With so many people renting in Canada nowadays due to the housing crisis, it can be tempting to want to venture into the world of being a landlord. Though exciting, jumping into real estate can also be a daunting process. This is especially the case if you’re a first-time home buyer in Canada looking to use the property as an investment. The idea can feel overwhelming, complex, and unobtainable for many. However, if you are able, an investment property can be an incredible way to make extra income. So, are you ready to take the leap and buy an investment property? What does purchasing an investment property entail? What should I look for? These are all common questions when it comes to venturing into the world of real estate. We’ve got what you need to know when it comes to buying a first-time investment property in Ontario.
Investment property vs. primary residence
When it comes to fully understanding investment properties, it is crucial to know what differentiates it from other types of properties you or your family may own. To put it simply, an investment property is purchased solely to generate a source of income and build your own wealth. These types of properties aren’t lived in by the owner and are instead, rented out for a profit. This can be a home, cottage, condo, duplex, or apartment complex.
On the other hand, a primary residence is where you live personally. This means that if you live in a home and rent out a room or basement, it would not be considered an investment property. These properties are always separate and never used for personal reasons.
What are the responsibilities of owning an investment property?
Like any type of property, owning an investment property can bring in a large amount of responsibilities and risks, in addition to income. It is crucial to understand these responsibilities before you step into the world of being a landlord:
Legal issues
There are a lot of legalities when it comes to being a landlord. Generally, most legalities come from tenant-related disputes. These include not paying rent, property damage, or eviction proceedings.
Local laws and regulations
Like any property, your investment property must comply with all of the rules and regulations put in place by the area in which it resides. This includes building codes, zoning laws, and health and safety standards.
Market fluctuations
Let’s face it, the real estate market is always full of surprises. When you buy an investment property, you risk the value of the property fluctuating due to many factors.
Vacancies
If nobody lives in your property for a given time, you won’t generate any income. This is something you need to be prepared for. You must factor in periods of potential vacancies when calculating your expected income from a first-time investment property.
Property maintenance
A property is something that needs constant maintenance to function safely and properly. This is something that can be expensive and must be accounted for when figuring out your generated income. Additionally, properties can lose value if not treated with proper maintenance.
Insurance coverage
Your property must have the proper insurance to protect yourself from fires, floods, or accidents. For more information on this, check out our article on landlord insurance! To make sure everybody is safe and secure, it is also recommended to have landlords inform their tenants of the benefits of tenant insurance.
Capital gains
Capital gains taxes are something you will potentially be liable for if the time comes to sell your property. This is something that must be factored in when you first plan on purchasing your investment property.
Are you prepared to buy an investment property?
Making sure you are prepared and in the correct financial situation is crucial before purchasing any type of property. Though this may seem simple for some, it takes a lot of planning. Take some time to make sure your current debts are evaluated and that you can make a down payment. Additionally, it is important to make sure that your credit score is sufficient. Knowing what you can and cannot afford will make your property search much easier.
What credit score is required to be eligible for a property?
Generally, you will need a minimum credit score of 680 to qualify for any type of investment property. When it comes to your down payment, you will be required to put down at least 20-25% of the purchase price. This figure differentiates from primary residences, which ranges between 5%-20%. So, if you are looking to purchase a $1 million property, you can expect to put down $200,000-$250,000 upfront.
What are my options when it comes to financing?
When financing your first investment property, you are met with a few options. First, you can try to save enough to purchase the property upfront. However, this is unlikely for many due to the state of the real estate market, high-interest rates, and the cost of living. Instead, many opt for a traditional mortgage or an investment property mortgage.
Generally, a traditional mortgage will be much simpler to qualify for and will have much lower interest rates along with longer amortization periods. At the same time, an investment property will give you a shorter term with a higher interest rate. This will result in much higher down payment requirements. On top of this, it is much more difficult to qualify for an investment property mortgage due to the requirement of a high credit score and lower debts.
Do your research before investing!
Doing your research when it comes to different properties and where to purchase is extremely crucial, especially for first-time buyers. Ontario has a very large and diverse real estate market and can offer different opportunities depending on what you’re looking for! Experienced investors will generally look for regions that house a strong rental market and job growth. Furthermore, it is important to make sure you have the potential for property appreciation. When you’re in larger cities such as Toronto, it is important to look into different neighbourhoods and what they have to offer. What are the crime rates? Are there good schools nearby? Are there a lot of families in the neighbourhood? These are all great questions to ask yourself when searching for your first investment property.
It is recommended you reach out and work with a local real estate agent when it comes to finding a home that suits your needs and will hold a good property value.
First-time investment property: Taxes and legalities
When you finally find the home you’re looking for, it is important to make sure you are prepared with the correct documents. Landlords are required to meet various property standards put in place by local regulations. Though the required documents can change depending on the area, you will generally be asked to present the following before you can begin renting your property out:
- Insurance documents
- Security deposits
- Tenant application forms
- Tenant screening forms
- Lease agreement or rental agreement
When it comes to taxes, many benefits assist real estate investors. For example, you can often deduct the cost of repairs and maintenance on your rental property from the rental income. This will reduce the amount of income tax you owe come tax season. You may also be able to offset capital gains tax by deducting the cost of any improvements once you sell your property. To learn more about capital gains taxes and the changes for 2024, check out our article: Capital Gains Tax: How does this affect Canadians?
What to look for in an investment property
Looking for that perfect first investment property can be tough. There are tons of things to look out for and red flags that can indicate issues down the road. To make your life as a landlord run smoothly, you should keep an eye out for the following:
- Water damage
- Roof condition
- Pest infestation (mice, roaches, bedbugs, ants)
- Legal or zoning issues
- Structural issues
- Electrical issues
- Plumbing issues
- HVAC concerns
Similar to buying your primary property, the importance of a home inspection is very high. Having a professional assess the property will give you peace of mind knowing it is safe and sound. This will help you avoid any unexpected expenses in the future, resulting in more money in your pocket.
Should you buy an investment property as your first home purchase?
If you want to purchase a home but aren’t over the moon about what you can afford just yet, an investment property is an incredible way to get your foot in the door of real estate. On top of this, once a rental property is fully paid for, it will quickly allow you to grow your passive income. If you are currently renting a home, the income from your home can help you pay your rent, allowing you to save more income from your primary job. A common misconception is that you’ll benefit from First Time Home Buyers Programs if your first property is an investment property. However, this is not the case! According to the Canada Revenue Agency, “You are considered a first-time home buyer if in the four years before your home purchase, you did not occupy a home that you owned.”
With this in mind, it is important to note that you will have to wait four years after moving out until you can benefit from the first-time homebuyer program. This is especially true if you plan on moving into your investment property.
How much do you have to put down on a first-time investment property?
As mentioned above, down payments on an investment property are drastically lower in comparison to primary residences. The same can be said about the interest rates when it comes to investment properties. Generally, people can expect to pay roughly 5%. Generally, first-time investment property owners will require financing to purchase rental properties. These low rates will make your mortgage lower, thus, the lower mortgage rates will make for a better cash flow for landlords.
What is the 2% rule for property investment?
A great rule of thumb in the world of property investment world is the “2% rule.” This rule determines how much rental income a property should be able to generate. By following this, one can expect to see a positive flow of income from their rental property if the rent is at least 2% of the original purchase price.
Let’s say you purchased a home worth $200,000. By using the 2% rule of thumb, that property should create at least $4,000 a month in rental income, 2% of the original number. If you only make $3,500 a month in income, then you wouldn’t pass the test. The result of this is a lower amount of income from the property.
Investment properties: A conclusion
At the end of the day, the road to being a landlord is long and confusing. However, an investment property is an incredible, worthwhile method of making an income for whatever you may need down the line. As mentioned above, having the proper insurance is crucial when it comes to being a landlord. Are you looking to become a first-time investment property owner? Are you simply in the market for new insurance for your primary residence? No matter your needs, isure is here to help. We offer some of the best prices when it comes to premiums as well as customer service you can always rely on. Contact us or request a home insurance quote today!
