Any real estate investor will tell you that having capital is just about one of the most critical parts of their business. You might be fortunate to have started with a nest egg of savings that catapulted you to investing success. Even if this is the case, you’ll want to keep reading because the time may still come when you need a rental property loan. Having a rental property loan means that you have some more cash on hand that you can use to purchase homes that you might want to rent out for extra income or flip and sell for a profit. The trick is that these loans tend to have more obstacles to overcome than traditional loans that you might seek for a long-term owner-occupied residence, so it’s good to understand all that you can about them before pursuing one to buttress your portfolio.
Table of Contents - Finance Corner: Getting Unlimited Rental Property Loans
What is a rental property loan?
A rental property loan is an infusion of capital that will give you the means to purchase an investment property, which is any residence from which you earn rental income or want to flip for a profit after renovating. Many types of buildings can count as rental properties, even if you live in the building for at least some portion of the year. For the purposes of our post here, let’s assume that investment property means single or multi-unit residential buildings as opposed to larger commercial properties like shopping centers. Under Canadian law and regulations, anything with four units or less is zoned residential, which is the type of property that these loans would be for.
How are rental property loans different?
Rental property loans function a bit differently than the mortgage you likely have on your actual full-time residence. Their requirements in terms of capital needed are one of the biggest differences. This can also change based upon whether or not you’ll be living in one of the units, which might be the case if you’re planning on buying a duplex and living in one of the two living spaces. This difference in owner occupancy is one of the biggest variables in how large of a down payment that you’re going to need to come up with.
How much of a difference does owner occupancy make?
Canadian real estate law changed in 2010 when the rates for rental property loans. At that time, it was decided that investors would have to come up with more money for a down payment. Let’s say that you’re planning on buying the two-unit duplex described in the paragraph above. If you are indeed planning on living in one of the units, then you’ll need to come up with a very manageable five per cent down payment on the mortgage. This could still represent a significant difference in your actual loan payment of course, but you won’t need as much cash on hand.
If you buy the duplex with the intent of renting out both units, then the required down payment goes up to 20 per cent. For beginning real estate investors in particular, this represents a big shift and can make it so that the only feasible way you can start out in the property investment field is to live in one of the units that you’ve purchased, so that you can qualify for a lower rate.
How can I find a great rate?
One thing to keep in mind about the interest rate is that some smaller financial institutions won’t give loans for units that won’t be occupied by the owner, at least in part. They represent a larger financial risk to the institution, so they might only grant investment property mortgages on units that will be owner-occupied. Additionally, smaller lenders will often add a small surcharge on rental property loans, so be sure to evaluate all of your options before deciding on a lender to work with. Larger institutions can offer more competitive rates, but you might still feel more comfortable working with a local community lender within your province.
You should speak to a reputable mortgage broker who understands real estate investing and can shop around for you to get you the best rates. We share our recommendation below.
What documentation will I need?
To start on the road to unlimited rental property loans as a real estate investor, you should have a thorough understanding of the documentation that you’ll need to produce to a lender to prove that you’re qualified. You will want to pull these together well in advance of any meeting so that you can demonstrate that you are a diligent and prepared borrower. You will need to have your most recent T776, your most recent Notice of Assessment and any current lease agreements that you have. Some lenders will also require an opinion of market rent, as well as other pieces of documentation that help them make a determination on your loan, so be prepared to be flexible and accommodating with any lender requests.
What other options should I be aware of?
There are a number of types of rental property loans for Canadian real estate investors to choose from. These include traditional mortgages that you’re likely accustomed to, but also include home equity loans, rent to own, working with partners and even assuming an existing mortgage (which frequently comes with a fee attached to it). We recommend consulting with financial institution like LendCity Mortgages who specializes in working with investors to ensure you’re investing on the right foot.
If you’re starting out in the world of rental properties and investment in Canada, the changes from a regular home mortgage can seem daunting at first. However, this should not dissuade or discourage you from pursuing the potentially profitable world of real estate investment. If you have thorough documentation of your loan and credit history, securing unlimited rental property loans in Canada could be a simpler proposition than you might think. Consulting with a qualified financial instituion is always a great first step in better understanding not just your own financial situation, but also how it can translate to securing a loan for a rental property loan.