Earn residual income from rental investment property mortgages in Vancouver

However, these differences become more elaborate when purchasing a multi-unit residential property with more than 4 units. That’s because anything with more than 4 units will be zoned for commercial use. It will require a commercial mortgage. We have a page dedicated to this type of property mortgage, here.

But, suppose you are only seeking to buy a single-unit home, a duplex or something with less than four units, which you plan to rent out. In this case, you will likely be buying a property zoned for residential use. This makes it easier, and more affordable to buy, than a commercial property.

With residentially-zoned rental properties, the main differences in your mortgage application will come down to three things:

• Your down payment amount.
• Whether or not you will be occupying one of the units yourself.
• The way your income is calculated, since buying a rental property, of course, means you’ll be earning income from that property.

We will explain these factors in more detail below. They can get intricate and detailed, however. If you feel like you need more help understanding them, give us a shout! We’re here to answer your questions. We can also give you a ‘bottom line’ answer to let you know whether or not you may qualify for a rental property mortgage.

Email: simon@bcmortgagesolutions.ca

Tel: 604-495-8787

Cell: 778-929-3678

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In general, you can expect the following rules to apply when seeking to mortgage an investment property in Vancouver (or anywhere in B.C.):

If you live in one of the units:

• A 1 – 2 unit home requires a 5% minimum down payment (in addition to mortgage insurance).
• A 3 – 4 unit home requires a 10% minimum down payment (in addition to mortgage insurance).

But, if the purchase price is over $500K, then the minimum down payment will be 5% on the first $500K, and 10% on the rest of the purchase price (in addition to mortgage insurance).

If you can put down 20% or more, you may not need to purchase mortgage insurance.

You can learn more about mortgage insurance, and when it’s required, here.

If you do not live in one of the units:

• A 1 – 4 unit home requires a 20% minimum down payment (with mortgage insurance as a possible, additional requirement, depending on the lender).

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You see, with all mortgages, lenders look at what’s called your gross debt service (GDS) ratio and total debt service (TDS) ratio. You can learn more about these calculations, and other factors that go into your mortgage application, here.

The GDS and TDS are essentially calculations to check whether or not you can afford a property purchase. They look at your debt payments and other expenses, and stack them up against your income. They are meant to answer one simple question: can you realistically pay back a mortgage on time, every month?

But, when buying a rental income property, there is another important calculation that lenders use to qualify your loan. This is called the debt service coverage ratio (DSCR), which is based on the net operating income (NOI) of your rental property.

We cover the definitions of these terms, and others you should know as a landlord, on this page.

In essence, before taking into account the income you’ll make from your rental property, a lender will make some important deductions. These include:

• Your operating expenses (such as maintenance fees, taxes, utilities, insurance, etc.).
• A percentage for inevitable, unpaid rent or vacancies (such as when tenants move or repairs need to be made), etc.

The latter deduction is called an offset. It can range from between 50 – 70% of your rental income. This means you are left with 30 – 50% of rental income that can be added to your mortgage qualification criteria.

If your rental income is higher than your NOI, that will be a good sign.

This then circles you back to the GDS and TDS. The rental income, minus the expenses and the offset, will help make the argument that you can make mortgage repayments.

But, rental income can’t be your only source of funds to prove this. You will still need additional proof of income to purchase a residential rental property.

If you’re feeling confused, there’s no need to fret. You can let us handle the ‘math homework’ for you! We’ll simply ask you to provide us with some basic information about your finances and goals. From there, we can package it together on your behalf, and send it as an application to a mortgage lender. It’s what we do all day, every day!

Contact us today!

Email: simon@bcmortgagesolutions.ca

Tel: 604-495-8787

Cell: 778-929-3678

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On the one hand, with a corporation, you’ll have the benefit of tax deductions. But, on the other hand, you may have a harder time being approved for a mortgage on a residentially-zoned property. Banks prefer to lend to individuals, rather than companies, in this case.

That said, you will still benefit from tax benefits as an individual who owns a rental property. The interest on your loan can be used as a tax deduction. And, your capital appreciation will be taxed at 50% your personal marginal tax rate. If you were a corporation, capital appreciation would be taxed at 100% of your marginal tax rate.

However, we are not accountants and lawyers. To find out the best financial scenario that suits your case in this regard, you should speak to one or the other. Professional accountants and lawyers can advise you further, and better than we can, as Vancouver mortgage brokers.

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On top of this, lenders will want to know that, should you default on your mortgage, they will be able to sell your home as quickly as possible, to recover their losses. If the home you purchase is in a rural area, or requires a lot of repairs, this can make some lenders wary of approving your mortgage.

In this regard, buying a rental property can be a lot like buying a secondary property or vacation home. If that is your case, see this page for more information that may apply to you.

Finally, if you have experience managing rental units, this could work in your favour. Being a landlord is not easy. There are risks involved, which you’ll need to be prepared for.

For example, if tenants refuse to pay rent, and refuse to leave, you’ll need to be ready to take legal measures to evict them. If someone is injured on your property, you’ll need insurance to cover you in the case of a lawsuit. These things all cost money, and could impact you financially. Being financially burdened can then affect your ability to repay a mortgage. So, regardless of the lender’s approval, knowing what you’re getting into is essential.

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