Buying a Rental Property
Investing in the housing market can be financially rewarding, but may also be a bit overwhelming. You will have a number of aspects to consider when owning a rental property. First you will have to ask yourself if becoming a landlord will be the right fit for you.
Our team specializes in mortgages on investment properties. We have the knowledge and personal experience needed to help you buy your investment property. When properly educated, an investment property can provide you with financial freedom down the road. There is a lot of information to research and some unexpected costs to consider. We want to help you make the right choices to maximize your profits.
How to mortgage a rental property
Rental properties are getting harder to finance each year. Banks are creating stricter rules to ensure you are financially prepared to cover your new mortgage payment and unexpected costs associated with your rental property. BMO® Bank of Montreal looks at each client and their financial situation on an individual basis. We take into consideration the down payment amount available, access to savings for unexpected costs, the number of other rental properties owned, the condition of the rental property and reliance on the rent that will be collected. Here are some common scenarios we see:
Keep my current home as a rental property
Keeping your existing home as a rental property and purchasing your next home is a common scenario we come across. The guidelines used in this situation are much different and a bit more relaxed than if you were to go out and buy an investment property. BMO® Bank of Montreal has a unique approval process for helping clients get approved to keep their existing home as a rental property and move into their next home. We can use 85% of the potential rental income to offset the payments associated with that property. We will also help you determine what that rent will be by hiring a qualified appraiser to research the rental market in the community.
The biggest obstacle you may come across is saving up for the down payment on your next home. See Understanding down payment for more information and requirements. In some cases we can take the equity out of your existing home for the down payment on your new home. See Accessing My Home Equity for more information on the requirements. We understand that it can be financially beneficial to keep your starter home and we want to help you convert it into a rental property.
Buying my first rental property
Financing your first rental property can seem overwhelming because there is a lot of information to learn. Let us make the mortgage financing easy for you to understand. The first step is to come up with a down payment of 20% or higher in some cases. The reason you need such a large down payment is because default insurance companies (such as CMHC and Genworth) do not insure rental properties. They are in the business of helping people purchase their first or second home. If you put less than a 20% down payment on a property in Canada, it is mandatory to have default insurance coverage. See Understanding mortgage default insurance for more information on the requirements.
The next step is to have access to savings for unexpected costs associated with the rental property. The bank calls this your “fallback money.” You cannot always rely on the rental income to cover all of the payments on your investment property. What if your tenant is late on the rent, the property becomes vacant, or repairs have to be completed? You are still liable for making the payments and we want to make sure you will be financially comfortable to do so.
The last step is qualifying for the mortgage on the rental property. Because the bank wants you to successfully own a rental property, the qualifying rules are a bit tougher. BMO® Bank of Montreal will add 50% of the potential rental income to your application. We will help you determine what that rent will be by hiring a qualified appraiser to research the rental market in the community. All of the payments associated with the new property will be added to your debts. For qualifying purposes only, you will often have to show that you can supplement a large portion of the payments associated with the new rental property with your own income. We know this can be complicated, call us and we can go over this information is more detail.
Buying my next rental property
The steps for buying your next rental property are the same as above in Buying my first rental property. You have to have a minimum down payment of 20% or higher in some cases, have “fallback money” available to you and qualifying for the new mortgage using 50% of the potential rental income. Bank of Montreal has a unique approval process for helping clients get approved who already own existing rental properties. We can use 85% of the rental income on investment properties we are not financing to offset the payments associated with the properties. This is a huge benefit to help you qualify for your next rental property. Let us do the calculations to see if you qualify to buy more properties.