Whether you are a novice working on your first property or veteran hunting down your tenth home, and whether you’re searching for a high-rise apartment or a single-family home, most real estate investors will begin their journey at the same place: securing a mortgage. Unless you’re drowning in investment capital, you will need to convince a bank that you can pay back a sizable sum over a few years.
Table of Contents - Step-by-Step Guide to Applying for a Rental Property Mortgage
Here are some tips and tricks for navigating the mortgage process.
Residential or commercial?
The first question to ask yourself is the kind of mortgage for which you will be applying. That means deciding if you’re after a residential mortgage or a commercial mortgage. When seeking out an investment property, single-family homes and multi-unit buildings up to 4 units are eligible for residential loans. Anything larger than that and you’ll be pushed into the world of commercial loans.
When you secure a commercial loan, potential financiers look at the expected performance of your business as a key metric. In a residential loan, your income is the highest priority. Commercial mortgages typically take longer, require a higher down payment and have higher interest rates than residential loans.
Hiring some help?
One common mistake made by novice real estate investors is to forget the cost of ongoing maintenance in factoring their budget. As you search for your first investment opportunity, you must remember that maintaining or remodelling your rental property will require professional help, and professional help will require disposable income.
So, before you start considering using the entirety of your available cash as a down payment on a rental property, you should consider holding some in reserve so that you have the capital to cover unexpected issues and ongoing maintenance for your new property.
Head to a mortgage broker
Unless you already have an established relationship with a bank, your best bet to secure any type of loan is to head to a mortgage broker. The primary reason to pick a broker over a bank is choice. When you head to a bank, they are most interested in selling their products at their rates. A broker, meanwhile, secures different rates from a variety of financial institutions.
Think of it like this: going to a bank is like walking into an Apple store. You can’t walk up and down the aisles and expect to find a Microsoft product. You’re only getting Apple computers. Going to a broker, on the other hand, is like heading to Best Buy. You’re going to see several products from several different manufacturers, which leaves you free to choose the best option for your needs.
We recommend LendCity Mortgages, a brokerage designed for real estate investors and owned fully by us, the Canadian Real Estate Network.
Where will you be living?
If you’re considering the purchase of a multi-unit building, you should determine if you’ll be taking up residence in the building itself. If you’re trying to secure a commercial loan, that question doesn’t matter. However, if you will be buying an apartment building with four or fewer units, that puts you into the realm of a residential mortgage. In that case, you’ll want to seriously consider the benefits of living in your rental property.
If you’re living in a building with 2 units, resident landlords need only put down five percent of the building’s value as a down payment. If the building you buy has four units, you have to put down 10 percent as a down payment if you’re living there. If you won’t be residing on the property, however, you will need to come up with 25 percent or more as a down payment.
Before you locate the building you wish to purchase, it’s worth contacting your mortgage broker to get pre-approved for a residential or commercial investment loan. The reasons for this is three-fold:
Requesting pre-approval gives you an idea of which documentation you’ll need to collect and show to secure a mortgage without the hassle of a constricted timeframe.
Dealing with a financial institution will help you determine your budget’s ceiling before you go off and make an offer without all the information.
Knowing that you are backed by a financial institution that is willing to leap with you will give you the confidence to bid the moment you find a building you love.
Finding the right property
When it comes to choosing the rental property that’s right for you, the process is as much art as science. There are certain environmental factors to consider about a building, like the demographics of its residents, their average income and the average family size. These considerations will help you determine the financial viability of your investment.
With that said, the building you choose to buy should also speak to you. Are you looking for a place you can visit? Are you hoping to attract families to your rental? Who is your ideal tenant, and how long are you hoping they’ll stay with you? These are just a few of the questions you’ll need to ask yourself as you’re searching for a building. After all, if you don’t have at least a small emotional investment, you may find it hard to maintain sustained interest in the running and maintenance of your rental property.
Once you’ve done your homework and shopped around, you can confidently make an offer on your new rental property.
Get to know the rules and regulations
Finally, as you transition to your new status as a landlord, you will want to acquaint yourself with the laws regarding your rights and the rights of your future tenants. The regulations vary from province to province, and the fines can get pretty steep for landlords who find themselves in violation of municipal codes. All of this will factor into your total operating costs, so it’s worth it to learn everything that will be expected of you—and it will make a good impression on your future lenders.