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Mortgages for an Investment Income Property

If you're thinking about real estate investing hence finding tenants to rent from you, the information below is a good starting point.

Revenue Property Advantages 

There are many advantages to owning a rental property:

  • Owning a tangible asset
    A tangible asset is an asset that has a physical form. You understand and control the asset yourself, as opposed to - say - a stock certificate.

  • Income / Cash Flow
    After the mortgage, tax, insurance, and utility bills have been paid, any rent above these amounts is extra 'cash flow' (money in your pocket) that your property has made for you.  Your mortgage balance is also reduced, called 'principal reduction.'

  • Appreciation
    Although this is not guaranteed, your property can go up in value over the years.  This is called 'capital appreciation'. Changes in interest rates and demand for housing can affect your property's value.  Upgrading a property also increases its value and allows you to attract more in rent (example, turning a 2 bedroom home into a 3 bedroom).

  • Tax Advantages
    The interest on a mortgage loan used to purchase a revenue property is a rental income tax deduction, Further, any capital appreciation is taxed at half your personal marginal tax rate, rather than fully taxable as is other business income.

Disadvantages

However, revenue properties are not a 'passive' investment like the stock market.

  • Maintenance
    It may seem like you can sit back and collect rent money, but that is not the case.  Tenants will rely on you to fix any problems that arise including plumbing, electrical or anything else that gets broken.

  • Irresponsible Tenants
    Although you will get a security deposit from your tenants, they may damage the property more than what it will cover, and you could be involved with a battle to make them pay for the damages.  Tenants could also refuse to pay, which means you will need to send them an eviction notice and not all tenants leave the property peacefully or willingly.  Properly attracting and screening your tenants is imperative, or use an experienced property manager instead.

  • The Law
    You'll want to research the Landlord Tenant Act and know your rights and responsibilities.  You must know and abide by the law. The law, in some provinces, tends to side with the rights of the tenant over the landlord.  If you don'd follow the law and procedure to the word, you will likely find you loose in a court.

  • Liability
    Having people live in a house that you own carries liability.  You want to make sure your house is up to municipal and government codes so that something like a deck railing breaking and a tenant falling off of it, is something you can avoid. You will also need liability and property insurance. If the tenant floods the house or drunk friend hurts them self, you will want them to have tenant liability insurance so that yours is not impacted as much.

  • Vacany
    When your house is unoccupied, you are making payments out of your pocket and don't have that income coming in.  You will have to immediately be on the search for new occupants when someone tells you they are moving out. 

Insurance

Landlord's insurance is different than homeowner's insurance and here's why: You need greater protection against injury claims and property damage.  You can also get protection for when or if your property become uninhabitable.  This covers the rental income you would have made, if tenants were occupying your property and lasts as long as it takes to fix your rental unit (up to a year).  

Make sure to research different insurance policies for landlords, and see what is covered.

More Resources

  • To learn more about revenue property investing, consider investigating the Real Estate Investment Network, which is a highly regarded Canadian educational network.  Watch for their "ACRE" events.
  • To learn more about mortgage rental property considerations, please continue reading below.

  • For more questions or to inquire about a mortgage pre-approval, please contact us.
    

As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.

Can I get a mortgage? Find out now.
Row housing often makes affordable rental property in Alberta

Mortgage Basics and Tips for Revenue / Rental Properties in Canada

  • When you also live in the property (say upstairs and there is a legal downstairs apartment) your down payment can be as little as 5% (10% if the property is a 4-plex)
  • When the property is non-owner-occupied, the down payment requirement is at least 20% and maybe higher depending on your situation and other properties owned.
  • Depending on the location of the property, lenders may require a mortgage to be CMHC-insured regardless of down payment
  • Rental income can be used to support the mortgage application. However the rules for applying rental income in order to make a mortgage approval work are very complex. Work with a mortgage professional who knows and owns revenue property!
  • Amortizations can be 30-35 years, which serves to lower the mortgage payment and increase cash flow. TIP: use surplus cash flow to pay down your own mortgage where interest expense in not tax deductible.
  • Interest rates are very competitive, although potentially 0.10% higher for non owner-occupied homes.
  • If you want to own multiple properties, choosing lenders in the right order is very tactical. For example, if a lender will only approve you if you own 2 properties or less, then going with that lender for your first rental property might make sense, as you are immediately ineligible for further properties with them afterwards.  Again, work with a mortgage professional who understands revenue property mortgages.
  • While owning properties in a corporation may seem appealing from a tax perspective, it is much more difficult to finance in a corporate name vs. your personal name, so it could limit your goals.

Here are Important Questions We Will Ask You

  1. How many properties do you own already, in addition to principal residence?
  2. How many do you want to buy/own in total? (more than 4?, more than 15?)
  3. Properties held in personal name, holding company, or operating company?
  4. How do you earn money besides rental properties? (don't give up your job!)
  5. Is your goal to renovate & sell/flip, or a long-term hold for capital appreciation?
  6. How much money available for down payment and source of this money?
  7. Suite status in target property – legal or illegal?
  8. Do you need funds to improve the property upon purchase?

With your answers we can help tailor an income property financing strategy that works for you. Please let us know what questions you have - we'd be happy to provide a pre-assessment.

Interested in owning a rental property

 

 

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