When done right, a rental property is an excellent investment. Historically, Canadian real estate has been a great hedge against inflation. Just think of all those Toronto Baby Boomers whose paid-off homes are now worth hundreds of thousands more than they originally paid.
By investing in an income property, you are securing your money in a tangible asset. What is more, the financial benefits are twofold: rental properties provide a steady source of income, and they should grow in value. The best part? Owning an income property can be relatively passive work.
But before jumping in, it’s important to learn how to do it right. Here’s what you need to know before buying your first rental property.
Learn the Ropes
Since your goal is to make money, you need to learn how to become a successful real estate investor. Start by exploring the neighbourhoods that interest you and see how much properties are selling for. Investigate rental rates. Learn about positive cash flow and appreciation, and aim for a property that gives you both. Don’t forget to explore different types of rental properties, like single family homes, duplexes and multiplexes. Each can be a money maker if the location and price is right.
Secondly, you’ll need to learn about being a successful landlord. Start by informing yourself. Read a few how-to books and websites, as well as your province’s landlord-tenant act. Consider joining your local landlord association. Talk to landlords and property managers and ask them what they wish they knew when they first started.
When it comes to a rental property, being well informed will allow you to make good financial decisions. Be careful not to let your emotions take over – your success will be based on buying the right property for the right price and selecting the right tenants.
Financing Your Rental Property
Financing an income property is a little different from financing a primary residence. Since it’s often a second property and won’t be owner-occupied, you’ll need to be aware of the specific mortgage rules that apply.
For rental properties, you need to provide a 20 per cent down payment in order to qualify for a mortgage. This high down payment is mostly due to the fact that income properties generally don’t qualify for CMHC insurance (the insurance that protects lenders in case of non-payment). Down payment money can come from your own savings, but it can sometimes also be borrowed – using a line of credit or second mortgage, for example.
Next, your lender will complete a cash flow analysis of the property. You will need to provide details about your own personal income, along with the new property’s rental income and expenses, in order to determine if you can afford the mortgage payments.
Speak to a licensed mortgage broker to learn more about mortgage products and guidelines specifically geared to rental properties.
Thinking of making an offer on a rental property? Contact us at the Mortgage Broker Store. We can find you the best available interest rate to save you money!
ronald August 15th, 2016