Not using a bank for financing - Alternative Lending

At first, I thought alternative lending was only for desperate people, like people who the bank won’t give money to. It is also for that, but now I understand more why it can be a great tool used by other people as well.

Financing

Financing can be scary. When it comes to financing, I have been super critical of people who take out loans for things that generally do not go up in value. For example, it bugs me to see signs for low or no interest on jewelry, maybe even more than seeing car ads that don’t even tell you the actual price and just the financing.

Other than feeling that those companies know the average person has no self-control, or worst think we are stupid, I think that if someone cannot afford something, they shouldn’t buy it.

Real estate is different. Maybe it is because in my life, over time, the prices have continued to go up. Condo prices in Edmonton are an exception at the time of writing this, but real estate is known as an investment and financing is a tool.

For example, if you buy a million-dollar property with 5% down (humour me), and it doubles in value, that is 20x the 5% you put in. If you bought the property in cash, you would just double it.

20X your investment sounds better than just doubling it.

The other point is that most people would buy very little if it meant trying to save a million dollars before you could do anything. This just an example and I used numbers that would make sense. Please do not tell your mortgage broker that Derek said you can get a mortgage on a million-dollar property with $50,000 as that probably won’t work for higher priced homes.

Obviously, I am talking more about leverage here, and starting to get off the topic. The point is generally smart/rich people finance real estate. It isn’t because they are poor or cannot possibly buy it without a loan. So, understanding the options, especially if you are a business owner, is important.

Alternative Lending - How does it work?

I’ll get into why it is an option for business owners a little later.

The other day I had a buyer that couldn’t get conventional lending (the bank said no). So, what else could he do to make this investment and buy the property he wants? Questions start to pop up; What are the fees? Interest rate? Minimum down payment? How is this going to kill me, right?

Feesfor Alternative Lending

Generally, a 1% fee needs to be paid when you use an alternative lender.

Rates for Alternative Lending

Since the video above was made, the rates have already lowered so check with your mortgage broker as rates will change, but Phil mentions 0.4 or 0.5 difference on the rate side. This seems low to me, but also welcomed news. I assume this is best case scenario and will depend on the case.

I do know lenders that lend personally and currently make 10% interest so alternative lending can also get more expensive on the rate side but in the best cases it may just be a little higher.

How much down for Alternative Lending?

Phil mentions 35 to 40% down. The point is that if you have enough cash but simply don’t show enough income, and the property clearly shows its value then alternative lenders will probably be comfortable lending. I think this is connected to the rates as well. If you are putting a lower amount down then, you would be higher risk, so rate they would be willing to give may be higher.

Why Alternative Lending works for Business Owners

In many cases alternative lending for business owners makes sense.

As a business owner you try to pay yourself as low of a salary as you can to avoid paying taxes. I heard someone say, that business owners usually don’t have a problem with paying their share of taxes, but they just don’t want to give a tip.

They will often structure their businesses, so they pay themselves in other ways. Generally, the NOA for business owners (notice of assessment from the government) is not going to be high. The bank seems to give money to massive companies but when it comes to the average business owner, getting a bank loan with a NOA, that shows a small income, is difficult.

The banks want to see a high income on your NOA and often cannot see past that requirement. Alternative lenders are usually able to look at the situation more and understand that the business owner could be paying themselves much more but, understandably, want to avoid paying higher taxes.

So, what do you do? Do you raise your salary or income so that your NOA looks better and you look much better in the eyes of the traditional banks? Or, with alternative lending you may pay a higher interest rate, and higher fees, but how much more money will you be paying than if you paid taxes on extra salary, you paid yourself to look good for the banks?

Do the calculation and your situation. For example, if you are paying yourself $60,000 instead of $120,000 per year, you may be saving you $30,000 in taxes, while the fees and extra interest you may be a much lower amount. In the end it is about making money. If there is a hot lady (or guy) at the bank that you want to impress, then spend the money on making your income look better on paper, but I think you will find when you do the calculations that alternative lending can put more money in your pocket as a business owner. If you need to increase your income and pay the extra taxes to get a mortgage with an A lender, it may not be worth it.

Please visit the following page to get Phil's details (Be sure to tell him that you found him through Derek's video)  https://dkeet.ca/guest-speakers.html

If you are looking to buy a property in Edmonton, Sherwood Park, or need advice on the current market contact Derek!

Derek is licensed for residential, commercial, and rural real estate, plus has many years of personal and business experience to be able to understand your needs.

If you are interested in buying or investing in Edmonton or the surrounding areas, click here to set up your own detailed search: https://dkeet.ca/map-search.html

Click here for more information on Derek Keet: https://dkeet.ca/about.html