Buying a rental property

Rental propertyMagnifying glass

For Canadians looking to add to their income, investing in a rental property is an attractive option. Acting as landlord and renting out a home allows you to collect extra income in a much simpler way than taking on a second job. Best of all, you get to act as your own boss, allowing you to make money on your terms.

The current state of the housing market is also making buying rental properties an appealing alternative. Canadian mortgage rates remain at historic lows, meaning home loans will cost you far less in interest down the line. Meanwhile, a report from the Royal Bank of Canada shows that home affordability is on the rise throughout the country.

Data from the RBC’s affordability index shows that the total income necessary to afford a two-story home has decreased by 1.2 percent as of the most recent quarter, reaching 47.8 percent. Detached bungalows and condominiums also saw declines, falling to 42 percent and 28 percent, respectively.

However, certain hurdles remain on the path to buying a rental property. Luckily, proper preparation will allow you to smooth out the buying process and ensure a good deal on your investment.

Down payment
Saving up for your down payment is an important first step. Federal legislation did away with insured rental mortgages with less than 20 percent down payments during 2010. So if you’re planning on buying a property you won’t be living in, 20 percent is the minimum down payment required by nearly all Canadian lenders. Keep this in mind when you’re searching for the right home to rent out. The higher the price tag, the larger the hit you’ll be taking for initial costs. Also be wary of where you’re buying your property. Certain cities qualify as higher risks than others, prompting lenders to ask for even higher down payments.

Paperwork
Before you apply for a home loan, take the time to make sure all your finances are in order. This means having copies of your tax returns, as well as any other pertinent financial data, ready to go. Also, make sure your credit report is up to date. Lenders take your credit history into serious consideration, so if you spot any errors or inconsistencies, have them fixed before applying for your mortgage. Most important of all is ensuring that your current mortgage is up-to-date and free of delinquencies. There’s no point in applying for a second mortgage if your first is in bad shape.

Lenders
When trying to find the best rate, it’s important to do business with buyer-friendly lenders. Different lenders will calculate your total debt ratio in different ways, meaning that shopping around can help you find a lender that will not only approve your loan, but offer you lower mortgage rates. If you’ve built a trusting relationship with a lender through dealings in the past, turn to them first. Lenders are more likely to reward loyal customers than strangers. 

Brokers
Purchasing a home with the express intention of renting it out can be quite different from buying a home you plan to live in. It’s with this in mind that you should consider talking with a mortgage broker once you decide to invest in a rental property. Mortgage brokers can bring you into a network of trusted lenders they have experience with, making it easier for you to find a loan that fits your needs. Some mortgage brokers may also specialize in rental properties, taking the guesswork out of the process while allowing you to focus on paying for your loan instead of searching for it.

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