Many Canadians dream of one day owning an investment property. Unfortunately, in the face of tightening qualifying regulations and the significant down payment required to purchase one directly (20% minimum for rental purchases) most feel it is difficult turning that dream into a reality. Despite this, there is good news! Thanks to savvy investors, there is straightforward process to side-step most of these big hurdles.
Owning an Investment Property
Step 1: For Your First Home, Buy with Your Head, Not with Your Heart
As a real estate investor, you want to make sure the first home you buy (Home #1) will eventually be suitable as a rental property. Because this home is bought for you to live in, you can purchase it with as little as 5% down payment, using CMHC mortgage default insurance. Don’t buy Home #1 solely because you love the neighbourhood, or because it is close to your work, as future renters may not value these aspects as much as you do. Consider up-and-coming neighbourhoods, which may allow you to purchase a property at a better value with the option of renovating as you live in it, if necessary. Work with your REALTOR® to maximize this value and lean on them for their expertise.
Step 2: Start Saving for Home #2
The key here is to take your time gathering your money for the down payment on your next home. Because your plan is to eventually move into your next home, you can purchase future Home #2 with as little as 5% down payment as well (or save up the 20% to avoid another default mortgage insurance premium). If Home #1 has increased significantly in value since you purchased it, you may be able to tap into some of it’s equity to help bolster the down payment for your next home.
Step 3: Qualifying for Home #2
Using the down payment you’ve saved up or the equity in Home #1, find out how much of a mortgage you can qualify for with your next home. Note: not all banks/lenders use the same formula to determine this dollar amount. Since Home #1 is going to turn into a rental property, lenders will use an appraiser to determine how much rental income this home can expect to earn each month since nobody can expect you to have a signed lease in place while you still live there. That determined income is then considered into your financial picture to calculate your maximum purchase amount for Home #2.
Step 4: Buying Home #2
If your goal is to have one rental property and one home for yourself, you can then look at this property through the lens of what would be ideal for you. Again, work with your REALTOR® to determine the neighbourhood, schools, facilities, layout, etc. that works best for your situation. If the intention for this property isn’t for you to live in forever, start back at Step 2 again and start saving!
The key to owning an investment property and buying homes in this manner is that the intention MUST be for you to live in them. This is not a “*wink-wink, nudge-nudge* suuuure you’re going to “live in this house” *wink-wink*” shady type situation. CMHC has rules about your intentions for the property and how long you must reside in it, as does any mortgage lender for the property. All these people have in common is that they don’t plan on being in that property forever. Their time-frame may be three years or thirteen years, but they buy Home #1 with the thought in the back of their mind about how well it will function as a rental property in the future. The hardest part is actually BEING a (good) landlord, but that’s another post of its own.
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As the Past-President of the Young Professionals of Nanaimo (YPN), Adam Hawryluk is a leader in his community and his industry. Years of experience in the mortgage industry have placed Adam among the best both locally and island-wide. Building his business to service 40% more clients year-over-year since 2015 and being nominated for the Top 20 Under 40 for the last 4 years have been recent highlights in his leadership capabilities, as well as joining the Board of Directors for Community Futures Central Island. If you have a question about mortgages, feel free to contact him at [email protected].
Adam Hawryluk | Mortgage Expert | Office: 250-591-9959 | Mobile: 250-619-5274