Buying a rental property may not be as good an investment as you think. When calculating the benefits of owning a rental property many Canadians will assume that the mortgage financing is the same as if you were buying a residence. This is not the case. Mortgages on rentals require bigger downpayments, higher incomes and they often come with a higher mortgage rate.
It wasn’t that long ago that you could buy a rental property with as little as 10% downpayment. Not as good as the meager 5% required for buying a residence, but much less than the current requirement of a 20% cash downpayment. This is one of the changes implemented by the department of finance to cool the heated housing market.
When qualifying for a mortgage on a rental property you’ll need a higher income than when buying a residence, even after you take into account the rental income. No lender will use 100% of the rent you’ll be receiving and just consider it a break-even scenario. Cautious lenders will take away increments for vacancy, maintenance and miscellaneous expenses. An aggressive lender will offset the new mortgage payments with only 80% of the rental income. This will rarely result in a positive cash flow, unless you make a substantially larger downpayment.
You can count on a higher mortgage rate as well. Even with a great credit score and high income, your mortgage lender will likely charge a modest premium on your mortgage rate. The rationale is that in the event of a financial catastrophe you will pay your home mortgage before you pay your rental mortgage – family first after all. The slightly higher risk level warrants a premium of 0.10% to .25% on your mortgage rate.
Long term investments in rental properties can be financially rewarding. Just make sure you know the facts.