The CMHC attack on small building owners and my response

Why your next multifamily loan should not be CMHC

If you are an apartment building owner (or want to be), this article is for you.  The multifamily lending universe has been flipped upside down recently, most notably with changes implemented by the CMHC to benefit LARGE landlords and essentially eliminate smaller ones. This has resulted in investors scrambling on how to fund their current and future apartment deals.

But how did the CMHC get away with it? And more importantly why did they do it?

Simply put, by consolidating their monopoly on multifamily lending, and then creating policies that work against smaller owners in favor of larger ones.  The CMHC makes decisions and policy from an ‘independent’ board of directors accountable to the federal housing minister. The ‘why’ is much less clear other than to distance itself from ‘renovictions’ but there is little doubt larger apartment building owners stand to benefit the most.

Coincidentally, one of the largest apartment owners in Canada is on the CMHC board, but no one seems to notice or even care. This would be the same as appointing the CEO of Bell media to run the competition bureau in Canada.  This email is not intended to discuss the Sherman Act, and how Canada is run by monopolies, but you get the idea..

Over the past few years I have observed 5 important steps that CMHC has taken to get to where we are today:

STEP 1 – CREATE THE MONOPOLY.  Monopolies cannot exist in Canada without the government either being involved in them or creating them directly which is the case of the CMHC.

STEP 2 – CORNER THE MARKET.  Offer an irresistible teaser product that allows investors to leverage themselves to the hilt for a very low insurance premium fee. The MLI select program allows you to borrow up to 95% of the purchase price or appraisal (whichever is lower) up to a 50 year amortization.  Even more surprising is the small net income ratio that CMHC allows to borrow massive debt putting the investor in an extremely vulnerable position later. This has resulted in lenders and brokers who previously offered conventional lending competition, to exclusively offer the MLI select program as nearly all multifamily owners jumped on board the program without reading the fine print. Demand for conventional multifamily loans plummeted as a result.

STEP 3 – DELIVER THE SHITTIEST SERVICE POSSIBLE – to the point that it would be less painful to stick a fork in your eye than arrange financing with them. Make things so convoluted and confusing that even lenders and brokers selling CMHC products are scrambling for answers. The CMHC seems to consolidate power in the individual underwriting the deal, with a massive backlog making it nearly impossible to purchase an apartment building with CMHC without interim funding, which you also cannot use.  You can even ask 10 different lenders for the CMHC position on certain policy and get 10 different answers and there is literally no consistency in their messaging or policy.

STEP 4 – JACK UP THE PRICES. Increase premiums and fees on not just the teaser product, but ALL products hoping nobody will notice, and increase the level of shitty service and mass confusion (step 3).  MLI select had premiums increased 155% and fees on standard CMHC increased by 19%.  These ‘fees’ are paid by you to protect the lender, and really should be paid by the banks in my opinion but I digress.

STEP 5– CHANGE THE RULES TO BENEFIT LARGE OWNERS.  Confuse investors even more by changing the rules to restrict the use of your money, and how you can borrow.  For example, you now MUST refinance from an ‘approved’ lender after 24 months of ownership BUT if you have the cash to buy you can place CMHC financing immediately.  This policy alone wipes out the strategy to improve projects with interim financing for smaller investors – but if you have the cash your all good! In summary the CMHC changes punish the investors who buy distressed assets and take the risk upgrading them, and roll out the red carpet for investors buying stabilized assets OR buying distressed assets in cash! (AKA, Large Investors).

Most of us are buying apartment buildings for some form of value add component, either a sharp forced appreciation in the form of a BRRRR, or a slower one in the form of a 5 year buy and hold.  This is trickier today because of the higher interest rate environment, and new rules around lending, in particular interim financing which could be in the form of a VTB, or a private or bridge lender. So what am I doing today do you ask?

I’m a very aggressive buyer and an unmotivated seller, and the markets today are very favorable for owners due to low vacancy, rising rents, and potentially interest rates to come down in the next year or 2.  Having said that I am a very cautious buyer, and it goes without saying that finding a deal these days is more difficult but if you stick to a system that works there is never really a bad time to purchase a block, but one can be tempted to overpay.  Remember to do the proper rental surveys for the area and go in with a long term vision and conservative estimates and you will do just fine.  Going for the short term flip, or buying on speculation is not the best idea unless you are a seasoned veteran.

My advice – Plan your next MF purchase WITHOUT CMHC financing because the Federal Government is a shitty, and unreliable partner!

For buy and hold get pre-approved with a CMHC approved conventional lender for a term of 2 years.  This way you check off all the boxes and have the option, but not obligation to use CMHC in 24 months.   Another good option that is even more conservative is to buy on a 5 year term, and raise your rents slowly.  Some conventional lenders will allow you to go up to 80% loan to value on a 30 year term. They operate on business terms and not bureaucracy, can turn loans over fast, and will not limit your BRRRR equity takeout’s!

There is an abundance of GREAT deals out there. I made my living and ALL of my JV deals on 5 year conventional mortgages, I think you should as well.  Feel free to reach out to me for more information on how you can get started in multifamily investing or the financing situation today.

Happy investing!

Cory Sperle