With increasing living costs, many Edmonton first time home buyers are considering investing in a second mortgage to buy properties that they rent out and supplement their income. Although the prospect of some additional source of steady income is attractive, it is not easy to get a second mortgage. Before you put down a deposit for your rental unit purchase and start realizing the rental income, there are a lot of elements you need to consider in determining whether owning a rental property is the right choice for you. Especially if you have significant debt consolidation to do, you may find yourself struggling to find the best mortgage broker in Edmonton who can support you to get good mortgage rates.
Buying a rental property
The first question that is a preamble to buying a property is whether you need a second mortgage or your Edmonton bank savings will cover you. Experts suggest that if you are retired, it is probably not a good idea to have an open mortgage, but this wisdom applies to your residential property and not rental. Purchasing a unit that you wish to rent in future is just perceived as an investment. It is looked at as a valuable fixed asset which may be resold later. If you are a Baby Boomer and are planning to downsize your family home to support your future transition into retirement, you can very well utilize the tax-free equity accumulated in your principal residence for the purchase of a rental property. This will reduce or even eliminate the need for a mortgage.
Benefits of a multi-unit, owner-occupied residence
You may be surprised to know but selling your principal home can actually provide you additional benefits. If you plan to sell your primary residence, you will need a new place to stay. If you are ready to forgo the revenue from your rental unit, moving into your investment home can be advantageous.
Lower down payment
Residing in your own rental unit means that you will need a lower down payment. Due to federal government’s down payment changes, the minimum down payment on an owner-occupied dwelling is 5% of the first $500,000, and 10% of the remaining amount greater than $500,000 but for a home that is not owner-occupied, the homeowner will need a minimum 20% down payment.
Higher down payment for non-owner-occupied buildings
Due to the increased risks attributed to dwellings that are not owner-occupied, lenders often demand a higher down payment as lenders are concerned that the renting party may not have the same level of commitment to look after the building as the owner.
Is your property classified as commercial?
Although you don’t perceive your property as commercial, remember that most lenders consider a property with more than four units or any building with retail spaces to be a commercial property. As a commercial property, you may require a downpayment of at least 20% to arrange a mortgage.
Is your rental property worth it?
Although you may have already made plans about reaping the benefits out of your investment property, once you get the possession and rent it out, consider the returns and potential yield of your investment. Remember that property investments carry some unique associated risks like:
- Payment defaulting
- The expense of property upkeep
- Dealing with clogged drains and malfunctioning appliances
- Risk of your rental property lying empty for a long time
As an Edmonton homebuyer, you may have to consider these risks and possibilities when it comes to purchasing a rental property. You may have many questions and concerns related to owning a second property. Discuss your questions and concerns with Mortgage Makers before proceeding a property purchase for a risk-free purchase.