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Investment Properties

Real estate continues to be one of the most popular and widespread ways to invest and build wealth. An investment property is real estate purchased to have a return on investment or with the intent of generating income and building wealth. For most purchases you will generally be looking at securing a mortgage for the property. An investment property comes with a range of responsibilities and duties that you have to carry out as a landlord.

Like with any financial investment there are risks associated with buying and owning an investment property. You need to be able to make payments on your mortgage and be prepared for the costs of repairs, property taxes, and unexpected expenses. For all your investment property needs, trust the experienced team at Mortgage Squad Agents to find you a solution that is right for you.

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    What is an Investment Property?

    A property that you buy for the purposes of investing or earning revenue is what is known as an investment property. Investing in real estate is a common and popular strategy used by people all around the world to develop a robust portfolio that can build wealth and generate income. An investment property can be residential, single or multi-family homes, or commercial properties. The mortgage and financing of an investment property follow the same general concept as a regular home purchase. You have a mortgage, a down payment, an amortization period, and several other factors to consider when getting an investment property, but some of the rules may be different depending on the number of units, the size of the down payment, and the planned occupancy of the investment property.

    What are the Advantages of an Investment Property?

    An investment property can be beneficial in a few ways:
    • Market Appreciation: An investment property can increase in value depending on market conditions. A good location or a growing local market for real estate can have your property substantially appreciate in value. This extra value can be cashed in on with a property sale or leveraged for a second mortgage.
    • Rental Income: An investment property can generate steady and consistent income by charging rent. This can help your property pay for itself over time. Depending on your down payment and the rental market you may be able to secure rental income equal to or greater than your mortgage payments. The amount of rental income charged will be specific to the market. The “1% rule” is an informal estimation that suggests that an investment property is considered a decent investment if it generates approximately 1% of the property value in rental income each month.
    • Tax advantages: There are a range of tax advantages that your investment property can make you eligible for. These include getting tax deductions for maintenance and repairs on your property, your insurance, property taxes, and even the interest on your mortgage. Different benefits will exist for different provinces and municipalities so make sure to take advantage of what is available to you.

    What are the Risks of an Investment Property?

    While an investment property can be an excellent way to develop wealth and generate income there are some risks you should be aware of before buying:
    • Understand the risk of a mortgage: Buying an investment property can be expensive. In many cases you will be financing your purchase with a mortgage. Your rental income may not cover the entirety of your mortgage payments, you need to ensure that you can make your payments as per your mortgage agreement.
    • Be aware of high mortgage rates: If you finance your investment property you will have to pay interest on the mortgage. If your down payment is smaller or your credit score is low you may be subject to higher rates.
    • Be ready for additional and unexpected costs: Your investment property will require maintenance and upkeep which can add up. You will likely be required to pay property taxes on your investment property too. There may be unexpected costs from unexpected damage from weather conditions or other unforeseen events like a burst pipe.
    • Be wary of ‘fixer upper’ properties: A trend growing in popularity is buyers going after ‘fixer upper’ homes that require renovations and repairs. The idea is to buy them as an investment property, fix them up, and either sell them or put them out on rent to generate income. If you are not an experienced buyer or don’t have experience with renovations it may not be a good idea for you to purchase a ‘fixer upper’ as an investment property.

    Tips for Getting a Investment Property

    Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:

    What Else Should I Know Before Buying an Investment Property?

    Before you buy an investment property there are some additional things you should consider:

      • Are you ready to be a landlord? Having an investment property generally means that your property will be rented out. Are you comfortable with all the duties you may be required to do as a landlord? There are also many legal obligations that you should be familiar with as a landlord.
      • Consider your insurance options: Buying an investment property may require certain types of insurance. Your mortgage may require mortgage default insurance and some form of life insurance. You should also consider landlord insurance for extra protection. Many insurance policies can be packaged together and you may save some money by grouping them together.
      • Find the right location: If you plan to rent out your investment property you want a good location. You want an area where you can consistently rent out your property, and ideally you should consider the long term viability of the area, as well as things like the property taxes charged by your municipality.

    Buying an Investment Property

    There are some rules and regulations to adhere to when purchasing an investment property. If you, the owner, will not be occupying the building then a down payment of 20% is required. If you are buying a multiple unit investment property and will be occupying one of then then there are different minimum down payment amounts. If there are 1 to 2 units where one will be owner occupied then the minimum down payment is 5%, if there are 3 to 4 units where one will be owner occupied the minimum down payment is 10%. 5 or more units are classified as a commercial property and will require a commercial mortgage for your investment property.

    If your down payment on your investment property is less than 20% then the maximum amortization period is 25 years. If your down payment is 20% or greater you may be eligible for a maximum amortization period of 30 to 35 years. Depending on the property and the lender, mortgage default insurance may also be required for your investment property even if you make a down payment of greater than 20%.

    For all your investment property needs, trust the experienced team at Mortgage Squad Agents to find a solution that is right for you.

    Is it harder to get a mortgage if I am self employed?

    Obtaining a Self-Employed Mortgage can be more difficult than a traditional mortgage as the borrower has to take extra steps to prove to the lender that they are capable of maintaining regular payments on their mortgage. It is possible that depending on the financial institution, that Self-Employed Mortgages are not offered at all. Where they are offered, there is also the chance that banks will significantly increase the interest rates for these loans, making them a more difficult consideration for borrowers. To give a better chance at being approved, lenders are expected to offer a large down payment, up to 20% or higher, as well.

    Another difficulty associated with Self-Employed Mortgages is the lack of a T4. A full time Employee can provide proof of income through a simple T4, however a self-employed individual must provide a stated income form, which shows the amount the potential borrower claimed to have earned, and then must provide documentation which can prove the stated amount is accurate.

    Lenders will also apply the Debt Service Ratio when considering your eligibility for a loan. This is a measurement which determines your ability to maintain regular payments on a loan after all your financial responsibilities have been considered. These include monthly bills, car loans, lines of credit, student debt and any other loans.

    If after considering these other factors the bank is confident that you are able to meet their requirements for regular payments, you will be eligible for a loan.

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    Commonly Asked Questions

    An investment property can be an excellent way to build wealth and generate income. Like with any financial investment there are risks associated with buying and owning. You need to be able to make payments on your investment property mortgage and be prepared for the costs of repairs, property taxes, and unexpected expenses.
    The minimum down payment for an investment property mortgage that won’t be occupied by you is 20% of the property value. If the property is going to be occupied by the owner then the minimum down payment is 5% for properties worth less than $500,000 and 10% for properties worth more than that.
    The “1% rule” suggests that a property is considered a decent investment if it generates approximately 1% of the property value in rental income each month. This “rule” is more of a guideline and the amount of rental income charged will be specific to the market. A good investment will depend on your own comfort with risk and your ability to make the payments on your investment property mortgage.

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