Things You Should Be Aware Of When Owning Investment Or Rental Property
Real estate investments can boost your monthly income and offer great returns, tax advantages, and long-term security. However, there are risks associated with this practice. These include unpredictability, a lack of liquidity, problems with tenants, etc.
To clear your confusion and arm you with information regarding the long and short-term benefits of real estate investments, Mortgages By Erin has created this blog explaining aspects of the opportunity.
Buying your dream retirement home now and renting it out until you’re ready to use it is one way to increase cash flow for potential expenses beyond retirement savings. Real estate investment goes a long way towards supplementing income and boosting pension in the future, creating more financial freedom.
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.
Minimum down payment and closing costs
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 the 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.
A higher premium
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 others 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.
Tax and other expenses
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 cash flow, but you will also be able 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 can help you with that aspect if you decide to sell in the future.
Before getting started, it is essential 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 them to current rental prices to be sure it is a profitable investment before purchasing.
If you’re looking for a mortgage broker in Toronto, reach out to Mortgages By Erin. With over ten years of experience, Erin and her team have successfully helped hundreds of people realize their dream of home ownership. Their passion for helping others is the driving force behind the way they operate.
Get in touch with us today!
If you would like to learn more about our services, please click here or call (647) 885-6940.