Buying real estate is a unique investment opportunity, because after the initial investment the mortgage can be covered by tenants. Income tax can be off-set by related expenses, and appreciation over time is often projected at doubling every 10-12 years. Real estate is attractive to many people especially when used to balance their financial portfolio.
The biggest comment we hear when talking about real estate is “who can afford to buy in this market?!” Fair enough question, but when you really think about it, people have been saying that for generations, and people still find ways to buy in this market.
So, here are a few…
- The most obvious (and most difficult option for many) is to put 20-30% down of your own hard earned CASH down on a property and rent it out. If this is your 2nd property, you’re probably thinking “Come on Chelsea, who has that kind of cash sitting around?!” Unless you have successfully saved $100,000 after tax dollars or recently made a large real estate transaction that allowed you access to some of that equity, the reality doesn’t seem possible in Toronto (other markets to be discussed).
- Borrow from the equity in your own home if you own it. This option can be a good one for those that have owned for some time. If you bought your home in Toronto along the subway line for $200,000, Twenty years ago, chances are your home is now worth over $1,000,000. Your mortgage broker can help you decide how much of that could be used to purchase an investment property. If you have owned your home for a few short years, borrowing equity might not be the safest option. As an example, in early 2017 we saw a very large spike in price. If one had borrowed from their newly purchased home equity in March 2017, and then tried to sell in September 2017, chances are there may have been a discrepancy between what you were appraised at in March vs what you sold for in September, as average home prices decreased from the hot spring market.
- Partner up! I expressed excitement about this option the other day, because it makes it possible for just about anyone to get into the real estate market as an investor. If you know of 1 or 2 other people that have very similar investment goals, you can buy a property together. With the help of a good lawyer, you can come up with an agreement that outlines financial obligations, maintenance plans, tenant plans, and determine how long you plan to keep the property. Keep in mind that the details in the agreement need to be in writing and reviewed by a lawyer. You wouldn’t start a business partnership without making some form of legal agreement, and this is no different.
Key points for self employed people:
Many lenders will require proof of income from 2 or more consecutive years, and they don’t like when those years show substantial differences between them. For example, my income in 2017 was significantly higher than 2016…sounds great right? My lender determined that there was too much fluctuation and wanted to use 2016 income as my true Income to determine what mortgage amount I would qualify for. Other scenarios might include lenders taking an average of those 2 years, or not counting one of the years all together. The long story short is, speak to a mortgage broker and your accountant to see how it applies to you personally. No two mortgage application stories are the same when it comes to self employed people it seems!
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