Getting Into Investment Properties Things You Should Know
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If you've ever thought about trying to make more money, the idea of making an investment has probably crossed your mind. Perhaps you've thought about getting into real estate, as investing in property could potentially offer the perfect opportunity to expand your income. From new to experienced, there are many things to know before crossing over to "real estate mogul" status. Making money is the name of the game, so you need to be armed with tons of knowledge, from the rental process, to different types of mortgages, responsibilities of a landlord, the ins and outs of flipping a house, to name a few areas you could pursue.
Mortgage Options & Costs
Securing a mortgage is one of the first things you need to think about, even before you've found your first property. It can be difficult navigating the choppy waters of searching for the right type of mortgage as there are so many options these days. Reaching out to a mortgage specialist, who generally offers a no-obligation consultation, would be an excellent starting point. By answering questions unique to your situation, you can start to shortlist your possibilities before starting your investment property search. This way you'll be educated and feel more confident about what you can afford and the required terms.
Types of Mortgages For Your Investment Property
When you're ready to start your investment property search, the first thing you need to consider is the number of units your building will have and how it is zoned. Most buildings zoned as residential have one to four units, making qualification for financing more challenging versus a traditional principal residence, but not by miles. Buildings with five or more units, however, are zoned commercial, with even tougher qualification criteria and higher interest rates.
If it's a multi-unit property, you will need to determine if you (the owner) will be living in one of the units. If you will be living at the property, it would be considered owner-occupied. If all of the units will be rented out, it would be classified as non-owner occupied. The major difference between the two is the required down payment amount.
If you have a credit rating of at least 680, you will be considered a lower risk for a rental property and to receive more favourable interest rates. It's not a bad idea to check your credit score before applying for a mortgage, to avoid any surprises as to where your credit standing falls.
The lender will need all of the required paperwork to apply, which could include current proof of income, a letter of employment, recent NOA (notice of assessment) or income tax returns. If you are commission-based or self-employed, it’s more than likely that notice of assessments, income tax returns and other business related financial documents and verification will be required.
Additional Lender Requirements
The lender will require that the majority of the property’s operating expenses, including the mortgage payments and property taxes, are covered by legal income. If the property income does not fulfill the operating expenses, you will need to show proof that you can personally cover any financial shortfalls.
You’ll also need to understand how cash flow works. This term represents the total rental income minus all allowable expenses such as mortgage interest, maintenance, potential vacancies and property taxes. In many instances, the rental income will be exceeded by the expenses and create a monthly negative cash flow. A negative cash flow allows an investor to reduce their income tax since it can be deducted from earned income.
How Much Is Required For A Down Payment?
The traditional benchmark is a minimum of 20% of the purchase price. You will have to show proof that the 20% hasn't been borrowed, as well. This condition is often satisfied by showing the money has been in your bank account for more than 90 days prior to the due date of the down payment. It can, however, come from the sale of another property, but you will need to provide the purchase of sale agreement to prove how much money was made from the sale.
In addition to the down payment, the lender might want proof of closing costs being covered, usually a minimum of 1.5% of the purchase price. If you already own other properties, the lender will want to see property tax and mortgage statements and lease agreements for any rented units. If the properties have a negative cash flow, you’ll need to provide proof that you will be able to personally cover monthly expenses.
When you're considering an investment property, you might decide that it would be better to build one. If you fail to find somewhere which really lives up to your expectations, this might be a viable option for you. If this is the case, you will need to learn about construction mortgages.
The two popular types of construction mortgages are the completion mortgage and the progress draw mortgage.
This is a standard mortgage that gets paid out after the home is built. Once construction is complete and the closing date has been determined, funds will be transferred or paid out just as they would in a home purchase. This type of mortgage is used when purchase pre-constructed or quick-close homes or ones currently under construction by the builder.
Progress Draw Mortgage
A progress draw mortgage is not available in all areas, but makes the process much smoother where it is available, as funds are released throughout the construction process. With this type of mortgage, the lender will release funds during the completion of each pre-determined phase of completion. Traditionally, these are at intervals of 35%, 65% and 100% completion.
It Takes More Than Money!
It's hugely important to have a great support system in place. It can be taxing jumping into a real estate investment on your own, especially if it's your first time venturing down this road. It makes sense to have the support of those who really know what they are doing. With the right realtors, contractors and mortgage brokers, you can feel more optimistic about the success of your investment.
It's important to have a strong entrepreneurial spirit, which so often sets apart those who succeed and those who don't. Happy hunting on your perfect investment property!