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Investment Property-Things to Consider

Q - I am seriously thinking of purchasing an investment property in the upcoming year.  What should I be aware of?

A - These are Canadian mortgage rules but universal principles.

There are many things you should be aware of.  I will try to outline some of them.  This will apply to residential income units up to 4 units - meaning no larger than a fourplex.  Beyond that size, your investment is classified as commercial and the rules are different.

1.  Since you yourself are inexperienced in this field, get an experienced mortgage broker who deals with such investment properties on a regular basis. Often, banks do not have experienced employees that can fully advise you regarding such mortgages.  Also, when dealing with a bank, you are limited to what they have to offer.  There may also be differences in how much of a downpayment you may require as well as other considerations such as credit scores.  These mortgages are always changing.

2. You should have at least 20% down.  If you don't, you are into a 'high ratio' mortgage which requires that the mortgage be insured and that is an extra cost for you.  If you have 20% down and a good credit score as well as the income to qualify for the mortgage, you can get a very good interest rate because you will be considered 'low risk'.  This should also enable you to get an 'open' (no mortgage penalty if you pay it off early) and 'portable' (able to move mortgage to another investment property without penalty) mortgage.

3.  You should be able to carry this mortgage if the property is not rented.  However, if you have 2 to 4 rental units, the chances are that you will still be receiving some income.  Make your assessment and be sure that you can handle the mortgage for a period of time without any additional income.

4. As with any property, maintenance is also a cost that should be included in your calculations.

The above represents the ideal situation for investing in an income property. You can fall short on some of these recommendations and still be able to obtain an income property but it would be at a higher cost and with greater risk.

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