort of people in Canada looking to make money in like with investing in real estate.

[00:11:20] In a lot of cases, still like trying to find like the next big thing.

[00:11:23] And I feel like, you know, I mean, without Nick and I sounding like hipsters here, I mean, we've been talking about MLI since we started the show, I mean, over two years ago now.

[00:11:33] And you're I think you're really just starting to see it become mainstream.

[00:11:37] Like, you know, I was mentioning before we started recording a lot of these pre-con brokers now are are pushing MLI deals and they're, you know, they're being positioned as like these government backed kind of like, you know, programs.

[00:11:51] And so it does feel like the shelf life is almost, you know, running out on this this kind of this opportunity, not from a FOMO perspective, but simply from, you know, like you mentioned, like the government is really, you know, which as a taxpayer, like I appreciate this, by the way, like I'm not so for the government because I know quite a few people over at CMHC have listened to the show.

[00:12:12] So I appreciate that they're scrutinizing more on the underwriting, that they're taking these things a little bit more seriously, that they are looking for good borrowers because I do not want to see our, you know, tax money be squandered in insuring bad deals and bailing out people who don't deserve to be bailed out.

[00:12:29] But with all of that being said, I mean, the fate of the of the MIRB program in like the 70s, this famous MIRB program, what ended up being, you know, it stopped getting housing built because it was basically too much of a good opportunity, too much of a good thing.

[00:12:44] And it was being exploited and it led to kind of some negative externalities, fraud, bad underwriting, etc.

[00:12:48] I guess all of that context from from my perspective, and it's kind of just me putting my lens on it to lead to maybe the question of like, what is CMHC doing about some of these, these issues that they've had?

[00:13:01] And, and what is like the window of opportunity look like from your perspective?

[00:13:06] And what are these like recent CMHC changes in the last little bit that you are kind of observing and the impact of them?

[00:13:16] Sure.

[00:13:17] Yeah, I mean, if anybody has been in the space or you use this type of debt, you know, that CMHC is a federally backed insurance company.

[00:13:26] Essentially, they provide orange default insurance to the market.

[00:13:29] What happens is CMHC changes their, their policy consistently to be able to keep up with certain trends and certain, you know, certain issues or challenges with, with the products.

[00:13:43] Now, some of these changes have historically impacted developers and borrowers negatively.

[00:13:50] And I think there's a lot of people who have a lot to say about how fast they come and how that affects, you know, projects as a whole.

[00:13:59] Currently, CMHC actually just came out with some changes this year that have positively impacted the multifamily market.

[00:14:08] Before we go into some of the stuff that happened just recently last week, you know, some of the positive impacts that CMHC changed were the NHA approved lender guidelines.

[00:14:18] So for anybody who doesn't know, CMHC had a requirement where the they would only pay out a lender that was NHA approved, which is the National Housing Association.

[00:14:28] That designation really only pigeonholed borrowers who were using bridge debt to acquire underperforming buildings to use a very few lenders in the space because the NHA approval or designation is very difficult to achieve.

[00:14:43] What happened was when they when they made that rule, anybody who had acquired a multifamily building on a vendor take back or tried to find a creative way to close on a building.

[00:14:54] This essentially pigeonholed them into having to refinance into bridge debt with a more expensive rates on a stabilized building with another lender.

[00:15:03] And then they had to wait two years to be able to move then into CMHC.

[00:15:08] So essentially it was it was it was hurting a lot of people who had already started projects, were trying to make good housing, were trying to push the needle on retrofitting preexisting multifamily housing.

[00:15:21] So that was huge.

[00:15:22] You know, it allows investors to go back out into the market, especially right now, to creatively purchase deals and to use real hard money to be able to get the projects done.

[00:15:33] And second was just the stabilization requirement.

[00:15:36] You know, it was very underrated dependent.

[00:15:39] So not requiring to have the stabilization with an NHA approved lender really did move the needle for real estate investors who were purchasing preexisting buildings, which as of, I guess, until the start of last year was the hot thing to do.

[00:15:56] And I think it's still majorly required.

[00:15:59] If you take a look at the stock in Ontario right now, all these walk ups are built in the 60s and 70s.

[00:16:06] Realistically, a lot of them haven't been updated.

[00:16:08] They have no debt on the properties.

[00:16:11] They're owned by, you know, one or two guys, you know, own 10 of them.

[00:16:15] They don't own one of them.

[00:16:16] And they're starting to offload them into the market.

[00:16:18] So there's a need for investors to rehabilitate most of these buildings in Canada.

[00:16:25] And if they can do that creatively to be able to acquire them, especially in today's industry environment, you know, I'm glad to see that CMHC made that policy change.

[00:16:35] Yeah, no, I think that's one of many that we've seen.

[00:16:39] And I think, you know, Josh, the reason why you're such an asset to our team and I think to the industry in general is because you've made this your calling to kind of follow CMHC, which is really a moving target.

[00:16:52] You know, like you understand it one week and then two weeks later, there's four different things.

[00:16:58] And then a month later, there's another couple changes.

[00:17:00] Can you just maybe kind of give us a high level look at the changes that we've seen, even in the last year, in the last couple quarters, all the way back from, you know, a few months back, I believe, removing the direct correspondence to the recent NHA changes.

[00:17:15] What else should our listeners who are a lot of them who are really interested in eventually or currently more immediately doing a project like this?

[00:17:26] You know, what changes do they need to be aware of?

[00:17:30] And then we can kind of go in and start dissecting how that impacts, you know, the small cap developer and the new or emerging investor into the space.

[00:17:40] Sure. Yeah.

[00:17:41] So, you know, one that just happened recently was CMHC changed their policy specifically on site contamination.

[00:17:47] Previously, you weren't able to submit a file with any sort of contamination.

[00:17:51] Now CMHC is allowing you to submit the file as long as the remediation is complete before the COI is put into effect.

[00:18:00] So, you know, anybody who's working on Brownland, you know, that is a major change.

[00:18:05] In regards to appraisals, this was kind of the one that caused the most ripples last week was CMHC now requires three appraisal approaches.

[00:18:15] So, whereas pre-existing or previously we were required to have direct comparison approach as well as a capitalization approach, a cost approach, if anybody is wondering, isn't necessarily reflective of a determination of value on, you know, a lot of these pre-existing buildings.

[00:18:31] And it does take a significant amount of more time and work.

[00:18:34] CMHC as of, I believe, last Monday now requires that all three approaches are in effect.

[00:18:42] So, for anybody who has a deal that isn't necessarily processing the CMHC, it does throw a little bit of a wrench.

[00:18:48] We talked to any appraisers recently.

[00:18:50] It's a little bit of a challenge for them because they're flooded with having to do all these cost approaches now.

[00:18:56] One of the major changes really is the COI and commitment to insure.

[00:19:01] Fundamentally, what happened was previously to September 1st, brokerages and brokers were provided CMHC correspondence status.

[00:19:10] What essentially this meant was a client would come to me and I could broker and go to CMHC directly through a sponsor of a lender and I could attain a certificate of insurance.

[00:19:20] And for anybody who's reading this or listening to this, a certificate of insurance is CMHC's stamp of approval saying we will provide mortgage default insurance on this loan.

[00:19:29] So, what you could do is you could go to that and different lenders and you could shop the debt to get the absolute best pricing for a client.

[00:19:37] What's happening was it was kind of like the Wild West where people were just firing off applications.

[00:19:42] And it was making a massive backlog because the consistency with the files just weren't there anymore.

[00:19:50] So, CMHC has September 1st said we're no longer doing the correspondence status.

[00:19:54] And it is now you have to broker it to go through a lender to be able to submit the actual file.

[00:20:01] There are a handful of players in the space right now that are operating as both lenders and as brokerage houses.

[00:20:08] And CMHC is essentially saying that you can't do both.

[00:20:13] That you are, if you're going to get the certificate of insurance, you can't release the certificate and then go to other lenders and try to fund these deals.

[00:20:22] You have to, if you're going to get the certificate and submit the file, we expect you to actually fund these deals.

[00:20:28] So, it's like shaking the foundation of how the actual process to submit these files is going through right now.

[00:20:38] Yeah, it's kind of shaking the foundation of how people submit these files.

[00:20:43] So, that's changed how certain brokerage houses are hiring.

[00:20:48] It's changed the flow in which deals are going.

[00:20:51] For most people who don't know, the financial world is very small.

[00:20:55] It's not as big as people would think.

[00:20:57] You have five major players on like, you know, mid-size stuff and then you have the big banks.

[00:21:04] And those five major players really have different lending parameters.

[00:21:08] They have different equity requirements.

[00:21:11] They have different loan size requirements.

[00:21:12] They have different location requirements.

[00:21:15] Each one has a little niche that they're good at and each one competes with themselves.

[00:21:19] So, you know, it changes the value add from a really good broker because your broker is now going to have to go and shop your deal with the relationship they have with each individual lender before you submit the file.

[00:21:31] So, I think fundamentally it bodes well for really good brokers like Nick and myself.

[00:21:37] But it doesn't necessarily help the average consumer anymore, which I'm hoping that CMHC goes back and takes a look at this.

[00:21:47] I think that from the perspective of a borrower, I think you're not getting the sharpest pricing if you can't necessarily shop once the file is ready to go.

[00:21:57] Yeah, as I said, moving target for sure.

[00:22:03] Constant changes, I guess, in a constantly evolving real estate market.

[00:22:08] And, you know, I think we've all spoken about this multiple times that this may be that renaissance period in Canadian real estate full of opportunity.

[00:22:17] You know, and once this stuff gets a little more mainstream, I think it will get even easier.

[00:22:24] Right now, this is, you know, the three of us on this call as well as a lot of the people out there that are doing it, I would say are still kind of early adopters.

[00:22:33] And, of course, being an early adopter to anything has its challenges.

[00:22:36] But speaking of challenges, let's talk about some of the challenges and maybe opportunities that you're seeing with these changes, Josh.

[00:22:45] I mean, let's let's we'll start with challenges first and then hop over to two opportunities.

[00:22:51] Sure. I mean, some of the challenges are being dealt with currently.

[00:22:56] So the challenge is being the processing time.

[00:22:59] You know, processing time has widely changed depending on where you when you submit your file this year.

[00:23:06] You know, we had six, eight months.

[00:23:08] Some applications take it now that we're back down to six, eight weeks.

[00:23:11] So processing times fundamentally can affect your actual financing, because when your financing is all based off of a live bond market and the bond market trades as if it's, you know, a publicly traded company on the S&P 500.

[00:23:27] It can be very it can be very challenging to be able to peg down exactly what your financing is going to look like.

[00:23:35] You know, when when rates start to go up at the start of covid, you know, a lot of lenders were underwriting at a really low max rate and that max rate very quickly increased and equity was required to be injected.

[00:23:48] So, you know, what we're seeing is some of these applications that were submitted at low max rates, which is the rate we submit your file at, which dictates your loan size.

[00:23:58] When you have a bond market and you lock in your rate that's higher than what your max rate is, you have something called a buy down.

[00:24:04] That buy down can eat up a large chunk of your equity takeout if you're refinancing a preexisting building or it can require you to inject significant amount more capital in the middle of a project.

[00:24:14] So, you know, it's not something that it necessarily is going to be fixed, but it is something that should be considered when you're looking to take on this type of debt.

[00:24:25] It's especially over the last 12 to 18 months where we've seen massive fluctuations in bond yields.

[00:24:32] You're trying to get a type of financing that directly is impacted by the social social factors of our society today.

[00:24:41] You know, we have, you know, on the brink of World War three, we have we have social issues around the world.

[00:24:46] You know, we have different policy changes happening in the States and Canada.

[00:24:50] I think that's the volatility in these markets is a is an impact.

[00:24:55] And I think like one other negative that most people don't talk about is just this program is being sold as like the savior of financing.

[00:25:04] It's like selling hope to the Pope.

[00:25:06] Like people are out here saying like they can do all these things.

[00:25:09] And, you know, I think fundamentally understanding the debt is the most important part because, yes, can you qualify for something?

[00:25:16] But you might not actually be able to get the financing.

[00:25:19] For example, you know, sub two million dollar like CMHC mortgages, like construction mortgages.

[00:25:27] You know, construction mortgages, like technically you qualify CMHC doesn't have really a minimum.

[00:25:32] But, you know, what I discussed earlier about the five groups of lenders out there that facilitate these types of transactions, you know, there's an appetite level for for these types of loans.

[00:25:45] As you said, Nick, at the start of the podcast, there there really is appetite levels, I guess.

[00:25:52] People don't necessarily it's as easy to close a hundred million dollar deal as it is a ten million dollar deal.

[00:25:58] So when all the deals are being funneled into one of these five firms, why would they want to take on a smaller deal?

[00:26:05] So the actual loan availability is there, but the ability or want to fund these smaller projects, I think it's just important to understand the intricacies around getting this type of financing.

[00:26:19] Because, you know, it's a lot of people who go to these seminars, these conferences and watch videos and listen to these podcasts.

[00:26:25] And I don't think they that they're being told the truth.

[00:26:30] It's possible, but you're not going to get your prime minus one on a two million dollar construction loan.

[00:26:36] There's the appetite isn't isn't there in the market to be able to do that.

[00:26:41] I think before we were talking a little bit about or like earlier on, you're talking a little bit about like compiling groups of people.

[00:26:48] Like what seems to be the problem that you're solving for the most in in a lot of these deals?

[00:26:52] Like I know CMHC has like stipulations on, you know, property management experience, development experience, owning of said asset.

[00:27:00] And like, again, just to circle back to kind of like that pre-con investor trope as an example, like a lot of those guys who were, you know, buying condos two years ago probably aren't really necessarily the right fit to be jumping into some, you know, no matter how compelling it is,

[00:27:16] some like 5% down deal of this nature in rural Alberta or whatever.

[00:27:22] What seems to be like these, I don't know, like teams that you're building that and what what are the gaps that you're filling with with connecting people?

[00:27:30] Sure. I mean, the majority of time that we see people come together is when they're looking to either do a development or they're looking to acquire a pre-existing building.

[00:27:39] Both of them have major liquidity requirements.

[00:27:43] So most of the time we're looking for to fill one of three things, either liquidity, so cash on hand to be able to do a project.

[00:27:51] And realistically, these larger projects require seven figures of cash.

[00:27:56] You know, you need significant amount of down payment, interest reserve, carrying costs, renovation costs, and then closing costs.

[00:28:03] You know, the second being experience.

[00:28:06] If you're going ground up construction, a lender, especially right now, is looking for some level of experience.

[00:28:12] If you don't have experience in ground up construction, then you better have a lot of money to be able to pay for the experience.

[00:28:18] And then net worth.

[00:28:20] The CMHC has a fundamental net worth requirement of 25% of the total loan size you're getting, not including the equity you actually have in the project itself.

[00:28:29] So when you start to take a look at these mid-sized projects, $5 million, and you get two guys to scrounge up, you know, a million, a million and a half dollars to put in the project.

[00:28:40] You still need to have that 25% of the loan size when you're refinancing at the end of the day.

[00:28:47] So, you know, a lot of it has to do with meeting net worth requirements.

[00:28:51] The experience requirement isn't necessarily like a hard, like, line in the sand.

[00:28:57] A lot of the times you can bring on a GC, you can pay for a GC who has the experience to make that happen for your first project.

[00:29:04] I think it's also risk mitigation, too.

[00:29:06] People are looking to enter into this space.

[00:29:09] They're doing it out of necessity because they can't personally qualify anymore.

[00:29:13] And it's kind of a scary jump, you know, getting into an apartment building, getting into having to renovate not one unit, but maybe four or five units.

[00:29:21] You know, do you have people who have experience who own construction companies?

[00:29:25] A lot of the most successful teams that we're seeing are people who are industry professionals, guys who own construction companies, guys who are realtors, guys who are mortgage agents, guys who have some level of expertise that they can bring to the table and come together to be able to move into that space.

[00:29:43] Yeah, it's funny.

[00:29:45] You know, I think for a while it was, at least from my perspective, it was, you know, everyone started off with a duplex or a single family conversion or some of the more traditional starting points.

[00:29:57] And then over the course of years or even decades, you know, would eventually work their way up to buying that apartment building or that 10, 5, 10, 15 unit plus kind of thing.

[00:30:09] And in some cases would liquidate their existing portfolio to be able to make that transition into the bigger stuff.

[00:30:15] That's what I saw for a long time.

[00:30:18] Now, I'm talking to, you know, Dan and I speak to a lot of, you know, we speak to everybody, but a lot of people that come to us are, let's say, maybe more on the beginning side of things.

[00:30:28] And I've never heard so many beginner or early on real estate investors, you know, shoot for the stars here and be like, yeah, I'm doing a five or four plus one.

[00:30:37] Or, you know, I'm trying to get an apartment building because I can do it with, you know, 90 plus percent loan to value or loan to cost and the best amortization.

[00:30:45] And I think, you know, as you said, this has really just been sold to the general public as the saving grace from financing and real estate investing.

[00:30:57] And I just, I don't know how true that is because of all of the requirements, right?

[00:31:03] Like, as you said, yeah, okay, fine.

[00:31:04] You don't need the experience, but if you don't have things like that, you got to have a lot of money.

[00:31:08] And if you're just starting out, chances are you likely don't have a lot of money.

[00:31:13] And, you know, the few that do, you know, this is an amazing strategy, but for those beginners, it's tough.

[00:31:19] I wanted to quickly ask, I know that one of the other changes that we've seen recently, right?

[00:31:25] It's affordability, accessibility, and energy efficiency.

[00:31:28] That's how you get your points to qualify for an MLI deal.

[00:31:33] And it used to be equal points and everyone, and I think Dan and I called this on the show, probably, I don't know what Dan, what six plus, six to eight months plus before it actually happened.

[00:31:44] Really, this energy efficiency stuff is just too good, right?

[00:31:47] It's a little bit of a loophole, so to speak.

[00:31:50] I know that the requirements for that has changed.

[00:31:53] How have you seen the, and just maybe explain a little bit because I'm doing a bad job here.

[00:31:57] Explain a little bit of what I'm talking about and then why that was so popular.

[00:32:00] And now with those changes in place, how are people getting those points?

[00:32:04] What kind of pivots have people had to make and what kind of advice are you giving those people?

[00:32:10] Sure.

[00:32:10] I think CMHC created this product with good intentions.

[00:32:15] I don't think they realized, first of all, how many retail investors were going to use this product out of necessity.

[00:32:21] But second, I don't think they also understood the level of, I don't know how to describe it, like the ability to be able to find a solution.

[00:32:30] An investor will always find a loophole in something to be able to take advantage of it, I guess.

[00:32:37] So what happened was CMHC released this product and it was a repurposing of another product that had energy credits.

[00:32:46] And the product essentially has three pillars and you can achieve between 50 to 100 points in any of these three pillars of energy efficiency, accessibility or affordability.

[00:32:56] And Ontario, fundamentally, it's very challenging to commit to affordability in a multifamily building, especially a preexisting one,

[00:33:03] because the value of the asset is derived by the net income that asset produces, which essentially you would be committing to underperforming your building.

[00:33:12] And you look at the demographic of people who were helping, again, that 40 unit below, most people are looking to get to bigger real estate.

[00:33:21] So a lot of people didn't want to necessarily commit to affordability on their building.

[00:33:26] So what people were doing was they realized you can get 100 points by increasing the efficiency of your building by 40%.

[00:33:34] So essentially what the strategy was is you would find a building that was not very energy efficient, that would have a really old boiler system,

[00:33:44] had a really old central vac system, had maybe really old windows.

[00:33:49] It costs less capital to increase the efficiency of a building that is operating at a very low level than it is a high efficiency building.

[00:34:00] So for the longest time, people were finding these older 60s, 70s, three-story walk-ups and just increasing the efficiency of it getting to 100 points,

[00:34:08] achieving the 95% loan to value on the as complete value of the 50-year amortization.

[00:34:13] Well, fundamentally, I don't believe CMHC wanted that.

[00:34:16] Their mandate is to create affordable housing in Canada, so they had changed that.

[00:34:22] Now the same amount of work that is required to increase the efficiency of the building is required to get level three.

[00:34:29] But level three now only gives you 50 points, which means you have to commit to either the affordability or the accessibility in either capacity to be able to achieve 70 or 100 points.

[00:34:41] The fundamental difference on a pre-existing building is instead of 85%, you get an extra 10% loan to value, which is 95% and 45 and 50-year amortization, depending on points.

[00:34:54] In Ontario, we're not seeing people fundamentally commit more to affordability.

[00:35:01] I think what's happening is they're just saying, I'm going to take less leverage, and they're still doing the energy efficiency, creating and staying with that, or they're just going directly into the standard program.

[00:35:12] So the standard CMHC program has the same leverage cap, so 85% and a 40-year amortization.

[00:35:20] So the 50 points and the standard programs are all the same.

[00:35:23] The only fundamental difference is the debt servicing ratio.

[00:35:26] MLI is 1.1, whereas the standard product is 1.2 and 1.3, depending on term length.

[00:35:33] Essentially, what investors are doing is they're looking at, what does it cost me to increase the efficiency of the building by 40%?

[00:35:43] And is that amount different?

[00:35:47] Is that larger than my insurance premium difference?

[00:35:52] And if it is, then is it quite an easy decision to make?

[00:35:55] But I don't see a ton more people committing to affordability on a pre-existing building, at least.

[00:36:02] On new construction, we are seeing more applications because the new construction guidelines and requirements around the percentage of units that need to be deemed affordable are less.

[00:36:11] To be able to achieve 50 points, 10% of your units need to be deemed affordable, whereas a pre-existing building is 40.

[00:36:19] So it's a significant difference to meet minimum points.

[00:36:21] So on new construction, we are seeing lots of developers allocate 10% of their new constructed units to being affordable.

[00:36:29] Currently, right now, there is no size requirements on those specific units that are being built at the moment.

[00:36:37] I think there are rumblings that CMHC is going to change that.

[00:36:41] But all of the affordable units that are under the threshold, as long as they're rented out, there isn't a larger unit under that threshold.

[00:36:49] You can allocate those.

[00:36:51] So in Alberta, it's a whole different story.

[00:36:56] Alberta has a very high median renter income.

[00:36:59] So essentially, everything in Alberta is deemed affordable at the moment.

[00:37:03] You could go in and purchase a building out there with 100% affordable units, and your market rent wouldn't achieve what CMHC deems as an affordable unit.

[00:37:13] So there's still lots of challenges with the program, but people are using it in different ways in different markets.

[00:37:22] And I think it's cool to see that certain markets will commit to the affordability.

[00:37:28] Certain markets will commit to energy efficiency.

[00:37:30] It's kind of a dynamic program.

[00:37:32] But in Ontario, we are still seeing a lot of people use the MLI product for the energy efficiency increases to get their points.

[00:37:42] Awesome.

[00:37:42] I feel like we...

[00:37:44] Is there anything that you think we didn't touch on?

[00:37:48] Because Nick and I will probably record a bit of an episode on this, just framing MLI a little bit.

[00:37:54] But anything specific that you think the average Canadian investor needs to know about MLI heading into 2025?

[00:38:04] More changes.

[00:38:05] Yeah.

[00:38:06] Like, it's not going anywhere.

[00:38:09] You know, I don't think CMHC is fundamentally going to go anywhere dependent.

[00:38:14] Even with the change in government next year, I think they've essentially allocated $60 billion to the Canadian mortgage bond.

[00:38:23] It might become less appetizing if fixed, uninsured fixed rates do come down, especially if the CMB stays high.

[00:38:32] You know, on smaller loans, you know, in those sub-$2 million loans, the spread on your Canadian mortgage bond can be significant.

[00:38:42] Like, if your 10-year bond right now is pushing almost 4%, you're 3.85%, I think, today.

[00:38:49] And you have 140 basis points on the spread.

[00:38:54] You're pushing 5%.

[00:38:55] Like, you're not getting 3% interest rates on smaller loans right now.

[00:39:00] So, you know, if the Canadian mortgage bond continues to stay high, just set realistic expectations with the total cost of the project, whereas, like, versus the actual rate you're going to achieve or you're expected to achieve.

[00:39:13] Because fundamentally putting these projects together, these loans together, they're not cheap.

[00:39:18] You know, you have to have an appraisal.

[00:39:19] You have legal costs for both yourself and the lender.

[00:39:23] You also have, you know, broker fee.

[00:39:25] You have a lender fee.

[00:39:26] You have to go get a phase one environmental assessment.

[00:39:29] Like, it's a significant undertaking in committing to taking on this type of debt on top of the insurance premium.

[00:39:34] A lot of people, you know, don't talk about the insurance premium.

[00:39:38] So, on the standard product, it can be past 6% of the total loan amount getting added on top of your loan.

[00:39:44] Or the MLI program, you know, you're sub 3% on 100 points, but you're above 3% on 50 points.

[00:39:51] So, you know, that's $30,000 in every million.

[00:39:54] Your average project is, let's say, $3 or $4 million.

[00:39:57] You're pushing $100,000 of insurance premium to be able to get, you know, 5% loan or, you know, 4% loan.

[00:40:05] Keep those in mind because, like, the actual cost of restructuring this debt versus maybe just keeping a little bit more equity in your deal.

[00:40:11] You know, those are all conversations that need to be had.

[00:40:13] And, yeah, before we let, you know, obviously the listeners go, I think it's important just to let everybody know, like, risk and over leverage is a real thing.

[00:40:22] Like, you know, these products that are made at 95% loan to value, like, not all projects are made for this.

[00:40:29] And not all borrowers are made for this type of debt.

[00:40:31] You know, purchasing these types of assets, you shouldn't take it lightly.

[00:40:35] You know, you have possibly 30, 40, 50 people living in these buildings with, you know, if you're purchasing with max leverage, make sure you do actually fundamentally have, you know, the proper management in place, the equity in place, the ability to be able to manage these types of assets.

[00:40:50] Sometimes it can feel like that these products allow you to be able to punch out of your league.

[00:40:55] But, you know, work with somebody who can actually, you know, fit that bill for you because it's quite a responsibility to take on.

[00:41:01] Yeah, completely agree.

[00:41:03] I think my biggest takeaway, and I, you know, Dan and I do our best to keep up with all these changes as well, Josh, but we always defer to you.

[00:41:11] My biggest takeaway is to have someone like yourself in your corner if you do plan on doing some of these projects.

[00:41:19] As you said, these aren't for everybody, right?

[00:41:22] They can be an amazing tool, an amazing vehicle to build wealth, to build real estate, to get your projects done.

[00:41:29] But, you know, at the same time, they do present a lot of risk and we're talking about a lot more capital and a lot more people involved.

[00:41:35] So, yeah, make sure you have that team behind you in a constantly changing policy environment in a very volatile real estate environment.

[00:41:44] Josh, I want to thank you again so much for gracing us with your presence today on the podcast.

[00:41:48] For those listening, Josh is also a member of our Realist community and comes on and does a monthly CMHC update, MLI presentations, construction financing presentations.

[00:41:58] So, if you are anywhere in the country and have questions for Dan, myself or Josh on MLI Select, CMHC changes or just investing in general, please reach out.

[00:42:12] We'll put all of Josh's contact info in the show notes.

[00:42:16] Go follow him.

[00:42:18] Actually, Josh, you just started a podcast as well.

[00:42:20] Go listen to the Build Financial podcast.

[00:42:22] Check Josh out on YouTube.

[00:42:23] A ton of great content there and much more to come as we continue to navigate this real estate market.

[00:42:30] Thanks again, Josh.

[00:42:32] Yeah, thank you for having me.

[00:42:34] The Canadian Real Estate Investor podcast is for entertainment purposes only and it is not financial advice.

[00:42:41] Nick Hill is a mortgage agent with Premier Mortgage Center and a partner in the G&H Mortgage Group.

[00:42:48] License number 10317.

[00:42:51] Agent license M21004037.

[00:42:56] Daniel Foch is a real estate broker licensed with Rare Real Estate, a member of the Canadian Real Estate Association, the Toronto Real Estate Board and the Ontario Real Estate Association.