Buying an Investment Property
A Residential Rental Property is a type of property that is purchased or developed to derive revenue from the dwelling units by renting or leasing them and not occupied by the owner.
The rental property landscape has changed over the past few years. Just 5 years ago 100% financing on rentals was possible, it could be in a company name, and the amortization was up to 40 years. Now the landscape has changed and to understand how to get approved requires someone who’s been there.
One of the biggest transitions in this lending field that we have seen in the past couple of years is the decrease in the number of lenders who are willing to lend for clients who have multiple investment and rental property mortgages.
If you are looking to invest in your first investment property, the process is relatively simple and straight forward. When you become more of a sophisticated investor, the field narrows considerably and financing becomes more difficult.
Since April 19th 2010, Canadian are required to have at least a 20% down payment on a rental property purchase. Rental properties consist of residential dwellings with 1-4 units. Anything larger or properties that have a commercial component could fall under commercial financing.
Most lenders will offer their best rates, however some of the lenders that offer rental financing, will charge a slight premium on the rate and some require that you pay the insurance premium on the mortgage.
The requirement for a minimum net worth varies from lending institution to lending institution. Most lending institutions do not have a minimum net worth, however some require that you have a minimum $100,000 net worth per rental property.
Debt Coverage Ratio
The requirement for debt coverage ratio varies among lending institutions. Some institutions will use rental off set for qualifying purposes, while other lending institutions will use 1.10% debt coverage ratio.
1.10% debt coverage ratio is arrived at by dividing the Net Operating Income by the Debt Service. For example, if you had property revenue of $1100 and expenses of $1000, your DCR would be 1.1 ($1100/$1000).
Rental off set is when a lending institution uses a percentage of the rental income and off sets it against the P.I.T. Only the shortfall will be included in the Debt Ratio. If there is a rental surplus this will be added to the client’s income. For example, assume a rental property with P.I.T. of $1432 and rental income of $2000. For this lender we will take 70% of the $2000 income ($1400) and deduct that from P.I.T. ($1432). We will only add the $32 shortfall to the Debt Ratio.
If you are purchasing your first investment property, your second or more, contact me, I would be happy to discuss your investment and rental property mortgage options and structuring with you.