With the run up in housing from the end of the 2008 recession to the spring of 2017, it’s no wonder people are paying attention to real estate more than ever before. So many investors have been able to enrich their lives and their portfolios in this timespan. It’s simple to understand why new investors are always looking to get into the investment property market. If you’re someone looking to buy into the market, at some point you must have asked yourself how to finance real estate investment.
There are plenty of opportunities for investors to do well from their real estate investments on the west side of the GTA. Every successful investor had to finance their dream of financial security with a mortgage to back them.
What is a Mortgage?
A mortgage is a loan provided by a bank or another lender that is mainly used in purchasing homes and property. Unless a stroke of luck lands an investor with a winning lottery ticket, nearly all of them will be required to use a mortgage to purchase their investment property. The property in turn can be used as collateral should there be a halt in payments.
There are two main methods for obtaining a mortgage and both have their values and hurdles.
Choosing your bank as your mortgage supplier has been known to be a simpler step in the sense that they already have most if not all your information on file. Outstanding loans, credit scores, and down payment can all be recalled with a press of a button. Banks can give you a greater understanding of your spending habits and since you already have an existing relationship with them, the entire process can be smoother. However, banks are limited by the packages they offer and can’t stray from the set guidelines provided by headquarters.
Another method is using a Mortgage Broker. What attracts homebuyers to Mortgage Brokers is their access to multiple lenders and mortgage rates. A Mortgage Broker specializes in only mortgages and do no provide the mortgages themselves. They are a third party mediator between the lender and the lendee, and will take the time to shop around for you. However, a Mortgage Broker wouldn’t have the same relationship with a first time homebuyer or investor as their bank, and may not be able to help a borrower make the best informed decision when determining options for any extra money (such as with RRSPs, RESPs, or other accounts). Either way, it’s important for first time investors to shop around and make an informed decision based on their comfort level and financing strategies.
How to Finance Real Estate Investment and a Few Other Things to Consider:
1. Have A Pre-approved Loan Ready
Determining how much you can afford will set a budget for when you are ready to start shopping and keep you looking at investments within your price range. Your income, personal finances, and credit score will determine how much you qualify for. Once you’ve been approved, the rate you’ve been approved with will give you 120 days to make a purchase. This simply means that if interest rates go up, your rate won’t be affected. However if the rates drop, your rate will adjust to match.
Being pre-approved is not a requirement but it will land you in a better position to begin negotiations with the owners and their agents. Also, pre-approval is not a guarantee that you will receive the amount you have been approved for, as the final approval will need to be done after your application has been submitted with the help of a lawyer and the lender.
2. Have A Down Payment Ready
In Canada, a first time homebuyer has the option of using a 5% down payment rather than the traditional 10% down payment that is regularly used. However, the required down payment for any investment property is 20%.
The type of investment property an investor chooses will determine the what size of down payment is required. For example, if an investor is looking into purchasing a condominium building that will be used solely for the purpose of renting out to tenants, an investor should expect to pay more than if they were purchasing a house with the intent of renting out the basement while also living on the premises. The intentions of the investor will be noted by the lender and they will ultimately determine the needed down payment required.
3. Determining How Much You Are Willing To Borrow
While investors can choose to use the maximum amount provided by the lender, it is best for investors not to stretch themselves too thin. Investors who are impulsive when it comes to deciding on what luxuries need to be cut may find themselves caught in an unrealistic situation.
Committing to giving up vacations, day trips, or even forgoing their daily coffees may prove to be more difficult after a bit of time. However, taking the time to work out a budget that fits your lifestyle could give investors the ability to benefit from both worlds. Allow some room to breathe.
4. Choosing A Plan
When choosing a loan, it’s important to explore every option available to you. This will help determine what the future payment options look like, as well as how you will need to budget for them. Here are a few options to consider:
- Short Term vs. Long Term Loans– Short Term loans require larger payments as the plan to pay them off is more accelerated than their longer counterparts.
- Open vs. Closed– Some investors like to have the option of paying off their Mortgages faster by making additional payments. An open Mortgage allows the holder to repay the Mortgage at any time without any penalties or repayment costs. These additional payments can be done in part or in full, and is a great option for investors who want to keep their options open with the possibility of selling.
- Fixed vs. Variable– A fixed rate is an interest rate that will not change with the market. With a locked in rate, investors who want to make regular interest payments can benefit knowing how much their payments will be during the years.
Understanding how to finance real estate investment really comes down to the investor’s goals. The decisions made to finance an investment property will need to cater to their needs.
While some investors may swear on their own formula for choosing financing methods and may have had tremendous success with it, it’s important for new investors do their own research so they can build strategies that match their goals.
However, talking with seasoned and like-minded investors can help clarify any preconceptions or concerns. By joining in on a real estate investors meeting such as Titan, new investors can gain some insider wisdom and trade secrets from investors who are experienced in the Canadian market.