With prices at an all time high, I still believe there are opportunities to invest in real estate. Here are 3 reasons why it is good to be a real estate investor in Toronto.
The larger the downpayment, the lower the mortgage rate should be. The more capital the applicant has into a property, the less risk there is to the lender, right? Wrong! Why less downpayment gets you a lower mortgage rate!
Over the years working with real estate investors, I have come across very interesting answers when I ask "How many investment properties do you need to buy?" I have heard from 1 property to 40 properties, 1 every year for the next 5 years, don't know... Most stumble when I ask why? It starts with why. Simon Sinek explains the importance of starting with why in his TED Talk
There are many reasons for buying investment properties, here are some:
- Retirement income
- Fund children's post secondary education
- Job replacement (one spouse might be considering leaving their job)
- Supplemental income
- Family legacy
- Full time real estate investor
- Investment diversification (real estate and stock market)
Once a reason or multiple reasons are chosen, determining how much monthly income the investment properties are to generate is the next step. This goal can be achieved via different investment properties options (single family, duplex, multi-family, commercial....) and various geographic locations.
To complete "why invest in real estate" analysis, reverse Engineer the number of properties you need and have your personalized "how and where" plan developed, click here.
There have been many changes with respect to mortgage qualifications in Canada. Above and beyond the 4 major changes announced by the Minister of Finance over 4 years, there have been changes on the backend on how lenders qualify applicants. The most recent one is mind boggling!
Investment Property Mortgage Qualification
For an applicant reporting a surplus on their T1 general (line 126), the surplus (line 126) is added to their income.
Example: Applicant's income is $100,000 and line 126 is showing $5,000, total applicant's income is $105,000. If the applicant owns other investment properties, here is the part that makes no sense: The principal portion off the annual mortgage statement is deducted from applicant's income!
Example: Applicant has paid down $10,000 of mortgage principal in the previous year, total income: $100,000 plus $5,000 less $10,000 = $95,000. This rule effectively penalizes real estate investors who build equity in their investment properties. Last time I checked statements made by Minister of Finance, Bank of Canada, Bankers..... they all advocate paying down debt and building equity now while interest rates are low (Canadians are at record high debt to income ratio).
This rule effectively encourages not paying down mortgage principal. Had the applicant paid more interest than principal in the previous year, the mortgage principal deduction would have been less and therefore their net income higher!
If you are thinking of showing a loss on line 126, it's even worse: Income less loss on line 126 less mortgage principal.
Are you confused and frustrated with all these guidelines? Rest assured this is what I do on a daily basis and I am here to help you navigate through the mortgage qualification land mines to build your real estate investment portfolio. It's all in the setup.....Happy Investing!