The hot property market in the city of Toronto casts definite allure for potential investment opportunities. However, as we at urbaneer.com contend, profitable investors are those who invest first in understanding the implications of their decisions and how they figure in to their overall investment strategy. After all, unless you've got a mattress stuffed with cash, getting (and understanding) financing should be part of your diligence package.
Although you may already be familiar with financing rules – like down payments and amortizations – as it pertains to your principal residence, did you know the rules and qualification process for purchasing an investment property are different? Given a lot of our clients are beginning to explore the acquisition of rental property, we thought we'd provide a quick synopsis on some of the criteria that serve as the basis for financing residential income and commercial properties. And what better way that getting some sound good advice from Jake Abramowicz – aka mortgagejake – for what property investors should expect (and plan for) when considering a purchase.
Urbaneer: What are some of the main differences when it comes to financing an investment property vs. financing a principal residence?
Mortgage Jake: The biggest difference is that the minimum down payment required is 20 percent for any/all investment properties, which differs from a 5 percent down payment for a principal residence. This rule was changed to slow down the rapid growth in purchasing investment properties. There is a program for “secondary homes” which are classified as properties occupied by the buyer OR the buyer's family, and the minimum down payment here is 5 percent. However for true rental properties, 20 percent or higher is the least you can have to get into the rental property market.
Urbaneer: What difference does it make if an investor plans to reside within the investment property?
Mortgage Jake: Then the down payment can be 5 percent down, and not 20 percent, if part of the property will be owner-occupied. Imagine a legal duplex where the owner will live in the main floor and rent out upstairs. This is a common move by many new buyers to get into the market. We can finance this property with 5 percent down.
Where it gets tricky is “legal” vs “non-legal” apartments. This is where Urbaneer's judgment and knowledge comes in with respect to the legalities of the property. Legal vs non-legal doesn't mean illegal, mind you. What it means is whether the property has been retrofitted to be three apartments, and thus a triplex (or two apartments, and a duplex). An overwhelming majority of Toronto properties are “non-legal non-retrofit” investment properties, therefore not all lenders will consider the rental income from the non-legal units to help you qualify. It certainly gets very sticky with what is and isn't allowed these days.
Urbaneer: Are things like amortization, rate and appraisals costs similar for an investment property mortgage vs. a principal residence mortgage?
Mortgage Jake: For residential investment properties, one could finance up to 35-years amortization at close to/best market rates. Therefore for residential 30-35 years is a common amortization to keep costs low. For principal residence properties, with 20% or more down, 30-35 years is still available. For less-than 20% down, 25 years is the maximum amortization.
Urbaneer: Some investors weigh their options between residential and commercial properties. What criteria determine whether a property is residential or commercial? From a lender’s point of view how is commercial property defined?
Mortgage Jake: Anytime there is any commercial zoning component from a property then immediately the property will be zoned residential/commercial. This will typically lead to longer underwriting time, less options for financing, greater down payment and potentially higher rates & fees. An example is a store-front apartment, where the bottom floor is 50 percent commercial and upstairs is 50 percent residential; this type of property usually requires 25 percent down payment or more. Each commercial deal is underwritten based on strength of property as well as strength of covenant, so there is no consistent across-the-board pricing for these types of financing.
Urbaneer: Are there additional criteria that need to be met when acquiring financing for a commercial property?
Mortgage Jake: For a commercial property the usually de-rigeur is: appraisal cost (typically $2000), potential environmental phase 1 assessment (also $2000 typically) as well as the borrower would sometimes be required to pay for the lender's legal fees, and lender and broker fees. The cost to get into a commercial property can definitely be more expensive at the front-end than residential. Also, note that for commercial properties, the amortization tends to be 20-25 years maximum.
Are you considering a property investment purchase? With over two decades of experience and a wide, solid network of professionals that lend you support throughout your property search, we help you take steps to ensure you have all the information you need to make prudent, investment decisions.
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~ Steve and the urbaneer team
Bosley Real Estate Ltd., Brokerage
(416) 322-8000 • firstname.lastname@example.org