Do you ever think of getting into real estate as an investment vehicle? If you’re like many GTA residents, you know there’s money to be made, you just don’t know where to begin. I know this because the subject comes up almost daily. The good news is that you can get started right here and now, with me. Over the coming months, I will be discussing the essentials of real estate investing and how to build a portfolio that works for you. This is the first part of my series on Investing in Residential Real Estate 101. I think you’ll enjoy it.
Securing your Financing
There are two key factors that help determine the mortgage terms and conditions on an income property: these are the number of units in the building and whether you will be residing in one of those units. While the actual terms and rates will vary depending on your lender, the following information should give you a ballpark for what you can afford and your best options.
How many units are there?
▪ Most buildings with 1 – 4 units are zoned for residential use. In these cases, qualifying for a mortgage is a little more difficult than securing one for your principal residence.
▪ Buildings with 5 or more units that are zoned for commercial use may require a commercial mortgage. In these cases, the qualification criteria are tougher to meet and come with higher interest rates.
Will it be owner-occupied or not?
The major difference between properties that are owner-occupied versus non-owner-occupied is the down-payment required.
▪ Owner-occupied:
1 – 2 units 5% down payment
3 – 4 units 10% down payment
▪ Non-owner-occupied:
1 – 4 units 20% down payment
Important note: As of February 15th, 2016, the purchase of an owner-occupied property requires a down-payment of 5% on the first $500,000 PLUS 10% of any amount over $500,000. For CMHC-insured mortgage loans, the maximum purchase price or as-improved property value, must be below $1,000,000.
CMHC Insurance
Mortgage insurance represents an additional cost that you need to expect. To avoid surprises, speak to your Mortgage Broker for a personalized estimate.
Don’t forget Canada Revenue Agency
You can’t run from taxes. Any money you collect in the form of rent is considered income and subject to taxation. If you purchase an income property (or convert a portion of your current home into a rental unit), the appreciation in value from the time you made the purchase and the time you sold it, is deemed a capital gain and subject to taxation. The amount of tax you pay will be based on your marginal rate of taxation which depends on how much income you earned in that year. In other words, if the property value goes up, so does the tax bill.
GST / HST New Residential Rental Property Rebate
If the investment property you purchase (or plan to purchase) is new or substantially renovated (before or after you bought it!), speak to your accountant about the GST/HST rebates that may be available to you.
As you can imagine, it is imperative that you speak with a mortgage broker early in your buying process. After that, call your accountant for advice regarding the additional costs you will incur as a landlord and so that you can begin a tax planning program.
