Buying an investment property is a popular choice for many Canadians, and has been an excellent strategy for investors in B.C. because of its unique and high demand real estate market.
Most first-time investors start with condos and single-family homes because of the lower price of entry, but multiplex units can bring higher returns, if one has analyzed the cost and can take on the increased risk.
The number of units in the investment property, and whether any of those units will be owner occupied will impact the type of mortgage that can be offered, the maximum amortization available, and the size of down payment required.
There are many different approaches investors can take, for example:
1. Converting your current home into a rental property and purchasing a new primary residence.
If you are looking to sell your home and purchase a new one, consider if retaining your current property and renting it out would make financial sense for you. We will work with you to determine if the rental income would cover the expenses of holding the property, and what the longer-term overall gain would be with that property and in your neighbourhood.
Having someone else pay down your mortgage for you, while earning the equity gain over that time can be a great financial decision. The mortgage interest and maintenance costs of the rental property will also be tax write offs come tax time.
Questions to ask yourself are:
a) What would be the cost to prepare your home to rent out?
b) Do you have the skills or desire to be a landlord, or what would the cost of a property manager or handyman be to manage required repairs?
c) What capital gains may be incurred by renting out your home?
2. Purchasing an investment property but remaining a renter yourself.
Potential investors in high price markets often find they cannot purchase the same quality of home that they can rent, so choose to continue renting their current residence and purchase an investment property to enter the market.
This is not a common strategy, nor do all lenders allow this, but there are many options for this scenario and allow renters to realize investment and equity gains in the real estate market without losing the home and neighbourhood they love and want to remain in.
3. Purchasing a condo or single-family home as an investment property.
Single unit residential properties are the most popular choice for first time investors because of the manageable price points and the ability to maintain the properties. This can be for a 3rd party tenant or for a direct family member. This is often:
a) A condominium, which has the lowest purchase price and least amount of maintenance required, but has the additional strata fee cost in lieu of handling the maintenance. Condo value gains historically have been steady but less than with single-family homes, but that varies with the location.
b) A townhouse or a duplex, which are in between a condo and house in both price point and size, and can also have strata fees depending on the property.
c) A single-family home, which has a higher price point but usually a higher equity gain over time. This also comes with more maintenance considerations.
4. Purchasing a multiple unit property.
A multi-unit property generally has the highest potential for positive cash flow, but its higher cost is a prohibitive barrier to most investors in higher priced markets. These can generally be 2-4 units, with one of the units being owner occupied in some cases. Whether or not you live in one of the units will impact the type of financing you can obtain.
5. Purchasing commercial real estate.
Commercial real estate can include a wide variety of properties, including a mix of residential and commercial tenants, or a residential property with 5 or more units. This type of property can mean a higher income potential, but also carries greater risk.
Whichever route you choose, it is important to work with a mortgage professional and a real estate professional in analyzing:
- Location – this will impact the gain in equity you will see over time and the type of tenant you will attract – is it an up and coming neighbourhood, or has the area’s value gain flatlined? How close is the property to schools or mass transit, parks, and businesses?
- Will it generate sufficient rental income – does this investment make sense for you, and will it bring you higher gains than investing in something else?
- Is the price point realistic for you? It is important that the purchase be manageable for you, and that you would be able to carry the additional mortgage(s) during any potential vacancies.
- What costs will be incurred? Homeowner insurance, advertising costs, maintenance costs, property management costs, repairs, potential vacancy or tenant issues, utilities, property taxes, etc. Many of these costs can be deducted on your taxes – for more information, please click here.
- What are the current landlord-tenant laws – be familiar with these and there have been many updates in recent years. For more detail on the changes and general information, please click here.
The minimum down payment for an investment property is 20% if it will not have an owner-occupied component, and can be as low as 5-10% if the owner will reside in one of the units (depending on the number of units). Most lenders will offer their best rates for investment property mortgages, but will add a premium surcharge to that rate.
Qualifying for an investment property purchase differs depending on the type of property being purchased, but in general you will need:
- Your personal income documents
- Proof of expected rental income, either from existing tenancy agreements or we can obtain a Letter of Economic Rent from an appraisal company to estimate future rent if it is not currently tenanted.
- Property tax statements for all existing and subject property.
- Strata fee costs of all relevant properties.
- Mortgage statements for all current properties owned.
- Confirmation of down payment (90 day history of any account(s) the down payment will come from)
We will work with you to determine how much of a mortgage and purchase price works within your budget and comfort level, and will lock in a rate for four months if you are ready to begin your property search.
Once you have found your new home, we will again research the best mortgage options and rates for you, and walk you through the pros and cons of each lender offering to help you make the decision that feels most right for you.
Our team will help you from first call through to following up with your lawyer at closing to ensure your homebuying experience is a smooth and a happy one!
Call NOW or email to find the right mortgage solution for you!