Owning a rental investment property in Vancouver can sound like a dream; all you need to do is put your money into a home, rent it out, and boom! You’ve got yourself an income, right? Well, sort of, but not quite.
Firstly, it’s not always cheap, nor easy to qualify for a rental property mortgage. This is true especially if it’s not your first home, or if there are too many units in the property.
Secondly, rental properties are not passive income; they require regular, financial inputs to maintain them. Lenders will consider this when reviewing your mortgage application.
Thirdly, as a landlord, you’ll need to be well-versed in the laws surrounding tenancies – especially when it comes to liability. You should expect that you’ll get the occasional missed rental payment, or damage to your property. Working with a property manager can help with this.
Nonetheless, earning residual income from rental investment properties is definitely a viable way to turn a profit, if you do it ‘right.’ By ‘right’ we mean by using a rental investment property mortgage.
In fact, rental properties can even provide interim benefits, such as tax deductions.
In the long run, they can appreciate in value. This can bring in more cash flow from higher rental rates. Or, they can provide you with a sizable return on investment, should you choose to sell.
The first step to owning an investment property is to speak with a B.C. mortgage broker.
Before you shop for a property to rent out, you’ll want to ensure your finances are ‘in check.’ This will increase the chances that a bank will approve your application for a loan.
Mortgage brokers are able to look at your unique financial situation, and then shop the market for a mortgage product that fits your case. This is far more efficient than trying to speak to individual lenders yourself, especially when looking to borrow for an investment property. That’s because investment properties can sometimes come with more restrictions and rules than primary, residential home mortgages. Mortgage brokers will know where to go, and who to talk to, to speed up this process for you.
And, best of all, mortgage brokers work in your interest, at no charge to you.
If you’re interested in learning how you can mortgage an investment property, we encourage you to get in touch! We’re ready to help you on your way to becoming a landlord!
Below, we’ll answer some questions you may have about rental investment property mortgages.
What’s the difference between buying a home to live in, versus buying an investment property?
When you buy a home as an investment, rather than as your primary residence, there are usually just a few differences to consider in your mortgage application.Read more
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.
How much of a down payment do I need to purchase an investment property in Vancouver?
Down payments for rental properties are based on whether or not you will live in one of the units, and how many units there are in total.Read more
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).
Can my future rental income help me qualify for a mortgage?
Part of your future rental income can be used to qualify for a mortgage. However, this part of applying for an investment mortgage can involve some intricate mathematics. We’ll do our best to explain it as simply as possible. But, know that it’s best to speak with a mortgage specialist to help you sort it out fully.Read more
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!
Should I set up a business to earn rental income from an investment property?
While you could set up a corporation or partnership to collect rental income, it’s not always advised to do so when you are purchasing a property with 1 – 4 units. These are not usually commercially-zoned, so they don’t require commercial mortgages.Read more
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.
What can increase my chances of being approved for an investment property mortgage?
- A sufficient down payment.
- A good credit score.
- A stable income to justify your purchase.
- Valid, government-issued identification.
And so on.Read more
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.
Start your journey into being a landlord with the help of a mortgage broker
The great thing about working with a mortgage broker is that there’s no cost to you, and no risk either. If you’ve been thinking of entering the property ‘game,’ there’s no time like the present (as they say). Our mortgage brokers can evaluate your finances, and let you know what they think it will take to be approved for financing on a rental property.
Contact us today, and we’ll get started on your pre-approval process right away!