The Financing Behind A Big Reno

I’m an avid reader of the Globe & Mail’s Real Estate section, especially Dave Leblanc and Alex Bozikovic. Quite often we see dreamy renovations accomplished in their articles but rarely do we actually know how much they cost. When inquiring about this, the writers both mention the fact that the subjects did not want to reveal personal finances - quite fair in my opinion. It was interesting to see an article in today’s paper, then, that did discuss actual costs and showed us the final product. The Principals behind Solares Architects gutted and greened an old Roncesvalles home for $325,000 and have done an absolutely fantastic job. Two goals were accomplished: 1. a complete makeover of the property and 2. a complete energy update to the property. The results are astounding on both fronts, and the budget was quite manageable in my opinion for an end product of this high quality.

When reading their article and very detailed blog I got to thinking: “I bet a lot of readers want to know how they can do the same?”. So here I present to you: The Financing Behind A Big Reno so you can understand the process and how you can get there!

First let’s start off with the purchase. Using Tom & Christine’s example, they did the absolute right thing in seeking a home with good proportions, but one that didn’t check most of the boxes for other buyers looking for a turn-key property. In a white-hot area of a white-hot market, they managed to secure their property for less than asking. Awesome. Purchase price paid: $680,000 on an original ask of $750,000. Check 1. To avoid CMHC costs, one should put down 20% on $680,000 and arrange for a $536,000 mortgage. Because renovations will be extensive (and what rhymes with extensive? that’s right, expensive), you want to amortize for the longest period you can which is still 35-years, and manage your cash-flow with low payments by taking a variable-rate and have payments of $1941 per month for this loan.

Once you move in, step one is to secure the plans and permits. Tom and Christine are very talented in their craft so they did all the work themselves but if you’re not fortunate enough to be an architect, you’ll need to hire one (like them!). Approximate costs for permits can be $15,000 with the City of Toronto, and drawings can range from $20,000 and up. Let’s put ourselves on a budget of $40,000 all-in for drawings, plans, permits, and anything needed to get started with a go from the City of Toronto.

Step two is to secure construction financing if you do not have the $325,000 available from other sources. Construction financing is often done through private means but can be arranged through an institution. If you’re income-qualified, have great credit, and have a strong application, a local credit union has the single best construction financing product period end of story: Single advance draw at bottom rates. How does it work? Simple:

1. Arrange for an as-complete appraisal.
2. Apply for the mortgage and construction financing in one shot.
3. Provide detailed plans, permits and budget breakdown.
4. Get approved.

Should this fail, you are also able to secure construction financing from a myriad of private sources available in the GTA. The difference here is you will have two separate mortgages: The first mortgage from your institution, and the construction mortgage from your private source. The second difference is the cost. While the example above would cost approximately 3.25%, a private can cost 7% to 14% with fees of approximately 3% of the total loan. Note the payments on a construction loan are interest-only and sometimes can be deferred to the end of the project.

Construction financing from private sources and everyone other than Meridian is also done in draws. A draw is essentially a milestone i.e. you have finished to a certain point and can show the lender via an appraisal, then the lender will release more funds until you complete the next phase. Usually construction financing is done in 3-4 stages or draws. Another difference is unlike with Meridian Credit Union, where the advance is done before start, private construction financing typically requires the borrower to have 25% of the budget on hand to start the project.

Assuming our example above then, here’s where we are at:

20% down = $136,000 on the purchase.
Cost to start = $40,000
If you need private financing = $80,000 to begin construction
If you can get away with the credit union single-advance = $5000 in set-up and legal fees to begin construction

Fast forward to the end of your project, where you’re finished at least 98%, and you can now finalize everything into one mortgage by way of a refinance. The reason for this is, you’ve probably tapped into lines of credit, credit cards, some private money, your own money, the bank’s money, or a combination of those. A refinance can be done to 80% of the end value. Let’s assume that this home is worth $1.1 on the market today, once renovated and all is said & done. Going back to our numbers; $544K for the first mortgage plus $325,000 for the renovation brings you to $869,000 first mortgage. Using the 80% refinance rule, $1.1M at 80%= $880,000 mortgage - or right where you want to be to pay off all of the debt associated with a job this big.

Does it sound daunting? Yes. Will it be easy? Heck no. Is the City easy to deal with? Not really. Is the end result worth it? You be the judge by looking at the photos in the article. I’d say a resounding yes. Not to mention you’re building a home that will cause much less energy usage thus less overhead, a home that can be lived in for 20+ years, and a home that you have built a very nice equity position in (my $1.1M estimate was quite conservative and in no way reflects the actual current value of their home - it was only for financing purposes).

If you want to explore this topic in greater detail, drop me a line anytime. Thanks for reading.

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