Buying rental properties

Over the last few weeks I’ve worked with several clients who are building their portfolio of rental properties.

Three of the mortgage applications went smoothly, while the other two were a little more challenging.

Each lender has slightly different policies and procedures for evaluating mortgage applications. An important starting point is:

  • the client’s overall financial situation
  • income
  • credit score.

Credit score can make or break an otherwise strong application.

When we get into applications with multiple rental properties, most lenders use a rental worksheet to determine how well an application debt services.

Very simply, debt service refers to the amount of money required over a period of time to repay debts. For rental properties, this calculation includes:

  • mortgage payments
  • property tax
  • allowance for vacancy
  • allowances for insurance and maintenance.

Some lenders use a simpler calculation. They factor in the full mortgage payment and allow a percentage of the rental income (often 50 per cent) but don’t factor in the additional allowances like vacancy, insurance, and maintenance.

One mortgage product that some investors use to purchase rental properties is a hybrid mortgage featuring both an amortizing portion (paying off steadily over time) and a credit line component.

Let’s say you have $250,000 for your down payment on a $500,000 rental property.

To purchase a rental property you need a minimum of 20 per cent down (in this case $100,000). In this example, you could choose a mortgage of $250,000 and add a credit line of $150,000.

The intent behind adding the credit line would be to have easy access to your equity in case you wanted to buy another property.

In the past this has worked well for investors.

Over the last few months, I’ve seen a number of lenders adding in a payment for the credit line as well. They are using a payment, calculated over 25 years at the Bank of Canada Benchmark rate (currently 5.34 per cent), based on the approved limit as opposed to what is actually outstanding.

The intent is to prevent clients from becoming over-extended and unable to meet their financial obligations. The lower your total mortgage exposure, the stronger your application.

The other thing I am seeing is lenders becoming more cautious when approving mortgages for clients with multiple rental properties. Depending on the client’s financial position, the tipping point seems to be about four rentals.

There are some lenders who are not concerned with how many rentals a client has, while others set a cap (often four properties). In some cases, after four properties it makes sense to then find commercial financing.

Commercial lending is a different option all together.

While still considering the overall strength of the application, on the commercial side there is a stronger focus on the property being purchased.

Commercial applications are handled a bit differently. I am seeing more investors move to the commercial side as residential lenders tighten their guidelines.

This information only hits a few of the important points of financing rental properties. Each client and each purchase is different, so it is really important to connect with your mortgage broker or banker before you write an offer to purchase.

What might have been a slam-dunk for you two years ago before the mortgage rules changed might be impossible to finance now. Having your mortgage professional run the figures before moving forward can save a lot of stress once an offer is in play.


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About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit http://www.okanaganmortgages.com

Visit their blog at https://www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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