You’re thinking of the future and how you will pay for your retirement. Maybe you just want to have a small secondary income to pay for vacations, buy that new vehicle or plan your child’s education. What are the types of investments that give the best rate of return and who do you trust to invest your money for you? You can invest in mutual funds, ETFs, RRSPs and the like but the bottom line is you are rolling the dice and holding your breath hoping for a positive result. In many cases you aren’t even the person earning the most return on your financial investments in the first place. As I’m sure you are aware – you, your spouse, or a financial planner cannot control the stock market. The worst part of this scenario is that you have no control over these types of investments.
The Good News
I have some good news for you that will provide you with a great deal of comfort: you are the best person to invest your hard-earned money. You don’t need to study financial planning for months, read the financial section of The Globe and Mail every day, or watch the stock market with an eagle-eye looking to spot trends. Take charge of your financial future by being the person who is in control of your investments. This is entirely possible by investing in real estate in the form of rental properties.
One of the first things you need to know is what the qualifications are for a mortgage for investment purposes.
Rental Property Program
Borrower Qualifications. The majority of lenders will allow you to finance up to 5 rental properties (that are not owner-occupied). Unfortunately there are fewer lenders who will accept you to finance this many student properties. However, if you meet their criteria, Magenta Mortgage Investment Corporation will work with you.
Rental Income Confirmation. In order to qualify for a mortgage for an investment property, you will need to confirm the income you will receive from your rental property through the following: current signed lease agreement with your tenants; a copy of your T1 General (your personal income tax return); and a copy of your Notice of Assessment from the Canada Revenue Agency. Lenders will allow you to use anywhere from 50% to 100% of rental income as part of the income confirmation portion of your application. You are more likely to receive an allowance for 100% of the rental income if you have a minimum credit score of 680 and if income is validated using a two-year average based on lease agreements OR income for new or existing units can be confirmed via fair market rent from an appraisal.
Down Payment. The minimum down payment that lenders will accept for a rental property is 20%. Gifted down payments are acceptable as well. The maximum loan-to-value on units where you don’t yet have tenants is 65%. This means you will need a 35% down payment.
Loan Amount. If you live in Metro Toronto, Metro Calgary or Metro Vancouver, the maximum amount that you can borrow for investment properties is $750,000. The maximum amount for the rest of Canada is $600,000.
Qualifying Property Types. Properties that you can mortgage for investment purposes include condominiums or non-owner occupied houses/dwellings that are anywhere from one to four units. Lenders will always require an appraisal for these properties.
Next Steps for Investors
If you are thinking investing in real estate could be for you, there are steps you can take on your own to start the process. First of all, apply for a mortgage. When you are pre-approved by a lender it puts you in a strong negotiating position when you find the property you want to purchase. Additionally, a pre-approved mortgage locks in your rate for 90-120 days. This is a good idea if an interest rate increase is looming. If the interest rate decreases between the time you were approved and your purchase date, you will receive the lower of the two rates. Keep this in mind: two weeks prior to closing, the lender will run another credit check on you (and any additional co-applicants) and conduct an employment verification. If there have been any changes to your employment status it can affect your mortgage application. Right before you are going to close on the purchase of an investment property is not the ideal time to make major purchases (e.g. car, furniture) as this could affect your credit check.
If you need further convincing about the stability and value of real estate investing, do some preliminary calculations about the rate of return. You can start with the capitalization rate (or “cap rate”). The cap rate (which is the ratio of a property’s net income to its purchase price) allows you as an investor to compare properties by evaluating a rate of return on the investment made in the property. Here is how you calculate the cap rate.
If you want a further in-depth idea of what it takes to successfully invest in real estate, you can call our Investment Specialist Andrej Micic at 310-SOLD or email him at firstname.lastname@example.org.