Buying An Investment Property

The purchase of an investment property offers challenges and opportunities. If you have considered buying a rental property, this overview will provide you with some valuable guidance.

Investment Property Challenges

Current and prospective owners of rental properties in Canada have faced some challenges over the past several years:

• Markets have declined somewhat as economic conditions have allowed traditional renters to purchase their first home.
• Having sustained losses in the 1980s, many lenders are unwilling to lend on negative cash flows.
• Mortgage insurance premiums for rental properties have increased.
• Changes to income tax policies have eliminated or reduced some of the advantages of investing in rental properties.

Investment Property Opportunities

Despite the challenges, there are many reasons for investors to feel positive about the rental sector:

• According to the Canadian Mortgage and Housing Corporation (CMHC), the demand for rental housing is expected to grow by 50,000 units annually until at least 2020.

• Competition among real estate investment trusts and real estate companies with expansion plans is expected to increase the value of existing properties and lead to new construction.

• Most markets show good potential for conversions of single-family homes to multiple rental apartments.

Financing an Investment Property

There are many considerations to be made when weighing the options for financing rental homes.

• Most lenders will not lend more than 65% of the property’s appraised value or purchase price (whichever is lower). A mortgage broker may be able to help you find alternative financing at more favorable terms.

• You may be able to find a lender who will offer 75%, but you will need excellent financial health and a property that is in a “good” area.

• Mortgages greater than 65% will need to be insured. It used to be that CMHC would offer insured mortgages of up to 85%, but in December, 2007, they announced a new program offering up to 100% loan-to-value ratios on rental property purchases and 95% on rental property refinancing.

• Lenders will require that the rental income be able to cover the majority of the property’s operating expenses, including the mortgage. If rental income cannot cover expenses, you must have enough personal wealth to make up for the shortfall.

• When considering how expenses are covered, lenders will look only at legal uses of the property. If you have an illegal suite, its rent will not be considered.

Ensure You Can Make Money from Your Investment Property

The key question for anyone looking to buy a rental property is “Can I make money?” To answer this question you need to do some research.

Find out what you can charge for rent in the area. Check with real estate agents, other investors, or rental listings for the area. Then deduct expenses to calculate what your income will be. Expenses include mortgage, taxes, utilities, insurance, maintenance and, if applicable, property management fees.

If the rent cannot cover the expenses, the investment may not be a wise one. You could wait years for an area’s property values to increase and by then you could be in major debt.