An investment (or rental) property, can be a great option for generating additional monthly income and growing your wealth over time, if done properly.
This strategy has multiple options and outcomes that can benefit Canadians such as:
- Supplementing income now and boosting pension in the future creating more financial freedom
- Allowing you to buy your dream retirement home now and rent it out until you’re ready to use it
- Increase monthly cash flow for potential expenses beyond retirement savings
- Utilize a multi-unit home (such as a duplex) by renting out one of the units
However, before you buy an investment property, there are a few things to know. Firstly, buying a property for the purpose of renting it out to someone else comes with different qualifying criteria and mortgage product options than traditional home purchases.
Before you look at purchasing a rental property, be aware that:
- The minimum down payment required is 20% of the purchase price, and the funds must come from your own savings; you cannot use a gift from someone else. Another option is to utilize existing equity in your primary residence and refinance for the cash to purchase your rental or investment property. Be sure to factor in funds for closing costs, potential repairs and maintenance in your amount.
- Only a portion of the rental income can be used to qualify and determine how much you can afford to borrow. Some lenders will only allow you to use 50% of the income added to yours, while other lenders may allow up to 80% of the rental income and subtract your expenses.
- Interest rates usually have a premium when the mortgage is for a rental property versus a mortgage for a home someone intends on living in. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.
With the right purchase price and rental costs per month, this can be a great way to supplement income and make the most out of your retirement. Not only does it offer monthly cashflow, but you also will have the ability to sell the property down the line if you so choose. However, bear in mind, the sale will be subject to capital gains tax. Your accountant will be able to help you with that aspect if you do decide to sell in the future.
Before getting started, it is important to calculate the cost of your investment (purchase price and closing costs), as well as consider maintenance amounts (approximately 1% of the property value for the year) and compare to current rental prices to be sure it is a profitable investment before purchasing.
If you’re looking to purchase an investment property, be sure to reach out to a Dominion Lending Centres mortgage expert to discuss your options and understand what is required.
written by DLC Chief Economist Dr. Sherry Cooper