How to buy your first rental property – Step Two

Posted by neil on February 06, 2010
General

In this article, I am going to discuss the second step that you must take in order so that you can buy your first rental property.

In the first article of this series I discussed the first step that you need to take in order to buy your first rental property.  As a recap, this first step is determining WHY you are buying.  Once you have firmly established in your mind why you are buying, you are ready to move onto the next step.

Step Two – Figure out how you are going to finance the property

Often times people put the cart before the horse. They think that they can start to look at potential rental properties, and once they have found one that is suitable, they want to buy it. They then try to obtain financing for the property, and often times become disappointed because they are not able to afford it.

People make this same mistake when they are in search of their own principal residence. They go out and find a house that they adore, and then they try to get financing for it. This is not the right process to take.

Before you even start to research any potential rental properties you need to consult with a representative in your bank or with a mortgage broker.

If bad credit is preventing you from buying a property, you need to consider The H.O.P.E. Program.  They have helped more than 12,000 people get homes who NEVER thought they could, assisting even those with POOR credit get qualified.  This is one of the best Rent To Own Programs out there as it gives access to thousands of property listings for Rent To Own homes.  CLICK HERE to enrol in The H.O.P.E. Program or to have your credit repaired.

If you chose to deal with your local bank, the person that you deal with at your bank branch should be the individual who is responsible for doing mortgages. Although your bank branch can get the job done, I am a fan of dealing with mortgage brokers. I like dealing with mortgage brokers because, if you select a good mortgage broker, their level of knowledge will be quite high. As such, they should be able to answer all of your questions.

I also highly recommend that you deal with a mortgage broker who has experience in providing mortgages for real estate investors. In addition, I also highly recommend that the mortgage broker that you are dealing with is a real estate investor, and owns at least one rental property. Not all mortgage brokers are created equally, and as a result, their level of knowledge with providing mortgages on rental properties can vary dramatically.

One of the best mortgage brokers in the business, providing mortgages on rental properties is Kevin Boughen. Kevin is my personal mortgage broker. If you have any questions regarding financing your rental property, or are in need of a mortgage for your rental property, contact Kevin at kboughen@dominionlending.ca

Determining your down payment

This is one of the important points that you will be discussing with your mortgage broker. Clearly, every person’s situation is different. People will have differing amounts of money that they can put down, as well, people will be earning different amounts of income. These variable come into play when your mortgage broker is determining your financing.

A general rule of thumb, that you should confirm with your mortgage broker is that you should be putting as a down payment 20% of the purchase price of the property.

In Canada, putting down 20% of the purchase price of the property, in most cases allows you to avoid paying the Canada and Mortgage Housing Corporation, CMHC premium.

Also, if you have plans on purchasing more than one rental property, putting down 20% of the purchase price of the property is a good strategic move. This move will be to your advantage when down the road you are trying to obtain financing for future properties.

Determining whether you should get a fixed rate or variable rate for your mortgage

There is no right or wrong answer here. This answer depends upon your risk tolerance and what you feel more comfortable with.

In simple terms, with a fixed rate mortgage, the interest rate on the mortgage that you are paying is fixed for a set period of time. As a result, the interest rate on the mortgage does not increase or decrease throughout the duration of the term. An average term that people will have for their mortgage is 5 years. It is important to note that the term is very different from the amortization.

With a variable rate mortgage, the interest rate on the mortgage can rise or fall throughout the duration of the mortgage term. These fluctuations can be unsettling for novice real estate investors. The fluctuations sometimes cause anxiety on the part of the investor, because they do not know what their exact payments are going to be on the mortgage. For example, with a variable rate mortgage, as the interest rate increases so too will the payment on the mortgage amount. This rise in price is often inconsequential if you have done your due diligence and have mitigated any potential risk to you with regards to the increase in price that you will be paying.

Get your pre-approval from your mortgage broker

There are a number of different terms that are used for the pre-approval.  Another interchangeable term is the ‘pre-qualification’.

At the end of the day, whether you call it a pre-approval or pre-qualification, it all means the same thing.

What it means is that you have the go ahead from your mortgage broker to go out and start to look at potential rental properties.

As this point your mortgage broker would have examined many things.  They would have looked at how much of a down payment you are putting down, how much income you earn, what your existing debt is, as well they would have reviewed your previous credit history.  These are all variables that effect the financing of your future rental property.

Once all of these items have been reviewed by your mortgage broker, they will give you a price range in which you should begin looking in.  In most cases, they will give you the potential mortgage amount that you should not exceed.

For example, your mortgage broker may tell you:

Neil, you can afford a mortgage up to $200,000 on your next rental property”

If this is the case, I know that once I begin my search for a rental property, I cannot purchase a rental property over the $200,000 mark, as I would not be able to afford it.

In summary, once your mortgage broker gives you a pre approval, this is essentially a ‘green light’ for you to go out and begin researching potential rental properties.

Happy Investing!

Neil

 

PS: The H.O.P.E. Program has helped more than 12,000 people get homes who never thought they would be able to, assisting even those with POOR credit get approved.  This is one of the premier Rent To Own programs as it gives access to thousands of property listings for Rent To Own Homes.  CLICK HERE to enrol in The H.O.P.E. Program or to have your credit repaired.

 

Related Articles:

Step One – How to buy your first rental property
Step Three – How to buy your first rental property

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