Many Canadians like to invest in real estate that can prove to be a lucrative investment option. That’s because land is a limited resource and is sure to rise in value years down the line. Though, of course, you cannot predict variables like how soon and by how much. Also, buying real estate has an added advantage. You can buy property and rent it out for some added income. This extra income can help pay off the mortgage and build wealth over time.
If you’re considering taking out a mortgage and buying an investment property, know that several factors come into play. And, these factors are distinct from the aspects you may have to deal with if you were buying a residential property. Like, for instance, lenders are likely to take into consideration the number of units in the structure you’re buying, and if you’re currently occupying any of the units in the same property.
Before starting to look around for a good property to invest in, you may want to remember that the category of the property you buy can directly influence the down payment you’ll make. And, lenders are likely to take into consideration the rent you are likely to earn when calculating the debt servicing ratios.
If the property you want to buy includes between 1 and 4 units, it comes under the residential category. Accordingly, the possible mortgages and qualifying criteria are somewhat more complex than if you wanted to buy a property for personal use. On the other hand, if the structure has 5 or more units, it comes under the commercial category, and you would be required to take out a commercial mortgage for buying it. In that case, the qualifying criteria become stricter, and you may have to pay higher interest rates.
Owner-occupied rental property is a house that you’ve purchased for living in with your family. However, it may also have a basement, suite, or carriage house that you can rent out to another person, individual or family. Accordingly, the required down payment is the same as for a personal residential house which is 5%. You can use a part like, say, around half of the earned rent towards paying off the mortgage. For this reason, lenders are willing to offer you larger mortgages for more expensive and bigger homes. Not only can you become debt-free sooner, but you’ll have a larger asset at the end of the mortgage term.
A non-owner-occupied rental property is where you will be giving out the entire building and its units on rent. This property could be a condo, a house, or a house with multiple suites. In this case, the mortgage provider will require you to pay a minimum of 20% of the value of the property as down payment. In addition, the lender is likely to take into consideration not just the mortgage you want for the rental property, but also any other mortgages you already have. These can include the mortgage on the residential property you currently live in. Of course, the rent you’ll earn on the rental property factors in the qualifying criteria.
Evaluating Mortgages Against Income and Expenses
In case you’re looking for a mortgage for a non-owner-occupied rental property that is likely to generate rent through multiple units, the lenders may use a “rental worksheet” as qualifying criteria. This worksheet carries a comprehensive list of all the expenses you’ll incur off the property. Like, for instance, mortgage payments, maintenance costs, heating expenses, applicable taxes, units going vacant, or any other.
In addition, the lender will add the rental income received from the units and combine it with the personal income you’re earning. If there are any shortfalls, they are deducted from your income. By comparing the income and expenses side by side, prospective lenders can get a fair view of your financial status and whether you qualify for the mortgage. This analysis becomes especially important if you already own other properties also.
At the time of assessing your eligibility, the lender may use estimates of the possible rent you can earn. But, as you continue with the mortgage, loan providers may require you to provide signed leases of the occupied units. If all of the units are not occupied, a fair market rent letter provided by an appraiser suffices.
Owning and managing rental properties do come with their own set of challenges that you’ll have to deal with. However, if you can manage them, investing in real estate is great way to earn an additional income, pay off mortgages quickly, and build wealth down the line.