How to Buy an Investment Property

An investment property is a property which generates income through rental. The property up to 4 units falls in residential category. Then it can be financed the same way as owner occupied property through a lender. The lender can be a Bank, Credit Union or Mortgage Lender.
There are 2 ways to buy an investment property.
1. Income
2. Equity
Income:
The income method is for people who show their income. This is the income that you pay tax on. For example an employee with the gross income of $50,000 of income who pays tax through his/her employment. Another example is for a business owner which shows only $40,000 of his/her income on his/her tax assessment after his/her written off expenses. The gross income of the self employed is usually higher.
In this method based on your income you can be qualified for a rental/investment property. The down payment requirement is now 20% based on new rules. This is an Un-insured or Conventional mortgage. The income generated by the investment property can be used in your debt ration calculation in order to qualify you for a mortgage.
Equity:
The equity model usually is designed for business for self or self employed people. In this method the income made on the tax documents is not the main concern. However the income needed to qualify your application should be reasonable. But the down payment should be anywhere between 25%-35%. The less income you show the more down is needed.
Cash Flow:
The goal is investment property is usually to have positive cash flow. That means that if you deduct all the costs including Mortgage Payment, Strata/Condo fee, Annual Property Tax, Property Management and Maintenance/repair costs from the income by the rental, then it is positive amount.
Tax Benefits:
There is a tax benefit for having a rental or investment property that you can benefit from. The whole rental income is not added to your income but you can write off the following expenses from the income.
• Interest on mortgage
• Strata/Condo fee (if applicable)
• Annual Property Tax
• Property management
• Maintenance/repair
Overall Benefits:
The goal of having an investment property is to have
1. Cash Flow
2. Increased Equity
Even if at the beginning of having your mortgage you are break even or in a short fall, in long term when the mortgage principal is paid down with your mortgage or adding the pre-payments you would be positive cash flow.
The interest only or Secured Line of Credit is not a very good idea as you are enforced to just pay the interest portion of the mortgage. So your principal would not increase.
You can earn equity in the property by increased price in longer term or as said paying the mortgage down.
Caution:
Having a good tenant is very important. You can use the expertise of a good property manager in screening your potential tenant by doing a credit and reference check.
If you have more questions on how you can purchase an investment property, please do not hesitate to contact me for more details and free consultation. You can find additional information in my web site at www.CityViewMortgage.ca.
By: Sean Manoochehri
Sean Manoochehri, MSc Eng, AMP
Mortgage Consultant
Innovative Mortgage Solutions – The Mortgage Centre
Direct 778-995-5230
Email: Sean@CityViewMortgage.ca
Web: www.CityViewMortgage.ca