Rental vacancy rates are at historic lows on Vancouver Island. If you’ve been looking for productive ways to invest your money, perhaps you’ve been thinking about purchasing an investment property as it seems like a pretty safe bet. The purchase of any new property is an important decision – one that should be planned for and executed carefully. It’s one thing to purchase a new home to live in yourself. It’s another thing entirely to purchase a rental property. While the purchase process – viewing the property, making an offer, signing contracts, etc – unfolds the same way, getting a mortgage can be quite different. The government has imposed regulations that have altered the qualification criteria and lenders have created different mortgage products crafted with investment properties in mind.
The first step in the purchase of any property should be organizing your financing. Here are a few important, but often overlooked points to be aware of:
- Have you saved up a sufficient down-payment? The minimum down-payment on an investment property is 20%, unlike the required minimum of 5% on an owner-occupied property.
- Recent regulatory changes by the government have forced lenders to price mortgages differently. Best rates are no longer available on rentals. Expect a rate 10-25 basis points higher than the rate offered for an owner-occupied home.
- Are your income taxes up-to-date? A lender will want to know that you’ve filed your most recent year’s taxes.
- Have you explored your options for property management? Do you know how much it will cost? Are you better off handling property management yourself? Do you consider yourself handy?
- How large is your real estate investment portfolio already? Some lenders impose limits on the number of rentals a borrower can own.
With this in mind, it’s important to determine just how much you qualify for, which is my job. You will need a sufficient annual income to cover the anticipated mortgage, property tax & insurance costs, in addition to all of your other debts, which includes mortgages currently in place on your primary residence or existing investment properties. To help keep debt servicing in check, rental income from your existing properties & the new rental can be used to help boost your total annual income. Exactly how much can be included can depend on certain factors, such as:
- the lender, as each has its own guidelines regarding rental income. Some allow 50% of the rent to be used while others allow 80%. Some treat it as an addback, simply adding the allowable rental income to overall income, while others treat it as an offset, deducting the rent from overall housing expenses.
- the location of the property. Rental income from a rural property may be looked at differently than rent from a condo in the city.
- the type of property. Is it a standalone single family dwelling? Is it a 4-unit townhouse? Or is it a rental suite attached to your primary residence. These differences will matter.
Before jumping into the purchase, you’ll want to make sure that this property will actually turn a profit for you. Is the property currently tenanted? If so, a current lease will let you know how much rent to expect. On the purchase of a rental property, an appraisal is almost always required. If the property is currently sitting vacant (which probably isn’t likely these days), an addendum can be added to an appraisal whereby the appraiser determines a value for fair market rent, and we can use that figure in your application for financing.
Becoming a landlord carries a lot of responsibility. It is important that you are aware of what is expected of you legally, and equally as important, what rights you have as a landlord. The government of BC provides a lot of info to help both individuals maintain a working relationship. Here’s a link to their page. Rules and regulations might be different in other provinces, so be sure to do your homework on the subject.
As you can see, there are a lot of variables and key points to be aware of when purchasing an investment property. It’s my job to take care of the financing part of the purchase. I’m with you every step of the way to make sure nothing is forgotten and that we’re getting you the best rate and mortgage possible. I can also help you plan for the future, helping you determine the best property to purchase to achieve your goals, and figure out what the next steps will be. If you’re thinking about an rental property to diversify your investment portfolio, give me a call today