If there is one thing that many of us have learned in the past few months, it might be that it’s really hard to create financial security with only one stream of income. With layoffs sadly being a large contributor to the increase in unemployment because of COVID-19, many families in Barrie and the surrounding area have been forced to defer mortgage payments or give up other essentials to make ends meet. The real estate market in Barrie hasn’t made owning a rental property any easier lately either. Home prices are still rising and anything with income potential gets snapped up faster than you can count to ten. And, to top it off, even though you’d like to become a landlord and own a rental property, the mortgage process for applying for a loan for a home that is not your primary residence is more strict and a little different too.
Investing in a rental property to create a second income stream for your family is possible though! That’s why I’ve put together this article for you to learn what it takes to secure the mortgage you need while answering a few popular questions along the way.
What’s the difference between applying for a mortgage for an investment property when compared to a primary residence?
First off, you won’t be living it in! But, you knew that. However, that is a big part of it when it comes to the bank’s or lender’s opinion of your mortgage loan application. Or perhaps you plan to purchase a duplex, live in one unit, and rent the other. Whichever you decide it will impact a few things when looking to secure a new mortgage for your purchase. If you’ll be living in one of the units and renting the other, your lender will consider the property “owner-occupied”. If you won’t be living there at all, they will consider the property “non-owner-occupied”. The reason why this is important to note in the process is that it will change the amount you’ll need to have set aside as a down payment.
Another thing that will be different is how the property is zoned by the municipality, town, or city it is located in. If the home has 1-4 units that can be rented it will be considered a residential property but if you have 5 or more units they would consider the property to be a commercial property. And, commercial properties need a totally different kind of mortgage.
If you do decide you want to live on the property on occasion and rent it out once in a while, like a cottage, for example, you might want to think about applying for a mortgage as a second home instead of an investment property and there are benefits to each type of mortgage but, we will get into that in a future blog post.
How much of a down payment will you need for an investment property?
The down payment you will need for your investment property varies depending on how many rental units are in the home, and whether you’ll be living there or not.
- If there are 1-2 units in the home and you’ll be living in one of them as an owner-occupied residential home, you’ll need a minimum of 5% down.
- If there are 3-4 units in the home and you’ll be living in one of them as an owner-occupied residential home, you’ll need a minimum of 10% down.
- If there are 1-4 units in the home and you won’t be living in any of them as a non-owner-occupied residential home, you’ll need a minimum of 20% down.
Finally, one of the most important things to think about before purchasing a rental property as an investment is how much debt you currently have.
Even though you’re making this investment to make more money, your lender is still going to look at your current credit score, your income to debt ratio, and how much money you have tied up in other debts like car payments and credit cards. If you don’t have many debts and you’re looking to get your money working for you to increase your wealth, an income property might make great sense to create a little more security in your financial plan. However, if you have a decent amount of credit card debt, large car payments, and you haven’t yet built a financial safety net for incidentals, you might want to wait a few years and implement a savings plan to get you to a place where you’re a little more balanced before jumping into an investment property.
If you’ve been wondering if an investment property makes sense for you at this moment or in the future give me, Darren Robinson a call at 705-315-0516. I’m here to help you make a plan to make that next property your own and to help you build an investment plan for your long term wealth advancement as well.