Decoding the Government CMHC MLI Select Program: A Comprehensive Guide to Multifamily Property Investment with CMHC insured mortgages

If you’ve been looking for a way to invest your hard earned cash into real estate, then the CMHC MLI select program is an incredible opportunity for buyers to invest in Canadian multifamily property. Not only that, but you can potentially invest in multifamily for 95% LTV (5% downpayment) and up to 50 years amortization!

Not surprisingly, this is a highly competitive product, and as a result, Canadian multifamily property is currently selling like it’s going out of style! Most half decent multifamily properties are selling within a week, and in many cases, within 24 hours with multiple offers.

What is the CMHC MLI Select program?

The CMHC MLI select program is a government backed initiative to encourage Canadian investment in affordable housing for Canadians, and it is an incredible opportunity for investors looking for the best bang for their buck. But there are a few important things to be aware of if you’re looking to go down this path.

In this blog post, I’ll get into everything you need to know about the MLI select program, the points based qualification system, and how you can use this amazing opportunity to expand your property portfolio. I’ll also talk about timelines, eligibility criteria, application and a number of important other FAQs.

I have already helped a number of clients jump into multifamily investing with this product, and can tell you first hand, it’s not too good to be true! It can be amazing if you have the patience and time to see this new and highly competitive process through to the end.

If you’re considering going down this path and are interested in finding some Alberta multifamily real estate, don’t hesitate to reach out to me at info@robintuck.com or give me a call at +14034012066.

What is CMHC?

CMHC is short for the Canada Mortgage and Housing Corporation. They are a government corporation whose mandate is to come up with and fund new housing solutions for Canadians, and more importantly they provide mortgage insurance to lenders, allowing lenders to reduce downpayment requirements from borrowers.

CMHC Mortgage loan insurance

If you’ve heard of CMHC already, it’s likely that you’ve heard about them in the context of CMHC mortgage loan insurance. This is one of the major initiatives that CMHC provides to make home buying easier for the average Canadian. As you may know, anyone buying a residential home under $1m is required to pay CMHC mortgage loan insurance premiums every month, and this is typically bundled into your mortgage payments. Generally speaking, lower your downpayment, the higher your premiums..

CMHC provides insurance to lenders (paid for by the buyer), that essentially compensates the lender in the event that the buyer defaults. It sounds rather unfair that the banks are making home buyers pay insurance premiums for the lender in case they can’t pay their mortgage, but the reality is that without CMHC insurance, all banks would require a 20% downpayment. Housing would be largely inaccessible for anyone with a downpayment of less than 20%.

CMHC insurance allows banks to provide consumers with mortgages with as little as 5% down on the property, without having to pay exorbitant mortgage rates. On average, home buyers would pay much less by paying a mortgage rate plus insurance, compared with no insurance and a higher interest rate.

What is CMHC’s MLI Select program all about?

While helping first time home owners buy houses is hugely important, there is still a large proportion of Canadians that are not currently in a position to be a home owner. So the government is also working to create solutions to keep rents lower and provide more affordable housing for renters.

The government can’t afford to build enough rentals of its own, but it can indirectly create more affordable rentals/housing by providing multifamily mortgages with far more reasonable terms to would-be landlords. In return, landlords have to keep rents at a reasonable rate. After all, when mortgage payments for landlords increase, those costs are generally passed on to tenants. If the government can keep mortgage costs low, then it stands to reason that rents will also stay lower (it is also mandated for 10 years, minimum).

This is what the CMHC MLI Select programme is all about. The government is insuring lenders from the risk of default, allowing banks to offer ridiculous LTV mortgages and long amortisations.

What are the key features of the MLI Select program?

The MLI Select program has three main goals:

1. Affordability
2. Energy efficiency
3. Accessibility

The system is tiered and points based. In order to qualify for the mortgage at all, a property needs to qualify for a minimum of 50 points. There are three tiers; 50+, 70+, 100+ points. The tier determines the financing terms you are eligible for.

The criteria are different for existing and new properties, so we’ll look at them both separately.

Qualifying for an existing multifamily property

Earning MLI Select points for existing multifamily properties

If you visit the CMHC website, you’ll see a breakdown of how various points are awarded for existing properties. I’ve copied this chart below:

Affordability points

Affordability points (i.e. reduced rents) require a minimum 10 year commitment, but an additional 30 points can be achieved with a 20 year commitment.

• 50 points: 40% of units are at 30% of median renter income in the area in question. For example, if the median annual income for Calgary is $69,500, then 30% is $20,850, or $1,738 per month. So in this case, you would need 40% of unit rents to fall below this number. For Edmonton, the number is $1,665 per month. For Red Deer, it’s $898 per month.
• 70 points: 60% of units are at 30% of median renter income
• 100 points: 80% of units are at 30% of median renter income

These rental rates can only increase with the approved government increase amounts or in line with the consumer price index, and will be tracked for your entire commitment period (10 years minimum).

Energy Consumption points

In order to qualify for these energy consumption points, you would need to renovate or optimise an existing property:

• 20 points: a 15% reduction in energy consumption below a starting baseline
• 35 points: a 25% reduction in energy consumption below a starting baseline
• 50 points: a 40% reduction in energy consumption below a starting baseline

To qualify for these points, you can either purchase a property through conventional financing and renovate it before applying for the CMHC financing (in which case the change has to be proven and have been done within the past 12 months), OR you can buy the property and finance the improvements through CMHC, but will have to prove these improvements within 60 days of completion. You also have to prove the energy efficiency has reached those thresholds within 24 months.

You only have to prove these energy improvements once.

Accessibility points

An existing building has to be renovated to include accessibility for a certain proportion of units according to a certain set of criteria.

• 20 points: 15% of units are considered accessible in accordance with the CSA standard B651-18 or min 15% meet universal design standards
• 30 points: 15% of units are considered accessible in accordance with the CSA standard B651-18 or min 15% meet universal design standards AND Min. 85% of units are universal design OR 100% of units are universal design.

What do CMHC points equate to with financing terms on an existing multifamily?

For each points threshold, there is a different set of financing terms available. Again, I’ve borrowed this chart from CMHC to show what is on offer for each level.

50 points +

• LTV: up to 85%
• Amortisation: up to 40 years

70 points +:

• LTV: up to 95%
• Amortisation: up to 45 years

100 points +:

• LTV: up to 95%
• Amortisation: up to 50 years

Additional terms that apply for all properties:

• Potential holdback on parts of the loan until it has been proven that the rents are stabilised at the required threshold (shouldn’t be an issue if you’re buying based on existing rents)
• Minimum 1.1 Debt coverage ratio (i.e net income has to be at least 1.1x the debt costs)
• The loan must be a full recourse loan unless you have 100+ points
• There will be an application fee and insurance premiums to be paid in addition to your mortgage rate.

Existing multifamily focuses on affordability

So what does that mean for buyers looking at existing properties? The points are heavily skewed towards affordability, and it means that even if you max out your points on energy consumption and accessibility, you still won’t be able to qualify for the best terms without including some affordability.

I believe the reason for this is that CMHC knows that existing properties are very expensive to retrofit. They know that the easiest figures to manipulate here are, by far, the rents, so this is what they’re pushing for.

The upside, of course, is that if you can retrofit a building and are happy to get 80 points and limit yourself to the second tier (70+ points), there are no rent restrictions on CMHC insurance.

Things to note about existing property applications:

Remaining Economic life on the property

One of the first hurdles I came across with a client of mine that purchased an existing building was a small clause that said the property must have an economic life that exceeds the amortisation of the property. If your home inspector/appraiser comes into an old, banged up property and says it has 30 years of economic life left, you will not be given a 50 year mortgage!

Qualifying for New Construction Multifamily Property

MLI Select New Construction points system

Once again, I’ve poached this chart straight from the CMHC website. Here we can see how points are awarded for new construction properties:

Affordability points

Affordability points (i.e. reduced rents) require a minimum 10 year commitment, but an additional 30 points can be achieved with a 20 year commitment.

• 50 points: 10% of units are at 30% of median renter income in the area in question.
• 70 points: 15% of units are at 30% of median renter income
• 100 points: 25% of units are at 30% of median renter income

These rental rates can only increase with the approved government increase amounts or in line with the consumer price index, and will be tracked for your entire commitment period (10 years minimum).

As you can see, the point tiers require far fewer rent restrictions to qualify. I believe the reason for this is that land and development is expensive now, so it’s not financially viable to hamstring a developer/owner with low rents and still expect them to build a high quality property. Although you can’t reach the top tier (100+ points) without including affordable rents in the project, it’s roughly 1/3 less than is required of existing properties.

Energy Consumption points

In order to qualify for these points, your new development would have to be a certain percentage better than the code benchmark:

• 20 points: 20% better than code
• 35 points: 25% better than code
• 50 points: 40% better than code

Unfortunately, as of June 2024, the government halved the points you would get for energy consumption points. Whereas before, you could get 100 points for simply building an environmentally friendly property, you will now need to include an element of affordability to reach that threshold.

Accessibility points

Accessibility points are the exact same as existing property points (see above)

What do CMHC points equate to with financing terms on an new multifamily developments?

For each points threshold, there is a different set of financing terms available. Let’s take a look at the chart from CMHC:

50 points +

• Amortisation: up to 40 years

70 points +:

• Amortisation: up to 45 years

100 points +:

• Amortisation: up to 50 years

Additional terms that apply for all properties:

• All 95% LTV
• All rental achievements are waived
• Minimum 1.1 Debt coverage ratio (i.e net income has to be at least 1.1x the debt costs)
• The loan must be a full recourse loan unless you have 100+ points
• There will be an application fee and insurance premiums to be paid in addition to your mortgage rate.

Additional criteria for a multifamily to qualify for the CMHC insurance

If you’re seriously considering either an existing or new construction multifamily, you’ll also want to consider the other terms in the small print as well. These are the following:

1. Property must have 5+ units
2. The property may contain some commercial units, but no more than 30% of the total property can be commercial
3. There is a net worth requirement. The borrower must have a net worth of a minimum of 25% of the loan amount, with a minimum of $100k. If the property scores more than 100 points, this may be waived.
4. The borrower must guarantee the loan until the rents have been stabilised.

Other things to be aware of when looking for multifamily property on the MLS

A caution against buying a property with high projected rents

This is going to be quite a long winded example, but I wanted to really dig into and explain one of the most important things to be aware of when looking for multifamily through the MLI select lens. Properties might be marketed with extremely high potential rents on their pro forma’s, but I would strongly urge some thorough research before diving in.

Understanding the pro forma and marketing materials for a multifamily

When you’re investing in a multifamily property, you are primarily focused on its investment return, so the first thing you should do is contact the list agent for a pro forma or financial statement (or have your realtor contact them). This is to allow you to find out the bottom line once all expenses are paid, and figure out if you’re going to make any money after all the expenses are paid.

The major things you’ll look at are:

1. The gross income
2. The expenses
3. The net income (Gross income-expenses) aka the bottom line
4. The cap rate (Net income per year/price X 100). This is a percentage that shows your annual return on investment.

Quick side note: remember that the net income line needs to be at least 1.1x the mortgage payment (debt coverage ratio)

Should you listen to the projected rents and cap rates?

What you absolutely need to pay attention to is the actual cap rate on offer, and not get too drawn into conversations about potential cap rates, potential rents etc. I’ve noticed that the vast majority of properties are being sold at prices that are already factoring in future rent increases and it’s important to take that with a pinch of salt unless you can say that the projected rents are likely to be accurate with a high degree of certainty.

A hypothetical example for understanding multifamily numbers

To further drive the point home, it might be helpful for me give a hypothetical example with easy round numbers (if this is all obvious, feel free to skip!):

• A 10 unit, property in Calgary is listed for $2m.
• Each unit is a 2 bedroom unit, bringing in $1500 per month in rent.
• 9 of the units are currently rented out.
• Let’s say ‘market’ rent for a 2 bed is $2000 (ignore whether or not this is anywhere close to real market numbers)
• Total expenses are 100k per year

To summarise the stats as of ‘today’:

• Gross revenue: $162,000
• Expenses: $100,000
• Net revenue: $62,000

With a net revenue of $62,000 per year and a $2m price tag, we can work out the cap rate.

62,000/2,000,000 x 100 = 3.1% cap rate. Or in layman’s terms, if you paid full asking price, you’d be making 3.1% per year on your investment…today.

What we are seeing a lot of right now, are properties marketed as if the property is already fully leased at market rates.

For example, you might be sent a pro forma that shows the stabilised rent should be $2000 X 10 units X 12 months or $240,000 per year. This means a stabilised income of $140,000 and a “projected cap rate” of 7%! Quite often it’s accompanied by a comment that says something along the lines of “this property has huge potential once the under market rents are increased!”

But remember, this property currently only has 9 units rented at way below market rates. 7% is not in any way accurate and is purely speculative, no matter how much the market supports the market rent data.

Reasons to be cautious when reading a commercial pro forma

There are two reasons why you should be extremely cautious of taking any projected numbers as gospel:

1. Projections are a hypothetical number, and honestly, while we should definitely look at the future potential of a property, our investment decisions should be based on today’s performance. This is what you are actually buying! We can never guarantee future returns. The seller is also often pricing the projected rent increases into their asking price which, in my opinion, doesn’t make sense. If it was that easy, shouldn’t they have done it themselves already and be selling it at market rates? Depending on the leases for this building, you may have to wait a year until you could increase rents to the ‘stabilised rates’, and the market could have easily changed by then. The further out the projection, the more likely the projection is to have an error. The seller is asking you to take on all of the risk for the rent increases while compensating them as if the rents have already been increased. I understand why this happens, but I don’t particularly agree with it. The facts are the facts and the rest is just fluff.
2. Perhaps more importantly, remember we are buying this with the aim of putting down 5% on this property, and with that comes affordability restrictions. In our example, if we want the best terms and 100 points, we would need 80% of the property’s rents to be below the median rent. This means that, for Calgary, 8/10 of these units could, AT BEST, be increased to $1738 per month.

Analysing a property for the MLI select insurance

So if we take this hypothetical property as an example, and we are aiming for 100 affordability points, the maximum rent we could get for this property is 8×1738 + 2x 2000 (even if market rates are $2000 per month). This would mean that the absolute max income we could get for this property and still qualify for CMHC is $214,848. Assuming the expenses are still the same, this means a net of $114,848 and a MAX cap rate of 5.75%.

If, for example, your required return for this property is 6%, the absolute maximum you could buy this property for would be $1.9m, because with fixed rents, the only way we can increase the return is to reduce the purchase price.

If I was representing you, I would probably recommend giving yourself an additional buffer and offering even less.

So you can see how these projected pro forma’s can be enormously misleading, and might make you think there is more upside potential than there actually is.

Competing against other buyers

Now, if you are confident in these rents and you don’t need to purchase through CMHC, then perhaps the higher rents and cap rates are achievable at the asking price, but if you are looking to buy through this route, it’s important to go in with your eyes wide open.

In addition, it may be helpful to know that this can be a very frustrating process that takes a lot of patience, and might require making multiple offers until one is accepted. But it is absolutely 100% the effort.

If we take that previous example, you may be competing against someone paying with cash or conventional financing, so they may actually be able to achieve higher rents than you can. In that case, you may struggle to compete with them on price as they can get the same return for a higher price.

Steps for analysing an MLI select multifamily property

1. Get the property pro forma
2. Analyse the numbers to make sure the property meets the criteria for MLI Select
3. Contact a commercial mortgage broker to see if it works
4. Tie up the property with appropriate conditions (at appropriate lengths)

Finding out if a property can be financed

The next step, if all of the numbers make sense so far is to chat with a commercial mortgage broker that’s familiar with CMHC mortgages.

The broker will then see what rates they can get you, factoring in the CMHC premiums, and will come back to you with the numbers. If it beats the 1.1 DCR and the interest rate makes sense, then we’re off to the races!

Your mortgage broker will also help you prepare your documents for financing, so it’s a good idea to have all of these ready when you reach out.

If you need a connection to one of these brokers, please don’t hesitate to reach out and I’d be happy to connect you.

How to tie up an MLI select eligible deal

So certainly for me and my past and current clients, finding an MLI select eligible multifamily seems to be a bit of a numbers game; putting in offers for a price that makes sense and eventually the stars align.

We’re sometimes looking for the diamond in the rough and our search might take us far and wide. As I’m licensed for anywhere in Alberta, it can mean driving many hours to find that perfect property (not always though, and don’t worry, I can video call so the buyer doesn’t have to trek out there in person).

Whereas looking for residential real estate might mean focusing in on a particular neighbourhood in one city, looking for multifamily tends to mean casting a wider net. Some of the smaller, more rural communities are overlooked and have some of the best returns! The main thing is putting in the due diligence to find that property where the numbers make sense for you and your required return. For some people that might be 4%, for others it might be 6%.

Other MLI Select FAQ’s

Can non-Canadians qualify for CMHC insurance?

Broadly speaking, if you are exempt from the ban on foreign investment then you can qualify for CMHC insurance. It’s important to do your own research, but commercial real estate (5+ units for multifamily) and land purchased for development are both exempt from the ban on foreign investment. For more information on opportunities for foreign investors in Canada, and a full explanation of the foreign buyer ban, click here

How long does MLI select insurance take to obtain

In my experience, getting the MLI select approval can extend financing by many months. Typically we are seeing anything from 3-6 months for financing. In reality, this means you may need a significantly longer financing condition. You will need a patient seller that is open to this, and may need to rely on your realtor to convey their confidence in you as a client and your ability to close. It’s a long time to tie up a property if you don’t end up closing on it.

And in addition to that, your rate will only get locked in 2 weeks from funding, so you’ll have a fair bit of uncertainty right up until the last minute. What that can mean in reality, is that if rates go up significantly between tying up the property and closing, you may have to buy down your rate with a bit more downpayment. For this reason, it’s not advisable to buy something that completely maxes out what you’re qualified for.

Getting bridge financing while you wait for a CMHC insured loan

If there is a real issue with tying up the property for a long time, and you have extra down payment available, your advisor might also suggest a bridge loan so you can close on the property and then refinance with your CMHC insured mortgage a few months later.

This could cost you quite a bit in interest, so if that needs to be factored in as well, you may even reduce your offer price to accommodate this. In many ways, your options will be determined by the seller’s willingness to play ball and work with you. Every sale is different and comes with its own unique nuances!

New developments available today?

There are many prepackaged multifamily developments that have been put together for exactly this program. All you have to do is qualify and there are already plans/builders/developments lined up waiting for an investor to pull the trigger. Feel free to reach out and I’ll be happy to fill you in on any opportunities available. Existing projects can be anything from $1m+, new developments tend to be $3m+ and take anywhere from 8 months to 15 months, depending on approval stage.

Final summary

So there is a fair bit of red tape to jump through to get MLI Select insured financing for multifamily, but the opportunity to buy it for 5% down is incredible. It has all but quadrupled the buying power for a lot of investors and is a rare opportunity. We don’t know how long it will be around for, so if it’s something you’re at all interested in, I would highly recommend jumping on the opportunity!

If you would like help finding an MLI select eligible multifamily property (either existing or new development), please don’t hesitate to reach out to me directly either at +14034012066 or at info@robintuck.com .

Disclaimer

While the information provided is accurate at the time of writing, readers are advised to verify current program details and consult with relevant professionals before making any investment decisions