Investing in Real Estate

Buying Real Estate as an investment is a fabulous way to generate passive income and plan for your future. Real Estate investments have the advantage of being very stable and predictable. Although returns are not always spectacular, especially in a city like Vancouver which has exceptionally high land values, the return is attractive when you calculate in the ability to leverage, depreciate and the near certainty of long term appreciation in a popular and growing city.
Not all lenders are lend on revenue properties. Those that do don’t always lend at their best rates.

Some lenders require larger down payments than others. Knowing which lenders to approach is almost as important as finding the right property.
Generally, one must put down 25% of the purchase price if intending to use the property as a rental.

Banks will not lend above 75% of the properties value with out mortgage insurance. The providers of mortgage insurance in Canada are the CMHC and GE Capital. Neither is in business to make investors rich. The CMHC will insure mortgages on rental properties, however the fees are excessive and the insurance premium is more than double the premium charged on an owner occupied residence.

Lenders guidelines are much more relaxed when the CMHC or GE Capital are not involved and more rental income can be used to qualify for the mortgage.

Investing Information

Investing in Real Estate is an exciting step for many people. Many people consider their home to be the best investment that they have ever made. If this is true, it's surprising than that more people don't own more investment Real Estate.

Owning an investment property, or several, not only provides the opportunity for potential capital growth, but in the right circumstances can also provide excellent cash flow.

There are many factors to consider when planning to purchase a revenue property. Of course, finding the right property is very important. What type of tenants will you attract? Will you have the time to properly manage the property or will you hire an outside management company? Is the cash flow sufficient? Don't forget that having the rent cover the mortgage payment isn't sufficient. You must also be able to cover the expenses. A 30% expense ratio is a good rule of thumb.

We'll leave the analysis of the property itself up to you and your Professional Realtor. For now we'll concentrate on the aspects of financing a rental property.
It is possible to buy a revenue property with as little as 15% down. However, CMHC considers itself to be in the business of helping Canadians buy a principle residence, not investments. Therefore they price their insurance premiums accordinly, making it very expensive to get high ratio financing to buy an investment property.

The insurance premium on a loan with 15% down is a whopping 4.5% Add to that a $600 application fee and a requirement for the applicant to show a net worth of $100,000.

Most choose to invest at least 25% as a Down Payment. It's important to note that not all lenders are willing to hold a mortgage on a rental property, therefore the options are more limited. The lenders that do lend on revenue properties may require up to 35% down. They also may not offer the full discount off the posted rates. It is more difficult to get the best discounting on a revenue property, but it isn't impossible.

When qualifying for a rental mortgage please note that most lenders will only take 50-75% of the rental income to use against the mortgage payment. If you have other mortgages or financial obligations this may limit the size of mortgage you can qualify for. We do have lenders that will directly offset the rent versus the mortgage payment. This makes much easier to qualify for multiple mortgages.

It is possible to buy a multi-family property with as little as 10% down if you plan on occupying one of the units as a principle residence.

Real Estate as an investment is a big step. There are many important factors to consider, however, for most people the pros outweigh the cons.

Pros of a Real Estate Investment:

• Real Estate has a proven track record over the years. Vancouver is and will remain a very attractive place to live. Over the long term, prices can only increase.
• With proper tax planning, your Real Estate investment can grow tax free.
• There has been a recent decrease in the Capital Gains Tax. Unlike many stocks or mutual funds, Real Estate is a tangible asset. The proper investment property can provide you with significant cash flow and provide passive income.

Cons of a Real Estate Investment:

• Real Estate requires a larger initial investment than many other investments.
• Real Estate requires a higher degree of management than many other investments.

There is another way to invest in Real Estate that provides excellent returns.

Privately held Mortgages are a proven investment vehicle that allows you to know your rate of return as well as the relavent amount of risk involved. You can even hold a Mortgage inside a self directed RRSP.

A private Second Mortgage will earn approximately 12% and generally does not exceed 80% of the value of the property, keeping the risk to a minimum.

Private Second Mortgages range from between $10,000 up to $75,000. They represent an excellent investment for those without enough capital to purchase a property or for those who don't want to take on the management.

If you'd like to inquire further about lending a Second Mortgage please give us a call.