With Canada’s red hot housing market, purchasing a second rental property can potentially be a lucrative investment. But before you make the leap, it’s wise to do your research, understand your responsibilities and assess both affordability and profitability. Here are a few things to consider:
Talk to a mortgage expert early.
Financing comes first! Before you do anything else, get in touch with a Northern Mortgage Expert to talk through the financial requirements for your new property. Typically, getting a mortgage approved for a second property is not quite as easy as your primary residence because lenders will want to ensure that you’ll be able to make payments on both properties, if need be. At Northern, we can work with you to help you through every step of the process.
Ask us about leveraging equity.
If your primary residence has gone up substantially in value and you have paid off a large portion of the mortgage, you can potentially refinance to free up equity to put towards the down payments for your new investment property. Another option is a home equity loan. You don’t want to overextend yourself, but it might be worth pursuing in some cases.
Account for operating expenses.
Managing and maintaining a rental property costs both time and money. Typically, operating expenses can comprise 50% of the rental property’s income. That means, if you rent a property for $1,000 per month, don’t be surprised if you need to spend roughly $500 on operating expenses. These might include, but are not limited to, maintenance costs, taxes and insurance.
Prepare an emergency fund.
When you buy your investment property, make sure you set aside an emergency fund for life’s little surprises. While costs like taxes and maintenance are predictable, it’s important to be financially prepared for unexpected situations, like a tenant losing their job and not being able to cover rent, for example. An emergency fund will give both you and your lender the peace of mind that you’ll be able to hand more than one property, come what may.
Do the math before you buy.
Before you jump in with both feet, you should first determine your margins and figure out if your new investment property is going to be a profitable venture on paper. To calculate your margins, you should look at these three metrics:
- Cash Flow = Monthly Rental Income - Expenses
- Cap Rate = (Cash Flow / Property Value) x 100
- Cash on Cash Return = (Cash Flow / Cash Investment) x 100
Use these metrics to compare the different properties you are considering buying. Another rule of thumb to help ensure profitability is to try to charge no less than 1% of your properties value, then find a monthly mortgage payment less than that amount.
Location, location, location.
When selecting an investment property, location is one of the most important factors to consider. It’s easy to recommend purchasing a property in the best possible neighbourhood. But in reality, the best neighbourhoods are often too expensive. Instead, you might want to seek a balance between location and cost. For your first investment property, consider a less expensive property in a modest but up-and-coming neighbourhood with decent amenities, like schools, transit, groceries and few vacant properties.
Understand what it means to be a landlord.
As the owner of a rental property, you should understand both your responsibilities as a landlord, as well as the rights of your tenants. For example, evicting a tenant can be a long and expensive process for landlords. Or, if an appliance breaks, it’s your responsibility to have it repaired. Much of this information can be found in the Residential Tenancies Act and the Ontario Landlords Association is another great resource for tips and advice.
We hope you’ve found these tips helpful. If you have any questions about buying an investment property, we’re here to help! Just book an appointment with a Northern Mortgage Expert online.
