Purchasing an Investment Property – Advice from Our Mortgage Brokers
Although renovating homes and reselling them at a higher price is definitely an effective strategy for making money, purchasing a rental property is really the core of real estate investing due to its ability to provide you with a consistent monthly paycheck, much like a dividend-paying utility stock does. To top it off, if you get lucky you may even benefit from some price appreciation. Our Vancouver mortgage brokers have listed some of the key things to consider before purchasing an investment property below and how we can help you through the process.
There are various requirements for underwriting when it comes to investing in an investment property including the following:
Only a portion of the rental income that the property generates will be used for qualification of the mortgage financing. The current range is between 50-80% depending on the lender reviewing the application
Your credit history will be reviewed in detail to ensure you can take on additional debt. Beacon scores of 680 or greater will be a requirement.
No bankruptcy or foreclosure history in the last 2 years
An increased down payment will be required; typically, you will need between 20% to 35% down payment depending on the lender you are working with.
Our mortgage brokers in Vancouver can work with you through the process and ensure that you understand each of the requirements and help you meet them as best as we can.
With the low interest rates in today’s real estate market, many owners of investment properties are considering refinancing. However, there are some differences between refinancing an investment property compared to a primary residence, including the following:
Higher interest rates than the norm, you will pay up to 10 bps higher for rental properties
Stricter loan-to-value ratio requirements, often 65%-75% is the maximum refinance allowed
More importance on credit scores
- Documented rental income by way of a 2-year history on tax returns is often required.
Residential zoning laws can have a big impact on the value of your investment property and the regulations proposed by these laws vary depending on whether your property is a single unit, duplex, triplex, four-plex or five-plex and above. You need to understand these laws and integrate them into your lease to ensure that you are not doing anything illegal. For example, some owners rent their property to tenants who run a business from home, which can lead to the unintentional violation of zoning laws.
Contrary to the regulations in the United States, mortgage interest is not tax deductible in Canada on primary residences. However, using the Smith Manoeuvre you can work towards turning your mortgage interest into something tax deductible by using a few nifty tax tricks. In order to do so you are going to need to have a readvanceable mortgage and invest in a non-registered investment account, which excludes RRSPs and TFSAs. If you’re looking to get some tax deductions from your mortgage interest, our Vancouver mortgage brokers can help you carry out the Smith Manoeuvre and get back as much as you possibly can.
Although Canada is an attractive area for foreign investors looking to purchase an investment property, there are still many tax compliance requirements that come with owning a Canadian property as a non-resident investor. For example, withholding tax is imposed on the gross amount of rent paid to foreign investors – this rate is typically 25%. Consulting with our mortgage specialists and tax accountant is essential to ensure that you know what you’re getting yourself into as a foreign investor of investment property.
Investment properties are a very lucrative investment and our Vancouver mortgage brokers can help you do it right. For more information or further questions, contact us at the numbers listed above and we can help you get started.