Buying an investment property – the basics

Investment property – a high level view

Approximately 25% of all new condos being built in Canada are expected to be rental apartments. Other multi-unit properties – duplexes, triplexes and four-plexes – are also expected to provide housing for renters.   With the mortgage changes that took effect in 2012, new immigration, and ongoing GDP growth in Canada, it is expected that the already low vacancy rates (2.3% across Canada as of April 2012, according to CMHC) will continue to decrease as the number of renters grows.  Buying investment property, if done well, is a proven long-term strategy for building wealth for Canadians.

Make sure your rental property is cash flow positive

As an investor, you will want to have the rent from each real estate investment to at least cover your costs, and provide a reasonable investment return over the long term.  If you follow this rule of thumb with each property, it will make the purchase of additional rental units, and the re-financing of existing units, much more straight-forward.

When financing an investment property through a mainstream lender, you are required to come up with at least a 20% down payment.  You need to show positive net worth, and excellent credit.  The property is expected to generate a positive cash flow.  If it doesn’t, you will need to show enough personal income to be able to support the mortgage and expenses of the investment property, without counting the rental income.

To give you more options, you may wish to access the equity in your principal residence, using a Home Equity Line of Credit or HELOC, to get a big enough down payment that reduces your rental property mortgage to a manageable size.

Rental property can be a great addition to your investment portfolio

Further, if you’re excited about the low rates on your home mortgage, consider that a mortgage on a rental property actually goes one better: like all investment loans, the interest on the loan to purchase a rental property is tax-deductible.

Not long ago, the rental business seemed to belong to a group of very affluent investors, but now, more Canadians are getting educated about the options available to them.  Of course, as with any investment, rental property isn’t an investment that you should jump into without doing your homework first. Consider your own aptitude for managing a real estate investment, figure out your goals and objectives, and then talk  to an independent mortgage professional about your mortgage options.

Want to read more about your options for buying an investment property?

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