BRIAN'S BLOG
Financing Investment Properties: It’s All About the Benjamins
September 7, 2021
Actually, it’s all about the Bordens as it’s Robert Borden who appears on Canada’s $100 bill. (Fun fact!)
In my last blog, I wrote about the ins and outs of investment properties. The truth is you can do all the research you want, but if you can’t get the funds (or you don’t figure out your financials properly) you’re not going to get the results you want.
I spoke with Samantha Comito, a mortgage broker and partner at Outline Financial that I refer clients to.
Here’s our conversation, condensed and edited for clarity:
What is the minimum deposit for an investment property?
If it’s strictly a rental property, you need a down payment of at least 20%. However, if it’s a duplex and you’re going to live in the property, you can do it with as little as 10% down as long as the value is under $999,000. If it’s over a million dollars, you’re looking at a 20% down payment.
The government has set guidelines that if you’re putting less than 20% down on a property, you need mortgage default insurance and they’re not willing to insure properties over $1M. This applies to everyone in Canada. It doesn’t matter if you’re going to live in it, if the purchase price exceeds $999,000, you’ll need to put 20% down.
If you’re going to assume tenants, the lender will take that into account for the amount of the mortgage they qualify you for. If you’re buying a property that isn’t currently tenanted, most lenders will allow for what’s called a market rent analysis, where an appraiser evaluates the potential rental that can be earned. That income can be used to help qualify the client to add it to their income to help them qualify for more money.
What if I don’t have enough for the downpayment?
Let’s say you want to buy a super spacious one bedroom plus den at West Harbour City with an asking price of $779,000, but you don’t have a spare $156k for the down payment. It may be worth accessing the equity in your home to finance an investment property. How much you can borrow depends on the value of your home – and the size of your mortgage.
Let’s say your home is valued at $1M. You can borrow up to 80% of the value. If it’s paid off, you can borrow up to $800,000. However, if you’re carrying a $400,000 mortgage, you can only borrow up to $400,000.
This might come in the form of a mortgage or a home equity line of credit (HELOC). The benefit of using your equity rather than liquidating investments is that it can be more tax efficient. (Check with your accountant for your specific situation).
You can write off the HELOC interest or the mortgage against the principal as well as the interest being incurred on the mortgage on the rental property itself.
Right now, if you have good credit, you’re looking at paying prime (2.45%) plus a half, though some lenders are offering prime plus a quarter.
How much you pay back monthly depends on your credit score – a great credit score may require you to pay just the interest. An average credit score may require you to pay 2% of the balance and interest.
Here’s where the number crunching comes in
For many people, the goal is to be cash-flow neutral, where the property carries itself. If you’re cash flow negative, you’re paying money every month to let someone live in the condo you just bought and if you’re cash-flow positive, you may be taxed on the income.
You need to take into account the interest you’re paying on the HELOC (though remember you can write it off on your taxes), property taxes, landlord insurance and maintenance fees.
In Toronto, it’s going to be a challenge to be cash-neutral with only 20% down when you calculate everything that goes into carrying that condo, including property tax, maintenance, landlord insurance and mortgage payment.
The information here is really high level. Each person’s situation is a little different when it comes to goals, income level and equity that they have within the home.
Depending on the situation, it could be more complex. If you have any questions, please get in touch with Samantha. She can be reached at (416) 803-1453 or by email at samantha@outline.ca.