So you want to buy a rental property?

The benefits of using an experienced mortgage broker become more obvious in certain financing situations…..poor credit, new to Canada…self employed…..and finally, buying a rental property. How much of a down payment do I need? How much of the rental income can I use? Does the basement apartment need to be legal?

The rules around financing a rental property can be significantly different than those that are in place for purchasing a primary residence and having access to a knowledgeable mortgage broker can certainly help. There are several different products available from various lenders and they all have specific guidelines.

How Much of a Down Payment Do I Need?

As of last spring you now require 20% to purchase a rental property with 1-4 units. Gone are the days of purchasing a rental property with only 5% down. If you purchased a rental property with 5% down before the new rules took affect this year, but have not yet closed on it…..you are going to have to come up with the additional 15% or risk losing the property. This mostly applies to those who purchased a new build condo with the intent to rent it. If you were lucky enough to get an approval with a CMHC policy number when you purchased the property, CMHC will honour the approval. I have encountered a few clients who were caught by the new regulations and were forced to refinance their principal residence or choose a mortgage option with a higher interest rate to close on their new rental.

How Much Rent Can I Count?

In most cases 50% of the rental income is counted toward the total income on the deal. In some cases if the owner of the property is going to live in one of the units the lender will count 80% of the rental income. Again, this is where your mortgage broker with an in depth knowledge of invest property products can be extremely valuable. You also need to remember to account for property tax and heating costs when calculating your ratios.

It certainly has become more difficult to invest in real estate in Canada. The new rules were meant to control real estate speculators and I think it has accomplished that. In my opinion real estate is a great investment and should be a part of a balanced portfolio and I don’t think it is such a bad thing that you now need to have a bit more skin in the game.

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