Investing in affordable and sustainable housing has often been seen as a compromise between social impact and financial return. However, the Canada Mortgage and Housing Corporation’s (CMHC) MLI Select program aims to change this. By incentivizing projects that prioritize affordability, sustainability, and accessibility, MLI Select enables real estate investors to achieve both goals.
The Mechanics of MLI Select
MLI Select uses a scoring system built around three pillars: affordability, energy efficiency, and accessibility. Each project earns points based on its alignment with these criteria. Higher scores unlock more favourable financing terms, such as:
- Enhanced loan-to-value (LTV) ratios: Up to 95%, reducing the upfront capital required.
- Extended amortization periods: Up to 50 years, significantly lowering monthly debt obligations.
- Lower insurance premiums: Reducing the overall project costs.
Demand for Affordable Housing
The demand for affordable housing in Canada is at an all-time high, driven by rising housing costs and population growth. MLI Select helps investors address this gap by offering financial incentives that reduce project risk. By incorporating affordable units into their developments, investors can expand their potential tenant pool and mitigate vacancy risks through lower vacancies.
Strategies for Profitability
Optimize Unit Mix
Balancing affordability with market-rate rents is crucial for maintaining profitability. For example, dedicating 30-40% of units to rent at 80% of the area’s median market rent can fulfill MLI Select’s affordability requirements while preserving cash flow from the remaining units.
Invest in Energy Efficiency
Energy-efficient buildings earn higher scores under MLI Select while offering substantial cost savings. Practical measures include upgrading insulation, installing energy-efficient windows, and incorporating solar panels or high-efficiency HVAC systems. These improvements lower heating and electricity bills and boost property value.
Target Cost-Effective Accessibility Features
Accessibility features not only improve MLI Select scores but also appeal to seniors, individuals with disabilities, and others. These improvements can be done cost effectively for good results.
Retrofit Existing Properties
It is possible to invest in older properties and retrofit them to meet MLI Select criteria.
Combining Profit and Purpose
As an example, if an investor purchases a 40-unit apartment building for $10 million, and aims to qualify for MLI Select by incorporating affordable units, energy efficiency upgrades, and accessibility features, there could be tangible savings and profitability improvements.
Affordable Units
To meet MLI Select’s affordability criteria, the investor designates 20% of the units (8 out of 40) as below-market rentals.
- Current market rent: $1,800 per unit per month
- Below-market rent (at 80% of market): $1,440 per unit per month for the 8 affordable units
- Revenue impact:
- Market-rate units (32 units): $1,800 x 32 = $57,600 per month
- Below-market units (8 units): $1,440 x 8 = $11,520 per month
- Total monthly rent: $57,600 + $11,520 = $69,120
By strategically deciding on the number of below-market units and maintaining 80% of market rent for those units, the investor preserves strong cash flow while meeting MLI Select’s affordability requirements.
Energy Efficiency
The investor retrofits the building to improve energy efficiency by 25%, focusing on practical upgrades such as improved insulation, LED lighting, and a high-efficiency HVAC system.
- Energy costs before retrofits: $4,000 per month
- Energy costs after retrofits (25% reduction): $4,000 x 0.75 = $3,000 per month
- Monthly savings: $1,000
- Annual savings: $12,000
Additionally, these upgrades increase the building’s MLI Select score, qualifying the investor for better financing terms and potentially making the property eligible for environmental grants or tax rebates.
Accessibility Features
The investor incorporates key accessibility upgrades, such as accessible entrances, grab bars in common areas, and adaptable units for tenants with disabilities.
- Upgrade cost: $100,000 for retrofitting common areas and installing adaptable features in 4 units (10% of the total).
- Impact:
- Broader tenant appeal, reducing vacancy rates and improving tenant retention.
- Higher MLI Select score, unlocking superior financing terms.
Financing Benefits Under MLI Select
Without MLI Select:
- Loan-to-value (LTV): 75% (standard maximum for conventional financing)
- Loan amount: $7.5 million
- Interest rate: 5%
- Amortization period: 25 years
- Monthly mortgage payment: Approximately $43,635
With MLI Select
By meeting the MLI Select criteria through affordable units, energy efficiency upgrades, and accessibility improvements, the investor qualifies for enhanced terms:
- Loan-to-value (LTV): 95%
- Loan amount: $9.5 million
- Interest rate: 5%
- Amortization period: 50 years (extended under MLI Select)
- Monthly mortgage payment: Approximately $41,287
With MLI Select, the investor finances a larger portion of the property (95% vs. 75%), which requires significantly less upfront equity:
- Equity required without MLI Select (25% of $10M): $2.5 million.
- Equity required with MLI Select (5% of $10M): $0.5 million.
- Upfront equity savings: $2 million, which can be reinvested elsewhere.
Despite financing a larger loan amount, the extended amortization term reduces monthly debt payments by $2,348, directly improving cash flow.
Managing Risks for Financial Sustainability
While MLI Select offers significant advantages, investors need to plan carefully to mitigate risks.
Maintaining Compliance
Investors must meet CMHC’s affordability thresholds throughout the loan term. Regular monitoring of rental rates and adhering to guidelines is critical to avoid penalties.
Addressing Upfront Costs
Energy-efficient upgrades and accessibility features often require significant initial investments. Assess the benefits of the MLI Select program against these costs.
A New Competitive Advantage
Investors leveraging MLI Select can access growing demand from socially conscious tenants who value affordable, sustainable housing. Moreover, meeting these criteria often makes projects eligible for government incentives or tax benefits, further improving financial outcomes.
Dion Beg is the Founder of Kanga Mortgage – a team that helps brand new and veteran investors with reaching their financial goals. Dion’s career started in Australia—hence the name ‘Kanga.’ Over the past two decades, Dion’s team has helped thousands of Canadian investors acquire over $1 Billion in real estate. A multiple-time recipient of the Consumer Choice Award, Dion has also consistently ranked among the Top 75 Mortgage Brokers in Canada. In addition to leading his team, Dion frequently speaks at the Toronto Regional Real Estate Board (TRREB) and the Ontario Real Estate Association (OREA).
