Escape this Summer with An Investment Property
Summer is quickly approaching! With that comes family vacations and travelling. But what if you owned a second home?
Whether it's a cabin in the woods, a beach house, or just another property to rent out and help pay the bills, owning more than one home can be a great way to build wealth and achieve financial security. But before you jump into buying that investment property, you should know a few things, depending on the type.
Intending to Rent?
Buying a property to rent comes with different qualifying criteria and mortgage options than traditional home purchases. Before you look at purchasing an investment opportunity, there are some things to consider:
20% of the purchase price is required as a down payment, and you cannot use funds from someone else.
Only a portion of the rental income can be used to qualify and determines the extent of your borrowing. Some lenders will only allow you to use 50% of the income added to yours, while others may allow up to 80% of the rental income and subtract your expenses.
Interest rates usually have a premium when the mortgage is for a rental property versus a mortgage for a home someone intends on living in. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.
There's a chance that interest rates on your mortgage will be higher than what you're used to. Investment properties are deemed riskier and thus pay off less frequently because there are few guarantees about their future earning potential. The premiums can range from 0.10 to 0.20% on regular 5-year fixed rates.
The rental income from this property could be used to debt service your mortgage application, but remember that some lenders will have a minimum liquid net worth requirement. If you decide to sell the house eventually, it'll also be subject to capital gains tax, which might require calling an accountant.
Want a Vacation Property?
What's better than a perfect getaway? The answer: an investment in property that will provide you with some relaxation time and increase cash flow and appreciation. If it sounds like your dream vacation destination has come true— it’s time to invest!
However, suppose you're considering buying a unit within the hotel as your vacation home (known as "fractional ownership"). In that case, it is essential to note that insurance would treat any mention of using this space for income like any other investment property. (See above for additional notes on that.)
Airbnb on Your Mind?
As Airbnb's popularity rises, more Canadians are taking advantage of the short-term rental market. It's an easy way to earn some extra cash, but don't forget there are a few things you need to consider:
What are the strata or city bylaws in the area? Research online.
Do you have the proper insurance coverage? Call your insurance agency.
Can a short-term income property affect your approval? Ask a mortgage broker.
What are the tax implications? Talk to an accountant.
When Considering an Investment Property
You may be surprised to learn that you can leverage the equity in your home for investing. If you are considering this, understand that the interest you are using is tax-deductible.
So then, why build a real estate portfolio over a stock portfolio? Think about it this way; you're buying an appreciating asset when you invest in property. The more time that goes by with your investment in real estate, the higher its value will be. Although property's worth can change drastically depending on where they are located and how much demand there currently seems for properties, a strategic purchase in a prime destination can make a difference.
Who is a Good Candidate?
You may be surprised that you don’t need six figures for a down payment. All it takes is being someone who wants their investment smartly planned and not taken too far into debt! Remember, the minimum requirement is 5% – unless your plan was originally to rent, you need 20%.
The search for a secondary property can be an exciting time. At Front Door Mortgage, we work with our clients to find the best solution, whether an investment or rental potential in mind!
As your broker, we promise to help you take advantage of this great opportunity that comes along once every lifetime to own another home! So, apply today.