Buying an Investment Property
If you are fortunate enough to have the assets and wherewithal that purchasing an
investment property is a possibility, there are many opportunities available to
you; however, when making the decision to make this type of investment, you should
carefully consider the real estate market where you are looking to buy. Local markets
can vary greatly in terms of price, and desirability and you want to make sure you
know what you are getting into before you invest. Most gains in this area will be
a modest 5-10%, but overtime, even these modest gains will net a fair healthy profit.
Most investment buyers desire to put down as small a down payment as possible, but,
if you a carrying a large mortgage and property values fall, you could end up carrying
a mortgage that is more than what the property is worth. Also, if you put down less
than 20% on a residential property, you may be required to carry mortgage insurance.
Generally, a property will still be considered residential if it has four or fewer
living units. Properties with more than four living units are normally classified
as commercial property and the mortgage qualifications will change.
If you do put down 20% or more, you should be able to get the best interest rates,
and your position will be stronger enough to be able to get an open mortgage. Meaning
you’d be allowed to pay off the mortgage early without incurring a penalty. Another
option for an investment buyer is to determine if the mortgage is portable, that
is if you can “move” the mortgage to another home or property with no or diminished
penalties.
In recent years, the Canadian mortgage market has changed a great deal, and properties
can now be purchased with as little as 5-10% down. This does, particularly in the
case of a 5% down mortgage, result in higher mortgage insurance premiums. Also,
be aware that if you are planning on purchasing several investment properties that
purchasing two properties at 5% down may prevent you qualifying for additional mortgages
loans.
Another consideration with an investment property is to negotiate an extended amortization
period. There are two reasons why this may work to your benefit. One, the interest
that is paid on the mortgage is tax deductible, and two, the lower payment will
increase your cash flow and reduce the monthly cost of carrying the loan substantially.
Mortgage opportunities for investment properties change frequently so it can be
extremely important to deal with an experienced broker if you want to make sure
that you have the best mortgage solution answers. Remember to ask as many questions
as you need to make sure you understand your options.
Ratesheet.ca has a Mortgage Broker Tool available to help you select the broker
that will help you make the smartest investment decisions.
