Whether you’re interested in a new and exciting business venture or are looking for a way to create another stream of income outside of your regular salary, an investment property may be a great opportunity for you.
What’s an investment property?
An investment property is a property owned with the intention of earning a return on the investment. This is done by renting the property out, resale of the property, or both. However, a question you’ll want to ask yourself before heading out to house hunt is…
Are you financially ready to take on an investment property?
An investment property is a great way to make a secondary income, however, without the right financial plan, you can lose your investment, and dig yourself deeply into debt. As I’m often asked for advice on how to go about funding an investment property, and how to create a financial plan that would support it, these are my top tips to getting started.
Have a good-sized down payment.
Normally, it’s required to have at least 20% down when purchasing a property (depending on the size of the property and how many units there are) if you plan to buy it as an investment property and not as a place you plan to live. A larger down payment is required since investment properties aren’t covered by mortgage insurance. And, having an even bigger down payment than 20% is better because you may qualify for a better interest rate. If you don’t have a 20% down payment, see if it’s possible to receive a gift or loan from a friend or family member however, it’s important to note that, that is not a small favour to ask.
Have a good credit score
Just like any property purchase, your credit score will be placed under the microscope to investigate whether you can financially afford the property and the extra expenses that go along with it. Ensuring that you have a high credit score and that you pay down/off any other debt(s) you may have (including car loans, credit card debt, the current amount you owe on your primary residence, and so on) will help increase the amount of the mortgage loan you could be approved for. Having a low credit score and a high amount of debt can severely hurt your chances of being approved for a loan even though you plan to use that property to increase your income. If this is this case, you may need to wait a few years until you’ve both paid off some/all of the debt and increased the amount of money you have saved for a down payment.
Understand the tax implications
If you are purchasing a property intending to rent it out, you are required to report the rent as income to the CRA which means that you will also have to pay income tax on the money you collect as rent. However, any amount that is spent on repairs or maintenance to the property is subtracted from that amount as they will be seen as operational expenses, not as profit. Be sure to review closely how the purchase of an investment property will affect your taxes and income and how this will impact your finances in the long term to ensure that the costs of purchasing an investment property is worth the return you will reap in income.
Meet with a mortgage broker
Working with an experienced mortgage broker, or financial partner like myself, we can work through your specific financial assets and plans to find the money for your down payment. Or, if your down payment isn’t as big as it should be, we can make a long term plan to help you reach your investment goals. With my access to loan products and my years of experience, I can show you how to properly finance your investment property, while getting the best rates and options for your mortgage while we’re at it. I can also give you the right financial advice in the case that now isn’t the right time for you to buy but need advice on how to get there. If an investment property is in your future plans, give me a call at (705) 315-0516, and let’s set up a virtual meeting to get started!