Mortgages for Rental Properties
Investing in a rental property can not only provide diversity to an investment portfolio outside of the financial market, but it can provide long term monthly income and act as a “Rental Retirement Plan.”
Whether you decide to invest in a residential or commercial property, getting mortgage on top of your principal mortgage can be a challenge. At McCallum Mortgages, we are able to offer flexible, private loans that large, risk-averse banks cannot.
Types of Investment Properties
Most buildings are considered residential if they have 1 to 4 units. This includes single-family homes, condos, townhouses and student rentals. Condos and single-family homes are regarded as “the easiest and possibly best investment properties for beginners”. Condos, on the other hand, are low maintenance as the condo corporation absorbs most of the up-keep responsibilities. The two financial factors on your residential mortgage depend on the number of units in the building and whether or not you will occupy one of those units yourself. “Owner-occupied” investment properties can require as little as a 5- 10% down payment, depending on the number of units, where as a “non-owner occupied” investment property will require a 20% down payment (at least).
Multi-Unit Residential Properties
Multi-unit residential properties such as apartment complexes are a great investment to make if you have had success with and enjoyed managing single-family unit rentals. Although more tenants means more responsibility, it also means a low vacancy rate. Multi-unit buildings provide strong monthly cash flow, which means that if you struggle to deal with hands-on management, you’ll have the income necessary to contract a property manager. Investing in an apartment complex is advantageous for portfolio building, as it is easier and quicker to secure a 10 unit apartment building than 10 single-family units.
When it comes to flipping houses, the first thing to understand is that it’s not as easy as it looks on HGTV. With so many variables, including sourcing materials, hiring contractors and even weather delays, house flipping can be risky. But not impossible. At the outset, it is important to indicate whether you plan on fixing a property to sell, or to keep. If your intention is to flip, you may be required to make a larger down payment, up to 35%, due to the previously noted risky nature of house flipping.
No matter your intentions, you’re better off borrowing from lenders who will, unlike a bank, evaluate the property itself and your ability to complete the project.
Buildings with 5 or more units require a commercial mortgage. Investing in commercial properties tends to provide more income security than residential investments for many reasons. Both office spaces and retail spaces typically have longer leases, with an average of between 3 and 10 years compared to residential lease averages of 1 to 2 years. As well, office and retail spaces often demand higher monthly rent than residential properties. Commercial properties can increase in appreciation value as new businesses attract other to the area, thus strengthening the local economy.
With the immense popularity of residential and commercial property rentals, industrial property rentals are often overlooked despite being in high demand. These multi-purpose facilities generally provide office space in addition to large high-ceiling work spaces well suited to light manufacturing or warehouse storage. As with other commercial properties, industrial investment properties have low tenant turnover rates with occupants looking for longer term lease agreements. In Southwestern Ontario, the geographic proximity to the major 400 series highways adds value to any industrial investment property.
Things to Consider Before Buying
What purpose will this property serve?
There are many factors to consider before buying which is why outlining your long term intentions for your investment is a logical first step. One question to ask yourself is “what purpose will this property serve?” Will you be renting it out or occupying it? What potential is there for the area you have chosen to invest in? Is the location near bus routes, hospitals or other amenities? Is the property in a safe neighborhood, or in an area with lots of employment opportunity? These factors will influence the property’s appreciation value down the line.
How is your credit?
To qualify for a conventional mortgage (down payment is 20% of the purchase price or more) you need a minimum credit score of 600 (for a mortgage under $1,000,000). Your credit score directly affects your interest rate. A higher credit score can mean a lower interest rate, where a lower credit score can mean a higher interest rate. If you have a low or bad credit score there are still mortgage options available to you.
Do you have enough capital for a down payment?
As of February 15, 2016, there are new rules for conventional and high-ratio mortgages. Conventional mortgages are for no more than 80% of the purchase price of the property, meaning your down payment will be 20% of the purchase price or more. A high-ratio mortgage means you will be paying a substantially lower down payment, however there are some variations. On a property listed at $500,000 or less, the down payment is 5%. On a property listed at more than $500,000 but less than $1,000,000, the down payment in 5% on the first $500,000 and 10% on the remainder. A property listed at $1,000,000 or more, the down payment is 20%. High-ratio mortgages are required to be insured by the Canadian Mortgage and Housing Corporation (CMHC).
There are always long-term financial factors to consider beyond the listing price of your property including closing costs, operating costs and emergency funds. Closing costs are fees that get tallied as a real estate deal concludes. This can include legal fees, home inspection fees and transfer taxes. If you plan on running a business out of your rental property, your fixed and variable operating costs must also be considered. Emergency funds are savings that are put away in anticipation of life’s unexpected curve balls. It is important to keep those savings in tact when thinking about your rental income mortgage.
Why Consider a Private Mortgage?
A private mortgage provides numerous benefits. First and foremost, we value honesty and transparency. We do our due diligence and look beyond the “usual details” a bank would look at in order to see the full picture. With us, you don’t need to sugar coat your financial situation. Not matter how sticky, spare no details because it’s our job to work it out. We service niche markets and are able to provide loans to individuals in unique situations. If you have a bad credit score, already own different rental properties, are interested in a “high-risk” investment or just generally don’t “fix into the box” of a big bank, private mortgage can help you avoid those institutional hassles. Because bank loan officers operate on commission, typically they aren’t incentivized to offer you the best rate.
Our lenders are local, flexible, accessible, with a commitment to investing in the community. As a homeowner in the local area myself, I understand the real estate landscape. Property investment provides an opportunity to actively grow your capital as opposed to passive financial investments. If you’re interested in discussing your financing options for an investment property, give me a call.